Is the EU Foreign Subsidies Regulation compatible with WTO Law?

By Pierfrancesco Mattiolo, University of Antwerp 

The blog post summarizes parts of the article ‘The EU’s New Regime on Foreign Subsidies: Has the Time Come for a Paradigm-Shift?’ published by Professor Csongor Nagy in the Journal of World Trade. The paper is available here.

State Capitalist Economies and the WTO

It is no mystery that, in the past couple of decades, we have witnessed the crisis of the global trade system, culminating in the paralysis of the WTO Appellate Body. In the mainstream debate, the ‘usual suspects’ have often been rebuked as their perpetrators – the Trump administration’s muscular trade policies, the COVID crisis, geopolitical tensions, especially between the United States and China… Yet, the underlying cause lies in a series of genuine institutional issues, with the WTO grappling with an ‘existential’ crisis that persisted after the conclusion of President Trump’s tenure and goes beyond the dialectics between the two biggest world economies. This crisis is deeply rooted in the WTO’s history and evolution. From the 1947 GATT to the 1994 Marrakesh Agreement, the Organization’s rules and mission were modelled after the principles of free market, autonomy of economic entities, and clear demarcation between the private and public sectors. This economic model would ideally go hand in hand with a liberal-democratic political system, where private companies are inherently not bound by political goals set by their governments.  

This paradigm has recently clashed with the realities of the global trade landscape. The past two decades have witnessed the substantial expansion of the WTO, which welcomed China in 2001, Saudi Arabia in 2005, Vietnam in 2007, and Russia in 2012. This expansion coincided with a long phase of general optimism towards democracy, free market and globalization. Former US President Bill Clinton argued in front of the US Congress that it was the right choice to let China into the WTO club since that would accelerate the country’s long march towards economic freedom first, and political freedom later. From the perspective of economic and trade policies, this transformation happened only partially among these new WTO Members. Their governments still maintain a certain degree of control and intervention in their economies, and this creates certain tensions with the WTO system. 

Today, ‘State capitalist economies’ do not look like planned economies, but rather as market-based systems where the government wields a decisive formal and informal influence over market operators. They may assume quite different forms and deploy different legal tools to exercise control. In countries with a communist political system, State-owned companies coexist with private companies, which also follow the guidelines provided by the party in power. Or in the case of the monarchies of the Gulf, the ruling dynasty controls both the State and the main private companies of the country, on the basis of simple property rights. Additionally, these systems exhibit a higher inclination to subsidization, sometimes by means that go beyond the usual, standard, concept of subsidy.  

These characteristics pose various challenges to the WTO system: some issues fall entirely outside the purview of WTO law, while others, though covered by current rules, arise with such intensity that the WTO struggles to handle them effectively. ‘Pure’ market economies may face unfair competition from State capitalist ones, plus the actions of companies backed by their governments can also pursue non-economic and politically sensitive goals. Hence, a few WTO Members have been campaigning for the reform of relevant WTO rules or they developed their own tools to fill the regulatory gaps. The EU did both: on the one hand, it engaged with the US and Japan in ‘Trilateral Meetings’ to produce reform proposals for the Organization; on the other, it developed one ‘autonomous’ tool to tackle foreign subsidies that distort its internal market: Regulation (EU) 2022/2560 (the Foreign Subsidy Regulation or FSR). 

The FSR: Is it Compatible with WTO Law? 

The FSR represents an effort to address a multilateral problem through an autonomous approach, adapting EU State aid law, i.e. the law applied to subsidies granted by EU Member States, to foreign subsidies. The tool presents several elements of novelty and is part of a broader effort by the EU to strengthen its autonomous toolbox and restore the level playing field in the global trade system. The EU strategy includes now different policy instruments, sometimes in apparent contradiction with each other. In the case of subsidies, in recent years the EU has been opposing foreign subsidies while authorizing more State aid at the domestic level. A strategy that is polarizing the debate in the Union. There are also other questions to be answered: is the FSR effective in filling the regulatory gap at the international level? Is it compatible with international law? In a recently published article, Professor Csongor Nagy reached the conclusion that the FSR is indeed compatible with the WTO and offers a model for potential multilateral use. After identifying the regulatory gap that EU legislators wanted to address, Nagy’s paper gives a comprehensive overview of the status and treatment of foreign subsidies in WTO law and State aid law in EU law. For this blog post, the considerations on WTO compatibility will be summarized.  

The FSR finds its conceptual grounding in WTO Law in the countervailing measures, which are regulated by the Agreement on Subsidies and Countervailing Measures (ASCM). The Regulation’s provisions do not discriminate based on the recipient undertaking’s country of origin, but still, it may have an asymmetric impact, targeting especially companies from countries that grant more subsidies, creating tensions with the Most Favoured Nation principle, and between EU and non-EU undertakings, which should be scrutinized under the principle of National Treatment. However, it is crucial to note that subsidization is not inherently linked to national origin, and the Regulation reacts to certain behaviours of the undertaking, rather than its status. Additionally, the Regulation aims to mitigate the asymmetric impact erga omnes by reducing the impact of foreign subsidies and eliminating differences between subsidizing and non-subsidizing countries, which is in itself a goal in line with the overall philosophy of the WTO and its Treaties. To make an example, when the FSR reduces the distortions caused by a subsidy granted by third country A, this benefits not only the companies based in the EU but also the competitors based in third country B. 

Another potential element to be scrutinized is how different are the intra-EU (State aid) and extra-EU subsidies regimes. The treatment of foreign subsidies granted by third countries under the Regulation should not be ‘less favourable’ than the treatment of Member State aid under the Treaty on the Functioning of the EU (TFEU, Art. 107 et seqq.). In WTO case law, an asymmetric impact does not amount necessarily to discrimination and does not violate automatically the National Treatment requirement. The complainant must demonstrate that the distinction is rooted in national origin, as evidenced by the Appellate Body’s decision in Dominican Republic – Measures Affecting the Importation and Internal Sale of Cigarettes. Furthermore, legitimate regulatory distinctions may not breach the National Treatment principle. In the article, Nagy demonstrates that the substantial and procedural differences between the FSR and EU State aid law are justified by legitimate regulatory considerations, due to the substantial distinctions between the two categories.  

The EU State aid system designates the granting Member State as the defendant, while the Regulation on Foreign Subsidies applies to the recipient undertaking. This is due to sovereign immunity considerations, but also to the fact that the identity of the third country that granted the subsidy is irrelevant in the European Commission’s decision tree. Foreign subsidies are not prohibited in principle, like State aid in Art. 107 TFEU, and become relevant only after certain actions of the beneficiary undertaking. Additionally, the FSR mirrors the regulatory patterns of EU antitrust and merger procedures, and its provisions mandate congruent application and interpretation with the rest of EU law. Nevertheless, the administrative burden is indeed put on the companies when they receive foreign subsidies, while companies that receive State aid do not have to face the administrative burden since it is placed on the shoulders of the Member State. Yet, the  FSR imposes a lighter administrative burden than EU State aid law: both procedures stem from an ex ante notification (more precisely, for the FSR, in case of a merger and participation in public tenders), but the Regulation has shorter and stricter deadlines. Simultaneously, the Regulation is more favourable to recipients regarding procedural rights and remedies, allowing the undertaking to avoid repayment under certain conditions or by offering certain commitments to the Commission. 

Given its compatibility with WTO Law, we may wonder if the FSR could serve as a model outside the EU to address the matter of foreign subsidies. It will be interesting to observe, in the following years, the Commission’s enforcement practice and the reaction of third countries, which may either challenge the Regulation in Geneva or adopt similar tools in their own jurisdictions. Could the FSR be adapted and translated to the plurilateral, or even multilateral, level? Its success as a potential ‘paradigm shifter’ is still to be fully assessed. One thing is certain: rise, outside and inside the EU, and new, creative, tools are needed.

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