Dear Readers,

The EU Foreign Subsidies Regulation (“FSR”) entered into force on January 12, 2023 and will start to apply from July 12, 2023. As João Azevedo describes, the stated aim of the FSR is to protect the EU’s internal market from foreign subsidies which allegedly distort competition and thereby create a level playing field. The FSR grants the European Commission (“EC”) extensive powers to intervene against such potential distortions in relation to any economic activity, and a new notification regime for certain M&A transactions and public tenders, which is independent from current EU/national merger control and foreign direct investment (”FDI”) notification requirements. 

These new powers will enter into force in parallel with the existing State Aid and merger control rules that already apply within the EU and its Member States. Perhaps inevitably, the array of new potential regulatory obligations on extra-EU businesses operating within the EU internal market has provoked lively debate and criticisms. The articles in this Chronicle reflect the state of the art of this debate as the FSR is about to enter into force.

Christian Ahlborn & Carole Maczkovics note the extensive criticism of the draft implementing regulation of the FSR, especially in the context of large concentrations for which clearance must be obtained from the Commission where certain thresholds are exceeded. Their paper takes a close look at the potential distortion of the internal market by foreign subsidies that the FSR intends to address. The authors submit that the relevant foreign subsidies for the substantive assessment under the FSR are limited to those that have a link to the concentration, because they are granted to undertakings that use them to fully or partially finance the concentration. The authors conclude that a focus on likely concerns will allow the Commission to significantly narrow the reporting requirements required under the notification form.

Drawing on existing experience, Nicole Robins & Francisco Couto highlight that, in the Commission’s own words, “in substance,” the FSR will be similar to State aid control. Drawing on insights from assessments in the State aid context. In particular, however, in the context of the assessment of concentrations and public procurement procedures, this is likely to require relatively new theories of harm to be examined. This article therefore also discusses, from an economics perspective, how the assessment of the distortions to competition could be carried out in practice, and the possible interactions with the EU Merger Regulation (the “EUMR”). 

Juan Jorge Piernas López also notes that the FSR has a very far-reaching scope, which poses challenges for legal certainty. The definition of financial contribution is significantly broad, and there is notable uncertainty as to how the Commission will apply the criteria for distortion or the balancing test. In this regard, the regulation tasks the European Commission to “publish and regularly update guidelines regarding the criteria for determining the existence of a distortion caused by a foreign subsidy on the internal market.” In this regard, as the author underlines, such clarifications will certainly be welcomed, and the EU Courts will probably be called upon to further refine the different tests. The implementation of the new instrument in future years will also be key to assess whether the FSR will trigger a global reaction or a risk of retaliation by trade partners that could set up similar schemes to the detriment of the multilateral control of subsidies. The reaction might also be positive, as stakeholders around the world might become more aware of the often distortive and wasteful character of many subsidies, for instance to ailing firms, and their negative effect on competition and public finances.

Taking a critical perspective, Lena Hornkohl questions the existence of the perceived regulatory gap that led to the adoption of the FSR in its current scope. In the author’s view, although EU law lacks an instrument guaranteeing equality of opportunity with EU State Aid law for subsidies granted by third states, the new notification-based tools for concentrations and public procurement procedures in the FSR go beyond that and what is necessary, putting third-country subsidies at a disadvantage compared to undertakings receiving Member State subsidies which are subject to EU state aid law. 

Looking to broader questions relating to the impact of the FSR on foreign trade and FDI, Georgiana Pop & Ana Amador discuss the notion of transnational subsidies, the existing gap in the international regulation, and the initiatives adopted to discipline transnational subsidies to minimize trade and competition distortions. Their timely article questions whether these regulatory initiatives lead to increased protectionism and undermine the expansion of trade in low- and middle-income economies.

Of course, regulation of foreign subsidies cannot be examined in isolation from world trade law, specifically the WTO rules governing subsidies and countervailing measures. Liliane Gam & Argyrios Papaefthymiou focus on the “extraterritorial”’ perspective of recent initiatives (i.e. efforts to counter within one jurisdiction the effects of subsidies stemming from another), in order to probe how these competing approaches will play out under the international trade rules that are established on a multilateral level under the WTO. The article examines the FSR in the context of the brewing green subsidies war – specifically the likely implications of the new EU regime on the U.S. Inflation Reduction Act’’ green subsidies – as a case study on the likely interaction of these different legal disciplines at the international level. 

In sum, as reflected in the contributions to this Chronicle. while many agree that the FSR could have some potential benefits in terms of promoting fair competition and protecting EU interests, it also raises concerns about trade tensions, protectionism, and its potential impact on green initiatives and emerging economies. It remains to be seen how these issues will be addressed as the FSR is implemented in practice.

As always, many thanks to our great panel of authors.


CPI Team 

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