As top policymakers from both sides of the Atlantic gather near Paris on Sunday for the second ministerial meeting of the EU-US Trade & Technology Council (TTC), representatives will seek to find consensus on how to push cooperation on economic and technology issues. The TTC is a key mechanism for Transatlantic partners to effectively deal with common priorities. We are seeing the results of this cooperation in the seamless coordination of sanctions against Russia. However, certain EU initiatives are defying the goals of the TTC. Take for instance the proposed EU Foreign Subsidy Instrument. This important proposal will significantly increase the legal risks for companies operating in the EU while having received financial contributions from a non-EU country, including those from market-oriented democracies like the United States and the larger group of OECD countries.
The proposal on foreign subsidies distorting the single market is wending its way almost unnoticed through the EU legislative process. The proposal originally aimed at addressing the undue power of state-backed enterprises, notably the Chinese. It is part of a wider trade and competition policy toolbox brought forward by the EU to bolster political ambitions for greater “strategic autonomy”. Last week the Council and the European Parliament adopted their positions kicking off the final negotiations.
France, which currently holds the Presidency of the Council of the EU, has made this initiative one of its priorities and is aiming to finalise negotiations by the end of the French semester on 30 June.
But the highly complex Regulation will have the consequence of imposing excessive burdens on companies from partners such as the US, Canada, Japan, Australia – as well as Europe itself. Due to vague language and strict obligations to monitor value chains, the proposed law may inadvertently deter welcome investment from countries from allied countries but also de-incentivise trustworthy companies that may wish to invest in the EU Member States.
For example, the definition of a foreign subsidy is broad and covers financial assistance to a company’s suppliers and subcontractors, which is very difficult to track and monitor. Equally, to participate in EU procurement, beneficiaries of foreign subsidies (European or not) may face a Commission investigation lasting up to 260 days before securing bids. By contrast, those which do not receive subsidies or only receive EU subsidies would not face such investigations and may therefore stand a better chance of winning contracts. This would likely reduce the number and quality of bids, delay tenders and, generally, decrease competition in the Single Market.
Putting the economic risk to Europe in perspective, the US accounted for almost a third (32%) of total foreign direct investment (FDI) in the EU at the end of 2020. In Germany alone, US investments totalled some USD 162.4 bn in 2020. Moreover, US affiliates in Europe employed an estimated 4.8 million workers in 2020, with over 671,869 jobs in Germany made possible by US investments. Did the Commission account for the direct and indirect exposure to subsidies of companies from the US or the larger group of OECD countries when drafting details of the legislation?
According to the leaked draft TTC conclusions, the EU and the US commit to transparency and information-sharing on their respective subsidies for semiconductor production. This focus is somehow ironic. As FT trade analyst Alan Beattie points out in a recent column, most constraints to state aid will indeed come from “unilateral means via traditional anti-subsidy duties or perhaps the EU’s new ‘foreign subsidies instrument’ which in effect extends European domestic state aid restrictions to overseas companies competing in the EU single market”.
Indeed, now more than ever the EU should work with like-minded partners – market-oriented democracies – to ensure Europe continues to benefit from foreign investments needed for structural renewal and to overcome the challenges from the current security crisis, such as the need for technology-driven investments in energy production, network infrastructure and raw materials, where many companies receive state aid.
But policymakers in Brussels and the Member States should be mindful of the potential for aspects of the foreign subsidies proposal to have negative impacts on the European economy and discourage welcome investment in the EU, with a knock-on effect on productivity, jobs and prosperity.
France’s ambition to have the foreign subsidies proposal adopted in the coming months needs to be balanced with economic realities. It is crucial that the EU institutions, in this final stage of the legislative process, do their best to agree on a text that targets unfair subsidies but does not inadvertently deter welcome foreign investment from key partners to Europe.