The Foreign Subsidies Regulation: Questions of Democratic Accountability

In the second post in a Renforce special series on the Foreign Subsidies Regulation (FSR), Thomas Verellen looks at the regulation – which applies as of today – from the angle of democratic accountability. In response to geopolitical unrest, the global expansion of state capitalism, and the climate crisis, the EU has significantly strengthened the European Commission’s unilateral trade policy toolbox. How the Commission can be held democratically accountable as it starts to yield its newfound powers, he argues, should be top of mind for everybody concerned about the democratic credentials of the European Union. The FSR cannot be seen in isolation from this broader context.

The Foreign Subsidies Regulation is part of the European Commission’s ‘open strategic autonomy’ agenda. Under this umbrella term, the Commission aims not only to keep the EU’s internal market ‘open’ in times of growing protectionism, but also to make EU trade policy ‘sustainable’ in a context of global environmental meltdown and ‘assertive’ in an age of geopolitical instability and great power rivalry.

As part of its open strategic autonomy agenda, the Commission has adopted an impressive series of legislative proposals—many of which have by now become law following their enactment by Parliament and Council. Some of these initiatives, such as the Deforestation Regulation, aim to bolster the EU’s climate credentials; others, such as the Anti-Coercion Instrument, aim to endow the EU with instruments to respond to economic bullying of the type practiced, for example, by China vis-à-vis Lithuania when the latter allowed Taiwan to open a representative office in Vilnius. Others still purport to ‘relevel the playing field’ between the EU and third country markets caused by ‘distortive practices’ of third countries.

Empowering the Commission to ‘relevel’ the playing field

The Foreign Subsidies Regulation fits into the ‘releveling the playing field’ category. As explained in earlier posts in this series, the regulation purports to address distortions caused by foreign subsidies—think, for example, of loans issued by state-controlled banks at below market interest rates. The Foreign Subsidies Regulation is a framework regulation: it empowers the Commission to adopt individual decisions. These decisions must comply with the conditions set out in the regulation. In this sense, the Foreign Subsidies Regulation is reminiscent of, for example, the EU’s anti-dumping or anti-subsidy regulations, or the EU’s merger control regulation. These instruments, too, are acts of secondary legislation that empower the executive (here: the Commission) to adopt individual decisions that directly affect the legal status of companies.

Crucially, many if not most of the abovementioned new trade policy instruments empower the Commission to adopt individual decisions. And, in a marked break with tradition, they empower the Commission to act in fields in which international trade law does not impose meaningful external legal disciplines on the EU’s behaviour—either de jure because there are no clear international rules, or de facto because their enforcement is subpar. As a consequence, the Commission will necessarily exercise significant amounts of discretion.

Two examples suffice to give an impression of the significance of the Commission’s newfound powers. Under the revised Enforcement Regulation, the Commission is empowered to adopt countermeasures without a final WTO dispute settlement ruling, whereas in the past the Commission could act only after having obtained the green light from Geneva. Or take the International Procurement Instrument. Under this regulation, the Commission can restrict access to EU procurement markets to third country companies in the absence of reciprocal access to the procurement market of the third country concerned, but only if it (i.e. the Commission) considers it to be in the ‘interest’ of the Union to do so. In short, these new unilateral trade instruments are not mere technical instruments; they endow the Commission with important new discretionary powers.

A freer hand for the Commission under the Foreign Subsidies Regulation

These new unilateral trade policy instruments are undoubtedly of interest to companies (and their lawyers) as they will have to navigate an increasingly complex regulatory landscape in years to come. However, the instruments are also interesting to public lawyers as they invite us to revisit long-standing questions of legitimacy and accountability in EU trade policy, and EU foreign relations more generally.

As I’ve argued before (see here and here), the ‘unilateral turn’ in EU trade policy is potentially problematic from this perspective as the EU legislature grants the Commission powers with important discretionary elements, without there being much of a (democratic) check on how the Commission exercises those discretionary powers. This is problematic in a polity that is constitutionally committed to representative democracy, as per Article 10(1) TEU, which states that ‘[t]he functioning of the Union shall be founded on representative democracy.’

The Foreign Subsidies Regulation is a case in point. The Commission is empowered to take measures to address distortive foreign subsidies. The regulation aims to define by means of objective factors what foreign subsidies are, and when they can be considered distortive. Yet it also provides that the Commission can start investigations on its own initiative, and that it is up to the Commission to assess whether imposing remedies is in the EU’s interest. On the latter point, Article 6 of the regulation provides that

[t]he Commission may, on the basis of information received, balance the negative effects of a foreign subsidy in terms of distortion in the internal market … against the positive effects on the development of the relevant subsidised economic activity on the internal market, while considering other positive effects of the foreign subsidy such as the broader positive effects in relation to the relevant policy objectives, in particular those of the Union.

To be clear, balancing is not new. Under the EU’s anti-dumping and anti-subsidy rules, the Commission is also invited to balance the negative effects of dumping or subsidization against possible positive effects. However, in the trade defence context, these positive effects are economic in nature: the Commission compares the harm with the benefit(s) that the dumped or subsidized imports cause for EU producers, importers and users. By contrast, under the Foreign Subsidies Regulation the Commission will not only compare material harm and material benefits, but also ‘consider other positive effects’ that have to do with ‘relevant policy objectives.’ This is a broader mandate than the one we encounter in the trade defence context. It introduces non-trade-related considerations into the Commission’s decision-making process.

Questions of democratic accountability

As the Commission is called on to broaden the scope of its analysis to include also non-economic considerations, questions that arise also in the competition law context present themselves: is the Commission well-placed to make this kind of assessment? Does the Commission have a mandate to look, for example, at the environmental impact of distortive foreign subsidies and to conclude that foreign subsidies that, in the Commission’s view, are distortive, should nonetheless be allowed because they fit in the EU’s Green Deal agenda? Is legitimacy derived from technical expertise enough? Is it okay for an institution with limited democratic credentials to engage in this type of exercise? And even if it is okay, should other institutions, with stronger democratic credentials, not be in a position to have their views taken into account, in keeping with the changing preferences and values of the EU citizenry?

Measures under the Foreign Subsidies Regulation will be adopted by means of implementing acts. Implementing acts: this means comitology, and comitology means Member State experts. Under the Foreign Subsidies Regulation, and in marked contrast once again with the above-mentioned more traditional trade defence instruments, these Member State experts will only be able to advise the Commission; they will not be able to block draft implementing acts. (The procedure is known as the ‘advisory procedure.’) The role of the European Parliament in the process is marginal: it could object to a measure if it considers that the measure is ultra vires. But doing so cannot stop the Commission from adopting the measure.

Further downstream, I have doubts as to whether the European Parliament will exercise meaningful ex post oversight over how the Commission will make use of its powers under the Foreign Subsidies Regulation. If experience in the competition policy context is to offer any guidance, there is little reason to be optimistic: the relevant Parliamentary committee’s oversight activities appear limited to a debate on the annual report sent to the Parliament by the competition commissioner.

Democratic accountability versus Commission independence

To suggest that accountability, including democratic accountability, is important in unilateral trade policy may come across as counterintuitive to some and perhaps dangerous to others. To be clear, Commission independence is important: it avoids capture by Member States and by economic interests, and it signals to market participants that the EU is serious about free and fair trade. That said, we have to be careful to avoid double standards. The abovementioned arguments that support Commission independence should also counsel against Member State (or Council) involvement in the Commission’s decision-making processes. Yet under the Foreign Subsidies Regulation—as under many other common commercial policy instruments, including those mentioned earlier—Member States are at the table through their representation in the comitology system. This imbalance makes little sense. Involving the European Parliament alongside the Member States in the comitology process would go some way towards closing what I understand to be a democratic accountability gap at the heart of the EU’s unilateral trade policy machinery. As trade policy becomes increasingly political and indeed geopolitical, more proximity to democratically legitimized EU institutions—and in particular the European Parliament—is needed.