The Foreign Subsidies Regulation: A Paradigm Shift in EU Competition Policy

The European Union (EU) has taken a significant step in addressing the challenges posed by foreign subsidies through the introduction of the Foreign Subsidies Regulation (FSR). The FSR, which applies from today, fills the void that existed between competition and state aid law, introducing an interdisciplinary approach to market governance. In this blogpost, the third in a special series on the FSR, Jasper Sluijs navigates some of the key aspects of this regulation and their potential consequences for EU competition law.

The FSR as extraterritorial state aid law

The FSR establishes a framework similar to EU state aid law, with the concept of “distortive foreign subsidies” mirroring the notion of “incompatible state aid.” Key differences exist between the two legal regimes—which has also been remarked by others. First, the FSR targets undertakings instead of the subject of state aid law: EU member states. Moreover, the FSR does not require notification to the Commission of aid by a government to a firm, like in the State Aid regime, but is set up as an enforcement tool for the Commission to investigate ex officio suspected cases of distortive foreign subsidies.

Then there’s a couple of aspects of the FSR that made me consider whether or not the FSR is actually stricter than the state aid framework:

• Inspections of undertakings are impossible under the state aid regime. However, with the FSR the Commission holds the power to enter premises and inspect undertakings in a way similar as under Regulation 1/2003 in competition law. The Commission can therefore more actively act as an enforcer.
• At this point the FSR does not contain block exemptions. In the state aid regime, in contrast, we have had the development of a parallel regime of block exemption regulations providing context and social political backing to the application of the state aid regime. Aid towards, say, disaster relief or environmental protection is conditionally allowed. The FSR does not (yet?) contain such block exemptions.

Therefore, the balancing objective that is inherent in both instruments works differently. State aid law tries to balance national protectionism with the internal market perspective, but at least both players are on the same team: both the Commission and the member states at least belong to the EU, and the Commission itself is very active in ex ante aid schemes and the development of the block exemption regulations. These aligned objectives between the Commission and the EU member states are altogether absent in the FSR. The recipients and the subsidizers of foreign subsidies are on different teams and this makes the FSR more prone to conflict than the state aid regime.

For the relation of the FSR and state aid as related to taxation, please consider the upcoming blogpost of my esteemed colleague Dionysios Pelekis.

Implications for the Abuse of Dominance regime

As a legal scholar I am excited to explore this regulation’s impact on EU competition policy. One overlooked aspect of the FSR is its impact on the abuse of dominance regime under EU competition law. The relation between foreign subsidies and abuse of dominance can be explained by the textbook definition of dominance: the ability to behave independently of competitors. Foreign subsidies can grant firms a position similar to dominance, by allowing behavior independent of competitive constraints. The FSR addresses the distorting impact of foreign subsidies on competition, particularly when third-country state-owned enterprises leverage their capital in adjacent markets. In such cases, the Commission can enforce measures similar to those used in behavioral and structural remedies in abuse of dominance cases. These measures include fair and reasonable non-discriminatory access, publication of Research & Development (R&D) results, capacity reduction, market presence reduction, or even asset divestment.

With the FSR we see Article 102 TFEU-like enforcement powers of the Commission, but without the need to actually establish abuse. Establishing whether or not a foreign subsidy is distortive requires a lower burden of proof than establishing abuse of dominance. In my view, therefore, the FSR aligns with the broader trend of expanding Article 102 TFEU on abuse of dominance, as seen in legislation like the Digital Markets Act.

Merger control

Merger control plays a crucial role in the Foreign Subsidies Regulation (FSR) as it aims to address state-subsidized acquisitions. By introducing a parallel review system alongside the European Merger Regulation (EUMR), the FSR adds an additional layer of scrutiny to mergers involving foreign subsidies. While the FSR incorporates familiar elements such as notification requirements, turnover thresholds, and procedural considerations, it also introduces a new financial contribution threshold, which can pose challenges for merging parties.

One notable aspect of the FSR’s merger control provisions is the Commission’s power to request a notification of concentration. This empowers the Commission to proactively investigate mergers suspected of involving distortive foreign subsidies, enhancing its enforcement capabilities. Furthermore, the FSR sets a lower substantive bar for establishing distortion as compared to the Significant Impediment to Effective Competition (SIEC) test under the EUMR. This lower bar reflects the unique concerns associated with state-subsidized mergers and allows the Commission to intervene more readily when distortions to competition are identified.

However, the introduction of this dual merger control system may lead to increased transaction costs for merging parties. The need to navigate both the FSR and the EUMR requirements adds complexity to the merger review process. Merging parties will have to ensure compliance with both sets of regulations, potentially leading to longer timelines and higher costs associated with obtaining clearance for their transactions. The practical implications and potential challenges of this dual system will become clearer as the FSR enforcement practice evolves and legal precedents are established.

The Brussels Effect

The EU has often served as a global standardizer of regulations through what is known as the “Brussels Effect:” through market mechanisms, the European Union has effectively extended its laws beyond its borders, resulting in a form of unilateral regulatory globalization, even if not explicitly mandated by legal provisions. However, this Brussels Effect has not fully materialized in the field of competition and state aid. Although the EU state aid regime sets the gold standard for combating protectionism, its adoption by the rest of the world remains limited. In this context, the FSR looks set to play a vital role in protecting the EU’s internal market by shielding it from distorting foreign subsidies where the Brussels Effect has yet to make an impact.

Conclusion

The Foreign Subsidies Regulation represents a transformative development in EU competition policy, as it addresses the challenges arising from foreign subsidies by utilizing tools from multiple formerly discrete toolboxes. Thus, by combining elements of competition law and state aid law, the FSR establishes an interdisciplinary approach to market governance.

At the same time, with the FSR at it stands now we see a general lack of checks and balances that are present in the competition law and state aid regimes. This makes me very curious about the development of FSR enforcement practice, and the ensuing litigation.