Welcome to Trade Secrets. As a resident of Europe, today I will mainly be staying inside and drinking cool water, and I advise anyone else who can to do the same. The main piece today is on another of the EU’s instruments against what it sees as unfair foreign competition, on this occasion state-subsidised foreign companies gallivanting freely around the single market. Charted waters looks at the latest UK trade figures. If you’ve got views on anything, and I promise to read all emails even if I don’t have time to respond, I’m on firstname.lastname@example.org.
Fighting off the handout hoodlums
And so another javelin is polished, sharpened and added to the EU’s arsenal. Its intended target: those barbarians seeking to plunder the European single market empire armed with that most dastardly and underhand of weapons, distortive state subsidies. A broad political agreement on the new foreign subsidies regulation (FSR) was reached between the EU’s governments and the European Parliament on June 30 as France, a big fan of the idea, pushed it through on the very last day of holding the rotating six-month EU presidency.
First, I’ll look at the policy context in which it was forged, and then about how it might work, or not.
The FSR is one of a series of instruments the EU is developing or expanding to address various unfair trade and investment practices by foreign companies, including screening of foreign direct investment, rules on procurement and the forthcoming anti-coercion instrument. Brussels labels them “autonomous” but I’ll continue to call them “unilateral”.
They share two attributes: one, a sense that the international playing field needs levelling, and two, a centralisation of power in the European Commission, reversing the conventional view that power has for years been draining out to the member states. They’re also all fairly obviously aimed mainly at China.
Unusually, the FSR is an internal market competition tool with trade and foreign direct investment (FDI) implications. In essence it extends the EU’s state aid regime beyond its borders. It can restrict public procurement bids, takeovers and general market activity by foreign companies receiving government subsidies if they get an unfair advantage — though a “balancing” test still allows those companies to operate if they bring big benefits such as improving competition or driving down costs.
Like EU state aid rules, it puts a lot of discretionary power in the hands of commission officials. The point here — the same is said of the anti-coercion instrument — is to insulate its use from bilateral lobbying (that is, bullying) of individual member states by trading partners (that is, China).
The logic seems solid, but the timing isn’t exactly perfect. First, the EU’s own state aid regime is under constant pressure from member states to loosen its disciplines. The EU relaxed the rules to respond to Covid-19 and then again for the Ukraine war. With the Brits gone and France rampant, the pressure to allow more government interventionism has intensified. If it makes a big deal out of going after other countries’ subsidies, the EU might find itself with a wobbly leg to stand on.
Second, if China is the target, the FSR is arriving a bit late. “This would have been a good tool to have had in the late 1990s,” says one EU official drily. Chinese FDI has been dropping off for years, as China has adopted President Xi Jinping’s “dual circulation” strategy, focusing on the domestic market. In 2017, the consultancy RBB Economics says, China held less than 1 per cent of the stock of FDI in the EU, and as of 2019 its share of FDI inflows was just 3 per cent and falling.
Instead of China, the measure might end up catching US companies, who make up nearly a third of FDI inflows to the EU. Lifting up a stone designed for Chinese toes and instead dropping it on the digits of a US administration that says it wants transatlantic co-operation on supply chains (though I for one have doubts) presumably isn’t the intended outcome. The EU-US Trade and Technology Council is supposed to create co-operation over subsidies for semiconductors, for example. The FSR isn’t likely to create a warm fuzzy feeling of transatlantic trust.
More generally, the FSR is bound to introduce some uncertainty among foreign companies about whether to enter the EU market, not least because of the hefty record-keeping and notification requirements it carries.
Ultimately, the FSR has the same issues as other EU unilateral instruments. You can see the problem it’s trying to solve; you can see how it’s supposed to work. But in the real world, with uncertainties over the facts on the ground, an untested bureaucratic process and back-stairs political pressure all in play, it might achieve little more than making the process of investing, selling and bidding for contracts in the EU more complex than normal. It’s all going to be about the implementation and the commission’s use of its discretion, and as such it’s going to be worth keeping a close eye on.
As well as this newsletter, I write a Trade Secrets column for FT.com every Wednesday. Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.
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Trade Secrets is edited by Jonathan Moules