EU Foreign Subsidies Regulation – Early Enforcement Trends

The EU's new Foreign Subsidies Regulation has now been applicable for over 10 months.  After a relatively slow start, the European Commission has begun to take significant enforcement action, particularly in relation to the renewable energy sector.  This has been accompanied by an uptick in the EU's use of its more traditional trade-defence tools, including the anti-subsidy regulation.  This proactive approach in addressing perceived unfair competition raises new potential risks and opportunities for investors and operators in certain sectors.

The EU Foreign Subsidies Regulation

The EU Foreign Subsidies Regulation (FSR) is a relatively new EU regulatory regime that is essentially intended to "level the playing field" between EU operators and their competitors from non-EU Member States which are not subject to EU State aid rules and are consequently able to provide their companies with significant State subsidies.

It seeks to do this through three subsidy control tools for the European Commission ("Commission") to address foreign subsidies:  a general ex officio tool for the Commission to investigate any allegedly distortive foreign subsidies; and two notification-based tools in relation to potentially subsidised mergers and acquisitions and in relation to potentially subsidised public procurement tenders. 

The notification tools are intended to address only major M&A and public procurement tenders and the relevant thresholds have been set accordingly.  For M&A deals, only transactions where the target has EUR 500 million turnover or more in the EU are notifiable, while for public procurement tenders, only procurements with a contract value of EUR 250 million or more are notifiable (although that is reduced to EUR 125 million in the case of procurements divided up into lots provided the overall "pot" is at least EUR 250 million).  That said, the Commission also has the ability to call-in M&A and public procurements below threshold where it suspects that foreign subsidies may be involved.

The FSR began to apply in July 2023, with the notification tools becoming applicable in October 2023.  To begin with, the Commission was focused on bedding down the new regulation and addressing the notifications received under the concentrations and public procurement tools (the volume of which appear to have exceeded the Commission's initial expectations).  However, in the last several months the Commission has significantly expanded its staffing in relation to FSR matters, setting up a new dedicated directorate within DG COMP, the new Directorate K, and has now begun to take significant enforcement action under the new regulation.

FSR ex-officio investigations relating to certain Chinese suppliers

On 9 April 2024, the Commission launched its first-ever ex-officio investigation, a wide-ranging investigation in relation to potential foreign subsidies affecting competition within the EU wind power sector, focusing on wind power projects in Spain, Greece, France, Romania and Bulgaria. 

The targets of the investigation appear to be Chinese wind turbine suppliers, which the Commission suspects may benefit from State subsidies that provide them with an unfair competitive advantage over their European competitors.  Should the Commission conclude that certain Chinese wind turbine suppliers benefit from foreign subsidies that distort competition, they could impose significant remedies, which could impact those suppliers' activities in the EU.  The investigation, currently in its initial stages, does not have a concrete timeline, and could extend over a number of years, with consequent implications in terms of legal uncertainty for wind power projects within the scope of the Commission's investigation.

Meanwhile, on 23 April 2024, the Commission carried out its first-ever "dawn raids" under the FSR, i.e. unannounced inspections at a company's premises in order to gather evidence in relation to potential foreign subsidies, targeting the Chinese security scanner company, Nuctech, at their premises in the Netherlands and Poland.  The use of this kind of investigation power, which to-date has been mainly confined to information gathering in relation to secret cartels, represents a very assertive approach by the Commission in relation to FSR enforcement and it remains to be seen whether this will be widely used going forward.

Investigations under the FSR notification tools relating to certain Chinese bidders in EU public procurements

The Commission has examined a significant volume of notifiable transactions and public procurement tenders during the past months without any significant action being taken.  Indeed, and in contrast to the position under the EU Merger Regulation, the Commission's practice under the FSR has been to allow the timeframe for opening a formal investigation, or a "Phase II investigation", to expire, thereby implicitly "approving" the transaction, without taking any formal decision as such.

In the last few months however, the Commission has opened three such Phase II investigations, all in relation to notifiable public procurement tenders involving Chinese bidders in the energy and infrastructure sector, as follows:

• The tender of CRRC Qingdao Sifang Locomotive (ultimately State-owned) for electric rail rolling stock in Bulgaria.
• The tenders of LONGi and Shanghai Electric in relation to a photovoltaic (solar power) project in Romania. 

In these cases, although the companies involved did not appear initially to provide much information to the Commission in their notifications, the Commission, apparently also undertaking its own research, identified significant potential subsidies well in excess of the tenders.  Indeed, in the case of CRRC, the Commission identified potential subsidies amounting to five times the value of its bid, which the Commission also noted was substantially lower than the competing bid and the estimated costs by the contracting authority.

In all of these cases, rather than contesting the Commission's investigation, the companies withdrew their tenders, allowing the Commission to terminate their investigation without taking a final decision.  The Commission has considered this to be a triumph for their enforcement activity under the FSR, with Thierry Breton, Commissioner for the Internal Market noting at the time of CRRC's withdrawal that: "In just a few weeks, our first investigation under the Foreign Subsidies Regulation has already yielded results".

Investigations under trade defence rules: electric vehicles and other goods from China

At the same time, the Commission has stepped up its use of existing trade defence powers and has opened a number of investigations against allegedly dumped and subsidised imports of goods, mainly focusing on China. 

These include notably: the Commission's anti-subsidy investigation in relation to imported electric vehicles, which it opened last year on its own initiative (as opposed to on the basis of a complaint from the EU domestic industry, which is its normal practice), as well as anti-subsidy and anti-dumping investigations in relation to mobile access equipment and biodiesel imports from China.  There also continues to be speculation in relation to the potential for the Commission to open a further trade defence investigation, targeting solar panel imports.       

The new competitive landscape?

The Commission's proactive approach in using the FSR and trade defence rules in addressing perceived unfair competition raises new potential risks and opportunities for investors and operators. 

On the one hand, the Commission's increasingly interventionist approach is a source of legal uncertainty for investors and tenders for projects that involve developers and suppliers from countries that are known to engage in State subsidisation. 

Based on its early enforcement practice, the Commission may be expected to target such projects under the FSR.  While the risk is greatest in relation to potential projects that could be notifiable under the FSR's notification tools, the Commission may also target projects that are not notifiable, including existing projects under its ex-officio powers, with as yet, uncertain results in terms of the potential remedies that the Commission may ultimately impose. The Commission could also open trade-defence investigations into imported goods, which, if concluded, would result in the imposition of additional duties on the imports, rendering them in principle more expensive for buyers. 

Conversely, the Commission's increased willingness to use these tools creates opportunities for European companies that consider themselves to be at an unfair competitive disadvantage.  It is probable that complaints from European wind turbine suppliers played a role in the Commission's initiation of its FSR ex-officio investigation into the wind power sector and trade defence investigations are also normally initiated on the basis of a complaint from the relevant EU domestic industry.

For the time being, the Commission's renewed enforcement activity has been relatively focused on certain sectors and countries.  But the Commission has also suggested that this would not remain the case, with Executive Vice President Margrethe Vestager, emphasising that the EU "needs more than a case-by-case approach […] we need a systematic approach".  A new competitive landscape is therefore clearly developing – how far it will extend though, remains to be seen.