Will the EU’s Foreign Subsidies Proposal Make Investors Think Twice About Doing Business in Europe?
The proposed EU regulation on foreign subsidies is an important step to counter unfair subsidies. However, EU lawmakers will want to think twice to ensure that the rules don’t deter legitimate foreign direct investments which are key to Europe’s economic recovery and future competitiveness.
Following concerns with state-affiliated enterprises undercutting European competitors, the European Commission presented its proposed regulation on foreign subsidies in mid-2021.
However, some economists have warned that the proposal, as it currently stands, presents “significant risks” to business investment in Europe. In trying to create a level playing field, the proposal adds uncertainty and more red tape which could ultimately ‘’disincentivise foreign backed bidders from participating in EU procurements’’, meaning that public authorities ‘’miss out on the best value contracts for public funds’’.
The European Round Table for Industry has moreover cautioned that the instrument should not ‘’make inward investments less attractive or prompting third countries to adopt tit-for-tat rules that would be harmful for European investments abroad.’’Lawmakers in the European Parliament and EU Member States are currently analysing and developing their positions on the proposal. It is vital for Europe’s economic recovery that they get this regulation right.
Policy makers should aim for better balanced and less burdensome regulation to avoid situations where companies halt investments because of onerous requirements placed on them.
There are several areas where the current text of the regulation is uncertain and imposes disproportionate burdens on companies. For example, the proposed look-back period of up to ten years is a long time to have to keep records on file, especially as not all sectors are required to keep detailed files for ten years. Ten years is a long time to have the power to look at an acquisition. If there are concerns these can and should be addressed during the acquisition.
Another issue in the proposal are the overly-broad rules concerning what could trigger an investigation by the Commission. Here a framework needs to be put in place so that companies can understand clearly when and if an investigation would be triggered.
Furthermore, the definitions of a subsidy and distortion are overly broad. The proposal defines financial contributions as a subsidy if they are provided by a non-EU government directly or provided by a non-EU government indirectly through private and public entities. This definition goes beyond the WTO Subsidies and Countervailing Measures Agreement and EU state aid rules. Clearly, a tightening of these definitions would catch cases where a genuine subsidy is granted and bring them in line with the WTO and EU frameworks.
The proposal as it stands would finally require a company to investigate their subcontractors and other suppliers to see whether they have received subsidies. It is impractical and almost impossible for any company to know whether any of their suppliers or any subcontractor have had subsidies that may trigger notification under these rules. EU lawmakers need to tighten these rules to make them more proportionate for business.
Two years into the pandemic Europe is in desperate need of foreign investments to ensure its economic recovery. European leaders are particularly eager to attract private investments to strategic sectors hit by supply chain disruptions and to boost Europe’s competitiveness through investments into R&D. As governments will start paying back generous recovery subsidies they will want competitive bids for their public tenders.
Hopefully, EU lawmakers will ensure that this well-intended proposal does not inadvertently create a wall of red tape that forces foreign investors to look elsewhere.
Inma Pérez Ruiz is a Policy Advisor at CCIA