The EU’s new Foreign Subsidy Regulation on collision course with the WTO

Abstract

The European Union (EU) has become increasingly concerned about government-dominated economies that provide financing for companies engaging in commercial activities in the EU. The concern is that companies receiving these so-called foreign subsides gain an unfair advantage over their European competitors. With astonishing unity and speed, the EU, therefore, has created an ambitious piece of legislation, Regulation 2022/2560, commonly referred to as the Foreign Subsidies Regulation (FSR).The FSR allows the European Commission (EC) to take unilateral action against foreign subsidies that are presumed to distort the internal market. The EU’s plan represents a far-reaching change in the EU’s foreign trade policy and creates a field of tension with the World Trade Organization (WTO). Whilst there is legal uncertainty about the scope of theWTO’s Agreement on Subsidies and Countervailing Measures (SCM Agreement), some of the practices now regulated by the FSR most likely fall under the SCMAgreement which was incorporated into EU law by Regulation 2016/1037 (Anti-Subsidy Regulation).The FSR provides for a conflict rule establishing the supremacy of WTO law in such situations. However, considering the EU legislator’s interpretation of the SCM Agreement, there are considerable doubts as to whether this mechanism will effectively prevent the EC from taking unilateral action in an area that is actually subject to WTO law. In the area of overlaps, the FSR may, therefore, violate the supremacy of WTO law which would lead to the illegality of the FSR. This article addresses this risk and provides an outlook on how the EU could ensureWTO compliance by not applying the FSR if the regulated practice also falls under the SCM Agreement. Subsidy, Foreign Subsidies Regulation, Agreement on Subsidies and Countervailing Measures, SCM Agreement, Anti-Subsidy Regulation, WTO Legality, Foreign Direct Investment, 301 US Trade Act 1974