By: Hannah Pérez
Back in December of 2022, the European Union (EU) adopted the Foreign Subsidies Regulation which requires notification and approval for certain mergers and other deals that ‘distort’ the internal market through receipt of foreign subsidies.[1] One of the central concerns for the European Commission (Commission) in adopting this rule was curbing the “unfair advantage” that subsidies create over domestic companies in attempting to win contract bids.[2] This regulation went into effect in July 2023 and has recently been put to work with the first in-depth foreign subsidy probe of the Bulgarian Ministry of Transport and Communications’ contract to acquire twenty trains from CRRC Qingdao Sifang Locomotive Co. for лв1.2 billion (Bulgarian lev).[3]
In this pending investigation, there are several questions regarding how the Commission will interpret and apply certain provisions regarding whether a transaction has the effect of “distorting the internal market” of the EU.[4] It will be interesting to see how the Commission frames its stance on such subsidized contracts, particularly as the probe in question involves a Chinese corporation. The EU has an incentive to deny the deal in question as Chinese investment and subsidies have contributed to the EU’s growing trade deficit with China which rose from $208 billion to $277 billion between 2021 and 2022.[5]
On December 29th, 2022, President Biden signed legislation ordering the Federal Trade Commission (FTC) to pass regulations requiring that pre-merger filings (already required under the Hart-Scott-Rodino Antitrust Improvement Act of 1976) include information on foreign subsidies.[6] The FTC’s proposed rule, published last June to the Federal Register, provides that pre-merger notifications will now require information regarding subsidies received from “foreign countries of concern.”[7] While specific countries are not identified, the proposed rule points to the definition outlined in the Infrastructure and Jobs Act.[8] This definition leaves open the possibility for the Secretary of Energy to designate key countries and regions as concerns (read: China, Macau, and Hong Kong). While the final rule, and subsequent changes to the CFR, remain to be implemented it is not hard to see this regulation as an eager expansion in the US’s protectionist regime.
While there is a shocking resemblance between the two regulations, there are also notable differences.[9] For one, while the US amendments only add a criterion to a long-standing reporting requirement, the EU regulations create a novel reporting requirement that targets larger companies only (those creating revenues in excess of €500 million).[10] However, the US regulations would require much less reported information than the EU regulations.[11] This means that both regulations have the potential to collect a significant amount of data on subsidized transactions, but the US regulation will incentivize a greater breadth of collection and the EU regulation a greater depth.
Still, both regulations cover more than just strict ‘subsidies’ or “state aid,” extending also to grants, loans, tax concessions, and provisions of goods or services.[12] Most importantly, it must be noted that while both regimes will regulate and require notification of these transactions, as it stands, only the Commission can challenge these transactions without filing a separate case, as the FTC or DOJ would have to undertake.[13]
As the Commission begins its first deep-dive investigation under its newly minted regulations, there is cause for pause and reflection. Undoubtedly, the US – and the world – is looking to this enforcement action with anticipation. The Commission has 110 working days (until July 2, 2024) to make a decision on the CRRC case.[14] It is unclear whether the US regulation will be finalized before then, but even so the US will benefit from seeing such a facially similar regulation being enforced. But this situation presents more than a learning opportunity for the US, this is a pivotal moment where the US can differentiate its regulation from that of the EU.
While the undertones of both regulations are consistent with preserving financial competition, the US regulation has a more explicit national security goal, as evidenced by the inclusion of the language of “countries of concern.” This, coupled with the fact that the US reporting requirement involves less disclosure while covering a greater number of transactions (as it is not limited to larger entities like the EU regulation) could mean that the US will have greater flexibility to review transactions. This means that the US could quickly become a leader in this new space of subsidy regulation, which is important because that essentially means the US can retain control in defining which markets get to play in the global economy.
Financial and national security motivations have always been inextricably linked, but these new regulations bring that policy interplay to the forefront. With the different approaches that the EU and the US have taken in recent years to de-risking with China,[15] ‘subsidy’ regulation could be the next arena for defining de-risking policies. As the FTC promulgates its final regulations, the US should keep these considerations top-of-mind and consider how to streamline the process of restricting certain transactions.[16] In this way, the US can take de-risking a step further, and define the standard for future foreign subsidy regulation.
Hannah Pérez is a Staff Editor at CICLR.
[1] Commission Regulation 2022/2560 of Dec. 14, 2022, On Foreign Subsidies Distorting the Internal Market, O.J. (L 330) (EU).
[2] Foreign Subsidies Regulation, Eur. Comm’n, https://competition-policy.ec.europa.eu/foreign-subsidies-regulation_en [https://perma.cc/F98W-WSSR].
[3] Jared Foretek, EU Launches First In-Depth Foreign Subsidy Probe, Law 360 (Feb. 16, 2024, 6:47 PM), https://www.law360.com/internationaltrade/articles/1803857 [https://perma.cc/5FDT-PTZV].
[4] Commission Regulation 2022/2560, supra note 1.
[5] David Rogers, EU Probes Chinese Train Maker Over State Subsidies, Global Construction Rev. (Feb. 21, 2024), https://www.globalconstructionreview.com/eu-probes-chinese-train-maker-over-state-subsidies/ [https://perma.cc/P8WH-4VLT].
[6] Consolidated Appropriations Act, 2023, Pub. L. No. 117-328, 136 Stat. 4459.
[7] Premerger Notification; Reporting and Waiting Period Requirements, 88 Fed. Reg. 42178 (proposed June 29, 2023) (to be codified at 16 C.F.R. pts. 801 and 803).
[8] 42 U.S.C. § 18741(a)(5) (providing that “foreign entit[ies] of concern” include, among others, those designated as foreign terrorists, those on the SDN list, and those “determined by the Secretary, in consultation with the Secretary of Defense and the Director of National Intelligence, to be engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States.”).
[9] Jay Modrall, Alexandra Rogers, & Andrew Eklund, Foreign Subsidy Scrutiny in Merger Review: The EU and US on Parallel Tracks?, Kluwer Competition L. Blog (July 24, 2023), https://competitionlawblog.kluwercompetitionlaw.com/2023/07/24/foreign-subsidy-scrutiny-in-merger-review-the-eu-and-us-on-parallel-tracks/ [https://perma.cc/82WR-AY4W].
[10] Regulation (EU) 2022/2560, supra note 1, at art. 20.
[11] Modrall, supra note 9.
[12] Regulation 2022/2560, supra note 1, at art. 3 (providing that the term “financial contribution shall include … transfer of funds or liabilities, such as capital injections, grants, loans, loan guarantees, fiscal incentives … the provision of goods or services or the purchase of goods or services” among others); see also supra note 7, at 42181 (providing that “’[f]oreign subsidies … can take the form of direct subsidies, grants, loans (including below-market loans), loan guarantees, tax concessions, preferential government procurement policies, or government ownership or control ….’”).
[13] Modrall supra note 9.
[14] Rogers, supra note 5.
[15] See Yukiko Toyoda & David Dolan, G7's Nuanced Pledge to 'De-risk' from China Reflected Concerns from Europe and Japan, Reuters (May 22, 2023, 8:41 AM), https://www.reuters.com/world/g7-pledge-de-risk-china-reflects-concerns-europe-japan-2023-05-22/ [https://perma.cc/3KNK-UNSX] (illustrating that EU member states have a more cautious and skeptical approach to de-risking from China than the US, due to the EU’s heavy economic reliance on China).
[16] See discussion above regarding limitations to FTC and DOJ powers to challenge transactions.