One year of the FSR: the first (in-depth) investigations and the impact on international trade dynamics

One year of the FSR: the first (in-depth) investigations and the impact on international trade dynamics

On 12 July 2024, the Foreign Subsidies Regulation (FSR) celebrated its first anniversary. This novel regulatory instrument provides the European Commission with three specific tools to review and address distortions caused by subsidies granted by foreign (i.e., non-EU) countries: (i) the power to assess following a mandatory notification by companies that participate in large public tenders, (ii) the power to assess companies engaging in large M&A deals, and (iii) the power to investigate on its own initiative (ex officio) for all other market situations.

This article offers companies insight into the Commission's case practice so far and provides an overview of concrete examples of the types of foreign subsidies involved and potential distortions identified that may be considered relevant (see below). In addition, it briefly addresses the effect of the Commission’s practice on international trade dynamics.

I. One year of the FSR: expectations put into reality

When the FSR framework was introduced in 2023, it was met with significant criticism (see our previous blog here). Although the initiative for the tool was generally well-received by the industry, in practice, it resulted in a highly disproportionate and unprecedented administrative burden on companies operating within the EU. Consequently, many companies have been searching for an efficient way to collect and monitor information on foreign financial contributions. Furthermore, companies entering into discussions with the Commission have little certainty about the exact scope of the obligations under the FSR and the Commission's concrete (substantive) application of these rules.

At the same time, the Commission itself is also navigating new territory and will need to learn how to enforce the FSR through case practice and case law. The Commission’s FSR task force has shown (as promised) that it is willing to listen to companies, without, however, adopting a more lenient approach 'too early in the game.' Furthermore, the Commission provides piecemeal clarifications based on practice so far. Most recently, on 26 July, the Commission published a working document providing further clarifications “of a preliminary nature” on the substantive application of various articles of the FSR.

II. The first year of FSR enforcement shows a determined Commission

One year after the entry into force of the FSR, the Commission has initiated four in-depth investigations following a mandatory notification (one in the context of an M&A deal and three in the context of a public tender) and two ex officio investigations. As expected, these investigations show that the Commission has directed its new regulatory instrument toward Chinese companies. More interestingly, these investigations provide some insight (albeit limited) into the interpretation of two important substantive concepts, namely the concept of 'foreign subsidy' and the concept of 'distortion in the internal market,' as laid down in Articles 3 and 4 of the FSR, respectively. A more concrete overview can be found in the schedule below.

(a) Three bids withdrawn following in-depth investigations into public tenders

On 16 February 2024, the Commission opened its first in-depth investigation following the notification by the indirectly state-owned Chinese rolling stock manufacturer CRRC after its bid for a public tender concerning the provision of 20 push-pull trains and related services. CRRC's bid was half the estimated value of the contract and half the value of a rival offer. This below-market pricing, together with the total amount of foreign subsidies (five times larger than the value of the bid), provided sufficient indications for further investigation.

On 3 April 2024, the Commission opened two further in-depth investigations following notifications by two Chinese bidders (Shanghai Electric and Longi) in a public tender for the design, construction, and operation of a solar panel park in Romania. For both companies, the Commission found indications of "significant potential economic advantages" resulting from foreign subsidies (amounting to at least several billion euros in the case of Shanghai Electric). In addition, the Commission considered the lack of information on the financial proposal itself and on the nature, conditions, purpose, or use of the foreign subsidies relevant as indications.

All three companies withdrew from the public tender shortly after the Commission initiated its in-depth investigation, well before the 110 working days deadline for the adoption of a decision.

(b) One in-depth investigation into the acquisition by a foreign company of EU telecom operations

Since the mandatory notification regime became applicable on 12 October 2023 to the end of July 2024, 106 transactions were pre-notified to the Commission. Of these, 76 transactions were formally notified., out of which 63 were closed after the preliminary review phase. The most common potential foreign financial contributions assessed in these cases included capital injections and equity contributions, loans obtained from financial institutions, as well as state guarantees, direct grants for specific projects, and tax benefits (for an overview, see the Commission's first Policy Brief of 27 February 2024).

On 10 June 2024, the Commission opened its first in-depth investigation into an M&A deal, in which e&, the United Arab Emirates' state-owned telecom operator, intends to acquire the telecom operations of the Czech conglomerate PPF Telecom Group in Bulgaria, Hungary, Serbia, and Slovakia for approximately EUR 2.2 billion. The Commission is concerned that the unlimited state guarantee and the loans from state-controlled banks improved the competitive position of e& during the acquisition process and in the future, by allowing e& to obtain financing for its EU activities on preferential terms. In response, in July 2024, e& offered to make changes to its proposed purchase to remedy the suspected competition distortions. For example, e& indicated it would submit to novel oversight and reporting obligations if allowed to acquire European telecom assets from PPF. The Commission has extended its review deadline from 15 October to 4 December 2024 to consider the offer and conclude its investigation.

(c) Two ex officio investigations and the prospect of the first FSR court case

The Commission can also, on its own initiative, examine information regarding potential foreign subsidies that distort the internal market. These ex officio investigations are arguably the most powerful FSR tool, as they can cover all types of economic activities, and the Commission has full discretion. In addition, the Commission has the power to start a preliminary review or in-depth investigation into foreign subsidies granted up to ten years previously, assuming these subsidies allegedly distort competition after 12 July 2023.

On 9 April 2024, the Commission announced its first ex officio investigation into the participation of two Chinese wind turbine producers (Envision and Mingyang) in five different wind procurement operations. The Commission said it would look into their activities in Spain, Greece, France, Romania, Bulgaria, Germany, and possibly other EU countries. With this investigation, the Commission fulfills the expectations set by the 2023 State of the Union address by President von der Leyen, in which she stressed the importance of the EU wind industry and the EU's aspiration to counter the increasing success of Chinese wind turbine suppliers in public tenders through aggressive pricing tactics in a sector where auctions are largely based on price.

The second ex officio investigation is particularly noteworthy for several reasons. First, the company under investigation – the Chinese security scanner company Nuctech – was the target of the Commission’s first dawn raid under the FSR. The inspection took place without prior notice on 23 April 2024 at Nuctech's company offices in Poland and the Netherlands. The purpose of the inspection was to gather information necessary to assess whether the company has received foreign subsidies that distort the internal market. The Commission suspects that Nuctech has benefited from Chinese state subsidies enabling it to undercut rival bidders in EU tenders.

Second, on 29 May 2024, Nuctech filed the first appeal against the FSR inspection before the EU courts (Case T-284/24), relying on five pleas, including that the Commission’s inspection decision was unlawful because "compliance with the decision would compel the undertaking to violate Chinese law, including criminal law," and raising the 'usual suspects,' such as an infringement of the right to privacy (Article 7 of the Charter of Fundamental Rights) and the right of defense.

Third, the company has already caused political and economic controversy due to national security concerns over cargo screening equipment (U.S.) and airport luggage scanners (Lithuania). The FSR does not provide for the consideration of potential threats to national security. The 'negative' effects that the Commission can weigh against the 'positive effects' of the foreign subsidies in the 'balancing test' under Article 6 of the FSR relate to effects ‘in terms of distortion of the internal market.’ Parallel investigations of Foreign Direct Investment (FDI) only occur in the context of FSR investigations of M&A deals. However, we cannot discount the possibility that the Commission might find a way to incorporate national security considerations under the FSR.

III. ...and further increases tensions in international trade dynamics

The protection of EU interests and the focus on Chinese companies seem to be acting as a catalyst for growing tensions between the EU and China. The China Chamber of Commerce to the EU (CCCEU) has been vocal in expressing its dissatisfaction with the use of the FSR, describing it as (in its own words) "a new tool of economic coercion to interfere with the reasonable and lawful economic operations of Chinese enterprises in the EU."

More recently, the discontent has escalated beyond vocal criticism to include political and economic retaliation. For example, on 27 June, China’s Ministry of Commerce (MOFCOM) announced that it is reviewing a request from its national industry to launch a 'barrier investigation' into the Commission's enforcement of the FSR. Chinese lobby groups and companies are urging their government to take the necessary countermeasures and are warning EU exporters (particularly agricultural exporters) to expect a range of retaliatory measures if the Commission continues its "selective transparency and potentially discriminatory application of the FSR."

Authors: Evi Mattioli and Céline Hennink
 

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