EU opens new front in anti-subsidy probes to address cross-border subsidies

Two recent anti-subsidy investigations by the European Commission (EC) into imports of glass fibre fabrics and continuous filament glass fibre products mark a significant change in the EC’s interpretation of foreign subsidies as governed by the EU’s Anti-subsidy Regulation (the Regulation). For the first time, the EC has extended the scope of its review to cross-border subsidies, i.e. cross-border financial support given by governments to companies in other countries.

The EC’s new interpretation suggests that, if a government acknowledges and endorses subsidies granted by other governments to manufacturers located in the first (endorsing) government’s territory, the EC may take action against those cross-border subsidies as if they were granted by the endorsing government.

The EC’s approach in the glass-fibre cases signals a more assertive stance by the EC in the enforcement against subsidised imports from third countries. This resonates with the EU’s wider ambitions to tackle the negative impact of foreign subsidies as illustrated by the EC’s publication last week of a white paper on levelling the playing field as regards foreign subsidies (you can find our briefing on the white paper here).

Factual background of the cases

In both cases (glass fibre fabrics and continuous filament glass fibre products), the relevant products were manufactured in Egypt by Chinese-owned companies (the case on glass fibre fabrics also covered products manufactured in China). The EU producers who lodged a complaint with the EC alleged that the producers in Egypt – located in the China-Egypt Suez Economic and Trade Cooperation Zone – benefitted from financial support obtained from both the Egyptian and Chinese governments, and called upon the EC to counteract such support claiming that it resulted in material injury to the EU industry.

Treatment of subsidies under the Regulation

General framework

When EU-bound foreign goods are financially supported by non-EU governments to the detriment of EU producers, the EU can levy anti-subsidy duties at its borders to offset such injurious subsidisation following an evidence-based anti-subsidy probe.

Under the Regulation, subsidies cover most forms of financial contributions (grants, loans, equity infusions, loan guarantees, fiscal incentives, provision of goods & services etc.) by governments or bodies owned or entrusted/directed by them (SODEs). In the EC’s practice, even privately-owned bodies can be found to be entrusted/directed by governments if they are influenced by the State. You can find further guidance on the EU’s anti-subsidy rules at the bottom of this post.

What is new in the glass-fibre cases?

To date, the EC has only targeted subsidies granted by the governments of countries where the imported goods were produced. This approach is supported by the definition of subsidy in the Regulation: “a financial contribution by a government in the country of origin or export.”

The recent glass-fibre cases were a challenge for the EC because they targeted products manufactured in Egypt and claimed to be subsidised by both the governments of China and Egypt. 

In order to be able to counteract the alleged cross-border support from China, the EC had to interpret the Regulation’s definition of subsidy broadly, to also include support given by a government outside the country of origin or export. The EC concluded that the Egyptian government, through its conduct, endorsed and ‘made its own’ the financial support given by China; in other words, the support given by the Chinese government was ‘attributed’ to the Egyptian government and brought into the definition of a subsidy under the Regulation.

An isolated incident or a precedent with wider implications?

It could be argued that the conditions surrounding the glass-fibre cases were exceptional: the EC analysed in detail the bilateral agreements between China and Egypt aimed at developing the special economic zone where the Chinese-owned producers are located and these agreements played an important role in the EC’s attribution of the Chinese subsidies to the Egyptian government. The EC built its case on a theory of close cooperation between the two governments serving a common purpose and benefitting common beneficiaries in Egypt.

However, the glass-fibre cases may have wider implications. The EC’s analysis regarding the ‘awareness’ of the Egyptian government of the heavy financial support involved in the Chinese government’s ‘One Belt One Road’ initiative (which – according to the Commission – provided the framework for the Chinese investments in Egypt) could be interpreted as suggesting that the EC may pursue cross-border subsidies cases involving other third countries based on a theory of ‘awareness of state subsidisation’, even in the absence of bilateral cooperation agreements between the countries involved.

Considering the extended definition of subsidies in the glass-fibre cases, we expect that the EC may increase its scrutiny over the following types of cross-border subsidies in future anti-subsidy probes:

• Direct loans from third-country governments or SODEs.
• Inter-company loans obtained from related companies which might have obtained such loans from third-country governments or SODEs.
• Export credit insurance contracts placed directly or indirectly with third-country governments or SODEs.
• Equity injections which are directly (or indirectly through related companies) received from third-country governments or SODEs.

We also note that the new approach resonates with the EU’s wider ambition to shield European businesses from the impact of unfair foreign subsidies. In this respect, the glass-fibre anti-subsidy cases complement the EC’s white paper on levelling the playing field as regards foreign subsidies published last week – which proposes an ambitious toolbox to address a regulatory gap concerning distortions of competition occurring in the EU as a result of subsidies granted by non-EU states (you can find our briefing on the white paper here). In line with these wider policy considerations, the EC (via its Directorate-General for Trade) may be inclined to further develop its new approach to cross-border subsidies in future anti-subsidy investigations.

Looking into the future

The exporters affected by the countervailing duties on imports of glass-fibre products from China/Egypt may appeal the EC’s decisions before the EU Courts in Luxembourg. China and/or Egypt may also start proceedings against the EC under the WTO dispute settlement mechanism, arguing that the EC’s expansive interpretation of the concept of subsidy violates the WTO Agreement on Subsidies and Countervailing Measures. 

These appeal proceedings will inevitably take several years during which the EC may continue implementing its new, expansive approach towards cross-border subsidies. 

For example, the EC is analysing similar cross-border subsidy allegations in its ongoing anti-subsidy probe into imports of hot-rolled stainless-steel sheets and coils from Indonesia. The EC’s preliminary conclusions on whether such operations amount to countervailable subsidies are scheduled to be published by the beginning of July 2020 and may shed further light on how the EC will apply the attribution test in a different factual context.

It remains to be seen whether trade authorities in other countries will embrace the EC’s new approach in their anti-subsidy investigations to the benefit of their own domestic producers.

What steps can businesses take to minimise risks?

The EC’s new approach is likely to be relevant to:

• all non-EU manufacturers which are exporting or looking to export to the EU, and (plan to) finance their operations with direct or indirect support from governments or SODEs in third countries;
• and all EU importers purchasing or looking to purchase goods from such non-EU manufacturers which may be benefitting from subsidies. 

Non-EU manufacturers and EU importers concerned by the EC’s new approach should consider taking the following steps:

1. Assess on a regular basis whether they might face anti-subsidy investigations by the EU. 
2. Review their supply chains (and also financing operations for non-EU manufacturers) to determine any potential issues and measures that may have to be taken. 
3. Follow the developments on the EC’s anti-subsidy investigations to stay informed of trends and potential policy changes.

Further background on the EU’s anti-subsidy rules

The EC can levy anti-subsidy duties on imported goods only if:

• the subsidies are conditional upon export performance or use of domestic content; or available to specific firms, industries or regions;
• the subsidies put the recipients in a better position than they would have otherwise been under market conditions;
• an evidence-based investigation reveals that the subsidised imports cause or threaten to cause material injury to the EU producers; and
• the duties would not be too detrimental to other EU businesses.

The anti-subsidy duty rates would depend on the subsidy amounts obtained by each exporting producer in relation to goods exported to the EU during the year preceding the initiation of the investigation. The amount of the subsidy is the difference between what the producers received from the third country government or SODEs and what they could have normally obtained in the market.