A New Barrier to Transatlantic Procurement: The EU’s Foreign Subsidies Regulation

Webinar: Tuesday, 18 April 2023, 9:00 Eastern US, 15:00 CET
Program Recording

Program Slides – Closed Captioning – Chat

The European Union has launched the Foreign Subsidies Regulation (FSR), which will take full effect in October 2023. Traditionally, and in order to advance the EU’s common market, the European Union has closely regulated “State aid” within the European Union, limiting the types of subsidies that Member States may provide to their own businesses. (See background paper.) Now the EU has extended that “State aid” doctrine to contractors competing from abroad for EU Member State contract awards: to “level the playing field” in public procurement competitions in the EU, per an implementing regulation the new FSR will require bidders to disclose subsidies they have received from foreign governments. Bidders planning to compete for procurements in the EU – both civilian and defense – will need to understand this new regulatory barrier.

Registrants from 35 countries across five continents

To learn more please join this free one-hour webinar led by Pascal Friton, Max Klasse and Ramona Ader of the BLOMSTEIN firm, Berlin. Discussants will include Jean Heilman Grier (formerly of the Office of the U.S. Trade Representative, and now at Djaghe Consulting), Christian Filippitsch of Reed Smith’s Brussels offices, and Robert Anderson (WTO, retired). Professor Christopher Yukins of GW Law School will moderate.

Pascal Friton
Max Klasse
Ramona Ader
Robert Anderson
Jean Heilman Grier
Christian Filippitsch

U.S. and EU Protectionism

The European Union’s FSR has arisen in a broader context of emerging protectionism on both sides of the Atlantic, such as the U.S. Inflation Reduction Act, which raised new barriers to nurture “green” industries in the United States (analysis), the infrastructure procurement protected by the Build America, Buy American Act (background), and the EU’s International Procurement Instrument (webinar), which can be used to penalize vendors from nations that refuse to agree to open their procurement markets to EU vendors.  For background, see Jean Heilman Grier, The International Procurement System: Liberalization & Protectionism (2022) (available on Amazon).

The FSR and Trade Agreements

The webinar will address the intersection between the FSR and other standing international trade agreements.  As Rebecca Halbach (K&L) and Emmanuelle Rogiest (Van Bael & Bellis) noted, the “FSR’s scope is very broad,” and it “may encompass subsidies related to trade in both goods and services.”  Hence, they wrote, “questions can be raised as to its compatibility with the Agreement on Subsidies and Countervailing Measures (SCM Agreement), the General Agreement on Trade in Services (GATS) and the Government Procurement Agreement” (GPA).  While Article 44(9) of the FSR provides that an “investigation pursuant to this Regulation shall not be carried out and measures shall not be imposed or maintained where such . . . would be contrary to the Union’s obligations [under] any international agreement it has entered into,” this proviso, they cautioned, “does not mean that the FSR, as applied, will necessarily be compatible with all WTO rules.”

  • WTO Subsidies Agreement:  One open question is the relationship between the EU’s Foreign Subsidies Regulation and the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement). As the U.S. Department of Commerce explains, the SCM Agreement “provides rules for the use of government subsidies and for the application of remedies to address subsidized trade that has harmful commercial effects.” These remedies “can be pursued through the WTO’s dispute settlement procedures, or through a countervailing duty (CVD) investigation which can be undertaken unilaterally” by a WTO member government. Id. The FSR parallels the SCM Agreement, but differs in important respects. For example, while the SCM Agreement calls for nations to “notify” other WTO members of a damaging foreign subsidy, the FSR requires vendors to “notify” EU procuring entities of their own alleged foreign government subsidies. And while the Subsidies Agreement Article 7.9 anticipates that injured nations may impose countervailing duties targeted at (and tied to) subsidized imports “commensurate with the degree and nature of the adverse effects determined to exist,” and Article 7 of the FSR similarly contemplates proportionate “redressive measures . . . [that will] fully and effectively remedy the distortion actually or potentially caused by the foreign subsidy in the internal market,” the FSR also will allow the European Commission to impose more generalized penalties against foreign firms that fail to cooperate with the Commission, penalties tied to the affected firms’ annual revenues – not their subsidized goods or services. With regard to the intersection between the SCM Agreement and the FSR, however, Halbach and Robiest note that it can be argued that the WTO SCM Agreement applies only to subsidies inside a covered nation – not to subsidies that apply in a foreign market.
  • WTO Government Procurement Agreement (GPA):  The GPA provides in Article IV.2 that, with respect to “any measure regarding covered procurement, a Party, including its procuring entities, shall not: (a) treat a locally established supplier less favourably than another locally established supplier on the basis of the degree of foreign affiliation or ownership; or (b) discriminate against a locally established supplier on the basis that the goods or services offered by that supplier for a particular procurement are goods or services of any other Party.” As Halbach and Rogiest note, given the broad scope of the FSR, “it cannot be excluded that the application in practice of the FSR could result in a violation of this obligation.” Data from the European Commission shows, for example, that U.S. vendors enjoy a substantial share of the EU public procurement markets, not through direct sales but through sales via local EU-based affiliates. If a EU affiliate in effect bears an uneven burden under the FSR because of U.S.-produced goods and services it offers, that affiliate could potentially argue a violation of the GPA.

EU State Aid Doctrine

Panelist Max Klasse’s European University Institute (EUI) Podcast on State Aid Doctrine

Another open question is how the EU’s “State aid” doctrine will be applied to foreign government subsidies under the FSR. For example, will the “General Block Exemption Regulation” (GBER) — categorical exemptions for certain subsidies which thus need not be “noticed” to the Commission, such as exceptions for certain aid to small- and medium-sized enterprises (SMEs) and for environmental protection — also apply to foreign subsidies to government contractors?

Additional Resources