Transatlantic Treatment of Transnational Subsidies

On June 30, 2022, the Council of the European Union and European Parliament reached a “provisional political agreement" creating a new framework for the discipline of transnational subsidies. Across the Atlantic, similar legislation was introduced in Congress by Senators Rob Portman (R-OH) and Sherrod Brown (D-OH), aimed at “strengthening U.S. trade remedy laws,” with a particular focus on transnational subsidies. The concept of transnational subsidies is addressed in greater detail in a previous CSIS analysis. In short, these are subsidies provided by governments to producers in a foreign country who then export to third countries. The U.S. and EU proposals seek to remedy market distortions and unfair trade practices caused by transnational subsidies. Issues that need to be studied include how these proposals intersect with current World Trade Organization (WTO) rules on subsidies and what they suggest for a multilateral approach going forward.

Q1: What do current U.S. and EU laws say about transnational subsidies?

A1: The U.S. law on countervailing duties—found in Title VII of the Tariff Act of 1930 —like Article 1.1 of the Agreement on Subsidies and Countervailing Measures (SCM), states that a subsidy is based on a government or public body financing—directly or indirectly—the production and manufacturing of a product exported to the United States. Just like the SCM, it emphasizes that the subsidy must take place “within the territory of a country.” However, it has a looser threshold in the form of government finance, stating that a subsidy may take the form of “indirect finance” rather than only direct finance (e.g., government loans). Nonetheless, the U.S. countervailing duties law, prima facie, does not give a strong enumerated guideline for the discipline of transnational subsidies. A congressional report also suggests that the United States could follow the European Union in proposing a new regulation for transnational subsidies.

Similarly, the EU law on countervailing duties is also predicated on the SCM. This is based on the notion that that a subsidy must be “a financial contribution by a government in the country of origin or export”—implying that the undertaking must receive the subsidy in the jurisdiction of the subsidizing country, thus creating a loophole for transnational subsidies. There are other tools that the European Union could use to address transnational subsidies. The EU state aid law, for example, provides the framework for a level playing field on the use of subsidies. However, the state aid law says nothing on subsidies granted by non-EU entities. Further, the recently passed regulation on foreign direct investment screening focuses on an investment’s impact on “security” and “public order” while saying little on the market distortions caused by transnational subsidies. The same could be said on EU public procurement and competition policies, all of which do not thoroughly cover transnational subsidies, as demonstrated in the European Union’s white paper on the matter.

Q2: How do regulations intersect with and go beyond the General Agreement on Tariffs and Trade’s SCM?

A2: Both proposals address the deficiencies of the SCM by addressing transnational subsidies. They do this by offering an explicit definition of a transnational subsidy. For the United States, Title II, Section 201 of the Eliminating Global Market Distortions to Protect American Jobs Act (EGMD) defines a transnational subsidy as one “conferred by a country that is not the country in which the class or kind of merchandise is produced, exported or sold.” Specifically, the bill amends provisions of the 1930 Tariff Act to include the notion that a subsidy is not only a financial contribution by a public body but one where the government allows “explicitly or otherwise, another authority to provide a financial contribution.” This regulation therefore outlines a criterion for a transfer of authority between the subsidizing and host country, giving the Commerce Department the ability to apply countervailing duties to the country subsidizing production. For example, as stated in the summary of the bill, this provision would allow the Commerce Department to apply countervailing duties to China’s Belt and Road Initiative subsidies, which “benefit China-based or China-operated companies operating in countries outside of China.”

Likewise, Article 2 of the EU regulation on foreign subsidies (FSR) explicitly defines a foreign subsidy (transnational subsidy) as occurring “where a third country provides a financial contribution which confers a benefit to an undertaking engaging in an economic activity in the internal market [European Union].” However, unlike the SCM and even the EGMD, redressive measures in the FSR are not countervailing duties but actionable requirements such as reduction of the capacity, market presence, or investments of the entity and “repayment of the foreign subsidy.”

Similarly, both regulations go further than the SCM in other aspects. For example, the notion of injury is much more elaborate in both regulations, with the European Union creating a new framework to measure distortions that is based not on injury per se, but on a set of ex-post situations elaborated on below. Furthermore, the FSR includes trade in services while the SCM—and the EGMD—are restricted to goods.

Q3: What are the driving factors behind both proposals?

A3: The driving factor behind the EGMD is the effort to protect American jobs, specifically in the steel industry, which has been adversely affected by Chinese subsidies. This was well articulated by Senator Brown in his comments on the bill, stating it aims to “challenge China’s unfair trade practices and protect American jobs.” He alluded to the number of Ohioans that have been laid off due to China’s “overcapacity crisis”—a situation of excess steel production vis-à-vis global demand. These concerns have been echoed by concentrated groups such as the Alliance for American Manufacturing and United Steelworkers, with the former calling for the G20 to address Chinese industrial subsidies amid the closure of various steel mines in the United States. These concerns were key elements in former president Trump’s China policy.

The FSR, on the other hand, has a more technocratic motive behind it: namely, ensuring a level playing field of actors and mitigating the instances of market distortions. This concept, known as “ competitive neutrality,” was the main concern referenced in the initial white paper on foreign subsidies. Examples of market distorting acts include the acquisition of EU companies by subsidized entities well above the market price and bidding on public procurement contracts at uncompetitive rates. The European Union posits that these scenarios harm efficient EU companies, stifling their innovation and investments. Strategic concerns from the European Union were also a force behind this regulation. This was noted in the white paper, which states that some acquisitions by state-owned entities may be done not for commercial reasons but to “transfer technologies to other production sites, possibly outside of the EU.”

Advanced tools were therefore introduced in the FSR to ensure competitive neutrality—for example, notifications of mergers and acquisition by entities receiving foreign subsidies in the EU market (€500 million turnover threshold). This illustrates why the technocratic approach behind the FSR involves tools—such as diversification and repayment—that are more advanced than those of standard trade remedies.

Q4: What other specific policy changes do both proposals seek to effectuate?

A4: Aside from the transnational subsidy provision, the EGMD also introduces a new framework on “successive investigations.” This includes concurrent investigations—where the same product is investigated at the same time but in two separate cases—and recently completed investigations (within two years). The aim of this provision is to discipline repeat offenders by giving the International Trade Commission the power to consider the “cumulative impacts of subsidized” products, while also easing the costs of U.S. industries instigating these investigations. This is done by offering expedited relief to cases that have previously been investigated. The focus, therefore, is on the speed of the investigation meant to support U.S. complainants. This is an attempt to address a chronic problem with unfair trade allegations: the investigation takes so long that relief may come too late for the injured domestic company.

Conversely, the FSR effectuates a comprehensive framework on distortions that goes much further than injury in the SCM. Specifically, the regulation puts forth qualitative characteristics that define instances of distortions as well as a numerical indicator. Qualitative characteristics include, inter alia, whether the subsidy (a) provides an “unlimited guarantee” of funds, (b) directly facilitates a concentration, and (c) is granted to an entity that would otherwise have gone out of business. For the numerical indicator, the regulation holds that a subsidy is unlikely to distort the market if it is less than €5 million over a three-year period. Aside from distortion, the FSR also lays out a “balancing exercise” to weigh the positive and negative effects of the subsidy before the commission issues a ruling. This goes to show the thorough approach the European Union is willing to make in ensuring competitive neutrality.

Q5: What do both proposals suggest for the future of multilateral approaches to transnational subsidies?

A5: Both proposals suggest that there is a growing appetite for regulating transnational subsidies. The FSR, although the more holistic of the two, is unlikely to be replicated at the global level via the WTO system. This is due to its overlapping nature with other domestic economic governance frameworks (e.g., competition policy) and its rigid requirements, which may be burdensome to other countries. Indeed, some American constituents are skeptical of the regulation, fearing it may hurt U.S. enterprises. This is not to say there is no future for a multilateral approach in addressing transnational subsidies. Both the United States and the European Union have expressed their willingness to cooperate on the matter. This was first discussed in the trilateral meeting among the trade ministers of the United States, the European Union, and Japan, the first meeting of which took place in 2020. Parties concluded there should be an expansion on prohibited subsidies in the SCM, and the burden of proof should be reversed in “cases of excessively large subsidies.” Current progress on the trilateral partnership appears to be put on hold despite suggestions that the three entities planned to “ meet on the sidelines ” in the last ministerial conference of the WTO—the 12th Ministerial Conference.

The issue most recently surfaced in the U.S.-EU Trade and Technology Council’s (TTC) Working Group 10. At a recent CSIS event, Commission Director General for Trade Sabine Weyand suggested progress had stalled due to a shift of emphasis to an evidence-based investigation (e.g., evidence of how China subsidizes the semiconductor industry). Similarly, in the latest TTC ministerial conference, Working Group 10 made progress in discussing “specific non-market, trade-distortive policies” and exchanged relevant policy tools that could be used to address them. However concrete actionable steps have yet to be carried out. Progress should be made on this in the next ministerial conference.

This all suggests that there is some attempted coordination in addressing transnational subsidies, though most of it has been on the surface level. Moreover, the trilateral working group and the TTC demonstrate that trans-governmental networks appear to be—in the short run—the most viable avenue of collaboration addressing transnational subsidies. However, these networks still encompass a small number of countries. Progress still needs to be made in bringing a greater number of countries to the table in order to properly contain transnational subsidies.

Kaycee Ikeonu is an intern with the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C. William Reinsch holds the CSIS Scholl Chair in International Business.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Kaycee Ikeonu

Intern, Scholl Chair in International Business