EUROPEAN COMMISSION Brussels, 5.5.2021 SWD(2021) 99 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the Proposal for a Regulation of the European Parliament and of the Council on foreign subsidies distorting the internal market {COM(2021) 223 final} - {SEC(2021) 182 final} - {SWD(2021) 100 final}



Table of contents 1Introduction: Political and legal context4 2Problem definition7 2.1Scope7 2.2Problem 1: Distortions in acquisitions10 2.3Problem 2: Distortions in public procurement17 2.4Problem 3: Other market distortions21 2.5What are the problem drivers?29 2.6How will the problem evolve?34 3Why should the EU act?36 3.1Legal basis36 3.2Subsidiarity: Necessity of EU action36 3.3Subsidiarity: Added value of EU action37 4Objectives: What is to be achieved?37 4.1General objectives37 4.2Specific objectives37 5What are the available policy options?38 5.1What is the baseline from which options are assessed?38 5.2Options considered but discarded at an early stage40

5.3Option to be further assessed43 6What are the impacts of the policy options?49 6.1Problem 1 - distortions in acquisitions50 6.2Problem 2 - distortions in public procurement59 6.3Problem 3 - other market distortions63 7How do the options compare?67 7.1Problem 1 - distortions in acquisitions68 7.2Problem 2 - distortions in public procurement70 7.3Problem 3 - other market distortions72 8Preferred option74 9How will actual impacts be monitored and evaluated?76 Annex 1.Procedural information78 Annex 2.Stakeholder consultation synopsis report81 Annex 3.Who is affected and how?84 Annex 4.Supporting data and analysis for the problem definition87 Annex 5.Supporting data and analysis for the assessment of the impacts102 Annex 6.Complete summary of the consultation activities105 Glossary Term or acronym Meaning or definition AD Anti-dumping AS Anti-subsidy DG Directorate-General DG COMP Directorate-General for Competition DG GROW Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs DG TAXUD Directorate-General for Taxation and Customs Union DG TRADE Directorate-General for Trade EEA European Economic Area EFTA European Free Trade Association ESIA European Semiconductor Industry Association EU28 EU27 countries + UK EUMR EU Merger Regulation FCO German Federal Cartel Office FDI Foreign Direct Investment FTA Free Trade Agreement FTE Full-time equivalent (employee) GATT General Agreement on Tariffs and Trade GATS General Agreement on Trade in Services GDP Gross Domestic Product GPA WTO Government Procurement Agreement GTA Global Trade Alert IPCEI Important Project of Common European interest IPI International Procurement Instrument MAST Multi-Agency Support Team NCAs National competition authorities NTMs Non-tariff measures OECD Organisation for Economic Co-operation and Development RAG Regional aid guidelines RDI Research, Development and Innovation SCM WTO Agreement on Subsidies and Countervailing Measures SMEs Small and medium-sized enterprises SOEs State-owned enterprises TDI Trade defence instrument TED Tenders Electronic Daily TEU Treaty on European Union TFEU Treaty on the Functioning of the European Union UNCTAD United Nations Conference on Trade and Development WTO World Trade Organization

1Introduction: Political and legal context The European Union (EU) is closely intertwined with the global economy. With trade in goods and services amounting to EUR 5 984 billion in 2019, the EU is the world’s largest trading block ahead of the United States of America (EUR 4 985 billion) and China (EUR 4 749 billion). As such, the EU accounts for 16.4% of overall global trade. The EU is also the world’s leading provider and destination of foreign direct investment (FDI) with outward stocks at EUR 8 990 billion and inward stocks at EUR 7 138 billion in 2019. According to data by UNCTAD, in 2019, the EU accounted for 25% of global inward stocks and 32% of global outward FDI stocks. Trade is an important element of the EU economy, making up almost 35% of the EU’s Gross Domestic Product (GDP) with 35 million European jobs dependent on exports. The flow of products, services and capital into and out of the EU contribute to the EU’s growth by enhancing its competitiveness, creating jobs, innovation and opening up new export markets. Trade is particularly important for Small and Medium Enterprises (SMEs), which represent 85% of all EU exporters. Openness to trade and investment is an important building block of the resilience of the economy and will contribute to the recovery from the COVID-19 crisis. As a destination of one third of the world’s investment stocks, in 2017 the EU28 was home to roughly 100 000 companies owned by foreign entities, which employed an estimated 9 million people in the EU28. Based on the Eurostat FATS statistics, these companies had a combined turnover of more than EUR 4 trillion and produced an added value of EUR 917 billion. Overall, 16 million jobs in the EU depend on foreign direct investment. Bringing such benefits to the EU economy, foreign investments are a welcome source of jobs, growth, and competitiveness. A strong, open and competitive single market enables both European and foreign companies to operate and compete globally. To meet these objectives, on 10 March 2020, the European Commission presented a New Industrial Strategy for Europe, which mapped out a path for the EU to allow its industry to lead the green and digital transitions based on competition, open markets, world-leading research and technologies and a strong single market. The EU is pursuing a model of open strategic autonomy by shaping the system of global economic governance and developing mutually beneficial bilateral relations, while protecting the EU internal market from unfair and abusive practices. As will be illustrated in this report, in recent years foreign subsidies appear to have had in some instances a distortive impact on EU’s internal market creating an uneven playing field for companies that compete in the EU internal market. While to date there is a general lack of reliable data on subsidies granted by third countries, there is an increasing number of incidences in which foreign subsidies seem to have facilitated the acquisition of EU undertakings, influenced other investment decisions, distorted the trade in services or otherwise influenced the behaviour of their beneficiaries in the EU market, to the detriment of fair competition. In this context, foreign subsidies can take different forms. They can for example be granted in the form of zero-interest loans, unlimited State guarantees, zero-tax agreements or dedicated State funding. Many of such foreign subsidies would be problematic if they were granted by EU Member States and assessed under EU State aid rules. Some EU trading partners have been actively pursuing industrial policies with the declared aim of achieving global leadership in key industrial sectors. For example, the Chinese industrial strategy “Made in China 2025” aims to make the country an industrial leader by providing favourable conditions for growth to a number of industrial and hi-tech sectors such as robotics, electric vehicles, medical equipment, aerospace, maritime and railways. Studies indicate that public financial support is an important part of this strategy and that Chinese direct and indirect subsidies to State owned enterprises (SOEs) have amounted to 1.3 – 1.6% of annual GDP in recent years, with the total subsidy figure in fact likely being higher as private firms receive about a third of total direct subsidies (2018). These are just some examples to illustrate broader policy trends such as national industrial strategies to create global champions and unilateralism. Since 2017, the EU has been actively engaged in trilateral talks with the US and Japan to improve multilateral cooperation in a number of key areas. There is a particular recognition of the need to strengthen existing WTO rules on industrial subsidies. The scope of the cooperation includes a strategy to address: “non-market policies and practices, market-oriented conditions, industrial subsidies and state-owned enterprises, forced technology transfer policies and practices, WTO reform and digital trade and e-commerce.” The three Trade Ministers agreed in January 2020 on ways to strengthen existing WTO rules on industrial subsidies In June 2018, the European Council gave the Commission a mandate “to pursue WTO modernisation in pursuit of the objectives of making the WTO more relevant and adaptive to a changing world, and strengthening the WTO's effectiveness.” Considering the challenge to find a multilateral solution to subsidies within a reasonable time-frame, the Commission committed, as part of the New Industrial Strategy for Europe, to explore how best to strengthen the EU’s anti-subsidies’ mechanisms and tools. On 17 June 2020, the Commission adopted a White Paper on foreign subsidies to explore the issue, launch a public debate and propose possible solutions. The White Paper, and in more detail, section 2.5 of this report, describes a legislative gap in EU trade, competition and public procurement rules, which effectively prevents the EU from taking action against certain distortions caused by foreign subsidies including distortions caused by subsidies to finance acquisitions or procurement bids. The White Paper notes that while the granting of support by EU Member State authorities is subject to EU State aid control, no comparable regime is in place for support granted by third-country authorities. This puts industry active in the EU and not receiving foreign subsidies at a disadvantage vis-à-vis beneficiaries of foreign subsidies. Recently, several suggestions for action have been brought forward aimed at addressing the possible distortions from foreign subsidies. The Netherlands have suggested to target undertakings receiving foreign subsidies or having an unregulated dominant position in a third-country market, in order to prevent potentially disruptive behaviour. France, Germany, Italy and Poland have called for an adaptation of the Union’s competition rules, notably to take account of the possible distortions created by foreign State support and protected markets. The German Monopolies Commission has proposed a third-country State aid instrument to address the negative effects of non-EU subsidies on the internal market. The issue of subsidies has also been brought forward by the co-legislators at several occasions. In the Council conclusions of 11 September 2020, the EU Council stated that it “looks forward, in that respect, to discussing the White Paper on levelling the playing field as regards foreign subsidies”. This Council position was later endorsed by the Special European Council in its conclusions of 1-2 October 2020, which called for, inter alia, “further instruments to address the distortive effects of foreign subsidies in the Single Market”. The European Parliament, in its February 2020 report on competition policy, also called on the Commission to “investigate the option to add a pillar to EU competition law that gives the Commission appropriate investigative tools in cases where a company is deemed to have engaged in distortionary behaviour due to government subsidies or to have made excessive profits based on a dominant market position in its home country”. In a joint letter to Executive Vice-Presidents Vestager and Dombrovskis and Commissioner Breton, a group of 41 Members of the European Parliament have expressed a strong support for an instrument to tackle “companies from third countries that have received substantial state support.” Finally, a recent report of the European Court of Auditors finds that certain subsidies granted by the Chinese state, if granted by an EU Member State, would constitute State aid and notes that this “difference in treatment can distort competition in the EU’s internal market”. 2Problem definition 2.1Scope Foreign subsidies are support measures provided by non-EU governments to undertakings active in the EU that can take various forms such as capital injections, grants, loans, guarantees and foregone public revenue in the form of preferential tax treatments. Foreign subsidies may confer an unfair advantage to their beneficiaries and upset the level playing field between companies in the internal market. Foreign subsidies, as defined above, and State aid, i.e. subsidies granted by EU Member States as defined in Article 107 TFEU, are very similar concepts. This similarity in the definitions reflects the analogous economic impact of both types of subsidies on the market. Indeed, the distortions caused by subsidies are in principle the same regardless of whether they are granted by a Member State or by a third country: if there is a market, subsidies will distort competition. However, EU State aid control provides clear and strict rules for determining when subsidies granted by Member States are compatible with the internal market i.e. may be allowed. In particular, State aid has to be proportionate to the objective pursued. As a result, EU State aid rules minimise the competitive distortions and therefore also of negative spill over effects into third-country markets. Moreover, State aid granted explicitly to promote exports is in principle prohibited under EU State aid rules. Additionally, State aid is subject to specific transparency requirements.

Other jurisdictions do not have similar control mechanisms for the subsidies they grant. As described in Section 2.5 and in Annex 4, those foreign subsidies are also not subject to the same transparency criteria as State aid. Consequently, the risk of negative spill over effects from distortive foreign subsidies into other markets, including the EU internal market, are much higher than in case of EU State aid. This leads to an uneven playing field between undertakings operating in the EU that receive foreign subsidies and those that receive no support or compatible State aid. On the other hand, foreign subsidies may have been designed to contribute to the policy objectives of the countries that grant them. Such policy objectives, e.g. environmental protection, may in some cases coincide with those pursued by the EU. Furthermore, foreign subsidies may well only affect the domestic market of the third country concerned without spilling over into the EU internal market. Consequently, a foreign subsidy would only be problematic in the EU if it has caused, or is likely to cause, distortions in the internal market. When determining whether a foreign subsidy is problematic, it is relevant to consider a number of conditions (or ‘indicators’), such as the type of market conduct, the size and nature of the subsidy concerned as well as the characteristics of affected market(s). Certain types of activities by subsidised companies, including different types of investments, can have a harmful impact on competition in the internal market, e.g. foreign subsidies to facilitate acquisitions or bids in public procurement tenders. Such acquisitions risk entailing the expansion of less efficient companies at the expense of more efficient non-subsidised ones. Distortions of competition in the internal market can also result from participation in public procurement procedures by bidders that have received foreign subsidies enabling them to submit bids that are economically more advantageous compared to those made by non-subsidised competitors. Subsidised bidding can ultimately lead to the crowding out of more efficient unsubsidised competitors that are not able to compete on an equal footing, thereby missing out on business opportunities and losing market shares. Due to the size of certain procurement markets and the fact that already a few contract awards can give successful subsidised bidders considerable economic advantages over their competitors, this practice can be considered harmful. Beyond specific types of activities, the size of the subsidy granted to companies needs to be taken into account when determining whether a foreign subsidy is problematic, since excessively large subsidies can be particularly distortive for competition. Likewise, the nature of the subsidy has an influence on how distortive it can be. Based on the EU’s experience with enforcing EU State aid rules, an operating subsidy is more likely to cause distortions than an investment subsidy, which indicates that the former can be considered more problematic in the case of foreign subsidies as well. Lastly, foreign subsidies can be especially problematic if they are granted to companies that operate in markets that already suffer from low levels of competition. For example, subsidies can exacerbate the malfunctioning of markets with high entry barriers and significant economies of scale. Subsidisation can further cement market concentration, thereby leading to increased profit margins and higher prices. Thus, if foreign subsidies are granted to companies that already enjoy a considerable market share in sectors with low levels of competition in the internal market, their impact is likely to be particularly harmful. In view of the above, the problem examined in this report is centred on the distortions caused by some foreign subsidies in the EU internal market. On the basis of the data in sections 2.2 to 2.4, these distortions fall in three categories: ·Distortions in the acquisition of EU undertakings, ·Distortions in the area of EU public procurement, and ·Other market distortions Most submissions to the public consultation on the White Paper and the targeted consultation confirmed the concerns that some foreign subsidies distort the internal market. Most Member State authorities, with the exception of three who requested more information on distortions, supported the problem definition as described by the Commission in the White Paper. A large majority of Member States also agreed that foreign subsidies may have a distortive effect in general market situations (i.e. beyond acquisitions and public tenders). As far as other EU stakeholders are concerned, almost all agree that foreign subsidies cause or could cause distortions in the internal market. Some stakeholders put forward examples of cases, especially of distortions in acquisitions or public procurement procedures, which will be addressed further in this report. Others, however, specify that it is difficult to provide concrete examples of cases where such distortions have materialised since reliable information on foreign subsidies is difficult to obtain. Non-EU stakeholders were generally more critical of the existence of a problem and the need to act. On the other hand, there are also some non-EU stakeholders recognising that foreign subsidies may indeed create distortions on the EU internal market. As will be described in more detail in sections 2.2 to 2.4, various stakeholders pointed to issues in specific economic sectors: steel and aluminium sector, aviation, railways (especially in the context of public procurement for infrastructure), oil and gas, and semiconductors. More specific stakeholder feedback will be referred to below in the context of the individual examples of sectors and case studies. Prior to discussing each problem, it has to be emphasised that data on foreign subsidies are currently not systematically collected – neither in the EU nor in third countries. This has to do with the fact that in most third countries there is a lack of transparency for subsidies granted by public authorities. In the absence of regulation, there are few incentives for companies or public authorities alike to make subsidies more transparent. As highlighted in the introduction, the only international organisation which tracks certain subsidies (for trade in goods) is the WTO, but also in this case the data is not complete because WTO Members do not always comply with the notification obligation. Several other organisations have attempted to track subsidies outside of the EU. At the national level, Good Jobs First, a US NGO, has for instances created an overview of subsidy schemes and individual subsidies in the United States (at both the state and federal level). At the global level, the Global Trade Alert (GTA) attempts to track subsidies more systematically across countries – the data contain subsidy schemes and individual awards but do not measure the impact of such subsidies. The IMF has carried out research on subsidies especially regarding subsidies granted as a reaction to the Covid-19 pandemic. As will be explained in more detail under problem 3, additional databases exist that track subsidies as part of broader categories (e.g., data collected by World Bank on state expenditure). In addition to the limited availability of data, there are significant methodological challenges when it comes to the definition of subsidies. In any event, even if there were an effective system to track subsidies in third countries, there would be a need to establish their potential link to the internal market. As regards information on distortions caused by subsidies, several OECD studies have attempted to quantify market and sector specific distortions. In a report on government distortions in the semiconductors industry, the OECD finds that investment incentives, in particular preferential tax treatment in non-EU countries, distort trade and competition in the relevant markets and might lead to a diversion of investments to less efficient locations. To sum up, there is evidence of the existence and impact of foreign subsidies, but it is sketchy and scattered across countries and sectors. To address these shortcomings, the Commission has compiled several case studies for each of the three problem areas. The case studies show that non-EU companies with significant links to the internal market have received financial contributions from non-EU public authorities, for example through loans not granted on market terms. The case studies illustrate that foreign subsidies can be traced back for instance by analysing annual reports of publicly listed companies which sometimes list the financial contributions they receive from public authorities. In other cases, specific legislative acts passed in third countries, which institute subsidy schemes or individual payments, can point towards subsidisation. However, these case studies have limitations. In order to confirm that the identified financial contributions have indeed conferred a benefit on the beneficiaries and distorted the internal market, a more detailed investigation based on more advanced investigative tools would be necessary.

2.2Problem 1: Distortions in acquisitions This subsection will describe the market distortions caused by foreign subsidies in cases when they facilitate the acquisition of EU companies (‘subsidised acquisition’). The findings of this section can also partially be applied to the other two problems. The discussion below differentiates between short and long run effects of subsidised acquisitions (and investments more broadly) on producers and consumers in the internal market. The discussion first focuses on effects on producers before proceeding with effects on consumers. At first glance, it seems that some market players active in the internal market benefit from foreign subsidies. According to some studies, one potential short-run consequence of subsidisation is that subsidised companies may overpay for their acquisitions (‘acquisition premiums’). Therefore, it logically follows that sellers of companies in the internal market can benefit financially from inflated purchase prices. However, potentially more efficient competitors of the subsidised acquiring company would be crowded out from the acquisition process. As highlighted by Hufbauer and co-authors, this has to do with the ‘soft’ budget constraint of public authorities that subsidise companies investing abroad: public authorities can provide funding to companies below market rates or directly support an acquisition through equity participation. In contrast, non-subsidised companies face ‘harder’ budget constraints when they try to raise funds to finance acquisitions. This crowding out effect is likely to outweigh any benefits for producers associated with reaping acquisitions premiums, i.e., the negative impact of foreign subsidies on companies in the internal market is more significant than any positive effects. Whilst one might argue that the negative effect of overbidding might be limited in the short run, it can seriously harm the functioning of the internal market in the long run. For example, overbidding can also deter non-subsidised companies from engaging in acquisitions more generally, which would limit their opportunities to grow in scale through acquisitions. The existence of this problem in the internal market has been confirmed by a recent publication that points out that the EU FDI screening regulation does not address the problem of subsidised acquisitions, which according to the author gives subsidised companies from third countries an unfair advantage. As described above, the paper also points to the issue of distorted acquisition prices that can occur as a result of subsidised acquisitions. Germany, France, and Italy had pointed out this problem during the negotiation process of the EU FDI Regulation. In a similar vein, several studies have pointed out that in the long run, subsidised acquisitions can lead to an expansion of less efficient subsidised companies at the expense of more efficient non-subsidised ones. Subsidised acquisitions may also help companies to gain easier access to cutting-edge technologies. Some analysts have attributed the strategic use of subsidised acquisitions to the Chinese government which, as part of the Made in China strategy, encourages and supports Chinese investments abroad in the high-growth technology sector. In general, the relevant literature suggests that subsidies granted by countries to encourage foreign investment abroad, especially in so-called “developmental” states, are likely to be widespread and focus on specific firms and sectors as well as specific host countries. In addition, studies have established that an uneven playing field due to subsidisation may ultimately lead to increasing market concentration, which increases risks for anticompetitive outcomes such as increased margins and higher prices. This problem is further exacerbated by an uncontested position of some companies in their home markets. The latter point already indicates the potential long-run effect of foreign-subsidised acquisitions (and investments more broadly) on consumers. In the short run, though, foreign subsidies could be seen as beneficial for consumers, as the subsidised company’s increased financial strength could allow it to offer cheaper prices for relevant goods or services than its non-subsidised competitors. This effect has been documented by a recent merger control decision of the German Bundeskartellamt (Federal Cartel Office, FCO) which is detailed in the case study boxes below (Example 2, Problem 1). In a nutshell, the decision points out that in the short run low pricing strategies are ‘inherently competitive’ and therefore benefit consumers. But in order to improve competition and foster innovation, such low pricing strategies would need to be grounded on comparative cost advantages of the company concerned vis-à-vis its competitors – if, however, the low pricing strategies are a result of systematic subsidisation, they can distort competition and lead to serious market distortions in the long run. In practice, both EU and non-EU companies operating in the internal market without receiving subsidies risk being crowded out by non-EU subsidised investments. As indicated above, by tilting the level playing field, subsidies contribute to the consolidation of markets and thereby allow beneficiaries to more easily attain dominant positions, especially in markets with high economies of scale and relevant entry barriers. After having attained a dominant position, subsidised companies can use their financial strength to engage in predatory pricing (or ‘dumping’) which further consolidates their position and pushes non-subsidised competitors out of the market. This might eventually negatively affect consumers – provided subsidised companies used their dominant position to increase prices. Altogether, in the long run, foreign subsidies are thus likely to have a negative impact on both producers and consumers alike in the internal market. It seems reasonable to assume that low pricing strategies could also be leveraged during public procurement procedures to undercut rival bidders or as part of general market distortions. In contrast to greenfield investments, which often require years before they become operational, subsidised acquisitions allow companies to gain a foothold in the internal market more swiftly, which is why subsidised acquisitions can be deemed to be particularly harmful. A subsidies-induced distortion of competition might have further knock-on effects or ‘indirect’ effects on other policy areas. For example, subsidised companies might shift production facilities abroad after having acquired companies in the internal market, which could affect labour markets in the EU. Outside of the EU, the idea of regulating the harmful impact of subsidised acquisitions has been discussed in a paper which has been submitted to the US-China Economic and Security Review Commission. The paper highlights that subsidised acquisitions can have adverse consequences for non-subsidised companies in the relevant market. Furthermore, the paper identifies several examples of foreign subsidised acquisitions of US targets, thereby demonstrating that subsidised acquisitions may not only affect the EU internal market. There is currently a discussion in the US on whether rules on foreign-subsidised acquisitions should be adopted. The US-China Economic and Security Review Commission recommended Congress to adopt a foreign subsidy review in its 2020 Report to Congress. Case studies The following case studies illustrate how foreign subsidies may have distorted the acquisition of EU companies. It should be noted that without appropriate investigative tools, it cannot be determined with certainty to what extent the various financial contributions can be qualified as subsidies and whether these funds were used to facilitate the acquisitions of the EU undertakings concerned. The case studies, however, give a clear indication of the potential of foreign subsidies to distort the internal market through subsidised acquisitions. These case studies also show that potentially subsidised acquisitions are not confined to specific sectors. Some sectors, however, seem to be particularly affected. Among these are the steel, aluminium and semiconductor sectors, which have also been analysed in-depth by the OECD and pointed out by respondents to the public consultation. Example 1, Problem 1: CNCC/Pirelli In 2015, China National Chemical Corporation (ChemChina) acquired Pirelli, via its subsidiary - the China National Tyre and Rubber Company (CNRC). In 2018 the European Commission stated in the final decision of an anti-subsidy investigation that CNRC had benefited from several interventions by the Chinese State as the company did not have sufficient own funds to finance the acquisition. The most relevant support measures are listed below: * CNRC received a grant of RMB 500m (around EUR 66m) from the Central SASAC (State-owned Assets Supervision and Administration Commission of the State Council) to promote global production capacity cooperation under the Belt and Road Initiative (BRI). * CNRC received an EUR 800m preferential loan from a bank consortium, including China Development Bank (state-owned), EXIM Bank (subordinated to the State Council) and China Construction Bank (state-owned). The loan agreement mentions as purpose of the loan the acquisition of Pirelli. * CNRC also received a RMB 17m (approx. EUR 2.13m) refund of the interest paid on the loan mentioned above. This refund was granted by the Ministry of Finance for the acquisition of Pirelli's stock rights, as part of the key projects of 2015 special funds for the development of foreign trade. * The Government of China also participated in the acquisition of the stake in Pirelli by providing an equity participation worth EUR 533m via Silk Road Fund (SRF), a government investment fund that is part of the Belt and Road Initiative. The investment of SRF corresponded exactly to the amount that was needed by CNRC to gain an absolute majority ownership in the Pirelli Group (65% versus 48.75% without SRF).

As there was no suitable EU instrument, no further investigation of the potential subsidy or its impact took place. Example 2, Problem 1: CRRC/Vossloh Locomotives Vossloh is a leading rail technology company focussed on rail infrastructure with sales of EUR 916 million and approx. 3,786 employees. Vossloh attempted to sell its business unit locomotives since 2014 and did not invest in new technologies since then. The business unit locomotives (Vossloh Locomotives) consists of the manufacturing of shunting locomotives and is the market leader in Europe: Vossloh’s market shares amounted to 40-50% in past years. Shunting locomotives are used by railway undertakings and industrial operators to load wagons in e.g. major industrial installations. In some cases, shunting locomotives are also used on the public rail network, for example to transport wagons from one site to another. CRRC Zhuzhou Locomotives (the acquirer) is a subsidiary of CRRC Corporation (CRRC). CRRC is listed and is 51 % owned by the Chinese State. CRRC is the world’s largest manufacturer of rolling stock. CRRC benefits from Chinese government subsidies. For example, the company openly reports subsidies of around EUR 75 million in its 2018 annual report. It also receives significant financing from state-owned banks (while no details are known on the actual terms). The merger decision of the German competition authority states that CRRC was using favourable prices to expand its position on foreign markets based on orders for shunting locomotives from several railway companies in the EU. On 26 August 2019, Vossloh signed the contract to sell its locomotives business unit to CRRC Zhuzhou Locomotive. The agreed purchase price is confidential. By decision of 27 April 2020, the German Federal Cartel Office (FCO) cleared the acquisition unconditionally. The FCO notes that “as a state-owned company subsidised in the context of two important strategic plans of China – namely “Made in China 2025” and “Belt and Road Initiative” – CRRC’s access to financial resources is exceptional.” It further notes: “CRRC indeed enjoys advantages due to receiving state subsidies” and “for the assessment of CRRC’s scope of action, the fact that granting a loan in China is an important instrument to provide financial resources to state-owned companies is also significant. The Chinese banking sector is characterised by a large share of state-owned banks, which are used strategically to achieve the goals set by state planning by, for example, financing state-owned (sister) companies regardless of their financial situation and the associated credit risk with loans at interests rates that are not in line with the market.” In spite of these favourable financial conditions for CRRC, the FCO could not directly take into account in the assessment of the acquisition to what extent support from the Chinese authorities was instrumental in acquiring Vossloh’s business, nor whether any such subsidies would support Vossloh’s locomotive business in the future. Such considerations are outside the mandate of the competitive assessment of acquisitions which is focused on the probability of the merger leading to a dominant position. Nonetheless, the FCO hinted at the potential influence of foreign subsidies on the future business of the acquired company: “Against this background, CRRC has extensive possibilities for implementing low-price strategies. Based on CRRC’s previous behaviour in foreign markets and also internal documents, it can be concluded that CRRC strategically uses low prices in order to expand its market position in foreign markets. This is indicated, for one thing, by the ordered shunters CRRC sold to DB and the Hungarian RCH, and, for another, by individual locomotive and railcar contracts concluded in other European countries. In addition, over the past years CRRC has won numerous important tender procedures relating to metro trains in the USA by offering particularly low prices.” Annex 4, Section 1 contains four additional case studies in which there are indications that the acquirers of EU targets may have received foreign subsidies facilitating these acquisitions. In these examples, the acquirers benefited from equity injections, grants or loans by public bodies that may qualify as subsidies. General context of foreign subsidisation of acquisitions Due to the general lack of reliable data on subsidies in many third countries, this section uses alternative methods to indicate the potential amount and origin of foreign subsidies. Notably, whilst foreign subsidies do not necessarily go hand in hand with foreign ownership of the beneficiaries, this section uses foreign ownership as a proxy to indicate which beneficiaries may potentially benefit from foreign subsidies. Such a proxy has also been proposed by other reports. Other proxies such as acquisition premiums paid by acquiring companies could in principle be used, but would require in-depth knowledge of the specific cases and the relevant markets, which are not available in the absence of an investigative tool. There are detailed data about the total value and the numbers of non-EU acquisitions by country of origin. When ranked by value, the US, the UK and Switzerland account for the majority of third country acquisitions in the EU. A similar pattern emerges when the number of acquisitions is considered (see Figure 1 and Table 1 below). Following the US, UK and Switzerland, Chinese acquirers have gained in importance. As regards the latter, recent research from the Rhodium Group and the Mercator Institute for China Studies finds that the value of Chinese acquisitions was between 2000 and 2010 on average well below one billion EUR per year. In the meantime, China has become the fourth biggest acquirer of EU undertakings, with acquisition values peaking at almost EUR 20 billion in 2016. Chinese FDI into the EU is largely driven by acquisitions, which account for 95 per cent of Chinese FDI in the EU. ‘Direct government financing’ is a particularly important feature of Chinese overseas acquisitions as noted by a recent study from the Rhodium Group, the Mercator Institute and the Bertelsmann Foundation. Source: JRC elaboration on Bureau van Dijk data. Data extraction: 06/11/2020. The following countries are shown: United States (US), United Kingdom (UK), Switzerland (CH), China and Hong Kong (CN+HK), Japan (JP), Norway (NO), Cayman (KY), Canada (CA), Russia (RU). Rest of the world (RoW) which excludes the countries previously listed. Notes: Data display the total observed number of announced and completed investment deals (≥30% of capital stakes) done by investors with an ultimate owner outside EU27. (*) 2020 includes observations between January and end of September.

Equity holdings 2013 2014 2015 2016 2017 2018 2019 2020* >10% 2897 3507 3551 3476 3438 3751 3370 1906 >25% 2735 3319 3421 3327 3272 3630 3267 1837 >30% 2727 3301 3405 3314 3255 3613 3254 1830 >40% 2694 3267 3384 3286 3232 3586 3231 1823 >50% 2677 3234 3343 3263 3200 3562 3203 1817 Source: JRC elaboration on Bureau van Dijk data. Data extraction: 06/11/2020. Data by year and threshold of the acquisition. Note: cells display the total number of foreign acquisitions of equity holdings higher than the threshold indicated in the first column. European companies refers to EU27. (*) 2020 includes values between January and September. The above figure illustrate the overall number of foreign acquisitions (both per equity holding and per country of origin). However, the figures on investments from non-EU acquirers do not include information on foreign subsidies. Therefore, the figures give only an indication as to the ranking of trading partners of the EU with regard to non-EU acquisitions (‘foreign investment deals’) but this ranking does not indicate the importance of a given trading partner as a grantor of foreign subsidies. The data illustrates nevertheless which third countries are potentially relevant to examine the possible existence of foreign subsidies. Table 1 above on equity holdings shows the overall numbers of non-EU acquisitions under different quantitative thresholds for equity holdings ( Table 14 on values of acquisitions per equity holding can be found in Annex 5). Most acquisitions (beyond a 10% shareholding) consist of the acquisition of a stake of at least 50% of the target company. In practice, a 30% threshold for equity holdings would be most closely in line with acquisitions aimed at achieving control of a certain target company. In general, only a fraction of foreign acquisitions meet the thresholds of the EU Merger Regulation and are thus notified to the Commission (between 73-190 deals with a non-EU acquirer per year). Smaller acquisitions are notified to national competition authorities (NCAs) under national merger laws, whilst some cases do not require notification at all. Without reporting obligations or a subsidy control mechanism in place, it is difficult to establish the overall magnitude of the problem of subsidised acquisitions. However, given the trends in foreign investment and foreign acquisitions in the EU (see section 5 in Annex 4) combined with the growing number of subsidy measures around the world (see section 7 in Annex 4), there are strong indications that foreign subsidies continue to have an impact on the internal market (which is likely to increase) as also illustrated by the above case examples. 2.3Problem 2: Distortions in public procurement This subsection will outline distortions that may occur when foreign subsidies are either granted with the express objective to, or are used to, enable or facilitate the participation of bidders in EU procurement procedures. The EU’s single market in government purchases constitutes a fundamental pillar of economic integration in the Internal Market. Public procurement accounts for over 14 % of GDP in the EU or around 2.1 trillion. It provides important business opportunities for economic operators from the EU and from third countries. The market is well-regulated at EU and national level to ensure compliance with three key principles: equal treatment, non-discrimination and transparency. These principles aim to achieve a procurement market that is competitive, open, and maximises value for money for the public sector and ultimately, the taxpayer. Well-functioning and integrated public procurement markets are essential for ensuring productive spending and investment of public money. To prevent efficiency losses, it is key to ensure fair competition in the internal market between companies without discrimination. When assessing the impact of participation by subsidised bidders in public procurement, it is necessary to examine the short-term and long-term effects. Contract awards to subsidised bidders in procurement may lead to short-term advantages for a number of reasons. Opening up procurement market to the highest possible number of interested parties, including subsidised bidders, will lead to a favourable increase of the number of bids submitted, to a decrease in tender prices offered and to increase the competitive pressure on incumbent bidders to be more cost-efficient. Lower bids are as a matter of principle advantageous to the contracting authorities from an economic point of view, regardless of how they come about. This is true in particular where public buyers select the winning bidder simply on the basis of the lowest bid price rather than on the basis of the best price-quality ratio. In the short term, lower prices offered by subsidised bidders benefit public buyers who have to spend less public resources. Furthermore, opening up markets to bidders that are able to offer lower prices can also increase the competitive pressure on incumbent bidders to be more cost-efficient. However, such short term positive effects have to be weighed against adverse consequences, both short and long term, that result from the participation by subsidised bidders in EU public procurement procedures. By choosing the best value option presented in a subsidised bid, a public buyer will not necessarily achieve value for money. Where subsidised low prices are obtained at the cost of quality and innovation, and ultimately lead to crowding out of innovative companies, they can be an indicator of a reduction of the level of competition in procurement markets. Similarly to adverse consequences for competition in acquisitions, participation by subsidised bidders in public procurement procedures can lead to short-term negative effects for non-subsidised companies that are competing for the same contracts. The most damaging consequence is the case when a non-subsidised bidder otherwise offering the most economically advantageous bid is not awarded a public contract only due to the participation of a competitor benefitting from a distortive foreign subsidy, which wins. This is a direct loss of resources and business for the non-subsidised bidder in a specific procedure, as a direct result of the undue advantage stemming from the subsidisation. In the long term, such losses of specific contracts may lead to situations where unsubsidised competitors are not able to compete for contracts at all on an equal footing, thus systematically missing out on business opportunities and losing revenue on a lasting basis. The ensuing uneven playing field may over time discourage unsubsidised bidders from competing. As in the case of acquisitions, where subsidies can be tools used by foreign governments to pursue strategic goals and to extend their economic influence abroad, bidding by subsidised undertakings for specific contracts can be part of a wider strategy of the subsidising country. Strategic interests play a role in particular when bidding for public concession contracts having as their object the operation and exploitation of large infrastructures (e.g. railways, telecommunications and utilities). Such strategic bidding practices may raise concerns with regard to long-term foreign control over public infrastructure, in particular with regard to natural monopolies. As regards the impact of foreign subsidies on the level playing field, such concerns can be taken into account as a factor, among others, in the overall assessment of the market situation. Foreign subsidies are therefore problematic not only because they lead to inefficiencies and distortions of the level playing field in the internal market, but because they may result in the foreign control of public infrastructure. In addition, any participation of subsidised bidders in a public procurement, even if the result is not winning a contract, has inherent disadvantages for the functioning of the internal market. Every public procurement is a test of the market, and as such needs to send realistic signals about all of its aspects. Foreign subsidies create unrealistic and false perceptions, whether about prices of material, about the price of quality and technology, about salaries, about the number of companies active in a market, delivery routes and time etc. Moreover, instead of lowering prices for public buyers, subsidised bidding can lead to higher prices and reduce the efficiency as serious competitors leave the market. A perceived short-term ‘gain’ for the public purse contributes to a general market failure harming public investors as much as private. Finally, where foreign subsidies in a winning bid are returned or otherwise forfeited after contract award, they can jeopardise the proper execution of the awarded public contract and lead to subsequent increases in prices through contract amendments. Concern over the existence of subsidies and unfair practices and their harmful effect on the internal market was strongly voiced by a significant number of contributors to the public consultation on the White Paper. In a number of submissions, contributors to the public consultation, such as the ones from the maritime equipment sector, have outlined that in recent years, European public procurement contracts have been awarded to economic operators from third countries such as South Korea and China that may have benefited from state-backed finance and government support provided to domestic technology industries. Notably, stakeholders have reported that this is the case in the railway supply, maritime technology and construction sectors. Stakeholders have pointed out that for specific third countries, these sectors are considered of strategic importance, and that behaviours which they see as indicating the existence of export-led government strategies enable their domestic companies (often state-owned) to compete globally with prices that distort competition. Example 1, Problem 2: Infrastructure Project - construction As stakeholders have indicated, foreign subsidies may be granted with the express objective of enabling companies to submit bids for public contracts, at prices that are below market price or even below cost, directly “underbidding” to the detriment of competing non-subsidised undertakings. Specific concerns have been raised in cases where EU Funding is given for the project concerned. A few years ago, a contracting authority awarded a major construction contract closing a gap in the country’s transport network to a consortium led by a non-EU company. The offer, while above the contracting authority’s proposed project budget, was nearly 20% lower than the next-lowest bid. The company structure might indicate that the offer may have relied on state financing.

Example 2, Problem 2: Infrastructure projects – supply Over the past years, a state-owned non EU supplier of essential transport equipment has won a number of high value tender procedures in the EU. They offered particularly low prices. The company is considered the world market leader in its sector. According to its own disclosure in stock exchange filings, it receives substantial government subsidies. Within the last 12 months, a consortium led by this company was awarded a public contract for the supply of a substantial number of equipment for local transport in a MS. The contract has an estimated value of EUR between 150 and 200 million EUR. A year before, the company has been awarded a contract valued at EUR over 50 million EUR to supply equipment for local transport in another MS, and at a similar time another consortium led by the company was selected to supply equipment for suburban and regional services for a value up to almost 1 billion EUR, having offered a price that was 25% lower than that of competitors. As mentioned under 2.2 the German competition authority has stated that specific companies use favourable prices to expand their position on foreign markets. Participation in public procurements is one way of achieving this aim. Contracting authorities like competition authorities, see above 2.2, cannot take into account in their assessment to what extent foreign subsidies were instrumental in winning the contract, and have had a distortive effect. Example 3, Problem 2 Infrastructure project – local transport In 2019, a regional council awarded a contract for works/supplies on a transportation network to a state-owned non-EU company for a value of several tens of millions of EUR. The winning bid was 40% lower than the next-lowest offer from competitors. The above examples are given to demonstrate the potentially distortive effects of foreign subsidies and state-sponsored bidding practices. These practices may be driven by long-term strategic goals, or in order to gain direct access to important markets or regions. In some cases, foreign subsidies are likely granted with the express objective of enabling companies to submit bids for public contracts at prices that are below market price or even below cost, directly “underbidding” to the detriment of competing non-subsidised undertakings. A response to the public consultation on the White Paper mentioned such an example. The examples provided above describe the problems linked with foreign subsidies. As for acquisitions, also for public procurement no specific data are available on the prevalence of subsidised bidding so that alternative methods to indicate the existence of foreign subsidies in public procurement have to be used. While foreign subsidies may be granted to any company, as mentioned under 2.2, the only available data in procurement is the share of contracts won by non-EU companies. Data in the database of Tenders Electronic Daily (TED) are only available for successful bidders, not for all bidders, and these data only report the country of registration of the bidding company, not their ownership. A study covering cross-border procurement in the years 2009 to 2015 also investigated so-called indirect cross-border, i.e. awards to foreign owned subsidiaries. This study determined that 3.0 % of contracts in the EU were directly awarded cross-border, and 20.4 % were awarded indirectly. Of the 3.0 % of direct cross-border awards, 78.6 % of all contracts were awarded to EU companies. This share has, however, been decreasing over the reporting period from 87.4 % in 2009 to 73.6 % in 2015. In fact, there were nearly twice as many direct cross-border awards in 2015 than in 2009. The share of non EU companies in indirect cross-border awards amounted to 39.7 % over the period from 2009 to 2015. Specific investigations for contract awards above EUR 250 million recorded in the TED database between 2015 and 2017 have shown that 21 of the 435 awardees or 4.8% had an ultimate owner outside the EU. No reliable data is available on foreign participation in the supply chain and as subcontractors. A 2011 study, on the basis of a pan-European survey, estimated the share for intra- and extra-EU cross-border participation of subcontractors, wholesaler, and distributors at 12.9 % of the total procurement. Overall, the available data show that the share of cross-border awards to non EU companies is increasing over time. This increase shows the openness of the EU market in general, and the EU procurement market in particular. Increasing openness, along with the general trend of increases in subsidies globallyas explained under point 2.2, underlines the need to have and maintain a level playing field in the EU procurement market for all economic operators. The special case of EU-funding Most of the EU budget – about 80% – is implemented under shared management: Member States distribute the funds and manage the expenses in compliance with the applicable EU and national law. A large part of funding under shared management is awarded through public procurement procedures. It follows that any future Union measure(s) addressing the distorting effects foreign subsidies in public procurement will apply to the EU budget expenditure under shared management through public procurement. The direct management of EU funds is subject to the EU’s Financial Regulation. The Commission may explore the possibility to propose to the co-legislators amendments to the Financial Regulation to take into account the impact of foreign subsidies. This is not part of the present impact assessment report. As regards EU funds implemented through indirect management, the Commission may liaise directly with the International Financial Institutions charged with their implementation. 2.4Problem 3: Other market distortions Apart from the specific cases of foreign subsidies facilitating acquisitions of EU companies and distorting public procurement procedures, there are indications that foreign subsidies can distort the internal market in other ways – e.g., through greenfield or other investments. As indicated in the section on Problem 1, the economic literature cites a number of negative effects that subsidies may generally have on the market. Subsidies may for example lead to an inefficient overall allocation of resources and cause growth differentials between subsidised and non-subsidised undertakings. In terms of the concrete impact of foreign subsidies on the EU internal market, the section on Problem 1 pointed out that subsidised companies may build up market power through low prices by driving competitors out of the market or preventing them from entering. Such market power could then, in the long term, lead to abuse, for instance by allowing the subsidised company to increase its prices (this strategy easier to impose if competitors have been already weakened). Hence, in the long term, undertakings not receiving third country subsidies would become less competitive which negatively affects the EU’s overall economic competitiveness. These considerations hold both for subsidised acquisitions and subsidised greenfield investment. Last but not least, foreign subsidies may also result in costly and often wasteful emulation and lead to subsidy races, further deepening the above inefficiencies and distortions. A lack of transparency about subsidies aggravates the distortive effects of subsidies as it leaves competitors unaware of their influence on market prices and production volumes and therefore undermines their own business decisions. Two types of general market distortions deserve particular attention in the context of this section, namely foreign subsidies that are granted to incentivise the delocalisation of companies active in the internal market as well as subsidised private tenders. Regarding the former, foreign subsidies may be granted to a parent company located outside the EU (e.g., through selective corporate tax measure), which in turn finances a subsidiary located in the EU through intragroup transactions. In other words, companies can divert their existing investments away from the internal market to third countries in order to benefit from selective corporate measures which in return increases their financial strength and improves their competitive position in the internal market. In practice this means that such foreign subsidies can cause a distortion of the internal market. Apart from distorting competition, foreign subsidies facilitating the delocalisation of companies active in the internal market can have indirect effects on the EU labour market. A key indicator to determine the social impact of delocalisation is to calculate the job losses that followed the delocalisation of a specific company. Such an analysis also needs to factor in job losses of relevant suppliers of the delocalising company. Further knock-on effects on aggregate consumer demand as result of job losses or decline in real wages may also be considered. Lastly, delocalisation may lead to a loss of tax revenues and in the long run to a ‘race to the bottom’ in corporate taxation between countries, though current research does not yield clear-cut results in that regard. In addition to the issue of public tenders, which were presented in Problem 2, private tenders may give subsidised companies an opportunity to gain market share by undercutting their competitors through below-cost pricing (see Example 1, Problem 3). Whilst in the short term below-cost pricing may benefit the company organising the tender and potentially also consumers, it can have negative effects in the long term on consumers and producers alike. More specifically, subsidised bidding proves to be particularly harmful for non-subsidised bidders, as they are cut off from relevant opportunities to grow. In the long term, below-cost pricing can therefore create lock-in effects which means that unsubsidised companies might have to leave the market at hand. This could enable subsidised companies to attain a dominant position which could be leveraged to raise prices. Respondents to the public consultation on the White Paper have brought forward some potential instances of distortive foreign subsidies. They concern, inter alia, greenfield investments from third countries in the internal market. An industry association stipulated that third countries might subsidise EU airlines, such as through the granting of non-arms-length loans, artificially keeping them alive to feed into third-country airlines’ hubs and networks, with a clearly distortive effect in the EU aviation market. Another stakeholder pointed to possible distortions through the EU activities of aluminium companies receiving foreign subsidies. In this context not only distortive subsidised acquisitions were mentioned, but also a contract of a non-EU-based subsidiary of a non-EU aluminium producer, which according to the OECD report receives foreign subsidies, to upgrade an aluminium facility in the EU. The aluminium sector is described in more detail in Annex 4. In the EU context, State aid granted by Member States may also lead to a misallocation of resources towards certain economic activities or types of firms. Moreover, there is a risk of competitive distortions between Member States to attract undertakings to their territory (‘subsidy races’). That is why Member States must notify planned aid measures to the Commission for validation and must also recover incompatible State aid. The very rationale for controlling State aid at EU level is its potentially negative effect on the EU internal market. Case studies

Several examples below illustrate how foreign subsidies may distort the internal market beyond acquisitions or public procurement procedures. As with the previous examples, it should be noted that these examples are only indicative because there is so far no mechanism and no legal framework to unambiguously identify the existence and precise impact of foreign subsidies on the internal market. Example 1, Problem 3 In a recent (private) tender procedure, an EU telecom operator chose Company A to provide equipment for its network. Company A’s deal with the EU telecom company concerns the provision of certain telecom infrastructure including the relevant software. According to confidential information provided by industry officials, Company A underbid a competitor by 60 per cent in the above-mentioned (private) tender – a price that allegedly does not even cover the costs of the provided equipment. Company A is suspected to have received considerable government support from Country X in the form of subsidies over many years. Current research indicates that subsidies, alongside other measures from which Company A benefitted in the past, have in fact had a negative impact on innovation in the respective telecom sector as a whole. Example 2, Problem 3 Company B is a non-EU Country Y state-owned vertically integrated energy group. The group comprises hundreds of enterprises. Company B and its subsidiaries are active in the EU internal market. Company B’s website lists cooperation with various EU Member States. Company B’s subsidiary 1, one of the world’s largest input suppliers in the field of energy, has contracts with several power plants in various Member States. Company B’s subsidiary 2 constructs power plants. It is also the general contractor for one of the on-going projects in the EU. Country Y has provided subsidies to Company B and its subsidiaries in the past years. Two published government decisions refer to several subsidies. According to Global Trade Alert, Country Y provided another subsidy to Company B in the form of a property contribution to develop the industry concerned. In December 2018, Company B’s subsidiary 1 received subsidies to cover 70% of its expenses related to the registration of intellectual property items in external markets. The 2014 annual report of Company B’s subsidiary 2 does not report subsidies but notes that Country Y supported its projects in international markets. The report adds that this increases the Company's competitive strength in the global market. In a recent report, the German Monopolies Commission noted that depending on the type of subsidy, a subsidy may lead to a reduction in the variable costs and therefore directly impact prices with an effect on competitors and consumers. An investment grant, on the other hand, may have more medium- to long-term effects on market entries or exits. The impact of a subsidy is furthermore dependent on whether it is a one-off or a recurrent support measure, and how selectively it is granted. In this context, an industry association pointed in its submission to the public consultation to potentially subsidised gas prices on the third country market, which allows the local gas users to expand their operations in the EU to the detriment of competitors. A Dutch report argues that non-regulated state support and market power in a third country market enable local undertakings to achieve cost advantages and surplus profits that in turn may allow them to build up market power on the EU internal market at the expense of other undertakings. Such behaviour, not driven by commercial considerations, may be driven by strategic goals in order to get a foothold in strategically important markets or regions, or to get privileged access to critical and major infrastructure. In terms of impact on the EU internal market, the anticompetitive behaviour based on subsidies may drive competitors out of the market or prevent them from entering the market, reducing their competitiveness and affecting the innovative capacity of the EU economy. As discussed above, several submissions to the public consultation on the White Paper and the targeted consultation pointed to specific sectors characterised by distortive foreign subsidies. The sectors mentioned included: steel, aluminium aviation, oil and gas and semiconductors. Moreover, the OECD has carried out several sector studies to examine the amount and distortive effects of subsidies. The sectors investigated are semiconductors, steel, and aluminium. These studies are described in detail in Annex 4. In addition to the OECD studies and the examples of transactions that contained potentially distortive subsidies mentioned in Annex 4, the European Semiconductor Industry Association (ESIA) confirmed in the targeted consultation that foreign subsidies in the semiconductor sector tend to provide significant benefits to their recipients and can lead to subsequent distortions in the market. General information on foreign subsidies According to a WTO report on subsidies issued in 2006, data on the use of subsidies are scarce and difficult to compare across countries and sectors because of methodological differences and data gaps. There are no more recent studies on subsidies covering all sectors. Data from various sources is available, but not necessarily on subsidies. The information presented in the figure below shows that the number of subsidy measures implemented worldwide has in the recent years been increasing steadily. Source: Global Trade Alert (GTA) The subsidy measures covered here are both subsidy schemes and individual subsidy grants outside schemes. To identify foreign subsidy measures that may affect the EU, this impact assessment examines in more detail the EU’s five main trading partners in terms of imports. These are (in decreasing importance): China, USA, UK, Russia and Switzerland. Three of these countries (USA, Switzerland and China) are also the main partners in terms of greenfield FDI into the EU. However, it should be noted that greenfield FDI by the UK has also been steadily increasing and grew by 37.5% in the period 2015-2017. When looking in more detail at the EU’s five main trading partners, based on the reporting by GTA, the US seem to have the highest number of subsidy measures in place. However, this is not necessarily indicative of the value of subsidies because the data in the table below refers only to the number of measures without specifying the subsidy amount per measure. Moreover, the specific foreign subsidies may not always be considered distortive.

Country Number of subsidy measures in place China 205 USA 999 United Kingdom 104 Russia 414 Switzerland 2 Grand Total 1724 In terms of trends, subsidies display a relatively flat or slightly upward trend if measured as percentage of total State expenditure, as can be seen in the below figure. Source: World Bank; data for China and Korea not available; EU countries excluded. This being said, since the year 2000, subsidies and other transfers have been an important element of economic policy for governments around the world. Countries such as Brazil, Canada, India, Japan, Mexico or South Africa have even seen an increase over the past two decades expressed as percentage of their expenses. The share of subsidies as percent of expenses of other major EU trading partner such as the US or the UK has remained relatively stable. It is difficult to obtain data on the total amount of foreign subsidies affecting the EU internal market. Some country-specific data is available on subsidy schemes in the United States via the Good Jobs First Subsidy Tracker, including the amount of subsidies granted to specific companies. However, this data cannot be used to clearly identify foreign subsidies that have an effect on the internal market. Table 8 below shows the publicly available information on the subsidies granted by the EU’s main trading partners for the production of export goods that were notified to the WTO in the period 2017-2018. It should be kept in mind, though, that this information concerns only subsidy schemes, not individual subsidy grants outside schemes. Consequently, it likely underestimates the total amount of subsidies. Moreover, for many measures notified to the WTO the budget and/or the expenditure were not yet known at the moment of the notification, and are hence not included in the total subsidy amount. Finally, some subsidies may have been omitted in the WTO notification. In million Euros 2017 2018 China 380,132.7 520,012.9 USA 14,932.8 17,008.4 UK 919.7 888.1 Russia 3,959.52 3,803.94 Switzerland 515.0 697.4 As briefly mentioned above, there is a lack of transparency and low compliance with the obligation to notify subsidies under the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement). Less than half of the WTO Members complied with the notification obligation in 2019. Moreover, the information included in the notifications is not uniform across WTO members. Additionally, WTO members do not appear to declare in their notifications all the subsidies they grant. This is, among others, evidenced by the fact that in the period 2014-2019 USA counter-notified Chinese subsidies four times. While the present report focuses on other ways than the import of goods to investigate the impact of foreign subsidies on the internal market, the SCM Agreement may nonetheless be a valuable source of information about the general subsidy policy of third countries. The most common types of foreign subsidies reported under the SCM Agreement are as follows: ·foregone or not collected public revenue, such as preferential tax treatment or fiscal incentives such as tax credits; ·the transfer of funds or liabilities (capital injections, grants, loans, loan guarantees, fiscal incentives, setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness or rescheduling); ·the provision of goods or services or the purchase of goods and services. These types of subsidies are largely confirmed by the information from GTA in the figure below. This being said, the transfer of funds and liabilities appears to be more prevalent according to GTA.

For an indication of third countries granting distortive subsidies and of sectors concerned, the countervailing subsidy cases started by the Commission in the period 2010-2020 may be illustrative. The overview enclosed in Annex 4 shows that the five countries against which the Commission opened most countervailing subsidy cases in the period 2010-2020 were: China, India, Turkey, USA, and Indonesia. As mentioned previously, China and the USA are amongst the top-5 trading partners of the EU and, according to WTO notification data, seem to be granting substantial amounts of subsidies to their industries. In terms of sectors, the main sectors affected by countervailing subsidy cases, as presented in Annex 4, are the following: iron and steel, electronics, glass fibre products and biodiesel. This seems to confirm stakeholder views expressed in the public consultation about the prevalence of distortive foreign subsidies in the sectors of, among others, steel and semiconductors. 2.5What are the problem drivers? The main root cause of the problem is the existence of foreign subsidies, causing distortions in the EU internal market, in the absence of any regulatory mechanism to prevent or remedy such distortions. Subsidies are typically part of broader industrial strategies of third countries. While the existing EU tool box includes some rules to deal with foreign subsidies in certain market circumstances, these rules are not sufficient, leaving a ‘regulatory gap’. In other words, there are foreign subsidies that are not captured by any of the existing legal instruments and can therefore impact the EU internal market. Countries have the right to develop and implement their own industrial policies including the granting of subsidies. Subsidies as part of these industrial strategies may however distort markets in other countries. There is a particular risk of distortions when there is no regulatory mechanism to control them. For illustration purposes, Annex 4, Section 9 includes the example of the role that subsidies play in China’s industrial policy with potential spill-over effects in foreign markets including the EU internal market. While the role of potentially distortive subsidies in the industrial policy of third countries is the very source of the problem, its actual impact ultimately depends on whether there are control mechanisms to prevent distortions in the EU internal market. Below, an overview is given of existing EU and international instruments in the area of competition, trade, public procurement and in certain sector specific legislation. The analysis demonstrates the existing regulatory gap to address the distortions in the EU internal market caused by foreign subsidies. As regards EU competition rules, the EU merger and antitrust rules aim to prevent significant distortions of competition due to mergers and acquisitions that would create a ‘significant impediment to effective competition’ or due to anticompetitive practices of undertakings. They do not specifically take into account whether an undertaking’s conduct, for instance in the form of anti-competitive pricing results from or was facilitated by foreign subsidies. In the area of merger control, a concentration is only declared incompatible with the common market if it significantly impedes effective competition, in line with the underlying objective of merger control to protect the market structure. The merger control rules therefore do not take into account which means are employed to bring about changes in the market structure, i.e. whether an acquisition is facilitated by foreign subsidies or not. Last but not least, EU State Aid rules only apply to financial support granted by EU Member States and aim to ensure that EU government interventions do not distort competition and intra-Community trade. No such control mechanism exists as regards subsidies granted by third countries which puts EU industry at a disadvantage in competition vis-à-vis undertakings receiving foreign subsidies. In the area of trade policy, the WTO SCM Agreement as well as the trade defence instruments (TDIs) allow the EU to react to unfair competition in terms of injurious imports of goods which are unfairly priced below their normal value (anti-dumping instrument) or subsidised (anti-subsidy instrument). These instruments, however, have their limitations. The EU anti-dumping and anti-subsidy rules apply to the import of goods and do not cover services, investment or other financial flows in relation to undertakings operating in the EU. In addition to the limitation on goods, the EU’s anti-subsidy rules in principle only apply to subsidies to companies in the granting (third country) jurisdiction while addressing subsidies supporting companies in a third country market (i.e. the EU internal market) remains exceptional. As regards the EU’s anti-dumping rules, unfair price practices of a third country exporter (dumping) are not always problematic in terms of competition and are not necessarily the types of distortions a new EU instrument on foreign subsidies aims to address. Furthermore, the FDI Screening Regulation allows Member States to screen foreign investments, which are likely to have an impact on a Member State’s security and public order by considering its effects on critical assets and infrastructure. The Regulation, however, does not specifically tackle the issue of distortions caused by foreign subsidies on the internal market. At the international level, the EU can bring litigation against a WTO Member before a WTO panel for breaches of the SCM Agreement. However, the scope of application of the SCM Agreement is also limited to trade in goods. Subsidies are not excluded from the scope of application of the WTO General Agreement on Trade in Services (GATS). In fact, GATS includes an inbuilt mandate to further negotiate disciplines for services subsidies. As regards bilateral Free Trade Agreements (FTAs), there are large differences as regards the provisions on subsidies. Most FTAs focus on transparency and consultations in case of distortive subsidies. Some include provisions prohibiting subsidies considered particularly harmful (such as unlimited guarantees). Agreements signed with some neighbouring countries include the commitment to put in place a subsidy control system inspired by EU State Aid rules. Although the scope of those agreements is to address subsidies that affect trade between the EU and the respective third country, jurisdictions that have in place such subsidy control systems are expected to be better placed to identify and address subsidies that distort the EU internal market. If there was a case under an FTA of a potentially distortive foreign subsidy impacting the EU, the Commission could have the choice to open the case under the FTA or take separate legal action for example under a possible new legal instrument. For instance, even if the Commission decides to initiate proceedings under the FTA, the Commission could take separate legal action if the trading partner does not take corrective action or stalls the procedure. The Agreement on the European Economic Area (EEA) brings together the EU Member States and the three European Free Trade Association (EFTA) States — Iceland, Liechtenstein and Norway — into a single market. EFTA has in place a State aid control system based on EU State Aid rules, with an independent supranational State aid control authority. As a result, the system is in practice well placed to prevent EFTA States from granting subsidies that would distort the EU internal market. In the following, two recent Bilateral Agreements are described and analysed in more detail, the EU-UK Trade and Cooperation Agreement and the EU-China Comprehensive Agreement on Investment. EU – UK Trade and Cooperation Agreement The EU-UK Trade and Cooperation Agreement (TCA), agreed by the EU and the UK on 24 December 2020 and, pending European Parliament consent, provisionally applicable since 1 January 2021 (until 28 February 2021), sets out preferential arrangements in areas such as trade in goods and in certain services. It is underpinned by provisions ensuring a level playing field (provisions on environmental protection and climate, competition, subsidies, labour, etc.). The TCA thus mainly applies to trade in goods by providing for zero tariffs and zero quotas on all goods that comply with the appropriate rules of origin. As regards free trade in services, the TCA limits the fees that customs may charge for services rendered and includes several modern disciplines that go beyond standard WTO commitments. In addition, rules applicable to individual subsidies are prescribed by the TCA but these are only enforced domestically by each Party (Art. 3.4.3). The arbitration tribunal under the dispute settlement mechanism of the TCA does not have jurisdiction over individual subsidies (Art. 3.13.2(a)). In principle, all subsidies fulfilling the conditions of the subsidies chapter (chapter 3 of the TCA) are covered by the TCA. Specific exceptions exist as regards agriculture, fisheries and the audio-visual sector. However, even if a remedial measure is taken under the TCA because a subsidy causes a significant negative effect on trade or investment between the parties (Article 3.12), the TCA may fail to remove the distortive impact of the foreign subsidy on the EU internal market. EU-China Comprehensive Agreement on Investment

On 30 December 2020, the EU and China reached an agreement in principle on the Comprehensive Agreement on Investment (CAI). The CAI seeks to improve market access conditions for European companies by eliminating discriminatory laws and practices that prevent them from competing in the Chinese market on an equal basis with Chinese companies and companies from other third countries. As such, the CAI has a different objective – creating a level playing field for investors on the Chinese market – than a possible EU instrument to address distortive foreign subsidies on the EU market and may rather be seen as complementary. In relation to subsidies, it contains a provision imposing transparency obligations as regards subsidies related to certain service sectors, thus complementing transparency requirements as set out in the existing multilateral rules on subsidies related to goods. A specific consultation procedure will apply requiring either side to engage in consultations in order to provide additional information on any subsidies that could have a negative effect on the investment interests of the other party and to seek to address such negative effects. However, the CAI does not set out an effective mechanism (i.e. it excludes State-to-State dispute settlement) to address and remedy the distortive impact that Chinese subsidies may have on the EU internal market. Thus, separate legal action on foreign subsidies could provide for more effective tools to fill the gap left open by the CAI, and FTAs more generally, in terms of effectively remedying the distortions caused by foreign subsidies. The CAI and a possible new instrument on foreign subsidies would therefore be complementary and mutually reinforcing each other. As regards public procurement, the existing EU legal framework aims at ensuring compliance with the principles of the Treaty on the Functioning of the European Union (TFEU). In particular, this includes the principles of free movement of goods, freedom of establishment and the freedom to provide services, as well as the principles deriving therefrom, such as equal treatment, non-discrimination, mutual recognition, proportionality and transparency. However, it does not specifically address distortions to the EU procurement markets caused by foreign subsidies. While Directives 2014/24/EU and 2014/25/EU allow contracting authorities to reject abnormally low offers if it can be established that a bidder has obtained incompatible State aid, the Directive does not contain any corresponding provision for foreign subsidies. In addition, while the grant of foreign subsidies can be considered in the overall assessment of a bid, any rejection of an offer as abnormally low needs to be justified by demonstrating that the foreign subsidy impedes the viability of the offer and the bidder’s capacity to execute the contract at the (abnormally low) price offered. However, contracting authorities enjoy a wide margin of discretion and are not legally required (and are probably not able) to investigate the existence of foreign subsidies when evaluating offers, and the Public Procurement Directives foresee no dedicated redress measures against distortive foreign subsidies. The International Procurement Instrument (IPI) aims to incentivise trading partners to negotiate with the EU the opening of their procurement markets for EU business. Once adopted, it would enforce the principle of balanced reciprocal market access for EU business to third countries’ procurement markets but it will not tackle distortions caused by foreign subsidies within the EU. The lack of such rules damages competition in the internal market in specific procedures and has long term harmful effects for economic operators as well as public authorities as described above under 2.3. In some cases the problem may be exacerbated by the fact that contracting authorities may feel an incentive to accept the lowest bids. Inter-governmental agreements (IGAs) are concluded to facilitate investment. They may cover organising procurements intended for joint implementation or exploitation of a project, especially in large infrastructure. Such procurements are exempted from EU public procurement legislation provided the conditions laid down in Article 9 of Directive 2014/24/EU are fulfilled, though they always have to be compatible with the EU Treaties. Distortive effects of foreign subsidies are not specifically scrutinised under such agreements. Therefore, a level playing field should be ensured within the proposed framework also for procurements under such agreements, especially due to their size and economic importance. Finally, there are a number of sectoral rules which allow the EU to act to protect the internal market in the specific sectors. Regulation (EU) 2019/712 on safeguarding competition in air transport outlines the investigative powers of the Commission and the redressive measures it may impose relating to practices which distort competition between EU and non-EU air carriers, and which cause, or threaten to cause, injury to EU air carriers. As such, Regulation (EU) 2019/712 covers discriminatory treatment adopted by a third country or subsidies granted by a third country government to the detriment of EU air carriers. To date, Regulation (EU) 2019/712 has not been applied, mainly because the investigation pursuant to Regulation 2019/712 can only be triggered by a complaint, i.e. in the absence of a complaint the Commission cannot investigate under this Regulation. As regards the interplay between Regulation (EU) 2019/712 and a possible new legal instrument on foreign subsidies, the former as lex specialis takes precedence as regards situations and actors that fall within its scope. However, as the scope of application of the Regulation is limited to air carriers, a possible legal instrument on foreign subsidies could apply to other actors active in the aviation sector (such as ground handling). Similarly, Regulation (EU) 2019/712 does not apply to acquisitions and public procurement procedures. Regulation 2016/1035 on protection against injurious pricing of vessels allows the EU to act against the sale of vessels that are sold at less than normal value and therefore cause injury to the Union industry. However, while this Regulation has formally entered into force, it has never been applied as its application is conditional on the ratification of the OECD Shipbuilding Agreement by South Korea and the US. Regulation (EEC) No 4057/86 of 22 December 1986 concerns unfair pricing practices in maritime transport but since its 35 years of existence, it has been used only once. This is because inter alia, it has therefore proven difficult to show that the conditions (e.g. the existence of dumping prices) under the Regulation are fulfilled. Therefore, in practice foreign subsidies are not captured by this Regulation.. A secondary root cause of the problem is the lack of transparency and data on foreign subsidies. Transparency is an essential governance element of subsidy control. It promotes compliance at all levels of government. It also offers the general public an overview of the expenditure of tax money thereby nudging the recipient of the subsidy into compliant behaviour, and to ultimately provide for better accountability of public spending. Furthermore, it allows undertakings to examine whether subsidies granted to competitors are in compliance with existing rules. This is also why EU State aid rules include detailed transparency requirements. In addition, Member States are obliged under the Transparency Directive to be transparent on the financial relations between the State and public undertakings. In terms of international subsidy policy, information is needed to better understand the impact that subsidies might have on international trade in goods, and more generally on international trade and investment. Peer pressure between governments can also have a nudging effect towards more subsidy discipline. As explained in Annex 4, Section 7, despite transparency obligations in international rules and other international efforts, comparable data on subsidies are difficult to find. In the absence of information on subsidies, it is difficult to analyse to what extent trade and competition are influenced by subsidies, and it is more difficult to develop rules on subsidies in international negotiations, such as in EU trade agreements. In addition, there is less peer pressure among governments, from competing undertakings or from the public to diminish distortive subsidies. 2.6How will the problem evolve? The problem definition in sections 2.2, 2.3 and 2.4 described the issue of distortive foreign subsidies in the context of acquisitions, public procurement and other market situations. The following section describes how the problem will likely evolve in the future and why it is becoming more pressing. Third countries continue to use industrial policies, which include large volumes of subsidies. Figure 2 in the previous section shows an upward trend in subsidy measures globally over the last decade. This increase has been consistently observed well before the pandemic, but is likely to accelerate as a result. Figure 5 in the same section illustrates that subsidies and other transfers have been an important element of economic policy in the last decades for countries around the world, which is also likely to continue into the future. Almost all countries have seen an increase of subsidies and transfers after the 2008-2009 financial crisis, which is manifested in the global increase from 29.4% of expenses in 2006 to 32.9% in 2011. This increase persisted in the following decade as the share of subsidies on a global scale did not go back to the pre-2008 levels. Using the Global Trade Alert (GTA) data, Evenet and Baldwin (2020) have shown that 32.7% of discriminatory trade policy interventions from 2009, including various types of subsidies, were still in place in 2020. Post-COVID economic crisis will lead to higher levels of subsidisation around the world According to the World Bank, global GDP is estimated to decrease by 4.3% in 2020 with a projected growth of 4% and 3.8% in 2021 and 2022 respectively. By comparison, the 2008-2009 financial crisis slowed down global GDP growth to 1.8% in 2008 and led to a drop of -1.7% global GDP in 2009. The same World Bank report also estimates that the fiscal stimulus in 2020 (based on a sample of 61 countries) has been more than double compared to the fiscal response to the 2008-2009 crisis. As after the 2008-2009 crisis, there is a risk that a part of such incentives remain in place and continue to distort trade and investment flows in the coming years. Based on the GTA data, Evenett and Fritz (2020) calculate that in the first ten months of 2020, G20 countries put in place 1.371 policy interventions, 1067 of which have harmed their trading partners. 670 of these measures are considered trade-distortive subsidies, which includes 98 export incentives and support to firms in foreign markets and 581 non-export-related subsidies. Trade in services is expected to continue growing faster than trade in goods As described in the problem definition section of this report, trade in services is not covered by the existing trade defence instruments. It is therefore more threatened by possible distortions caused by subsidies. According to the 2019 World Trade Report, global trade in services has been growing faster than trade in goods in 2005-2017 and the share of services in the global output has been projected to further increase from 74% in 2018 to 82-84% in 2040. The COVID crisis has provided an impulse for digitalisation of some services, but also had a negative impact due to various travel restrictions, which have limited transport and tourism, two areas with a large share in the services sector. The World Bank projects a 9.5% contraction of total global trade in 2020, comparable to the 2008-2009 financial crisis, followed by an average growth of 5.1% in 2021-2022. Despite this slowdown, international trade in services is set to grow by 31% between 2019 and 2025 by some estimates.

The deflated valuation of EU companies may lead to a higher number of acquisitions The mergers and acquisitions (M&A) activity in Europe is closely linked to the economic cycle. In recent years, the number and total value of transactions have been growing since their lowest recorded levels in 2009. While the number of transactions peaked in 2015, the total value only reached its highest level in 2018. This means that the average transaction value has increased over the decade, which corresponds to the number of notifications to the Commission, which also peaked in 2018. Due to the deflated value of some EU companies as a result of the COVID crisis, a similar wave of acquisitions may ensue. According to a survey of leading euro-area companies on the impacts of the COVID crisis, more than 50% of respondents expect to see an increase in concentration of their markets. Due to the disruptions to the global production chains, some companies are also considering diversifying or localising parts of their supply chains. UNCTAD estimates a 40% drop in FDI in 2020 with a further decrease in 2021 and signs of recovery in 2022, noting, however, that investment activity by digital companies has actually increased. Large parts of the fiscal stimulus of the EU and Member States will be spent through public procurement Public investment will play a key role in the recovery of the European economy from the crisis due to COVID-19. The major part of it will be implemented through public procurement. With significant fiscal stimulus put in place by Member States and an EU recovery budget of EUR 1.8 trillion (Multiannual Financial Framework of EUR 1.074 million for the next seven years + Next Generation EU of EUR 750 million), public procurement contracts will present an attractive business opportunity for both EU and foreign(-owned) companies. They are likely to grow in importance beyond their pre-COVID 19 share of around 14% of EU GDP. The combination of these factors increases the likelihood that foreign subsidies may be used to distort the EU internal market in the future, in particular as regards subsidised acquisitions and public procurement. 3Why should the EU act? 3.1Legal basis A possible legal basis for EU interventions is Article 207 of the Treaty on the Functioning of the European Union (“TFEU”), possibly combined with Article 114 TFEU. Article 207 TFEU provides for the adoption of measures defining the framework for implementing the common commercial policy. The scope of the common commercial policy is defined in Article 207(1) TFEU, which refers inter alia, to trade in services, foreign direct investment and measures to protect trade in the event of subsidies. The initiative is about foreign subsidies and their distortive impact on the internal market, including in situations where a subsidised company plans to acquire an EU target or participate in an EU procurement. Other EU instruments dealing with foreign subsidies (namely the EU anti-subsidy Regulation) or with foreign investment (namely the FDI Screening Regulation) were based on Article 207(2) TFEU. Article 114 TFEU is about the approximation of laws, and could be a suitable additional legal basis given the internal market dimension of the initiative. Article 114 provides for the adoption of measures which have as their object the establishment or functioning of the internal market. While the initiative is indeed about foreign subsidies distorting the internal market, to date there are no national rules dealing with foreign subsidies. However, several Member States have indicated that they see a need to address the distortions caused by foreign subsidies. Therefore, in the absence of EU action, some Member States may decide to put in place national legislation. Consequently, it would be more efficient to put in place a uniform EU-wide solution to address distortive foreign subsidies that applies across the entire internal market. Therefore, Article 114 TFEU could also be a suitable additional legal basis given for the initiative. 3.2Subsidiarity: Necessity of EU action Article 5(3) of the Treaty on European Union (TEU) provides that the principle of subsidiarity applies in areas which do not fall within its exclusive competence of the European Union. Article 3(1)(e) of the TFEU provides that the EU shall have exclusive competence in the area of common commercial policy. The possible legal basis (Article 207(2) TFEU) falls into this category of exclusive competence. While legally speaking, the question of subsidiarity does not arise with respect to Article 207 TFEU, it would arise with respect to Article 114 TFEU. In any event, there seems to be a need for action at EU level. Subsidies cause distortions on the internal market including in the context of acquisitions of EU targets and of public procurement. The situation is comparable to State aid granted by EU Member States, which by its very nature has effects on more than one Member State. Likewise distortions caused by foreign subsidies may have a Union dimension comprising one or more Member States, so that foreign subsidies can best be tackled through legislative action at the EU level. Finally, pursuant to Article 3(1)(e) TFEU, the EU is exclusively competent for trade defence instruments, including the EU anti-subsidy Regulation, which are also based on Article 207(2) TFEU. The same is true for legislation on State aid. According to Article 3(1)(b) TFEU, the EU shall have exclusive competence in the area of "the establishing of the competition rules necessary for the functioning of the internal market". The EU has thus experience in legislating on subsidies as well as on State aid, and it is therefore more effective if the EU, and not Member States, legislates also on foreign subsidies. 3.3Subsidiarity: Added value of EU action There seems to be an added value of EU action. Notably, the objectives and added value of a control of foreign subsidies can be compared to those of the existing State aid control i.e. to en