EU State Aid Policy and External Trade Relations

Abstract

European Union (EU) state aid policy has an oft-overlooked external dimension that is most clearly witnessed in the linkage with external trade relations. This paper seeks to illuminate the issues and potential problems raised by this state aid-trade linkage. If EU state aid creates barriers to market access, it can contravene international trading rules, in particular those of the World Trade Organization’s (WTO) Subsidies and Countervailing Measures Agreement. When this linkage is made to external trade, the EU engages offensively in an array of complex international interactions through which it may pursue two politically-contentious procedures: countervailing duties or dispute settlement. The paper argues that an understanding of the EU’s role in these complex interactions must take into account the Union’s institutional landscape and the competing preferences of different private interests. When deciding to impose countervailing duties against foreign state aids (ie, subsidies), private interests play a significant role in initiating investigations and can use their access to both the Commission and member states to encourage the imposition of such measures. While a variety of factors help to explain why EU institutions and firms prefer pursuing countervailing duties — including increased speed, greater likelihood of satisfying domestic interests, remedy against past subsidies, and the time lag before filing a counter-complaint — the Union also actively uses the WTO’s formal dispute settlement mechanism (DSM) as an alternative in the complex interactions. Under this alternative, private interests again play an important role, pursuing varying strategies of passive non-opposition, active opposition and active support. The most important determinant of a firm’s preference to pursue countervailing duties or a DSM dispute appears to be the extent to which it is concerned with restoring competition in their home market or with restoring competition in multiple/global markets.