Level Playing Field in international Trade

POSITION | EXTERNAL ECONOMIC POLICY | GOBAL ECONOMY

Level Playing Field in international Trade – Strengthening the EU's Capacity to Act From Competition Law to Commercial Law - Towards More Effective Instruments

June 2021 Recommendations ▪ For the European Union (EU), international trade and investment under fair conditions are a requirement for securing growth, sustainability and jobs. Therefore, the EU needs an effective and balanced toolbox that can ensure a level playing field in global trade in the interests of European exports and imports and that is in line with the changing conditions in international trade.

▪ International trade rules and economic partnership agreements between the EU and third countries must be enforced more effectively and the internal market must be protected against unfair competition from third parties. In ensuring this, the EU must not foster the international trend toward protectionism but must strategically counteract it. The EU should focus on international cooperation, rules-based and free trade and investment with its economic partners.

▪ For a resilient and assertive EU trade policy under the guiding principle of open strategic autonomy, this should mean: – Open: Multilateral and rules-based world trade must remain the guiding principle of European trade policy. A reform, strengthening and further development of the World Trade Organization (WTO) is necessary. Particularly in the wake of the Covid-19 pandemic, the EU must set a good example and work against increasing protectionism and for market access. Specifically, this means, for example, negotiating further European trade agreements that open third markets.

Investment screening cannot be motivated by considerations of industrial policy. The EU should remain open for investments from third markets.

– Strategic and autonomous: The EU must further strengthen and expand its global leadership role through strategic alliances with key partners. Geo-economic objectives must also be taken into account. In addition, the EU's trade policy must be assertive in order to ensure an international level playing field for European economic operators. This requires effective and balanced instruments that protect European companies from unfair market behavior and make it possible to enforce agreements and international rules. Specifically, this means, for example, that a European instrument to protect against extraterritorial economic coercion (anti-coercion instrument) must operate within the framework of multilateral principles. In addition, an international

Matthias Krämer | External Economic Policy | T: +49 30 2028 1562 | m.kraemer@bdi.eu | www.bdi.eu Anna Kantrup | External Economic Policy | T: +49 30 2028 1526 | a.kantrup@bdi.eu | www.bdi.eu

procurement instrument that opens third markets without leading to more bureaucracy and unjustified discrimination on the domestic market must be adopted quickly. However, under no circumstances should autonomy be confused with autarky. Europe must be able to act in an appropriately self-determined manner, but without endangering the established, efficient and wealth-creating division of labor in the global economy as a whole.

Content Open Strategic Autonomy – the Context .......................................................................................... 1 Instruments for a Strategically Autonomous, Open Europe .......................................................... 2 Public Tenders and Procurement Procedures: The International Procurement Instrument ................. 3 Market Distortions due to Third-Country Subsidies............................................................................... 7 Anti-Coercion Instrument ..................................................................................................................... 11 EU Enforcement Regulation ................................................................................................................ 14 Export Controls .................................................................................................................................... 16 Anti-Dumping Measures in Merchandise Trade .................................................................................. 18 Countervailing Measures in Merchandise Trade................................................................................. 22 The Safeguard Instrument ................................................................................................................... 25 Investment Screening .......................................................................................................................... 29 Annex: The European Union in the World ...................................................................................... 32 Imprint ................................................................................................................................................ 35

Open Strategic Autonomy – the Context Since the spring of 2020, the concept of an open strategic autonomy of the European Union has increasingly been discussed in Europe - often in the context of the global system competition between open market economies and state economies. Further issues in this context are the crisis of the World Trade Organization (WTO), the increased use of unilateral measures, for example by the United States, and the increasing return to economic nationalism. The consequences of the Covid-19 pandemic are also playing a key role in the debate.

At the center of these debates is the level playing field for European economic operators. To ensure the implementation and enforcement of the EU's trade rules vis-à-vis its trading partners, which are intended to guarantee competition on a level playing field, the office of Chief Trade Enforcement Officer (CTEO) was created. The CTEO is also the Deputy Director General of the European Commission's Directorate General for Trade. The CTEO's responsibilities include strengthening the implementation of the EU's multilateral, regional and bilateral trade agreements, monitoring the EU's trade defense measures and coordinating dispute settlement procedures between the EU and third countries (under WTO rules and European trade agreements). The office has been held by Denis Redonnet since summer 2020.1 However, the actual effectiveness of this office remains to be seen.

Accordingly, EU trade policy in the future is to be characterized by European open strategic autonomy.

Thus, the European Trade Commissioner, who was appointed in October 2020 and is also Vice President of the European Commission, Valdis Dombrovskis, clarified that this is the guiding principle and shows that the EU wants to strengthen its global leadership ambitions in a number of areas and build alliances and strategic partnerships. According to Commissioner Dombrovskis, the concept of open strategic autonomy means reaffirming Europe's commitment to free and fair trade, and taking a tougher, more assertive approach to protect our businesses and consumers, notably through stronger defence and enforcement."2 The concept of open strategic autonomy also takes a central role in the strategic plan of the Directorate General for Trade (DG Trade) for the years 2020 to 2024, which was published in November 2020.3 In the EU Trade Policy Review, completed in February 2021, the European Commission defines the approach of open strategic autonomy as "the EU’s ability to make its own choices and shape the world around it through leadership and engagement, reflecting its strategic interests and values." International cooperation should continue to be the preferred method. To this end, the openness of the European Union is central, as it "brings prosperity, competitiveness and dynamism". At the same time, however, the trade strategy states that this approach should enable the EU to "assertively [defend] its interests" and protect “EU’s economy from unfair trade practices." The creation of a level playing field for European economic operators is also addressed by the European Commission. Here, the

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European Commission, Chief Trade Enforcement Officer, <https://ec.europa.eu/trade/trade-policy-and-you/contacts/chieftrade-enforcement-officer/> (accessed 27 November 2020).

2 European Commission, European Parliament: Speech by EVP Dombrovskis at Trade Policy Day “A Renewed Trade Policy after the Covid-19 Pandemic”, 12 October 2020, <https://ec.europa.eu/commission/commissioners/2019-2024/dombrovskis/announcements/european-parliament-speech-evp-dombrovskis-trade-policy-day-renewed-trade-policy-after-covid-19_en>.

3 European Commission, Strategic Plan 2020-2024, Directorate-General for Trade, <https://trade.ec.europa.eu/doclib/docs/2020/november/tradoc_159104.pdf> (accessed 30 November 2020).

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Commission is planning a combination of existing and new instruments to be used to protect European companies from unfair trade practices.4 In view of the global challenges to open markets and fair international trade, the BDI generally supports the European Commission's concept of open strategic autonomy. In particular, the systemic competition with state-led hybrid economies, which increasingly leads to distortions of competition in the EU internal market as well as in third markets, calls for a comprehensive evaluation and – where necessary – adjustment of the EU's economic defense instruments.

Instruments for a Strategically Autonomous, Open Europe To ensure a level playing field, German and European industry depend on effective and balanced trade instruments. Multilateral, plurilateral and bilateral trade agreements as well as unilateral measures by the EU must be used to work toward structures that enable a level playing field. Trade policy can only be one part of the toolbox. At the same time, it must be ensured that unilateral EU measures, such as the creation of international instruments against illegal subsidies or economic coercion, are oriented toward the interests of an open market economy. EU trade and industrial policy instruments must create an international level playing field without fostering the international trend of increasing protectionism. Rules-based world trade must remain the cornerstone of European trade policy. The EU cannot undermine the rules of the multilateral system but must work to further develop and strengthen them.

International trade and global competition have fostered innovation, new technologies and the wellbeing of Europe's societies for decades. The founding idea of the EU as we know it today was to create interdependencies between economies in the interest of peace and prosperity and to avoid conflict and nationalism. At a time when the global economy is coming under geopolitical and geo-economic pressure, the EU must fundamentally stand for an open, cooperative and multilateral global economy while also pursuing its own strategic interests. Europe needs a strategic and forward-looking trade and industrial policy: one that ensures the continent's future prosperity and economic resilience while focusing on achieving the EU's strategic goals. Acting on one' s own strength is the best way to achieve a level playing field. At the same time, European companies rely on international trade, but continue to face sometimes unfair competition outside of the EU. For German industry, it is important to take advantage of global opportunities, address challenges and minimize risks. This again requires more global cooperation to overcome the current obstacles. However, it also requires an effective toolbox to be able to act in a self-determined and assertive manner.

To ensure compliance with international trade rules and the enforcement of European trade agreements, the European Union needs a balanced set of instruments that can respond to changing conditions in international trade, such as rising international protectionism or the weakening of international organizations, and ensure a level playing field. To this end, the Commission has adapted existing instruments (for example, the EU Enforcement Regulation) to the changing conditions in international trade and has also announced that it will create new instruments (for example, an anti-coercion instrument). The aim is to protect European economic interests.

Defensive instruments, however, can only be an additional way of ensuring a level playing field. The focus of the EU's economic policy must be on strengthening its own economic competitiveness. Only

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European Commission, Trade Policy Review - An Open, Sustainable and Assertive Trade Policy, 18 February 2021, <https://trade.ec.europa.eu/doclib/docs/2021/february/tradoc_159438.pdf>.

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a dynamic and innovative European economy can be globally successful in the long term and act as a role model. This requires a market-oriented, industry-friendly and technology-open environment. In addition, the EU must continue to focus on offensive measures to open third markets and promote reciprocal trade. This includes the conclusion and implementation of further free trade and investment agreements with important economic partners. In addition, the EU should pursue plurilateral paths with other interested parties in order to better protect market economies from the distorting effects of state economies. Finally, the EU Commission and the governments of the Member States should use the dialogue with third country state economies to encourage and urge economic reforms toward a more market-oriented economy.

In the following, we analyze various trade, investment and competition policy instruments of the EU and examine to what extent these instruments are already sufficient to ensure an international level playing field and where readjustments should be made. Once these instruments have been implemented, they should be applied consistently if the respective conditions are met.

Public Tenders and Procurement Procedures: The International Procurement Instrument The awarding of public contracts is an extremely important economic factor at the national, European and international level. The total volume of public contracts, both at the national and European level, generally amounts to ten to 20 percent of the respective gross domestic product. In this respect, public contracts are also of considerable relevance for economic well-being, growth, innovation and jobs.

In this respect, access to public contracts based on transparency and equal treatment of all bidders is essential. Furthermore, effective legal remedies are required in the event of violations of the aforementioned principles respectively the provisions of procurement law created for this purpose.

Thus, it is important for companies interested in public tenders not only to have access to public contracts on their home markets, but also to markets for public procurement in other countries. This is particularly important for the heavily export-oriented German economy.

As far as essential national security interests pursuant to Article 346 of the Treaty on the Functioning of the European Union (TFEU) require a deviation from this principle, internationally or at least EUwide harmonized principles of application should be pursued wherever possible. In particular, the BDI is of the opinion that unilateral compensation respectively “offset” requirements as a secondary condition of public contracts should be avoided, or – if unavoidable – should be designed in a balanced manner in the sense of a level playing field.

Already existing imbalances in market opening in the relationship between the comparatively more open EU on the one hand and often still closed third countries on the other have intensified in recent years. This is one of the factors that could have a negative impact on Europe's desired strategic autonomy. The Commission intends to counteract the growing imbalances in terms of market opening by creating the international procurement instrument (IPI). This instrument aims at opening procurement markets of third countries which are still closed. To this end, a procedure is proposed for the EU to object to and prosecute unacceptable market closures or unfair practices by third countries, which may lead to the sanctioning of bids originating from these countries and thus increase the pressure on them to open their markets.

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Status quo Access to national and European procurement markets is ensured by national procurement law and – for the award of large public contracts above certain thresholds – by the EU Directives on public procurement, which prescribe transparency and equal treatment of bidders. In contrast, access for European companies to public tenders in third countries is still closed or at least severely impeded in many cases.

The plurilateral WTO Government Procurement Agreement (GPA), to which the EU and its Member States are parties, has led to an opening of markets for large public contracts in some but by no means all WTO members: In addition to the EU Member States, other traditional industrialized nations such as the United States, Canada, Japan and Switzerland are also members of the GPA. Most developing and emerging countries have not yet joined the GPA because they have so far rejected a binding opening of their procurement markets to foreign bidders. This also applies to economically especially important emerging third countries, such as China in particular, but also to other significant countries such as Russia, India and Turkey. China has repeatedly delayed accession to the GPA, which has been promised many years ago, by making inadequate offers of accession which are unacceptable to the members of the GPA. Beyond market opening under the GPA, the EU has also worked in recent years to achieve further opening of procurement markets in third countries through bilateral trade agreements that go further than the GPA. In this way, quite a few improvements have been achieved vis-à-vis some important trading partners such as Canada and Japan. However, this does not change the fact that many important countries have not yet accepted any opening of their own procurement markets towards the EU. Overall, a disparity in market opening has increasingly emerged in recent years in the relationship between the EU on the one hand and economically significant third countries with still closed markets on the other. This is true at least in factual terms. While the EU public procurement directives do not provide for a legal claim of a company from a third country to access public contracts in the EU if the company's home country has not concluded a corresponding opening agreement with the EU, bidders from such third countries may be excluded from participating in public procurement procedures in the EU. However, such exclusion is not mandatory.

A number of EU Member States, including Germany, have opened their procurement markets widely and do not generally exclude bidders from third countries. In some EU Member States, bids from China with extremely low prices, some of which may even be suspected of dumping, have repeatedly been awarded contracts to the detriment of European competitors in recent years, even though China has still not accepted any market opening vis-à-vis the EU in this regard and continues to seal off its own markets against foreign bidders in various ways. Examples of this can be found, for example, in public procurement in the areas of construction and infrastructure contracts, railroad and road construction in various Eastern European, but also in Western European Member States.

In addition, in a number of cases where bidders from isolated third countries are awarded contracts, this is made possible by means of EU funds and thus money raised by EU taxpayers, ultimately benefiting companies from third countries with dubious bids and to the detriment of companies from the EU. This is particularly true when foreign state-owned enterprises act as bidders with suspiciously low prices in the EU.

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The Commission's Proposals on the IPI and the further Discussion To overcome the imbalances that have arisen, the Commission presented an initial proposal for an international procurement instrument back in 2012. The aim is to create a regulation for the access of bids from third countries to procurement markets in the EU and at the same time to work towards opening up markets in third countries which are still closed. In simple terms, the IPI provides a procedure for reviewing and objecting to problematic procurement or trade policy behavior by third countries.

In the event that the complaints do not lead to the elimination of the problems, the IPI provides for sanctions against bids that originate at least 50 percent from third countries that are classified as closing off their markets or acting unfairly.

While the IPI's stated objectives have been generally welcomed, the 2012 proposal met with widespread criticism, including from Germany and German industry, due to expected negative side effects.

As a result, the Commission presented an amended proposal in 2016, which provides for partially modified sanctions (price surcharges of up to 20 %) for offers from closed-off third countries. In the Council, IPI proponents welcomed the new proposal, while other Member States rejected it, mainly due to continued fears regarding problems caused by a complicated determination of the country-oforigin and associated legal uncertainties. This again led to a stalemate in the Council.

Finally, while problems of unequal market access continued to intensify, in 2019 it became clear that the discussions on the IPI should be revitalized in the Council and the possibility of revising the amended proposal should be examined. Insofar, an important aspect, also from BDI’s point of view, was the fact that long expected changes in the behavior of states such as China did not materialize.

Instead, the impression has arisen that these states are increasingly acting as "systemic competitors" which, on the one hand, are penetrating EU markets more and more, but on the other hand are not willing to open their own markets and thus there is a need for action.

Under the current Portuguese Council Presidency, new momentum has been injected into the IPI discussions in the EU Council. An agreement is now being sought in the Council by summer 2021.

Recommendations German industry advocates that the negotiations resumed in the Council in 2019 should now be taken forward decisively. In doing so, the remaining deficits of the Commission's amended proposal from 2016 must be addressed. When revising the IPI, it must be ensured that adversarial effects, additional burdens and legal uncertainties for EU companies and contracting authorities in the EU are avoided.5

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On June 2, 2021, the Council agreed on a mandate for negotiations with the European Parliament on the IPI. The mandate is based on a Council compromise text for the IPI regulation prepared by the Portuguese Presidency in the first half of 2021. It has to be welcomed that the compromise text of the Council takes up quite a few proposals of BDI and BusinessEurope. This may help to overcome several weaknesses still contained in the earlier revised Commission’s proposal of 2016 and thus contribute to a better overall shaping of the IPI. Among others, BDI welcomes that the Council compromise text leads to a structural change from the initial model focussing on the often complex determination of origin of an offer to the new approach focussing on the origin of the bidder. This leads to a reduction of bureaucratic burden at least for a considerable number of stakeholders. Equally, it is important that, in contrast to earlier texts, the Council compromise text does not lead to a ban of further existing national or sectorial sanctions against bids from sealed-off third countries. Nevertheless, also with a view to the Council compromise text, attention will still have to be paid to the envisaged exemption clause regarding sanctions. It must be safeguarded that this clause will not allow for a circumvention of the necessary sanctions of the IPI.

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In the revision and final development of the IPI, especially the following objectives are essential: Ensure practicability of the IPI: Compared to the amended Commission proposal of 2016, the existing provisions on sanctions are in urgent need of revision. Above all, the complicated regulations regarding the linking of sanctions to the - possibly only partial - origin of offers from third countries must be changed in order to avoid excessive administrative burdens and legal uncertainties. As rightly sought by the Portuguese Council Presidency, it is preferable to focus on the origin of the bidders instead of the origin of the goods used for the bid. This is a significant simplification for both bidders and public procurers compared to the previous concept under the Commission's amended proposal of 2016.

The proposal for a so-called “safety net” also appears sensible in order to prevent the IPI regulations from being circumvented by the fact that a bid originates from an EU bidder but includes a predominant share of goods from closed third countries. Under the safety net, only the successful bidder will be obliged to declare contractually that less than 50 percent of the value of his bid is derived from goods or services from a third country deemed to be closed or acting unfairly according to the assessment of the Commission. Such a declaration may not be an easy task for the successful bidder in individual cases, but it appears to be much less onerous than the corresponding investigation of the origin of the bid, which has been required for every bid so far. Guidance by the Commission regarding the most practicable determination of the information for the successful bidder's declaration would appear to be helpful.

Maintain national scope for action under the EU procurement legal framework: The IPI can become a key instrument for more balanced market access in public procurement with a strong role of the Commission. In this respect, the IPI provides, to some extent, a basis for common action at EU level. However, it must not prevent Member States from adopting necessary measures that go beyond the IPI, as long as they are compatible with the EU's legal framework on public procurement. Therefore, German industry calls for: ▪

a removal of a provision previously included in the IPI that would prohibit Member States from adopting more far-reaching measures (Art. 1(5) of the Commission's 2016 amended proposal), and

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a deletion of a previously intended provision that would lead to the abolition of an existing provision of the EU Directive on procurement in special utilities sectors, which stipulates that contracting authorities or Member States may exclude tenders where more than 50 percent of the value originates from a closed third country (Art. 17 of the amended Commission proposal of 2016).

An ambitious and effective instrument: For the IPI to be effective, it is essential to ensure that the instrument cannot be undermined by overly broad exemption rules. A key point in this respect is above all an envisaged provision on exceptions. These must be strictly limited to narrowly defined exceptions, such as an exception in the event that there is only one bidder in a tender. On the contrary, the currently proposed, overly far-reaching exception for the case of a sharp increase in costs or prices for the contracting authority in the event of the application of the IPI must be rejected most insistently. This exception could very easily lead to the IPI being completely undermined and should therefore be removed without replacement.

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Ensuring effective and sufficient sanctions: Furthermore, ensuring effective and sufficient sanctions is of great importance. The previously proposed limitation of sanctions to a price surcharge of up to 20 percent is considerably too narrow. Even sanctions with a fixed cap of a price surcharge at a maximum of 40 percent may not be sufficient. In this respect, it might be advisable to provide flexibility for the upper cap of the sanctions so that, for example, a price surcharge of 50 percent should also be possible under certain circumstances. For particularly serious cases, the possibility of completely excluding a bid should also be provided for. In particular, this should be given greater consideration if the bidder in question is demonstrably a state-owned enterprise from a third country identified as closed or unfair. One argument in favor of a complete exclusion in these cases is that the increasing occurrence of such companies on EU markets, often with suspiciously low prices, has recently proven to be particularly problematic in many cases.

Market Distortions due to Third-Country Subsidies In June of 2020, the European Commission presented proposals for new control instruments (“modules”) to address third-country subsidies that distort competition in the internal market in its White Paper on levelling the playing field as regards foreign subsidies (COM(2020) 253 final).6 German industry welcomes the objective set out in the White Paper, but notes that there is a need for adjustments to the shaping of the modules. It is especially important that they are coherent with existing EU law.

Status quo An increasing number of third-country companies are also operating in the EU's internal market. Thirdcountry subsidies that favor these actors can therefore also have an effect in the internal market and may distort competition there. Such third-country aid can, for example, result in extraordinarily low bids in the context of public procurement in the EU. This means that bidders subsidized by third countries can undercut other bidders by submitting particularly low bids and thus win contracts. Such extremely low bids would not be economically sustainable without the third-country subsidies, so that competition for the contract is distorted to the detriment of other bidders who do not receive third-country subsidies.

However, third-country subsidies can also distort competition when acquiring shares, voting rights or otherwise "material influence" in EU companies. Competition between potential buyers of EU companies can be distorted by the fact that only a third-country subsidy (strengthening of financial power) makes it possible to submit an acquisition offer that is favored over offers from other potential buyers; at the same time, this also impairs investment opportunities in EU companies.

While EU state aid law provides effective control for Member State subsidies, there is a lack of comparable control and monitoring for third-country subsidies. To protect competition in the internal market from distortions caused by third-country aid and to ensure a level playing field in the EU, effective control mechanisms for third-country subsidies are needed as well. The European Commission's White

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On May 5, 2021 the European Commission published a subsequent legislative proposal to the White Paper: https://ec.europa.eu/competition/international/overview/proposal_for_regulation.pdf.

From German industry's point of view, it is very positive that the European Commission is now presenting a legislative proposal to curb market distortions caused by massively subsidized companies from third countries. Particularly in the case of takeovers and public procurement, companies need fair opportunities and a level playing field. The right balance must be struck between effective third-country subsidy control and maintaining the EU's openness to investment (this initial assessment will be followed by a detailed evaluation by the BDI). In the following, the analysis in this position paper refers only to the preceding White Paper.

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Paper is the first step towards introducing control for third country subsidies. The White Paper proposes three modules as well as possible regulations with regard to EU management of financial resources.

The first module is intended to check for possible distortions of competition in the internal market caused by subsidies from third countries. This involves reviewing the conduct of companies in the internal market that are subsidized by third countries. In this respect, there is a certain comparability with abuse control under EU competition law. The latter enables the European Commission to sanction the abuse of a dominant position by companies in the internal market.

With the second module, the White Paper proposes a preventive control of the acquisition of shares, voting rights or otherwise of "material influence" in EU companies by companies receiving third-country aid. A similar preventive control already exists to protect future competition in the market affected by such acquisitions through EU merger control. However, EU merger control only serves to examine the effects of the intended merger on competition. By means of the second module, on the other hand, it would be possible to examine whether competition-distorting effects of third-country subsidies exist that favor an acquirer.

For controls under the first and second modules, the European Commission also proposes that competition-distorting third-country subsidies may be tolerated if they serve EU policy objectives, such as achieving climate neutrality, protecting the environment, or creating jobs.

The third module of the White Paper proposes a specific preventive control of third-country subsidies that favor bidders in the context of public procurement. So far, the provisions of the EU public procurement law allow, at best, only a very limited control of bids subsidized by third countries; the EU Directives on public procurement contain provisions on "abnormally low bids", which, however, give the contracting authority wide discretion in the assessment and are therefore often not very effective as a result.

Following on from the proposals in the White Paper, at the beginning of October 2020 the European Commission had launched an Inception Impact Assessment on various possible options for action - to protect competition in the internal market from distorting third-country subsidies. These options for action concern the implementation (legislative, administrative, etc.) of new control mechanisms for third country subsidies.

Recommendations Ensuring a level playing field in the internal market requires effective protection of the internal market against distortions of competition caused by both, state aid to Member States and third-country subsidies. It is time to complement the competition protection provided by EU state aid law with a corresponding protection mechanism for distortions caused by third-country subsidies. Market-distorting third-country subsidies should not be tolerated on the basis of general EU policy objectives. They should not be justifiable by means of an EU interest test; as such, a level playing field in the EU would not be created. Rather, an EU interest test would open the door to the politicization of legal decisions.

New instruments must address the distortions of competition caused by third-country subsidies that have already been identified and, at the same time, address future distortions of competition. To this end, ex-post and preventive controls are necessary, also to adequately address vulnerabilities of certain procurement markets to distortions caused by third-country subsidies.

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The introduction of corresponding control mechanisms must be coherent in order to minimize additional bureaucratic burdens for companies and avoid contradictory decisions due to different controls. This applies both to the relationship of new controls to each other and to existing EU competition law, EU rules on public procurement (including the upcoming revision of the draft International Procurement Instrument (IPI) and the regulation on the screening of foreign direct investment (FDI screening regulation). Nor must the EU's fundamental openness to investment be undermined. In the interests of coherent decision-making practice, the European Commission should be exclusively responsible for all the modules proposed in the White Paper. This would make sense given its expertise and experience in EU state aid control when it comes to investigating aid to Member States. However, the Member States and their expertise on more regional markets should be included in the decision-making process of the European Commission.

The procedures must be designed to be as unbureaucratic as possible, also in order not to counteract the economic advantages of lawful conduct. This includes legally clear assessment criteria that enable predictability of decisions. In the case of parallel investigations of the same conduct under different control regimes, the procedures should be linked wherever possible in order to reach a uniform decision on the permissibility of the conduct; this applies in particular to controls under the second module and controls under the EU merger control and FDI screening regulation.

As a matter of principle, the modules should be linked to appropriate thresholds so that they are limited to those situations that pose a risk of significant distortion of competition. The proposed general de minimis threshold of 200,000 euros for relevant third-country subsidies appears to be set too low for this purpose. Particularly with regard to the proposed preventive controls, it gives rise to fears that a flood of cases to be reviewed will divert the European Commission's personnel and technical resources away from cases with a significant risk of market distortion.

In order to counter transparency deficits with regard to the financing of state-owned enterprises (SOEs), it should be presumed that these enterprises receive third-state subsidies if a third state holds a stake in them above a certain threshold, for example 20 percent. The (German) Monopolies Commission also advocates such a presumption in its XXIII Biennial Report.

Module 1 - General ex-post review The factually unrestricted ex-post review of the first module may not result in undermining decisions or thresholds of the preventive controls proposed in the other modules. Accordingly, circumstances subject to the preventive controls proposed in the White Paper must not be subject to a renewed ex post review by means of the first module when addressing the same concerns. Otherwise, legal certainty of and legitimate confidence in valid decisions would be undermined.

In the context of the ex-post review of the first module, privileges (measures that amount to special or exclusive rights) of the subsidized company in third country markets, including domestic markets, should also be taken into account if they create an artificial competitive advantage in the internal market. Furthermore, the measures taken by the European Commission to offset the subsidization (remedies) must be proportionate in design and application. In principle, a third-country subsidy should be repaid with interest, as in EU state aid law. However, a corresponding compensation payment by the subsidized company to the EU budget could also be considered. Divestments and other measures affecting the corporate structure must be clearly defined as measures of last resort. The first module should also contain options for issuing guidance and recommendations.

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Module 2 – Preventive control for acquisitions of shares, voting rights or otherwise of "material influence" in EU companies Preventive control of the acquisition of shares, voting rights or otherwise of " material influence" in EU companies by companies receiving third-country subsidies should be designed in conformity with existing (preventive) controls under EU merger control and those under the FDI screening regulation.

The time limits should correspond to those of EU merger control. Moreover, in the case of parallel reviews under these preventive controls, the procedures should also be linked from the very beginning with the notification initiating the procedure. This would reduce burdens on the companies involved and risks of contradictory decisions. Remedies under the second module should be sought primarily through commitment offers by potential purchasers; prohibition decisions should be considered only as a measure of last resort.

Module 3 – Preventive control for bids in public procurement In principle, German industry welcomes the fact that the proposed instrument is also intended to combat unjustified subsidization on the part of third countries in connection with bids for public procurement contracts. However, with regard to the third module, a significant revision of the proposal in the White Paper appears to be necessary. While the proposal so far would cause a very high and partly unjustifiable bureaucratic effort with regard to individual contracts, the general orientation of the instrument should be less focused on individual procurement procedures and more on a systemic assessment at sector level.

The notification requirement proposed in the White Paper appears to be disproportionate and in part too far-reaching, especially considering the sanctions for non-compliance (fines of up to 10 % of group revenues). According to the White Paper, bidders or companies, respectively, should notify not only third party subsidies to themselves, but also third party subsidies to all members of their consortium, all their subcontractors and all their suppliers (hereinafter: third parties) when submitting a bid. First, companies do not have the same informational and investigative powers with respect to third parties as do government agencies, so they must rely on the completeness and accuracy of the information received from the third parties. Therefore, sanctioning bidders in case of incorrect or incomplete information provided by these third parties would be inappropriate. Second, the scope of notification for all third-party benefits for all types of public procurement seems disproportionate given the burden it places on companies. The third module of the White Paper should therefore differentiate the scope of the notification obligation of bidders between public procurements receiving EU funds and those not receiving EU funds.

For public procurements not receiving EU funding, it should be considered to limit the notification requirement for third party subsidies to members of a consortium to the members of the consortium and major subcontractors and suppliers such as direct subcontractors and suppliers.

In contrast, there is a greater potential for distortion of competition in public procurement receiving EU funding. Not only would competition between bidders in the award of contracts be affected here, but also competition for the reception of limited EU funding for projects (in the context of contract implementation). Therefore, a more comprehensive notification requirement would be appropriate for thirdcountry subsidies.

The responsibility for the third module should not lie with the national authorities of the Member States, as this could lead to inconsistent decision-making practices. In addition, the pressure to reduce costs triggered by the budgetary policies of the Member States could have a negative impact on the 10

assessment of third-country subsidies in public procurement contracts. The European Commission should be exclusively responsible for evaluation and decision-making. This would ensure the coherence of decisions and also enable synergy effects through the expertise of the European Commission in state aid law.

In addition to the proposed preventive control – i.e., the ex-ante control of individual, specific public procurement contracts – it should also be possible to look retrospectively at the general conditions of competition in procurement markets with regard to the extent to which they are influenced by thirdcountry subsidies. Specific measures, such as the issuance of guidance or recommendations, should also be provided for. If a subsequent analysis shows that a specific company receiving third-country subsidies has repeatedly negatively influenced competition among bidders, it should also be possible to exclude this company from future public procurement contracts. Moreover, we propose a special presumption in the scope of application of the third module: Companies from countries that have neither signed the WTO Agreement on Government Procurement nor a free trade agreement with the EU containing provisions on public procurement should be presumed to receive competition-distorting third-country subsidies in case of participation in public procurement in the EU.

Anti-Coercion Instrument In September 2020, the President of the European Commission sent a letter of intent to the President of the European Parliament and the German Council Presidency outlining the Commission's work plan for 2021. In the context of a newly strengthened economy, an "instrument to deter and counteract coercive actions by third countries" was mentioned.7 Extraterritorial sanctions, but also measures against European companies abroad or tariff barriers against imports from the EU, are now increasingly economic symptoms as a result of the economic manifestation of geopolitical disputes. German industry welcomes the plan to counter this trend by creating a reactive instrument to deter and counteract geo-economic measures. Geo-economics is understood here as the pursuit of geopolitical goals by economic means.8 Status quo This overlapping of political and economic relations is not new, but incidents are becoming more frequent. Just a few years ago, it was taken for granted that the economic interests of EU Member States and their foreign policy goals could be separated clearly. Accordingly, the European Union's options for deterring economic coercion and responding with its own measures have, so far, been very limited.

To date, only the anti-boycott regulation, also known as the blocking statute, exists as a procedure to ward off extraterritorial influence of third countries on European companies.

Ursula von der Leyen, Maroš Šefčovič, State of the Union – Letter of Intent to President David Maria Sassoli and to Chancellor Merkel, 16 September 2020, <https://ec.europa.eu/info/sites/info/files/state_of_the_union_2020_letter_of_intent_en.pdf>.

8 Geopolitics and geo-economics are increasingly used as concepts. Often, there is a lack of analytical separation of the concepts that describes intelligibly how they relate to each other. Without this separation, however, it remains unclear how the intertwining of international politics and global economics creates negative externalities for economic operators. A common definition of geo-economics that is clearly distinguishable from geopolitics comes from Robert D. Blackwill, Jenniver M. Harris, „War by Other Means, Geoeconomics and Statecraft“, Cambridge, London: The Belknap Press of Havard University Press, p.

20: „The use of economic instruments to promote and defend national interests, and to produce beneficial geopolitical results; and the effects of other nations’ economic actions on a country’s geopolitical goals.”

7

11

Regulation (EC) 2271/96 was enacted in response to the 1996 U.S. Cuban Liberty and Democratic Solidarity Act (Helms-Burton). Under its Section III, this law allows U.S. citizens to sue foreign companies in U.S. courts for the use of property expropriated after the revolution. Helms-Burton consequently does not provide for sanctions as they have been widely discussed after the United States exited the Joint Comprehensive Plan of Action (JCPoA) also known as the nuclear treaty with Iran. Through the blocking statute, the EU wanted to ensure that such court rulings from third countries would neither be recognized nor enforced in Europe.9 It was the EU's intention to dissuade the U.S. from using Section III of Helms-Burton through the blocking statute and have it suspended by presidential decree instead.10 As a matter of fact, all U.S. presidents have shown a willingness to do so until the spring of 2019.

The EU activated the blocking statute regardless of Helms-Burton when the United States withdrew from the JCPoA in May 2018.11 The EU included U.S. Iran sanctions in the annex of the blocking statute. However, these U.S. sanctions differ significantly in their extraterritoriality from the provisions of Section III of the Helms-Burton Act. Today as a result of these secondary sanctions, natural and legal U.S. persons are prohibited from doing business with, for example, banks that in turn continue relations with sanctioned individuals or entities. However, since any reputable financial institution must refinance in U.S. dollars, such sanctions are akin to exclusion from economic life.

Originally conceived as a remedy to U.S. court rulings, the European anti-boycott regulation was not designed to effectively address comprehensive financial sanctions. Among the general public, the regulation was largely seen as a symbolic act, both then and now. 12 There is therefore need for action.

Recommendations For German industry, coercive economic measures are fundamentally unacceptable. It is therefore welcomed that the European Commission is addressing the issue of extraterritoriality and intends to develop instruments to enable Europe to respond effectively, robustly and appropriately to geo-economic coercion in the future. Some points have to be considered: ▪ In its discussions on appropriate measures to protect its interests, the EU should not lose sight of its economic policy objectives: an open Europe that remains connected to partners around the world through rules-based global trade. Here, a balancing of the Union interest should be part of the

9

To underscore their opposition to extraterritorial laws, European policymakers also formulated the possibility of a clawback under Article 6 of the EU anti-boycott regulation. This article enables affected Europeans to compensate for damages caused by lawsuits before U.S. courts. For this purpose, assets of the plaintiffs in Eu-ropa are to be seized and sold. See also: Vaughan Lowe, “Helms-Burton and EC Regulation 2271/96“, in: The Cambridge Law Journal 56 (2), July 1997, p. 250.

10 Jeffrey Lewis, “The Institutional Problem-Solving Capacities of the Council: The Committee of Permanent Representatives and the Methods of Community”, in: Max-Planck Institut für Gesellschaftsforschung (MPIfG) Discussion Paper 98/1, February 1998, p. 32.

11 This was linked to the rapid reinstatement of extraterritorial U.S. sanctions against Tehran, which had originally secured the conclusion of the nuclear agreement in conjunction with its European partners. At the heart of these sanctions was, and still is, the intention to make it almost impossible for companies to do business by threatening financing banks with exclusion from the U.S. dollar zone. See also: BDI, Iran Sanctions: U.S. Withdrawal from the JCPoA - BDI Position on the Reintroduction of U.S. Economic and Financial Sanctions against Iran, July 2018, <https://english.bdi.eu/publication/news/iran-sanctions-u-s-withdrawal-from-the-jcpoa/>.

12 Mathias Brüggmann, „EU-Schutzmechanismus gegen Trumps Iran-Sanktionen wird zum Fehlschlag“, in: Handelsblatt, 28 January 2019, <https://www.handelsblatt.com/politik/international/blocking-statut-eu-schutzmechanismus-gegen-trumps-iransanktionen-wird-zum-fehlschlag/23917690.html?ticket=ST-2751322-UGIpb5urHspyDWYkPpTI-ap5> (accessed 9 January 2021); Deutsche Welle, „Interview Anahita Thoms – EU-Blockade gegen US-Sanktionen, wie wirksam?“, in: Deutsche Welle, 18 May 2018, <https://www.dw.com/de/eu-blockade-gegen-us-sanktionen-wie-wirksam/a-43844483> (accessed 8 February 2021); Niklas Dummer, „Interview Laura von Daniels SWP – Die Nachteile der US-Sanktionen überwiegen heute die Vorteile des US-Geschäfts“, in: Wirtschaftswoche, 19.5.2018, <https://www.wiwo.de/politik/europa/us-wirtschafts-expertin-die-nachteileder-us-sanktionen-ueberwiegen-heute-die-vorteile-des-iran-geschaefts/22583752.html> (eingesehen 7.2.2021); Vaughan Lowe, “Helms-Burton and EC Regulation 2271/96“, in: The Cambridge Law Journal 56 (2), July 1997, S. 250.

12

triggering mechanism. Only then will such an instrument generate tangible and sustainable benefits for companies.

▪ Since the very adoption of an anti-coercion instrument will lead to reactions from third countries, it should be embedded in a uniform EU foreign policy. This is all the more important if, as the Commission is currently considering, the instrument is based on Article 207 TFEU. A consensus of the EU Member States, for example after the conclusion of an implementing act, should help to ensure that the Union also speaks with one voice in the event counteractions have to be applied.

▪ An anti-coercion instrument seems particularly appropriate if it can be coherently integrated into a larger EU foreign policy strategy. Clearly, the deterring effects of an anti-coercion instrument and the prevention of geo-economic conflicts should be a priority for the EU. In areas of potential conflict, the EU should advance targeted and strategic dialogue processes with international partners. Only if designated as a reactive tool can an anti-coercion-instrument provide for the necessary stability and predictability in conflict situations.

▪ It is important for the EU to develop a political strategy that goes beyond reactive measures. That is, the EU should purposefully pursue a policy of strategic interdependence based on three principles: strengthen incentives, enable deterrence, protect economic operators.

– To create incentives, the EU should expand and further integrate its single market. The capital market and banking union are particularly important aspects to that effect. The pursuit of a digital Euro, as already initiated by the ECB, should be continued. This measure will have an indirect impact on the attractiveness of the European currency – a decisive factor, since so far, the euro has lagged far behind the U.S. dollar as an international means of payment. The EU should also support invoicing in euros. For some transactions, such as in the energy sector, there is often no de facto need to use other currencies. Furthermore, the industrial base and technological competence must be strengthened through a comprehensive industrial strategy. Investments for infrastructure and network-based growth (energy, digitization, mobility) should strengthen Europe's attractiveness as a market and could usefully be integrated into Europe's connectivity strategy.

– Deterrence should not only generate counter-pressure but should be guided by multilateral principles. Countermeasures should, on the one hand, serve to enforce short-term and specific interests. At the same time, they must be embedded in a legitimate and international order. Thus, it is important that countermeasures are WTO-compliant and in line with the principles of international law.

– Protection of economic operators must not be limited to defensive measures. The EU has made a first, albeit unsuccessful, attempt to do this when it established INSTEX as a clearing house.

Further options should be considered and shaped into a coherent strategy that provides practical support services in a concrete and short-term manner. The following questions should, therefore, be considered further: ▪

Can payment channels and financial messaging services be made more resilient through international agreements?

▪

Should a European sovereignty fund be established, for example, to Europeanize the system of export credit financing? Or should such a fund support especially those projects that serve the strategic interest of the Union?

13

▪

Could such a fund perhaps also provide financial assistance to support companies that fall victim to extraterritorial sanctions through no fault of their own - i.e. without any previously foreseeable sanction risk (example: JCPoA)?

▪

The availability of information for state actors is central to the design and implementation of a reactive anti-coercion instrument. Here, anonymity is a necessary prerequisite for economic operators to share sensitive information. Against this background, consideration should be given to how this confidentiality can be made legally secure. Separation from the requirements of the blocking statute is certainly one of the sufficient conditions in this context. The question therefore arises whether a single European body – an EU resilience office – should collect information on how businesses are affected by extraterritorial sanctions and, in turn, process this data for the protection of economic operators for European measures.

Measures to protect against extraterritorial economic constraints and to enforce geo-economic interests are largely new territory for Europe. The common market and EU foreign trade thrive on open trade. An explicitly horizontal industrial policy – also known as economic order policy or Ordnungspolitik – is one of the cornerstones of our social prosperity and should not be sacrificed to the trend of geopolitical kerfuffle. This makes it all the more important for the EU to find a sensible balance that incentivizes rules-based trade, deters geo-economic escalation, leverages the EU’s economic weight when necessary, and provides for corporate protection. Only in this balance can Europe retain its strategic interdependence with the world.

EU Enforcement Regulation The EU Enforcement Regulation allows the EU under certain conditions to withdraw or suspend concessions made in international trade agreements or to introduce new restrictions (such as tariffs or quotas) in order to protect the Union's trade interests. The original prerequisite for such measures was, among other things, a completed WTO dispute settlement procedure: No measures could be taken without a final WTO ruling.13 Status quo Due to the blockade of the WTO Appellate Body 14 the European Commission on December 12, 2019, presented an amendment to the EU Enforcement Regulation to provide the EU legal framework for enforcing EU rights under the WTO Agreement even if the interim review mechanism (Multi-party interim appeal arbitration arrangement, MPIA)15 is not available and the blocked appellate body prevents the conclusion of the WTO dispute settlement. The aim is to prevent the EU's trading partners from using the paralysis of the Appellate Body to their advantage by undermining the international, rules-

13

European Parliamentary Research Service, Review of EU Enforcement Regulation for Trade Disputes, 20 July 2020, <https://www.europarl.europa.eu/RegData/etudes/BRIE/2020/652021/EPRS_BRI(2020)652021_EN.pdf>.

14 Since December 11, 2019, the Appellate Body (AB) of the World Trade Organization's dispute settlement mechanism is no longer able to act, as the United States are preventing the necessary replacement of AB members. This means that WTO dispute settlement cases cannot be brought to a final conclusion. Even with the election of Joe Biden as the new U.S. President, it is not clear whether and when the United States will abandon this blockade.

15 The MPIA is an independent, two-tier dispute settlement system based on WTO law that was created in the wake of the WTO Appellate Body blockade. In addition to the EU, more than 20 other WTO members have joined. The MPIA is to be available until the WTO Appellate Body is able to function again.

14

based trading system. It also aims to address similar problems under bilateral and regional trade agreements. The updated enforcement regulation entered into force in February 2021.

Therefore, countermeasures will be possible if the dispute settlement panel of the WTO or of a bilateral or regional free trade agreement has ruled in favor of the EU, but the other party blocks the further dispute settlement process. This agreement extends the scope of the Regulation to trade in services and certain aspects of intellectual property (trademarks, designs, geographical indications), thus allowing the use of trade policy measures in these areas. The regulation also provides for the Commission to investigate treaty violations in the area of sustainable development as well as market access violations and, where appropriate, to take enforcement action when permitted by the basic trade agreements.16 Recommendations For German industry the top priority is open and rules-based world trade. The preferred framework for this is and remains the World Trade Organization. German industry therefore welcomes the fact that the European Commission is pushing hard for reform of the WTO and for independent and binding dispute settlement. Only if international rules are enforced can we prevent the law of the strongest.

Only if there are orderly procedures for enforcing rules can escalating trade conflicts be avoided. When trading partners block agreed rules and independent arbitration procedures, the EU must be able to respond in terms of multilateral rules and principles. In doing so, the Union interest must be taken into account in a balanced way, with the aim of preventing protectionism at home and around the world.

Against this background, the BDI supports the adaptation of the EU Enforcement Regulation: ▪ The amendments ensure, in line with the EU's internal rules and with international law, that the EU can take effective action against third country breaches of law despite the WTO dispute settlement blockade and possible dispute settlement blockades in other trade agreements.

▪ The EU must be able to react quickly and proportionately when European companies are affected by clear violations of international agreements by a third country.

▪ By extending the scope of the enforcement regulation to services and intellectual property rights, the EU is closing its own legal gaps and increasing its ability to respond appropriately to breaches of rules by third parties. In doing so, care must be taken to ensure that the measures are in line with the Union interest, do not create unnecessary bureaucracy, and contribute to strengthening international law, particularly in the area of intellectual property rights.

▪ Sustainable development agreements in trade agreements should be binding and enforced where possible. BDI supports the EU's approach, which relies on incentives (including consultation procedures, transparency, civil society participation in monitoring, naming and shaming, etc.) and support when it comes to enforcement. BDI remains critical of the enforcement of sustainability chapters of FTAs. The CTEO should also not be able to take action on the basis of the enforcement regulation beyond the set of rules laid down in free trade agreements.

16

European Parliament, Stronger EU powers in trade disputes, 11 November 2020, <https://www.europarl.europa.eu/news/en/press-room/20201105IPR90923/stronger-eu-powers-in-trade-disputes-trade-meps-back-rule-revision> (accessed 25 November 2020).

15

▪ In order to fully understand the Union’s interest, the economic operators concerned should be involved in individual proceedings from an early stage on and in an appropriate manner.

▪ When applying the Enforcement Regulation, the EU should be careful not to undermine WTO law.

Export Controls Status quo Due to increasingly differentiated licensing requirements, fair framework conditions for German industry are important regarding export controls. There is a specific need for action in two areas. The tightening of US export controls to counteract civil-military integration in China is putting pressure on the internationally interconnected German industry. The U.S. response to Beijing's behavior in recent years has threatened to create exclusive economic hemispheres. The desire to protect against technology piracy carries the plausible risk of inhibiting companies' innovative strength and thus damaging their competitiveness. Because of the extraterritorial application of U.S. export control law, there is a potential that supply chains will have to be permanently restructured. However, an area that is, so to speak, semi-sanctioned under export control law would have a negative impact on efficient value chains and lead to a loss of prosperity. Moreover, export control practice in the European single market is still not uniform. Even with Europe’s reformed dual-use regulation in place, aligning legal practice to serve the needs of governments and economic operators equally across the EU will take time. What is more, the reform failed to make European export controls future-proof. There is a particular need for improvement in controls regarding emerging and foundational technologies so that the EU has the legal means at hand to effectively represent its interests and the interests of its economic operators in plurilateral control initiatives.

1. Tightening U.S. Export Controls Under the last administration, the U.S. continued the export control law trend of the Obama years and introduced further restrictions. It is very likely that controls will continue to be expanded under the Biden administration. The driving factor behind the tightening of U.S. export controls is China's civil-military fusion - that is, the elimination of the distinction between a civilian sphere on the one hand and military end-users on the other. When economic operators can no longer distinguish between civilian and military end-uses for their customers, tighter controls are urgently needed. Two tightening measures adopted by ordinance are particularly worth mentioning here.

Tightening against China, Russia and Venezuela In the summer of 2020, the Bureau of Industry and Security (BIS) published enhancements that now apply to certain shipments involving China, Russia, or Venezuela (Expansion of Export, Reexport, and Transfer (in-Country) Controls for Military End Use or Military End Users in the People's Republic of China, Russia, or Venezuela ). This regulation significantly expands the scope of application of U.S. export controls related to end-use, expands the scope of application for the "regional stability" evaluation category, and tightens disclosure requirements for exports to China, Russia, and Venezuela. Basically, in the new version of § 744.21 of the Export Administration Regulations (EAR), BIS prohibits the export, re-export, and non-border transfer of goods in the event that exporters should have knowledge under U.S. law that those goods could be directed to a controlled military end-user or enduse. In addition to items listed on the Commerce Control List (CCL), §744 of the EAR (Control Policy) includes a so-called "Supplement Number 2" for those countries, which includes an additional nine 16

separate categories of items from the area of future and enabling technologies – for example, sensor technology – and laser technology or propulsion technology.

Control of emerging and foundational technologies Export controls serve national security interests beyond the non-proliferation of weapons of mass destruction. U.S. export controls in particular are designed to deny third parties access to security-relevant technologies of the latest generation for as long as possible. The aim is not technological isolation, but to ensure a technological lead. It is against this background that the discussion on the control of emerging and foundational technologies must be evaluated. The 2018 John S. McCain National Defense Authorization Act integrated control of these technologies into U.S. export control law for the first time. Initially, there were significant concerns that the extraterritorial experience with the U.S. administration at the time would transfer to the area of export controls. However, despite the existence of the instruments for unilateral and extraterritorial application of export controls, this extreme scenario did not materialize. On the contrary, in December 2019, the 42 member states of the Wassenaar Arrangement for the Control of Conventional Arms and Dual-Use Goods were able to agree on six new entries on the common control list that fall within the scope of emerging technology controls. These are the only listings in this area to date, even in the U.S. case. This multilateral approach is encouraging, but a realistic scenario remains in which delays in the Wassenaar process could, at worst, lead to unilateral action by Washington. Likely in this context is the possibility of plurilateral initiatives outside the Wassenaar in the context of a coalition of the willing.

2. Reform of the EU regulation on export control of dual-use items In May 2021, after more than five years of negotiations, European co-legislators passed a reform of the EU Dual-Use Regulation. The aim of the reform was to strengthen the contribution of export controls to the protection of human rights. Following the Arab Spring of 2010, export controls indeed had to be adapted to a changed technological and security environment. Authorities in the affected states used telecommunication surveillance equipment to spy on social networks and committed targeted human rights violations (identification of protesters, abduction, torture, targeted killings, etc.) to intimidate and suppress protesters.

As a contribution to the reform process, German industry had proposed an EU-autonomous list. This would have created clarity for economic operators and would also have been an effective instrument towards a strategically focused EU foreign policy. Such a list would have represented a unilateral intervention outside the Wassenaar process but would not be a legal rarity in Germany and Europe. To ensure that a European regulation would not harm the multilateral non-proliferation regimes, BDI advocated that those EU Member States represented in the Wassenaar Arrangement commit to introduce such controls into the Wassenaar control process. This would have ensured that a temporary European mechanism could be effectively linked to an overarching multilateral process.

However, European legislators have agreed in legal practice on an eclectic one-time solution with the concept of a list-based catch-all. Quality categories covered by this instrument can be expanded by consensus of the Member States. Rather than into the future, this agreement points to the arduous negotiation process of recent years. Thus, there is no mechanism by which the EU would have an instrument to assert its interests in plurilateral control initiatives. Moreover, no end has been put to the unlevel export control practice within the common market. Transparency rules and measures to improve cooperation between the authorities of the Member States are supposed to pave the way for a Europeanized export control practice. However, the EU is still a long way from common control standards across its Member States.

17

Recommendations ▪ Because Chinese end users can hardly be differentiated by civilian or military end uses, Beijing's behavior poses a challenge to international export controls. China's behavior compels an international response. Multilateral approaches to a solution should be at the forefront. These are effective and allow economic operators to adapt their operations efficiently and effectively.

▪ The Transatlantic partners should intensify to pursue common interests in security policy. German industry recognizes that the states of the liberal-democratic West must adapt to the changed security situation brought about by China’s party-state capitalism. The Transatlantic partners should agree to cooperate closely on controls in the future. A coordinated export control practice could also provide important momentum in multilateral export controls.

▪ In order to retain influence and to increase its power to shape European economic interests, European export controls should urgently be adapted to the changed geopolitical climate. Specifically, German industry therefore calls for a qualification of EU-autonomous controls equivalent to the 0Y521-ECCN Series in the United States. This would ensure a temporary mechanism by which European export controls would remain linked to the processes in the Wassenaar Arrangement.

▪ Qualified EU-autonomous controls would not be uncharted legal territory. As in the United States, European special interventions should include a voluntary commitment to bring such listed items into the Wassenaar process. In this way, political conflicts over EU export controls could be avoided in the future. In addition, it would limit the proliferation of unilateral controls.

Anti-Dumping Measures in Merchandise Trade17 In recent years, increasing numbers of anti-dumping cases have been observed both in the EU and globally. Between October 2008 and October 2020, the EU initiated 146 anti-dumping investigations against 29 countries, an average of twelve investigations per year. The EU is the sixth largest user of anti-dumping investigations within the G20, behind India (544 investigations) and the United States (383). Most of the EU’s investigations (59, or 40 %) were targeted against China. Investigations were also initiated against India (11), Russia (9), Turkey (7), and Indonesia (6); five each against the United States, South Korea, and Taiwan; four each against Thailand and Ukraine. In 75 cases, or 51 percent of cases, definitive anti-dumping measures were imposed on the basis of investigations initiated by the EU. Within the G20, measures were taken in 60 percent of cases.18

17

BDI has published a more detailed position on the anti-dumping measures of the European Union. The paper is available via the following link: https://english.bdi.eu/media/publications/#/publication/news/anti-dumping-measures-of-the-european-union/.

18 Methodology: Each investigation against N countries is counted as N investigations. Russian investigations include all investigations of the Euro-Asian Economic Union (EEU), South African investigations include those of the South African Customs Union (SECU), and Saudi Arabian investigations include those of the Gulf Cooperation Council (GCC).

Only definitive measures were counted.

18

Number of newly Initiated Anti-Dumping Investigations Diagrammtitel (October 2008 - October 2020) 300 EU

244

238

250

227

215

208 200 137

150

100

176

166

160

G20

181

168

130

77

50 4

16

15

17

13

2009

2010

2011

2012

4

14

12

14

9

8

11

9

2014

2015

2016

2017

2018

2019

2020

0 2008

2013

Source: WTO, G20 Trade Monitoring Report, <https://www.wto.org/english/news_e/news20_e/g20_annex_bis_okt20_e.xls>, BDI Analysis. .

Number of newly Imposed Anti-Dumping Measures Diagrammtitel (October 2008 - October 2020*) 200

EU 168

180

G20 175

153

160 131

140

135

129

119

115

120

95

100

78

80 60

47

42

40 20

0

7

10

8

7

2

2009

2010

2011

2012

2013

10

7

11

2014

2015

2016

2

3

8

2017

2018

2019

0 2008

Source: WTO, G20 Trade Monitoring Report, <https://www.wto.org/english/news_e/news20_e/g20_annex_b is_okt20_e.xls>, BDI Analysis.

*As only definitive anti-dumping measures were counted here and no definitive measures were taken in 2020, there is no column for 2020.

Status quo The EU's basic anti-dumping regulation (AD regulation) has been in force since 1995 and has been continuously improved in the subsequent years. Revisions are necessary in order to adapt the defense instruments to the changing trade policy framework. To ensure fair competition, German and European industry is dependent on effective and balanced trade defense instruments.

In 2016, the AD regulation and its numerous amendments were consolidated in a vertical codification process to ensure clarity in the upcoming reforms. Following proposals from the Commission, the actual renewal of the trade defense instruments was then addressed separately by the European

19

Parliament and the European Council in a methodology section (determination of normal price as a basis for anti-dumping proceedings) and a modernization section (conduct of anti-dumping proceedings). The EU completed the reform of its trade defense instruments on 7 July 2018. As a result, the anti-dumping procedure has also been modernized.

The reform was prompted by the expiration of a key article in China's WTO accession protocol in midDecember 2016. According to this article, Chinese producers had to prove that the prices of their products were achieved under market economy conditions. Without this evidence, importing countries were not allowed to base their determination of dumping on domestic market prices, but on cost structures that existed for the product in question in market economy countries. In order to avoid criticism of treating China as a country without market economy structures, the EU members agreed on a more differentiated methodology for determining the actual domestic price in China. Additionally, several other adjustments were introduced.

An important innovation in the basic EU anti-dumping regulation is that the EU no longer makes a distinction between a market economy and a state-trading country. Instead, the components of full costs are systematically examined to determine whether they are complete and reasonably priced. The Commission provides market reports for potential complainants, which facilitate the substantiation of the anti-dumping complaint and thus the initiation of an anti-dumping investigation.

Recommendations ▪ The anti-dumping measures (AD measures) of the European Union (EU) are an important instrument to protect European producers from unfair competition from abroad. It must be ensured that their application is in accordance with World Trade Organization (WTO) rules and reflects the Union interest.

▪ In principle, the AD instrument is effective. German industry welcomes the latest reform. However, individual sectors report that existing anti-dumping duties are being circumvented by various measures (channeling through the use of preferential TARIC codes, transshipment, incorrect classifications, and so on). This undermines the effectiveness of the duties and contributes to the fact that a level playing field is not being established. Measures are therefore necessary to limit the possibilities of circumvention. As a general rule, the concerns of importing economic operators must be taken into account as well.

▪ Before once again reforming the AD toolkit, a detailed analysis of its effectiveness should be undergone, including consultations with the manufacturing, processing, exporting, and importing industries.

▪ In the case of further reform, it should be considered that – changes in AD law are not unilaterally to the detriment of one of the parties involved (complainant/defendant); – a far-reaching tightening of anti-dumping and anti-subsidy legislation in the EU may lead to retaliatory measures in third countries, for example by making national anti-dumping legislation more stringent or initiating anti-dumping proceedings against EU-based companies.

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▪ The European Commission's introduction of the mandatory reporting requirement in the case of China was just and in order. Nevertheless, the burden of proof remains very high in individual cases.

The EU should publish further reports on market distortions.

▪ Parallel anti-dumping and anti-subsidy proceedings are a welcome development. In principle, however, it remains difficult to provide the necessary evidence regarding subsidies. A key objective should therefore be to create more transparency about subsidies in third countries in the future.

– As concurrence makes the procedures as a whole much more expensive and complex than individual proceedings, proceedings should only take place where a significant increase in protective duties can be expected. Nevertheless, anti-subsidy proceedings in particular send an important political signal.

– Concurrent proceedings must not lead to double counting and excessive duties.

▪ The reduction in the length of AD procedures is positive for most economic operators. Despite the SME Helpdesk 19, many small businesses in particular are still reluctant to initiate AD procedures due to the high administrative burden, so a further streamlining and optimization of procedures would be welcomed. The Commission must ensure that applicants and interested parties alike continue to be given sufficient time to represent their interests and to prepare for any duties that may be imposed.

▪ Trade defense measures should be subject to review prior to their expiry at the request of any Union producer or, if necessary, ex officio, and should be extended if warranted by the continued existence of global market distortions.

▪ An extension of the anti-dumping instrument to services should be examined without prejudice to the outcome.

▪ It would be desirable to examine whether environmental and social costs can also be taken into account in the determination of normal value, also with respect to WTO conformity. If the European Commission recognizes future costs, especially from emissions trading and the upcoming CO2 avoidance costs, the damage margin is likely to be larger.

▪ Restricting the application of the Lesser Duty Rule where there are distortions of competition due to low energy and raw material prices is mainly seen as sensible and as a contribution to creating fairer conditions of competition. The Union interest must be taken into account.

▪ Further standardization of the individual stages of the proceedings would be desirable, for example in the preparation of an AD claim in the sense of providing checklists, questionnaires, or decision guidance with explanations on the websites of DG Trade or of the Member States. The same level of assistance should be provided for all economic operators.

▪ The general aim should be to provide companies with sufficient information to constructively counteract any possible uncertainties.

19

A helpdesk provides support for small and medium-sized enterprises and has been expanded with the reform of the antidumping regulation.

21

Countervailing Measures in Merchandise Trade 20 Industrial subsidies are nothing new but have become an increasing threat to fair competition on global markets in recent years. Similar to the number of anti-dumping investigations, the number of anti-subsidy investigations is also steadily increasing. According to the WTO, new countervailing investigations among members have increased in recent years, with 36 new investigations initiated in 2019 compared to just nine in 2010. 21 Since the founding of the WTO in 1995, WTO members have introduced 604 countervailing investigations against one another. In 337 cases (56 %), measures were imposed and countervailing duties collected (as of June 2020).22

Total Countervailing Investigations initiated among WTO Members (1995-2020)

Diagrammtitel

700 600

541

604

486

500

*Data as of end of June 2020 380

400 300 200 99 117 100

577

33 10 17

217 190 201 168 176 182 144 153

245 254

279

302

411

445

335

58

0

Quelle: World Trade Organization, Countervailing Initiations: By Reporting Member 01/01/1995 - 30/06/2020, <https://www.wto.org/english/tratop_e/scm_e/CV_InitiationsByRepMem.pdf> (accessed 8 Februar 2021).

Status quo While the rulebook of the WTO contains disciplines on subsidies, there is a lack of coherent and comprehensive rules to effectively address market distortive practices particularly in the area of subsidies (beyond export subsidies) – in particular regarding industrial subsidies – the role of state-owned enterprises (SOEs), and forced technology transfers. The WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) only vaguely defines subsidies. It also covers only export subsidies and subsidies intended to increase domestic supply or replace imports.

20

BDI has published a more detailed position on the reform of the WTO Agreement on Subsidies and Countervailing Measures.

The paper is available via the following link: https://english.bdi.eu/publication/news/reform-of-the-wto-agreement-on-subsidiesand-countervailing-measures/.

21 The WTO data is only available until the end of June 2020; in order to compare full years, we have used the data here for 2019.

22 World Trade Organization, Countervailing Measures: Reporting Member vs. Exporting Country 01/01/1995 – 30/06/2020, <https://www.wto.org/english/tratop_e/scm_e/CV_InitiationsByRepMem.pdf> und Countervailing Measures: By Reporting Member 01/01/1995 - 30/06/2020, <https://www.wto.org/english/tratop_e/scm_e/CV_MeasuresByRepMem.pdf> (accessed 8 February 2021).

22

Moreover, the hurdles to obtain the authorization for countervailing duties are high: The complainant bears the burden of proof to show the injury that has been suffered and must demonstrate a causal link between the injury and the subsidized imports. Opaque government funding in some countries makes this very difficult. In addition, the notification disciplines under the WTO for subsidies are weak.

The WTO has little leeway to sanction those countries which do not fulfill their notification obligations.

To address this regulatory gap, the Trilateral Initiative of the European Union, the United States, and Japan issued a joint statement on 14 January 202023 after a meeting in Washington, DC. Among other proposals, the statement dealt with a comprehensive reform of the SCM Agreement to more precisely regulate government subsidization of industrial goods and their exports.

The SCM Agreement provides multilateral disciplines regulating the provision of subsidies. It also regulates the use of countervailing measures to offset injury caused by subsidized imports. The Trilateral partners agreed that the SCM Agreement in its current form is “insufficient to tackle market and tradedistorting subsidization” of industrial goods in “certain jurisdictions.”

They identified insufficiencies in several areas for which they provide policy recommendations: the definition and types of subsidies, benchmarking, notification, and conditions for countervailing measures.

The parties lastly reassert their commitment to continue work on: ▪

Identifying the scope of prohibited subsidies as well as additional categories of unconditionally prohibited subsidies;

▪

identifying the scope of harmful provisions as well as additional instances of harmful subsidization;

▪

the provision defining the threat of serious prejudice;

▪

the definition for public body based on their assertion that interpretation of this term for subsidizing entities by the WTO Appellate Body has been inadequate and “undermines the effectiveness of WTO subsidy rules “.

Recommendations ▪

While the rulebook of the WTO contains disciplines on subsidies, there is a lack of coherent and comprehensive rules to effectively address market distortive practices particularly in the area of subsidies (beyond export subsidies). This regulatory gap must be addressed quickly und sufficiently.

▪

The framework for countervailing measures (CVM) should be strengthened and its application should be facilitated. In the future, CVMs should be designed in such a way to more fully address

23

Joint Statement of the Trilateral Meeting of the Trade Ministers of Japan, the United States and the European Union , 14.

Januar 2020, <https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/january/joint-statement-trilateralmeeting-trade-ministers-japan-united-states-and-european-union>.

23

the market-distortive effects of foreign SOEs and industrial subsidies. This can help to ensure competitive neutrality.24 ▪

The EU should pursue multilateral, plurilateral (in the best case, under the WTO) and bilateral efforts (such as in free trade agreements) to develop new disciplines on industrial subsidies and state-owned enterprises.

▪

German industry welcomes the proposals of the Trilateral Initiative (EU, Japan, and the United States) on appropriate disciplines. It is an important step forward to restore fair competition.

▪

The EU should reform its CVMs. The framework for CVMs should be strengthened and its application should be facilitated. In the future, CVMs should be designed in such a way to more fully address the market-distortive effects of foreign SOEs and industrial subsidies.

▪

If the WTO Agreement on Subsidies and Countervailing Measures (SCM) cannot be modernized multilaterally, a plurilateral agreement could prove a viable interim step.

▪

BDI welcomes parallel investigations of dumping and subsidies, which reflect the reality of the trade distortive effect of industrial subsidies.

▪

In order to direct countervailing measures properly, the monitoring and reporting of industrial subsidies across sectors needs to be improved markedly. German industry supports more stringent disciplines for notifying subsidies at the WTO and a more effective enforcement mechanism.

▪

German industry supports the introduction of new types of unconditionally prohibited subsidies as put forward by the proposal.

▪

German industry recognizes the growing importance and value of trade in services and supports all efforts within the WTO to further the negotiation process on services.

Finally, it should be noted that even comprehensive reforms of the SCM agreement and the EU’s CVM regulation would mainly tackle the trade side of the issue. The problem of state induced market distortions in domestic competition, competition in third markets, investment (including M&A) or public procurement should also be addressed, if possible, in parallel by the EU. Finally, the EU will have to reassess and reform its state aid instruments to support industry in its transition towards greenhouse gas neutrality and circularity. Therefore, new multilateral or plurilateral rules on subsidies should provide a specific framework for these purposes. International approaches for this necessity are favorable over fragmented national responses.

24

BDI, alongside BusinessEurope, proposes an SOE principle that entails that EU policies are designed in a way to mitigate the impact of government induced market distortions through SMEs. Business Europe, The EU and China. Addressing Systemic Challenge, Brussels 2020, <https://www.businesseurope.eu/sites/buseur/files/media/reports_and_studies/the_eu_and_china_full_february_2020_version_for_screen.pdf>.

24

The Safeguard Instrument25 Since 2008, the number of safeguards investigations initiated by the G20 countries has increased steadily. A similar trend can be observed regarding the number of measures imposed. 26 Thus, a comparable trend is evident for safeguards as for the other trade defense instruments, anti-dumping and anti-subsidy instruments. In recent years and months, the discussion on safeguards has also reached the broader public in the European Union. In the context of the EU’s Trade Policy Review and in the discussion on European open strategic autonomy, this previously little-known and relatively rarely used instrument is increasingly moving into the focus of the trade defense debate.

The G20 countries initiated a total of 123 safeguard investigations between October 2008 and midOctober 2020. Definitive measures were imposed in 63 of these cases (51 %). With 39 investigations, India initiated the most, followed by Indonesia (33), Turkey (15) and Russia (10). Argentina, Japan, and South Korea did not initiate any Safeguard investigations during the period covered, and Brazil, Canada, China, and Mexico initiated one investigation each.

Total Number of Safeguard Investigations Initiated among G20 Countries Diagrammtitel October 2008 - mid-October 2020 140 123 116

120 104 96

100 79 80

83

89

66 59

60 42 33

40 21 20 3 0 2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: World Trade Organization (2008-2020), G20-Trade Monitoring Reports, <https://www.wto.org/english/news_e/news20_e/g20_annex_bis_jun20_e.xls> (accessed 12 February 2021), BDI analysis.

25

BDI has published a more detailed position on the safeguard instrument. The paper is available via the following link: https://english.bdi.eu/media/publications/#/publication/news/the-safeguard-instrument/.

26 World Trade Organization (2008-2020), G20-Trade Monitoring Reports, <https://www.wto.org/english/news_e/news20_e/g20_annex_bis_jun20_e.xls> (accessed 12 February 2021), BDI analysis.

25

Total Number of Definitive Safeguards Imposed among G20 Countries Measures October 2008 - mid-October 2020 70 63

63

2019

2020

57

60 51 50

45 40

42

40 34 30 30 22 17

20 10 10 2 0 2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Source: World Trade Organization (2008-2020), G20-Trade Monitoring Reports, <https://www.wto.org/english/news_e/news20_e/g20_annex_bis_jun20_e.xls> (accessed 12 February 2021), BDI analysis.

Status quo Unlike the more common trade defense instruments (TDI) – antidumping and countervailing measures – safeguards do not focus on “whether trade is fair or not” but are applied when European economic operators are affected by an "unforeseen, sharp and sudden increase of imports.” The instrument aims to provide "temporary breathing space" for the affected industry to adjust to a significant increase in imports. Thus, safeguards do not stem from wrongdoing by third parties (such as dumping or illegal subsidies). Therefore, third countries affected by safeguards are entitled to receive equivalent trade compensatory measures (for example, tariff reductions in other areas). Another difference between safeguards and the other two trade defense instruments is that they are not applied to imports from a specific country or countries, but to imports from all countries. 27 Moreover, the investigation is not limited to like products but can also cover directly competing products. Although the EU completed a reform of anti-dumping and anti-subsidy instruments in 2018, no reform of the EU safeguards is currently planned.

The framework for EU safeguards is found in the WTO Agreement on Safeguards (Article XIX, GATT).

The Agreement allows WTO members to adopt safeguards to protect a particular domestic industry from an unforeseen surge of imports of a product that causes or threatens to cause serious injury to that industry.

The Agreement sets forth the requirements for safeguard investigations, including public notice of hearings, the opportunity for interested parties to present evidence, and the possibility of provisional measures where serious injury has already been determined. The criteria for serious injury and the factors to be considered in determining the effect of imports are also specified in the Agreement.

27

European Commission, Safeguards, <https://ec.europa.eu/trade/policy/accessing-markets/trade-defence/actions-against-imports-into-the-eu/safeguards/> (accessed 30 July 2020).

26

Measures should be applied only to the extent necessary to prevent and remedy serious injury and to facilitate the adjustment of domestic production. If a quantitative restriction on imports is imposed as a result of an investigation, the measure should not reduce the volume of imports below the annual average of the previous three years. Measures should not exceed four years. In special cases, they may be extended to a maximum of eight years.

Certain developing countries are excluded from the measures if two criteria are met simultaneously, specifically when 1. the share of imports of the product from a developing country does not exceed three percent of the total imports of that product, and 2. imports of the product from developing countries accounting for less than three percent of total imports together account for less than nine percent of total imports.

Developing countries can extend their own safeguards by up to two years beyond the normal maximum, to up to ten years. Finally, the Agreement established the Safeguards Committee to oversee the application of safeguards.28 EU Safeguard Investigations The hurdles set by the WTO for the use of safeguards are very high. For instance, the European Commission must demonstrate that the increase in imports of affected products or product groups has been significant, is due to unforeseen developments, and causes or threatens to cause serious injury to the EU market. Thus, a higher injury risk than for anti-dumping or countervailing duties is required.

In addition, beyond the obligations under the WTO Safeguards Agreement, the Commission must demonstrate that these measures (for example, duties or import quotas) are in the interest of the European Union.

Both EU producers as well as the Commission itself can initiate safeguard investigations. On the part of producers, this requires a duly substantiated request to the authorities in one or more EU Member States. If the Commission, after consulting the national authorities, considers that there is sufficient evidence, it opens such an investigation by publishing a notice in the Official Journal of the EU. The investigations will examine import trends, the conditions under which they occur, and the threat or cause of serious injury to EU producers. They must be completed within nine months.

Safeguards can be imposed in a variety of ways, for example through increased tariffs or import and tariff quotas. If import quotas are imposed, they are usually set at least at the average level of imports over the last three representative years. In the past, the Commission has imposed tariff quotas, which means that additional tariffs are imposed on imports that exceed the quota. In special circumstances, such as the steel duties taken in 2018, provisional measures may also be imposed if evidence of clear injury has been provided.29

28

World Trade Organization, Agreement on Safeguards, <https://www.wto.org/english/docs_e/legal_e/ursum_e.htm#lAgreement> (accessed 30 July 2020).

29 European Commission, Measures, <https://trade.ec.europa.eu/doclib/docs/2013/april/tradoc_151032.pdf> (accessed 30 July 2020).

27

Recommendations ▪ To ensure fair international competition, German industry relies on effective and balanced trade defense instruments that ensure a fair and global level playing field for EU-based manufacturers, importers and consumers.

▪ Generally, German industry considers the WTO Agreement on Safeguards to be adequate. In any case, compliance with the requirements of the Agreement must always be ensured.

– Concerns of both producing and importing economic operators, i.e. the Union interest, must be adequately taken into consideration.

– Criteria enabling the application of safeguards must be defined as differentiated and practice oriented as possible.

▪ The (EU) safeguard is an (particularly sharp-edged) instrument intended to avert massive and sudden external shocks and is only to be used in situations of trade policy emergency. Thus, before safeguards are imposed, the European Commission must carefully examine whether the criteria required for this are met.

– The existence of the criteria required for safeguards should be examined on a product-specific basis. Terms such as "unforeseen increase of imports" should be defined more precisely.

– For safeguards to be imposed, there must have been an unforeseen and sharp increase of imports. This together with verifiable negative economic consequences should be the focus of the investigations.

– Interaction with existing EU anti-dumping measures should be prevented, as these may jeopardize supply security at competitive prices in a highly dynamic market environment.

▪ Within the European Union, the safeguards instrument has so far played an only minor role in trade defense. In view of the growing challenges in international trade for some sectors (increasing global protectionism, increasing overcapacities, redirection of supply to the European market), the European Commission should carefully review the use of safeguards to determine when their application can help to secure a level playing field internationally.

– If (for example, after lodging a complaint) the conditions and criteria for the use of the instrument are met, it must be applied consistently following a precise and balanced investigation.

– There must be a certain flexibility in the monitoring of the safeguards in order to be able to react to changing conditions at short notice. Some interested parties have suggested that the European Commission should monitor developments on the import side more closely. At the same time, however, the necessary degree of predictability for economic operators needs to be ensured.

– The provisions in the EU Regulation on safeguards, describing in which cases safeguards are to be applied to imports from developing countries, should be implemented consistently. However, the EU should take into account both the Union interest and development policy considerations throughout the decision-making process.

28

– Safeguards in third countries are not always imposed in accordance with WTO rules. Some industries report that they are regularly confronted with safeguard investigations or measures, sometimes of a retaliatory nature, in third countries. The EU should closely monitor the use of safeguards by third countries in consultation with industry and, in the event of new investigations, support the EU companies concerned in taking decisive action against obviously illegal and improper measures (for example, dispute settlement procedures).

– The notification of safeguards to the WTO and the transparency this creates is of great importance to allow foreign trade to adapt to the changed situation and, if necessary, to participate in investigation proceedings as early as possible. BDI considers the notification of safeguards to the WTO to be necessary. It is in fact problematic that not all countries comply with their notification obligation. A more effective enforcement mechanism including stronger incentives for notification should be implemented by the WTO.

Investment Screening Status quo The German economy is globally interconnected through direct investments abroad. More than eight million employees work abroad for companies in which German investors hold significant shares. On the other hand, Germany as a business location also depends on the trust of investors from abroad.

In Germany, 3.2 million employees work for 16,817 companies in which foreign investors are important shareholders (2018). However, investments and acquisitions from third countries in Germany have also led to controversial discussions in this country in recent years. In Germany, the takeover of the German robot manufacturer KUKA and the Chinese entry into companies in the automotive industry, among others, led to controversial discussions. According to UNCTAD, the volume of Chinese direct investment abroad has increased tenfold in the last ten years (2009 to 2019).30 Advocates of stricter state control of investment warn that foreign investment could endanger security and public order. They also see the competitiveness of the business location in danger if foreign investors acquire future technologies through acquisitions. They also consider how other states can be persuaded to give in on political issues by strengthening their own rights of intervention ("reciprocity").

In response to the debate, the German government expanded its options for screening and prohibiting foreign investments in 2017, 2018 and 2020, despite strong protests from business representatives.

For example, a notification requirement was introduced for corporate acquisitions in critical infrastructure. In spring 2020, in response to the Covid-19 pandemic, the 15th amendment to the Foreign Trade and Payments Ordinance included companies in the industrial health sector. The participation threshold above which investments from third countries can be prohibited was also lowered from 25 percent to 10 percent for critical infrastructures. For the remainder of the year, further extensions of the state's rights to intervene in certain technology sectors have been introduced by the 17th amendment.

The European Union is also working on stricter screenings of investments from third countries. In October 2020, an EU regulation on the Europe-wide handling of investment controls, which had already been adopted in 2019, came into force in the EU Member States. With this, the EU has created a

30

UNCTAD, <http://unctadstat.unctad.org> (accessed 1 September 2020).

29

European framework for investment screenings. The regulation lays the foundations for a systematic exchange of information between Member States and with the European Commission on acquisitions from third countries. In doing so, the regulation explicitly emphasizes that the only reason for restrictions on foreign investment is a threat to national security and that the final decision on restrictions on specific investments is always in the hands of the Member States. In spring 2020, the European Commission also explicitly called on Member States to use their legal instruments for investment screening to critically review strategically relevant acquisitions of companies in the healthcare sector from third countries. In recent months, the EU has taken the first steps toward a coordinated European approach to investments from third countries. It remains to be seen what further steps will be taken toward greater unity in Europe in dealing with investors.

However, understandable security concerns must be weighed against economic risks. Germany and Europe benefit considerably from open markets for goods, services and investments.31 Investment screenings are a profound encroachment on property rights and freedom of contract, which are a cornerstone of our successful social market economy. Moreover, new restrictions on foreign direct investment (FDI) are also painful because FDI is in any case increasingly attracted to the growth markets in Asia. In addition, the global wave of protectionism is not stopping at investment. UNCTAD's latest report on international investment policy shows that one-third (34%) of global investment policy measures recently restricted investment.32 In the wake of the Covid-19 pandemic, this trend has intensified, partly because many states wanted to ensure control over the production of health-related goods. The stricter laws are already reflected in the practice of states in dealing with foreign investments.33 Globally, three times as many takeovers were prohibited in 2018 as in the previous year to protect national security, according to UNCTAD.34 The restrictions on foreign investment, which are mainly motivated by security policy, reinforce the global trend of declining FDI flows, which has already accelerated in connection with the pandemic in the course of 2020. FDI flows to industrialized countries, for example, fell by 75 percent in the first half of the year.35 At the same time, however, Berlin and Brussels must ensure security and public order when dealing with foreign investors. State control of takeovers of security-relevant companies, such as war weapons or infrastructures, is both permissible under EU law and necessary in terms of regulatory policy but must in each case be the subject of a comprehensible security policy balancing of interests. However, a continuous dialog between stakeholders from business, security policy and foreign trade policy is necessary to precisely define such sectors, as technologies and threat scenarios change over time.

The BDI rejects any intervention in private property and freedom of contract that goes beyond the

31

The foreign sales generated by German companies through their locations abroad exceed Germany's exports by about twice that amount. Foreign companies are similarly involved with us. In Germany alone, 3.2 million employees work for 16,817 companies in which foreign investors have a stake (2018). However, foreign involvement in Germany is declining. The year before (2017), there were 17,167 companies. The number of companies in Chinese hands and the number of employees there have also been declining recently.

Source: Deutsche Bundesbank, Direktinvestitionsstatistiken, <https://www.bundesbank.de/resource/blob/804098/507b44231439ce3bf4402a9c5d1d084f/mL/ii-bestandsangaben-ueber-direktinvestitionen-data.pdf> (accessed 7 December 2020).

32 This is the highest level in many years. Both UNCTAD and the Organization for Economic Co-operation and Development (OECD) note a trend in the G20 countries to broaden the framework for government investment reviews. Source: UNCTAD, Investment Policy Monitor Issue 23, <https://unctad.org/system/files/official-document/diaepcbinf2020d1_en.pdf> (accessed 07 December 2020).

33 OECD/UNCTAD, Twenty-fourth Report on G20 Investement Measures, <https://www.wto.org/english/news_e/news20_e/g20_oecd_unctad_report_nov20_e.pdf> (accessed 07 December 2020).

34 UNCTAD, Investment Policy Monitor Issue 23, <https://unctad.org/system/files/official-document/diaepcbinf2020d1_en.pdf> (accessed 7 December 2020).

35 UNCTAD expects global investment flows to decline by up to 40 percent by 2020. Source: UNCTAD, Investment Trends Monitor Issue 36, <https://unctad.org/webflyer/global-investment-trends-monitor-no-36> (accessed 7 December 2020).

30

protection of public security and is motivated by industrial policy. After all, the competitiveness and innovative strength of German industry are based on the protection of private property and freedom of contract, not on state protection of certain technologies. Germany must therefore not participate in the acceleration of a spiral of investment protectionism.

Recommendations ▪ Foreign investments are welcome in Germany. They create prosperity and jobs. In Germany, three million employees work for foreign-owned companies. Germany benefits greatly from open borders.

▪ The screening mechanisms currently enshrined in the Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance to protect public order and security are adequate. In addition, the general laws regulating the economy (for example, competition law) can also prevent negative effects of companies' economic activities.

▪ German industry opposes the use of investment screening to achieve industrial policy goals. A fundamental extension of the intervention criterion "protection of public order and security" in the Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance to economic criteria could open the floodgates to protectionist instrumentalization.

▪ The transparency and reliability of the screening process should be improved. A more transparent and precise definition of what is meant by "national security and order" in the context of foreign direct investment can increase legal certainty for investors and thus be beneficial for Germany as a business location.

▪ BDI welcomes political initiatives to reduce investment restrictions. Investment protection and promotion treaties (IIAs/BITs) and free trade agreements (FTAs) are the most suitable instruments for opening foreign markets to investors. Dialogue in the WTO and within global governance fora such as the G7 or G20 must also be used to promote greater openness. Threatening to introduce market access restrictions for foreign investment ("reciprocity"), on the other hand, is unsuitable to induce states to open their markets. Germany can only lose in such a scenario.

▪ Property rights and freedom of contract as cornerstones of the social market economy in Germany must be guaranteed and strengthened. The decision of owners to whom they sell their company shares should not be restricted any further than it already is.

▪ The European regulation on the handling of foreign investments in the EU reconciles the needs for openness and security well. The regulation emphasizes that interventions may only be made to protect national security. The decision-making authority on investment screenings remains in the hands of the Member States. The experience gained from the newly created cooperation mechanism between Member States can later be used to consider further steps towards a more coordinated EU investment policy. Unilateral national tightening of investment screenings beyond the level specified in the regulation should not lead to competitive disadvantages for Germany as a business location (level playing field). In addition, the EU should be able to act more strongly as a global driver of international investment policy in the interests of German investors and capital seekers.

31

Annex: The European Union in the World The European Union is globally interconnected like no other association of states. Although the EU's share of world trade has fallen slightly in recent years, it remains at a high level and represents an important foundation for the EU's growth, competitiveness and employment.

Although the EU population accounts for just under six percent of the world's population 36, in 2020, the EU's total exports (goods) accounted for 31 percent of global exports (including intra-EU trade). In 2020, the European Union thus ranked first, ahead of China (14.7 %) and the United States, whose share was 8.1 percent. In 2020, the EU's total imports (goods) amounted to 28.8 percent of global imports (including intra-EU trade). In 2020, the European Union was thus well ahead of the U.S. at 13.5 percent. China ranked third with a share of 11.5 percent.37 EU exports secured 36 million jobs in Europe in 2017. This figure has increased by two-thirds since 2000.38 The export ratio of the 27 EU Member States – the ratio of exports of goods and services to gross domestic product (GDP) – was 46.7 percent in 2020.39 This corresponds to a minus of 2.7 percent compared to the previous year. However, imports are also important for the EU-27: The import ratio – the ratio of imports to GDP – was 42.7 percent in 2020 – down two percent on the previous year.40 These figures underline the importance of trade for the EU. According to initial estimates, extra-EU goods exports amounted to 148.3 billion euros in January 2021, a decrease of 10.8 percent compared to January 2020. Imports from the rest of the world amounted to 139.9 milli- billion euros, a decrease of 16.9 percent compared to January 2020. The EU registered a surplus of 8.4 billion euros in trade in goods with the rest of the world in January 2021. Compared to January 2020, intra-EU trade in January 2021 decreased by 5.4 percent to 244.9 billion euros.41 Due to the Covid-19 pandemic, imports and exports decreased in 2020 compared to 2019. As a result, the real GDP growth rate registered a decline of 6.1 percent in 2020.42 EU exports recorded a decline of 9.3 percent. EU imports also decreased by 7.1 percent compared to the previous year.43 In 2020, China was the European Union's most important trading partner overall, accounting for 16.1 percent of the EU's total external trade. The USA (15.2 %) and the United Kingdom (12.2 %) followed in second and third place. With a share of 18.3 percent of all EU exports, the United States was the top destination for European goods exports in 2020, followed by the United Kingdom (14.4%) and China (10.5%). The leading supplier of goods to the EU in 2020 continued to be China, with a share of 22.4 percent of all EU imports. The volume of goods imports from China was thus almost double that of the United States,

36

Worldbank, Population, total, <https://data.worldbank.org/indicator/SP.POP.TOTL> (accessed 12 April 2021).

World Trade Organization, Merchandise exports by product group – annual (Million U.S. Dollar) und Merchandise imports by product group – annual (Million U.S. Dollar), <https://data.wto.org/> (accessed 15 April 2021).

38 European Commission, Studie: Internationaler Handel sichert über 36 Millionen Arbeitsplätze in der EU, <https://ec.europa.eu/germany/news/20181127-handel-36-millionen-jobs-der-eu_de> (accessed 13 April 2021).

39 Eurostat, Exports of goods and services in % of GDP, <https://ec.europa.eu/eurostat/databrowser/view/tet00003/default/table?lang=en> (accessed 13 April 2021).

40 Eurostat, Imports of goods and services in % of GDP, <https://ec.europa.eu/eurostat/databrowser/view/tet00004/default/table?lang=en> (accessed 13 April 2021).

41 Eurostat, Überschuss des Euroraums im internationalen Warenverkehr in Höhe von 6,3 Mrd. Euro, Press release 35/2021, <https://ec.europa.eu/eurostat/documents/2995521/11562995/6-18032021-BP-DE.pdf/cb022f21-7d8c-148f-65380e463c86a782?t=1616088646979 > (accessed 13 April 2021).

42 Eurostat, Real GDP growth rate – volume, < https://ec.europa.eu/eurostat/web/products-datasets/-/tec00115&lang=en> (accessed 21 April 2021).

43 Federal Statistical Office, Zusammenfassende Übersichten für den Außenhandel: Vorläufige Ergebnisse, Fachserie 7 Reihe 1, <https://www.destatis.de/DE/Themen/Wirtschaft/Aussenhandel/Publikationen/Downloads-Aussenhandel/zusammenfassende-uebersichten-jahr-vorlaeufig-xlsx-2070100.html>, (accessed 13 April 2021).

37

32

which followed as the second most important supplier with 11.8 percent. The United Kingdom (9.8 %) follows in third place.44

Main trading partners of the European Union 2020, Share of extra-EU trade China 16%

others 31%

United States 15%

India 2%

South Korea 3% United Kingdom 12%

Norway 2% Japan 3% Turkey 4%

Switzerland 7% Russia 5%

Quelle: Europeam Commission, Client and Supplier Countries of the EU27 in Merchandise Trade (value%), <https://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_122530.pdf> (accessed 22 April 2021).

In the first eleven months of 2020, China was the EU's main trading partner. This result is due to an increase in imports (+ 4.3 %) and exports (+ 1.1 %). At the same time, trade with the United States recorded a significant decrease in both imports (- 13, 0 %) and exports (- 9.3 %).45 The EU balance of trade in goods has shown a continuous surplus since 2012. In 2019, the EU recorded a plus of almost 200 billion euros. Due to the Covid-19 pandemic, international trade in goods, including the EU's trade in goods with its main trading partners, decreased, especially in the first half of 2020.

Foreign companies owned 34.2 percent of total EU assets in 2018. European companies owned 45.4 percent of foreign direct investment in 2018. China, on the other hand, allowed only 6.5 percent direct investment by foreign companies in 2018.46 This leaves the EU with one of the most open investment systems in the world. International investment is an important driver of economic growth and jobs. 16 million jobs in the EU depend directly on foreign direct investment held by investors from third countries

44

European Commission, Client and Supplier Countries of the EU27 in Merchandise Trade (value%), <https://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_122530.pdf> (accessed 22 April 2021). All figures exclude intra-EU trade.

45 Eurostat, Überschuss des Euroraums im internationalen Warenverkehr in Höhe von 25,8 Mrd. Euro, Press release 10/2021, <https://ec.europa.eu/eurostat/documents/portlet_file_entry/2995521/6-15012021-AP-DE.pdf/c114d653-00f1-5c62-fb408c70195cad76> (accessed 13 April 2021).

46 European Parliament, Die Europäische Union und ihre Handelspartner, <https://www.europarl.europa.eu/factsheets/de/sheet/160/die-europaische-union-und-ihre-handelspartner> (accessed 13 April 2021).

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(2017: 6.3 trillion euros). For years, there has been both a steady increase in foreign direct investment in key European sectors and an increase in investment from China. The traditional and largest investors, accounting for 80 percent of all foreign assets in all sectors of the EU economy, include the United States (2.2 trillion euros), Switzerland (800 billion euros), Canada, Norway, Japan and Australia. Investments by state-owned enterprises from China, Russia and the United Arab Emirates have grown particularly strongly. In 2017, they made three times more company acquisitions than in 2007.4748 The Covid-19 crisis is having a massive impact on trade and economic growth not only in the European Union, but around the world. Especially in the early phase of the pandemic in 2020, there were production losses due to employee illnesses and a shutdown of production for infection control purposes.

During the course of the year, a new normality in dealing with the threat of the Covid-19 pandemic gradually emerged, but the economic recovery to pre-crisis levels will take some time, despite expected economic growth.

After the gross domestic product of the European Union fell by more than six percent in 2020, the European Commission expects the European economy to grow again in the next two years. The GDP is expected to grow by 3.7 percent in 2021 and by 3.9 percent in 2022. Due to the different effects of the pandemic on the EU Member States, it can be assumed that the speed of the economic recovery will also vary within the EU.49

47

European Commission, Ausländische Direktinvestitionen: Kontinuierlicher Anstieg ausländischen Firmeneigentums in Schlüsselsektoren der EU, <https://ec.europa.eu/germany/news/direktinvestitionen20190313_de> (accessed 13 April 2021).

48 European Parliament, Ausländische Direktinvestitionen: EU-Interessen schützen, <https://www.europarl.europa.eu/news/de/headlines/economy/20180122STO92231/auslandische-direktinvestitionen-eu-interessen-schutzen> (accessed 13 April 2021).

49 European Commission, European Economic Forecast, Winter 2021, Institutional Paper 144, February 2021, <https://ec.europa.eu/info/sites/info/files/economy-finance/ip144_en_1.pdf> (accessed 13 April 2021).

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Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 Authors Matthias Krämer T: +49 30 2028-1562 m.kraemer@bdi.eu

Dr. Peter Schäfer T: +49 30 2028-1412 p.schaefer@bdi.eu

Anna Kantrup T: +49 30 2028-1526 a.kantrup@bdi.eu

Ferdinand Schaff T: +49 30 2028-1409 f.schaff@apa.bdi.eu

Friedolin Strack T: +49 30 2028-1423 f.strack@bdi.eu

Dr. Christoph Sprich T: +49 30 2028-1525 c.sprich@bdi.eu

Eckart von Unger T: +32 2 792 1020 e.vonunger@bdi.eu

Dr. Ulrike Suchsland T: +49 30 2028-1408 u.suchsland@bdi.eu

Sebastian Freimuth T: +32 2 792 1005 s.freimuth@bdi.eu

Katherine Tepper T: +49 30 2028-1499 k.tepper@bdi.eu

Dr. Nikolas Keßels T: +49 30 2028-1518 n.kessels@bdi.eu

Document Number: D 1398

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