Fair Play? The Politics of Evaluating Foreign Subsidies in the European Union

The European Union (EU), for decades a pillar of openness and multilateralism, has recently shifted towards a more assertive commercial policy relying on the development of new geoeconomic instruments designed to level the playing field and deal with the increasing blurriness between economy and national security. Alongside the new EU FDI screening framework for national security in place since 2020, the EU recently proposed and adopted another FDI screening mechanism to tackle market distortions arising from foreign subsidies in the context of European mergers and acquisitions. Why is the EU introducing this new policy instrument right now? What political economy forces shape the institutional design? And why does this instrument enjoy broad support in the Commission, Council of Ministers and European Parliament despite its likely redistributive impacts on Member State economies? Our paper uses process tracing, expert interviews, media research and secondary literature to trace the history of this policy project from its inception to its entry into force in mid 2023. In particular, we question why the decision was made to embed this policy under the competition arm of the European Commission, unlike FDI screening for national security which is managed by the trade policy arm. The paper finds that framing foreign subsidies as a competition issue sought to insulate the policy from accusations of disguised protectionism and ensured political support across the EU. Whereas more activist Member States, services of the European Commission and Members of the European Parliament see the instrument as a steppingstone toward a European industrial policy and more assertive foreign policy, vis-à-vis notably China, others perceive it as a long overdue measure to close regulatory gaps and to strengthen EU competition and state aid policy as well as relevant WTO rules. The paper contributes to the growing literature on EU foreign economic policy at the nexus between International Political Economy and Security Studies by shedding light on one of the most prominent new policy initiatives in these domains.