EU Industrial Policy How It Is Developing And How To Contribute

The EU is increasingly concerned about its declining industrial competitiveness and threats to economic security. The Draghi and Letta reports stressed the seriousness of the challenges and implementation of their recommendations was made a cornerstone of the Commission’s mission statements and is regularly referred to in subsequent work programmes.

According to the EU Treaty industrial policy is the responsibility of the EU Member States. Article 6, of the Treaty on the Functioning of the European Union (“TFEU”) lists industrial policy as an area where the Union may only “support, coordinate or supplement the actions of the Member States” in the same way as for health and education, for example. Article 173 TFEU instructs the Member States to coordinate their industrial policy “in liaison with the Commission” and requires the Union to contribute to the achievement of such objectives through the policies and activities it pursues under other provisions of the Treaties.

We described in an earlier blogpost some of the techniques that the EU was using to pursue industrial policy, through State-Aid policy, EU funding and legislative initiatives such as the Chips Act, the Net Zero Industry Act, the Critical Minerals Act as well as through environmental and climate legislation.

The incorporation of industrial policy goals into EU legislation is continuing apace. Indeed a blending of traditional EU objectives (covered by the competences and legal bases conferred on the EU by its founding treaties) with industrial policy objectives is well illustrated by the recent “One Europe, One Market Roadmap of the European Parliament, the Council of the European Union and the European Commission” (the “roadmap”) which sets out an ambitious and wide-ranging legislative program for the coming years. The introduction of the roadmap states that:

“In a world shaped by geopolitical rivalry, technological disruption, and economic uncertainty, Europe's economic strategy must combine three mutually reinforcing pillars: a stronger, fairer and more integrated Single Market, a trade policy that diversifies partnerships and reduces strategic dependencies, and an industrial policy that protects and strengthens Europe's capacity to produce, innovate and compete in a manner that respects the European Pillar of social rights creating a just transition that secures quality jobs and leaves no one behind.”

The annex to the roadmap contains a long list of initiatives some of which we discuss below.  Subsequently, we will discuss the ways in which stakeholders may seek to contribute to the development of EU industrial policy.

Recent Initiatives

The Industrial Accelerator Act

We have described the proposed Industrial Accelerator Act (“IAA”) in an earlier blogpost. It is arguably the most ambitious attempt yet to utilise other EU policy tools to achieve an industrial policy objective – specifically to increase the contribution of manufacturing in EU GDP from the current Eurostat estimate of 14.3% to 20% by 2035. It seeks to accelerate and simplify permitting for energy intensive industries including paper, petroleum, chemicals, plastics, minerals and metals as well as the automobile industry. 

The most concrete measures in the IAA are designed to promote low-carbon and certain strategic industries as well as the electric vehicle industry. For the first time, the Commission explicitly proposes to use State Aid and public procurement rules to ensure certain minimum low carbon content and “Union Origin” for materials, subject to exceptions. More detailed rules of this kind are laid down in the case of certain electric vehicles. 

The IAA also proposes to ensure that foreign direct investment (“FDI”) flows (which the EU can regulate under its external trade policy powers) contribute to the goal of improving EU competitiveness in certain emerging strategic sectors (battery, electric vehicle and solar technologies as well as the extraction, processing and recycling of critical raw materials). FDIs of over EUR 100 million from countries with over 40% of global manufacturing capacity in a given sector are to be subject to prior approval and such approval will require satisfaction of a minimum of four out of six “value added” criteria relating to EU equity participation, investment through a joint venture, technology transfer, research and development in the EU, employment and EU sourcing of inputs.

At present the new FDI value added requirements appear to be designed to affect investments originating in China (indeed, investment from free trade and economic partnership agreements are exempted) and are limited to certain strategic sectors.  However, the list of emerging strategic sectors can be extended by the Commission acting under delegated powers.

Public Procurement law

The current EU public procurement legislation is designed to promote fair competition and value for money.  Its underlying principles are transparency, equal treatment, non-discrimination and proportionality.  While it also includes the possibility of excluding companies because of security concerns these do not allow favouring of EU companies on the grounds of nationality alone. More recently, the EU International Procurement Instrument has introduced a mechanism for investigating whether EU suppliers are subject to discrimination or unjustified restrictions in third countries and imposing retaliatory measures.  However, this falls short of allowing discrimination against foreign suppliers and promoting EU competitiveness. 

Revisions to the public procurement rules are however in preparation in the Commission and is expected to allow some form of EU preference (probably in a similar way to the IAA).

Climate Action

The EU Emissions Trading Scheme (“ETS”) and Carbon Border Adjustment Mechanism (”CBAM”) are pillars of the broader EU action against climate change motivated by laudable environmental objectives.  Recently, however, industrial policy objectives have been influencing the evolution of these measures. An early example is the maintenance of free allowances for industries subject to international competition.  More recently, there have been proposals to include within the scope of CBAM products not included in the scope of the ETS but containing steel and aluminium (which are within the scope of CBAM).  The most telling example is washing machines. There are also proposals to exclude fertiliser (which is subject to the ETS) from the scope of CBAM in order to reduce agricultural costs. 

Environmental legislation

Other environmental legislation is also susceptible to being used for industrial policy purposes. For example, the deforestation regulation is an ambitious attempt to slow deforestation worldwide by imposing restrictions on products from deforested land.  It has been the subject of delay and review due to objections notably from the US.  One consequence of the review is proposed to be that imports of leather should be exempted while the meat from the same animals would remain subject to the restrictions. Part of the rationale appears to be that the EU luxury goods industry needs access to imported leather (while the EU can produce its own meat). 

Merger Guidelines

We have recently published a separate blogpost about the draft new EU merger guidelines (“Draft Guidelines”).  The point we highlight in here is the way in which competitiveness, economic security and industrial policy concerns have influenced the Draft Guidelines.  The guidelines now include a number of considerations that go beyond the protection of competition in the EU.  The Draft Guidelines note that “the global geo-political and trade context has changed” and that “[i]ndustrial scale and global competitiveness have become increasingly important”. They recognise that “the growth and scaling-up of firms in the internal market so as to reach the necessary size to compete in global markets can be procompetitive and have a positive impact on the EU economy and its competitiveness, including on innovation and investment”. 

The Draft Guidelines develop not only the traditional “theories of harm” to competition but also new “theories of benefit” to EU competitiveness. The door is therefore now more open for merging parties to put forward efficiencies that can be taken into account in favour of a merger that has benefits to the  EU competitiveness or achieves other EU policy goals (resilience, sustainability etc).  

Digital Industries, Artificial Intelligence, Cybersecurity and Cloud Sovereignty

The EU has been quite active in regulating and proposing to regulate technology companies and has received pushback notably from the US which considers some of the legislation to be discriminatory towards “its” companies. The EU response has been that it is only trying to ensure a “level playing field”. One implication of this is that these initiatives may help the development of EU-based alternatives.  

It has of course always been easier for all jurisdictions to impose restrictions that primarily impact foreigners rather than their own subjects.  The use of competition and harmonisation legislation to serve industrial policy goals also goes further, however.  The forthcoming proposal for a Cloud and AI Development Act, is expected to pursue the policy of seeking to strengthen the EU presence in artificial intelligence and cloud computing. 

How to have an impact

The European Commission still conducts widespread stakeholder consultations before making legislative proposals under the better regulation policy.  Stakeholder consultations continue even after proposals are made through feedback exercises. 

The description above of the means by which the EU is implementing its industrial policy already indicates where and how stakeholders can seek to impact the development of relevant initiatives.  In the rest of this section we describe some of the legal arguments that can be used to support engagement in relation to the development and implementation of the measures. First, we outline the main international trade law arguments and then some EU law considerations. 

International Trade Law Arguments

Many provisions of the WTO Agreement are aimed at combatting national regulations that seek to promote local production at the expense of other WTO Members.  Free trade agreements reinforce and develop these rules.  A notable example is the EU-UK Trade and Cooperation Agreement (“TCA”) that contains ambitious “level playing field” provisions designed to prevent the UK from gaining a competitive advantage over the EU as a consequence of Brexit.  The level playing field and other disciplines in the TCA do however apply to the EU as much as to the UK.

Although WTO obligations are currently being widely ignored and their enforcement is impeded by the US blockage of the Appellate Body and consequent weakening of the entire WTO dispute settlement mechanism, the EU continues to declare itself an ardent supporter of the WTO.  Invocation of relevant WTO rules and principles can therefore have an impact on the development and application of EU legislation. We briefly review the main provisions.  

National treatment

One of the most fundamental obligations of the WTO is Article III:4 GATT (entitled "national treatment"). This prohibits WTO Members from treating goods imported from other WTO Members less favourably than like domestic goods when adopting "laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use".  "Like" means that the products are similar or in a competitive relationship. 

A breach of Article III:4 occurs even if the measure is not applied in a particular case. It is sufficient that the measure's design, structure and expected operation reveal the potential for adversely affecting the imported goods' competitive opportunities compared to those of like domestic goods. 

Straightforward preference for EU goods over the goods of other WTO Members fall within this prohibition.

However, government procurement and subsidies are to some extent carved out of the general national treatment requirement and are discussed separately below. 

There is also a national security exception in Article XXI GATT 1994. This is a sensitive provision that the US has always considered to be "self-judging" by the Member concerned (and therefore to be, in effect, a blank cheque).  The EU on the other hand has always considered that for this exemption to apply a measure must have a genuine relationship with security interests and a connection at least with an "emergency in international relations" The existing WTO case law supports the view that the EU has traditionally held.   

Similar provisions apply to services under the General Agreement on Trade in Services (“GATS”) but these are generally more complex and subject to many exceptions in Member-specific schedules.

The WTO Government Procurement Agreement

The EU is a party to the WTO Government Procurement Agreement (“GPA”) which contains Member-specific schedules with annexes defining the commitments with respect to procuring entities, covered goods and services, threshold values above which procurement activities are covered and exceptions.

The EU Schedule is broad-ranging and the exceptions, including for national security, are well-defined.

For all procurement covered under the GPA, the EU and its Member States must:

• Treat suppliers, goods, and services from other GPA Parties no less favourably than domestic suppliers, goods, and services (national treatment).
• Avoid discrimination based on foreign ownership or origin.
• Not treat locally established companies less favourably due to foreign affiliation or because their products are of foreign origin.

There are also transparency and other procedural obligations for procurement opportunities (e.g., calls for tenders).

In addition to specific exceptions to GPA obligations listed in the annexes to the EU Schedule, there are general exceptions. 

Article III:2 GPA contains a list of general exceptions that include, for example, measures necessary to protect human, animal or plant life or health. These must not be "applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination between Parties where the same conditions prevail or a disguised restriction on international trade". While these allow certain restrictions, for example on environmental grounds, they do not allow origin restrictions.

There is also a general security exception that provides that:

"Nothing in this Agreement shall be construed to prevent any Party from taking any action or not disclosing any information that it considers necessary for the protection of its essential security interests relating to the procurement of arms, ammunition or war materials, or to procurement indispensable for national security or for national defence purposes."

Recital 1 to the IAA mentions national security as a justification for its provisions.  However, the GPA national security exception would seem to require an origin restriction to be "indispensable” for national security and to be of a similar importance to the need for secure procurement of weapons. 

Subsidy disciplines

WTO Members have also negotiated a specific agreement regulating the use of subsidies – the Agreement on Subsidies and Countervailing Measures (“ASCM”).  Whereas subsidies are accepted as being legitimate policy tools which are only “actionable” where they cause injury to another Member, there are two categories of subsidies that are outright prohibited, without any need to show injury. The most relevant is the prohibition of "subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods." 

No security exception applies to the ASCM.

Similar subsidy disciplines are also included in EU free trade agreements.  The TCA contains probably the most advanced subsidy disciplines of all as well as additional remedial possibilities.  

Concluding comment on international trade law considerations

WTO obligations are considered not have direct effect in the EU and are therefore not directly enforceable by private parties in EU courts.  However, the EU always claims to take its WTO obligations seriously and is therefore sensitive to criticism that it is not respecting its WTO obligations.  This can therefore have an impact on policy making. 

The impact of international trade law arguments is clearly illustrated in the evolution of the IAA. One of the main purposes of the IAA was to introduce EU preference in the covered sectors.  This raises issues under EU international trade law commitments and there was significant opposition to the “EU origin” requirements proposed for the IAA. Several compromise formulations were attempted, including the inclusion of materials from “trusted partners” within the scope of “EU Origin”. Finally, probably because of the difficulty of establishing which countries were (or were not) “trusted partners”, the IAA currently contains exemptions for free trade agreement (“FTA”) and GPA partners with a possibility of the Commission deciding to exclude countries in certain circumstances and in particular countries that do not provide national treatment to the EU.  The debate about how to design EU preference has certainly not yet concluded.      

EU legal arguments 

Apart from international trade law there are specific EU law arguments that can be deployed to in the context of the development of EU industrial policy.

One issue is whether the EU has competence to pursue to pursue some of its objectives.  First, as mentioned above, there is no legal basis in the EU Treaty for EU industrial policy measures.  Second, national security is expressly a reserved competence of the Member States. Consequently, the EU relies on the legal bases in the EU treaties to remove obstacles to the functioning of the internal market and to pursue environmental objectives and trade policy, for example. The European Court of Justice has upheld many controversial new EU policies on the grounds that the EU is entitled to take broader considerations into account when pursuing internal market or environmental policies. For example, the Court of Justice has stated that the EU is allowed to aim for a high level of health protection (a Member State competence) when seeking to ensure the free movement of tobacco products.  Similarly, it may be argued that it is necessary to take account of the impact on EU industry of pursuing environment policies. There should however be limits to this technique, for example, where certain measures do not improve the functioning of the internal market or facilitate the attainment of environmental goals – but even impede them. 

Other potential EU law arguments include violations of the principles of proportionality and subsidiarity and also of the principle of equality enshrined in the Charter of Fundamental Rights. Some of the measures described above can lead to products and companies from other Member States of the EU being treated differently from national products and companies by virtue of their composition and ownership which may violate the EU principles of free movement of goods and services and freedom of establishment.

Securing exemptions

An attractive approach during the long preparatory phase of these measures is to seek to secure exemptions. We have already mentioned above the exemptions from the IAA for GPA and FTA partners.  There are also exemptions for specific products and for cases of need as well as for special cases such as the war in Ukraine or the candidate status of some neighbouring countries.

More broadly, there is frequent reference in EU economic security policy to the formation of “clubs” of like-minded countries pursuing similar objectives who can then exempt each other from their respective restrictions. There were extensive (but unsuccessful) negotiations with the US on the creation of a Global Arrangement on Sustainable Steel and Aluminium (referred to as “GASSA”), which would have effectively created such a club. More recently there are discussions between OECD countries seeking to coordinate their action on steel overcapacity in the OECD Steel Committee and the Global Forum on Steel Excess Capacity.  The objective is to direct measures at the real cause of excess capacity – principally China – and for members to exempt each other from their measures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.