There has been considerable discussion about financial aid for car manufacturers in the US, the EU and China. This has prompted reactions from the European Commission that such aid needs to be compatible with WTO and EU subsidy law. On any analysis, those with an interest in the car industry should be aware of the WTO and EU rules and the fact that any financial aid is subject to legal scrutiny and could be challenged by competitors.

This bulletin provides a brief overview of relevant WTO and EU rules. Put simply, WTO rules have an almost-global reach whilst EU rules only apply to aid measures from EU Member States. On the other hand, EU rules are stricter and more efficiently enforced than WTO subsidy law.

The differences between EU and WTO law have triggered complaints that the strict EU rules on State aid are disadvantageous to European manufacturers that compete in global markets. EU law limits the amount of aid EU Member States can grant to companies in the EU. There exist no such restrictions in non-EU countries such as the US or China. The resulting legal gap is only partially filled by the WTO.

  1.  WTO LAW: THE AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES ("SCM AGREEMENT")

The SCM Agreement is designed to address distortions to international trade that may result from the conferral of subsidies. Financial support is subject to the rules of the SCM Agreement if (i) there is a financial contribution by a government or public body; (ii) this results in a benefit; and (iii) it is specific to one or more enterprises or industries (or is specifically related to export or import).

Whether a subsidy is contrary to WTO law depends on its nature and effects:

Subsidies that promote exports or discourage imports (by encouraging the use of domestic over imported goods) are prohibited outright (because of their inherently trade distortive character). It seems unlikely that the support measures currently under consideration for car manufacturers would fall in this category (although this cannot be excluded entirely).

Other subsides (i.e. not specifically related to promoting exports or discouraging imports) violate the SCM Agreement when they have adverse effects on competition in any market around the world. For instance, if the US were to grant aid to Ford, this would be contrary to the SCM Agreement if it were to affect the sales of European made Volvo cars in (i) the US; (ii) the EU; or (iii) any other market.

Remedies:

The SCM provides for two types of remedies against incompatible subsidies.

The first remedy is WTO dispute settlement and is available against all infringing subsidies. WTO dispute settlement is only available to member countries and it is, therefore, not possible for private entities to start this type of legal action. However, WTO member countries will usually start dispute settlement procedures on behalf of, and in cooperation with, domestic industry. Some WTO member countries even have formal procedures via which industry can officially petition their Government to start such an action (such as the so-called Trade Barriers Regulation in the EU).

The second remedy is the imposition of countervailing duties by importing countries. These normally take the form of additional customs duties to be applied to imported products that benefited from SCM incompatible subsidies. Provided a WTO member complies with the relevant procedural and substantive rules of the SCM, it is allowed to adopt this type of countermeasure. This "unilateral" remedy does not require prior authorisation from the WTO or a prior dispute settlement case. Moreover, private companies have a formal right to complain to their Government and request the initiation of an investigation. The downside of this remedy is that it is only available in relation to a home market. For instance, if US produced and subsidised Chevrolet cars were to cause injury to European car manufacturers on the EU market, the EU could impose countervailing duties on imports of Chevrolet cars (thus offsetting the competitive advantage of the US subsidy). However, this remedy would not be available to the European car industry in relation to the US market or that of any other country where European and US manufacturers compete (as noted above, however, WTO dispute settlement could address such harm occurring on non-domestic markets).

On any analysis, the risk of such countervailing measures should be taken into account by any manufacturer that accepts subsidies and by any other business involved in the exportation of the relevant product (whether that is cars or any other product).

  1.  EUROPEAN STATE AID RULES

In the EU, aid granted by Member State Governments must be notified and approved by the European Commission before implementation. The European Commission may approve aid measures on a number of bases, including (i) aid for research and development, (ii) regional development; and (iii) rescue and restructuring aid for companies in difficulties (all of which are potentially relevant to the car sector). When approving such aid measures, the European Commission will always seek to minimise the impact on competition (by imposing conditions or by refusing to approve the aid). In the past, the Commission has applied particularly restrictive criteria to the car manufacturing industry.

Aid that is granted without proper notification and approval constitutes unlawful aid. This must be repaid by the recipient, even if this risks resulting in the liquidation of the company.