European Union (EU) state aid and competition law are by and large intended to promote a level playing field on the EU internal market. The EU member states are prohibited by article 107 TFEU from subsidizing undertakings unless certain anti-discriminatory conditions are met. Some heavily subsidized non-EU undertakings, however, have in recent years distorted the fair conditions on the internal market. Undertakings owned or influenced by the Chinese state have, through state subsidies, been able to acquire several patent holding companies on the internal market as well as present artificially low bids in public procurement procedures. In order to protect the level playing field the EU has implemented a new and unique instrument, Regulation (EU) 2022/2560 of the European Parliament and of the Council on foreign subsidies distorting the internal market (FSR), which authorizes the Commission to launch investigations into subsidized undertakings and compel them to e.g. divest assets, refrain from investments, share research, reduce capacity or market presence, repay subsidies etc. The FSR is purported to be compatible with the international agreements of The World Trade Organization (WTO), agreements which constitute binding legal norms in EU law, as well as with EU legal principles.

However, the WTO legal system, being founded on cooperation and mutual understanding, does not allow for unilateral trade restricting measures or discrimination between members unless there is an express legal basis to do so within the WTO treaties. As the FSR, though formally non-discriminating, de facto puts administrative burdens and unique sanctions on non-EU undertakings, there is valid criticism that the FSR is in breach of WTO legal norms such as the National Treatment-obligation. The legal principle of the protection of legitimate expectations presents another problem for the Commission. Unlike an EU undertaking, which might easily determine that an EU member state has acted ultra vires by granting unlawful state aid, the recipient of non-EU subsidies cannot be faulted for their participation in the perfectly legal subsidies granted by their non-EU patron state. Even if the EU were to consider such subsidies to be in breach of WTO-rules, the only body with the requisite jurisdiction to make such a determination is the WTO Dispute Settlement Body (DSB).  

This essay will explore the legal conflicts related to the FSR through the use of the legal dogmatic method, by judging the substantive provisions of the FSR based on the standards established by WTO law and the principle of protection of legitimate expectations. The analysis will not include bilateral free trade agreements as, although they may offer unique dispute settlement mechanisms between the parties, they are too context specific and do not apply to the primary challenges facing the EU internal market, namely subsidies by China and, to a lesser extent, the USA. Nor will the essay explore state aid or trade defense mechanisms by the EU member states as the FSR is a Commission instrument.