No simplification in sight for EU public procurement! I’m having a hard time keeping up with the new terminology, a lot of it sounds similar – but it does not have the same meaning. Some good examples are similar terms across the Industrial Accelerator Act (IAA) and Public Procurement Act (PPA) proposals: ‘Made in EU’ is not the same as ‘European preference’. And to add to the confusion – a new term is here – ‘Made WITH EU’.

For those of you who missed it, an important debate is taking place on how to define eligible countries (and therefore economic operators and goods) in the designated ‘strategic’ sectors within the meaning of the IAA. France is in favour of a stricter approach (only ‘Made in EU’ counts), while Germany is advocating an approach that broadens coverage – ‘Made with EU’.

Germany explained its position in this non-paper circulating since yesterday.

Germany is in favour of expanding ‘Made in EU’ to include the EU’s established trade partners – WTO GPA countries, countries with other FTAs with procurement provisions in place and custom union countries. So – basically Germany is showing support for Article 8(1) of the IAA:

With respect to the Union origin requirements referred to in Article 11, content originating in third countries with which the Union has concluded an agreement establishing a free trade area or a customs union, or that are parties to the Agreement on Government Procurement, where relevant obligations of the Union exist under that agreement, shall be deemed to be of Union origin.

The interesting thing here is that Germany wants to go beyond concluded FTAs, and expand ‘Made with EU’ to other third countries ‘on a reciprocal basis’. This might be connected to a section of the non-paper introduction:

This is also necessary because, in some of the IAA sectors, independent EU production does not (yet) exist and is unlikely to be established in the short term. For example, an independent European battery ecosystem (cell production, battery materials) has so far only been established to a limited extent. The starting point for the technologies covered by the IAA varies greatly, which is why a nuanced discussion is required, taking into account the specific industrial landscape and technology in question.

So, if EU industrial capacities in a certain strategic sector are still not sufficient – maybe we shouldn’t exclude Chinese solar panels if they are not excluding EU (non-competitive in the Chinese market!) solar panels.

But the more interesting part of the non-paper is the one where more new terminology is introduced – ‘adverse undermining'(consider it a younger brother of ‘economic coercion’ made famous by the Anti-Coercion Instrument). This term I like as it eloquently describes a real problem when drafting any kind of protectionist/reciprocal legal provisions. This is the definition provided in the non-paper:

In order to ensure the measures in the IAA are effective, adverse undermining must be addressed by providing a clear definition of the ‘opt-out’ criteria. The aim is to address the situation where companies from a third country establish production capacity in a partner country that falls within the scope of ‘Partner’s Origin’ in order to meet the requirements of the IAA, and where such a situation would lead to indirect maintenance or establishment of high-risk dependencies from that third country (“adverse undermining”). The IAA should be designed in such a way that potential opportunities for adverse undermining can be addressed quickly and effectively, thereby preventing them from arising in the first place.

A Chinese solar panel manufacturer might set up a factory in Canada and import a big amount of raw materials, equipment and even unfinished solar panels from China – therefore potentially qualifying for ‘Made with EU’ status. ‘Adverse undermining’ provisions would counter this – via preliminary examinations and subsequent potential measures – both by the Commission.

This term is even more interesting as it is also applicable to an inherent flaw of Article 3 of the International Procurement Instrument. Article 3 establishes economic operator origin rules – and these rules are being referenced in the PPA proposal also:

  The origin of an economic operator shall be deemed to be:

(a) in the case of a natural person, the country of which the person is a national or where that person has a right of permanent residence;

(b) in the case of a legal person, either of the following:

(i) the country under the laws of which the legal person is constituted or otherwise organised and in the territory of which the legal person is engaged in substantive business operations;

(ii) if the legal person is not engaged in substantive business operations in the territory of the country in which it is constituted or otherwise organised, the origin of the legal person is to be that of the person or persons who may exercise, directly or indirectly, a dominant influence on the legal person by virtue of their ownership of that legal person, their financial participation therein, or the rules which govern that legal person.

In this context ‘adverse undermining’ happens when a Chinese company establishes a subsidiary in Croatia, where this subsidiary is ‘engaged in substantive business operations’. If this is the case – section (ii) does not apply and ‘dominant influence’ from China is not taken into account. Therefore, this subsidiary is considered a Croatian company and can freely do business in Croatia but across the EU too, as long as it is engaged in ‘substantive business operations’ in Croatia (for more context on what are ‘substantive business operations’ see the 2023 IPI Guidelines).

I see this as a big problem in the IPI and by association in the new PPA Proposal (something I will address in detail in my upcoming commentary of Article 74 PPA), so I even proposed a rewriting of Article 3(1)(b)(ii) in my book:

if it is established that a person or persons exercise, directly or indirectly, a dominant influence on the legal person by virtue of their ownership of that legal person, their financial participation therein, or the rules which govern that legal person, the origin of the legal person shall be the same as the origin of the person or persons that insert dominant influence.

While this non-paper proposes watering down of the IAA by allowing even countries with no FTAs to be included (which I’m not sure is a good idea), it does touch upon a very important aspect of this new protectionist/reciprocal procurement push that I do not think we still have an answer for (how to determine origin) and tries to give solutions. I hope Article 3 of the IPI and Article 74 of the PPA get a lot of attention going forward.

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