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10 key themes

Supply chain resilience — where new trade and subsidy rules will help or hinder

The optimization of supply chains and ensuring their resilience will be near the top of the agenda for any business. Competition, subsidy control and trade law developments will make that more important than ever in 2022.

New trade and subsidy rules, as well as changing antitrust and foreign subsidy and investment rules, mean that new challenges and opportunities are emerging for supply chains — regardless of where a business is located.

In addition, growing stakeholder scrutiny of the environmental and social impact of supply chains has to be a key driver of strategy.

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New free trade agreements — and beyond

Around the world, states are making free trade agreements (FTAs) that open up new trading opportunities. The UK and Australia have recently concluded an agreement, and both the UK and EU are hoping to conclude agreements with New Zealand in the near future; both the UK and China have applied to join the mega-regional Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP); and last year saw the conclusion of the broad Regional Comprehensive Economic Partnership (RCEP), which brings together the ASEAN countries and China, Japan, South Korea, Australia and New Zealand.

These reduce customs duties on trade between parties, making the sourcing of products from FTA party countries cheaper than from non-parties. But they are not without challenges. For example, demonstrating that the product being sourced “originates” in an FTA party country can be tricky and often requires expert input.

FTAs form an indispensable part of the regulatory framework that business operates under and are key to any business’s organization of its supply chains.

Lorand Bartels
Trade Counsel,
Brussels and London

Sophisticated supply chains are about more than trade in inputs, and modern FTAs now go further than simply reducing trade barriers. They guarantee capital movements and the ability to supply services and protect investments and intellectual property. Increasingly, these agreements also contain provisions guaranteeing free flows of data, limiting data localization, and encouraging the development of common digital standards and other confidence-building measures. We expect that efforts to tackle barriers to the flow of data will become a much bigger issue in 2022 and beyond.

Trade and other supply chain challenges

While FTAs free up trade, trade restrictions of various sorts will nevertheless continue to hamper it, sometimes dramatically. The COVID-19 pandemic has shown how trade restrictions can interrupt traditional supply chains, with many countries adopting export restrictions to keep hold of the products produced in their territories, exacerbating existing product shortages. The EU is now considering ways to keep supply chains open in such situations. Political events can also lead to countries imposing trade restrictions on sovereignty or national security grounds, even beyond what is provided for in foreign investment regimes.

Supply chains can be significantly disrupted by national protectionist measures, whether via legal regimes, such as those providing for measures based on national security or other grounds, or outside these.

François Gordon
Antitrust Counsel,
Paris

Another emerging risk area is subsidy control. Where supply chains involve companies receiving EU Member State support, they have always been subject to EU State aid rules. Now the risk of coming up against this sort of issue is about to increase, with the EU planning to introduce new rules on subsidies coming from foreign governments, and the UK introducing its own (currently somewhat skeletal) regime following Brexit. A supply chain that includes companies that have received state support could be vulnerable to actions to recoup that assistance.

The EU’s proposed regime to control foreign subsidies benefiting those doing business in the EU will introduce new hoops to jump through for companies looking to boost their supply chains by joining forces with companies that receive State support from outside the EU.

Martin McElwee
Antitrust Partner,
Brussels and London

ESG supply chain due diligence

Yet further conditions are imposed on trade, either by governments or by private actors such as retailers, to ensure that businesses and their suppliers comply with prevailing ESG norms. Investors are also increasingly focused on a company’s ESG profile. For example, the EU has just announced a mandatory due diligence proposal for businesses importing agricultural products to ensure that they are not associated with deforestation.

This comes on top of new rules adopted in Germany and the EU in relation to forced labor and other human rights violations, with climate change and other sustainability concerns likely to follow.

Antitrust issues in the supply chain

The UK Subsidy Control Bill will take the place of the EU State aid rules that applied before Brexit. It provides for judicial review by the Competition Appeal Tribunal of subsidies from UK public authorities and the possibility of ordering recovery of illegal subsidies.

Ricky Versteeg
Antitrust and Dispute Resolution Counsel,
London

Joint arrangements with competitors continue to need care, as do arrangements involving joint purchasing, access to IP and know-how, and data collection and exchange. 

In 2022, arrangements between companies at different levels of a market will need particular attention. New EU distribution rules are close to being finalized and will enter into force in 2022. While the general approach remains consistent in most areas, some notable changes are currently proposed: 

  • the removal of the benefit of the block exemption “safe harbor” from online cross-platform retail price parity (or most favored nation (MFN)) clauses;
  • removal of the exemption for information exchange aspects of dual distribution (when a manufacturer competes with its retailers) above a 10% combined retail market share; and
  • for online intermediation services, removal of the benefit of;
    • the rules that take agency arrangements outside the scope of antitrust prohibitions; and
    • the block exemption of dual distribution arrangements.

While targeted in scope, these are big changes for companies caught by the new rules.

The UK verticals regime is also under review and while the CMA recognizes the advantages of ongoing consistency with the EU rules, it has stated that any advantages of convergence should not outweigh the need to protect UK consumers and the UK economy. This has already led to a number of areas of divergence between the proposed revised EU Vertical Block Exemption Regulation and the new Vertical Agreements Block Exemption Order in the UK, so that in certain areas the UK proposals are either less permissive (as in the case of parity clauses) or more permissive (as in the case of dual distribution). Such divergence will require careful consideration by companies whose supply chains involve both the EU and UK.

If the EU goes ahead with the removal of the block exemption for many dual distribution arrangements, this will have a huge impact on both online and traditional businesses that rely on hybrid or omnichannel distribution model.

Maren Tamke
Antitrust Counsel,
Berlin

With thanks to Joanna Goyder for her contribution to this theme.

Looking ahead in 2022:

  • Check whether new or pipeline FTAs or other trade agreements may provide opportunities for cheaper or more efficient sourcing.
  • Be aware of current and potential future government and purchaser ESG requirements and their implications for management of your supply chains.
  • Review your European distribution policies in the light of the likely new EU rules and keep an eye on them as they are finalized in time for their entry into force on June 1, 2022.
  • Keep under review any UK-related distribution arrangements, giving particular attention to restrictions on parallel trade between the UK and the EU.

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