EU Geopolitical Risk Update - Key Policy & Regulatory Developments No. 116

On 23 July 2024, competition authorities for the EU, UK, and US released a Joint Statement on Competition in Generative AI Foundation Models and AI products*.

Backdrop / objectives. The Joint Statement responds to the transformational potential of AI, including so-called foundation models.** It notes that AI is one of the most significant technological developments in recent decades, which can introduce new means of competing, catalyzing opportunity, innovation and growth. Given this, the authorities commit to safeguarding against tactics that could undermine fair competition, in order to ensure the fair treatment of consumers and businesses.

AI risks. The authorities seek to address AI risks before they become entrenched or irreversible harms, including the following three main risks in particular:

• Concentrated control of critical inputs: Some key components (e.g. specialized chips) are vital to developing foundation models. This could possibly create bottlenecks across the layers of technologies and components that make up an AI system (so-called AI stack), which could impact the development and innovation of these tools.
• Deepening market power in AI-related markets: Some digital firms already possess strong advantages and substantial market power at multiple levels related to the AI stack. These advantages can allow those firms to extend or entrench their positions on the market, which could harm future competition.
• Collaboration among key players: Arrangements between firms developing AI (e.g., partnerships, financial investments) can be used to undermine competitive threats and steer market outcomes at the expense of the public.

Safeguards. The Joint Statement then identifies three main principles to protect competition and foster innovation in the AI ecosystem:

• Fair dealing: Firms with market power should engage in fair-dealing and not exclusionary tactics that can undermine competition and discourage innovation.
• Interoperability: Fostering interoperability will enhance competition and innovation in the AI field. If interoperability is claimed to harm privacy and security, this will be carefully examined.
• Choice: Choice among diverse AI products should be ensured through competitive processes, such as by scrutinizing how companies may employ "lock-in" mechanisms to prevent companies or individuals from seeking other options.

The Joint Statement also identified other competition risks associated with AI, for example, the risk of using algorithms to enable competitors to exchange competitively sensitive information. The authorities further committed to monitor and address any specific risk that may arise in connection with other

* Joint Statement on Competition in Generative AI Foundation Models and AI Products presented by Margrethe Vestager, Executive Vice-President and Competition Commissioner; Sarah Cardell, Chief Executive Officer, U.K. Competition and Markets Authority; Jonathan Kanter, Assistant Attorney General, U.S. Department of Justice; and Lina M. Khan, Chair, U.S. Federal Trade Commission.

** A foundation model (also known as large AI model) is a machine learning or deep learning model that is trained on broad data such that it can be applied across a wide range of use cases. Foundation models have transformed AI, driving well-known generative AI applications like ChatGPT.

AI developments and applications.

On 26 July 2024, the European Commission released a Staff Working Document (SWD) that seeks to clarify how it will apply and make assessments under the Foreign Subsidies Regulation (FSR) (Regulation (EU) 2022/2560 of 14 December 2022 on foreign subsidies distorting the internal market), which started to apply on 12 July 2023.

To recall, in the Commission's view, the FSR will help level the playing field in relation to companies that receive subsidies from outside the EU, given the Commission's power to investigate such aid with the aim of ensuring that it does not create distortions in the EU. If the Commission deems that such distortions arise, the Commission can deploy a wide range of redressive measures, which include the repayment of a foreign subsidy, the prohibition of an M&A transaction, or the rejection of a tender in a public procurement. (see also Jones Day EU Emergency Response Update No. 110 of 23 November 2023).

The SWD sets outs, in particular, initial clarifications on the following:

• Assessment of the existence of a distortion caused by a foreign subsidy on the internal market in various contexts (e.g., distortions caused by unlimited guarantees, which can take many forms and may go beyond an explicit statement or legal act referring to the undertaking concerned, for instance, where an undertaking benefitting from an unlimited guarantee may receive a loan from a private bank that prima facie appears to be on market terms, but whose conditions actually reflect the existence of such guarantee);
• Application of the balancing test to weigh the positive and negative effects of foreign subsidies distorting the internal market (e.g., the Commission's balancing assessment will include information received on possible positive effects, which may be provided by all relevant stakeholders (the undertakings under investigation, the EU Member States, and other third parties)).

Looking ahead. The SWD's initial clarifications will be further developed through case practice and EU case law. The Commission will also publish guidelines on applying certain FSR provisions at the latest by 12 January 2026.

The Commission approved additional measures under the State aid Temporary Crisis and Transition Framework (TCTF) to support the economy in the context of Russia's invasion of Ukraine and in sectors key to accelerating the green transition and reducing fuel dependencies (as most lately amended on 2 May 2024 and 20 November 2023).

Among the most recently approved State aid schemes under the TCTF (up to 26 August 2024):

• Amendments to an existing Italian scheme supporting companies active in Southern Italy in the context of Russia's war against Ukraine, with modifications to the existing scheme such as a budget increase by €2.9 billion, bringing the overall budget from €11.4 billion to €14.3 billion.
• €158 million Dutch scheme to support the investments for the production of equipment necessary to foster the transition to a net-zero economy, in line with the Green Deal Industrial Plan.
• €10.82 billion French scheme to support offshore wind energy to foster the transition to a net-zero economy.
• €50 million Austrian scheme to support primary agricultural producers in the context of Russia's war against Ukraine.
• €400 million Italian scheme to support investments in the decarbonisation of industrial production processes to foster the transition towards a net-zero economy, in line with the Green Deal Industrial Plan.
• Amendment to an existing Romanian scheme, including an overall €54.4 million (RON 270.7 million) budget increase, to support tomato and garlic producers in the context of Russia's war against Ukraine.
• -€200 million Finnish scheme to support the production of renewable fuels of non-biological origin and the deployment of energy storage to foster the transition towards a net-zero economy, in line with the Green Deal Industrial Plan.
• €1.5 billion French scheme to support sustainable biomethane production to foster the transition to a net-zero economy.
• €25 million Slovak scheme to support livestock producers in the context of Russia's war against Ukraine.
• €750 million Dutch State aid scheme to support the decarbonisation of industrial processes to foster the transition to a net-zero economy.
• €1.2 billion Spanish State aid scheme to support investments in the production of renewable hydrogen to foster the transition to a net-zero economy.
• Amendments to an existing Dutch scheme, including a €50 million budget increase, to support agricultural producers in the context of Russia's war against Ukraine.