Subsidy provisions in the UK/Japan Comprehensive Economic Partnership Agreement: what are they, and what do they mean for the UK/EU negotiations?

The text of the Comprehensive Economic Partnership Agreement between the UK and Japan was published on 23 October.  Somewhat disturbingly for those who believe in effective Parliamentary scrutiny of such agreements, that was the same day on which the Agreement was signed, so that it is in effect now too late for scrutiny to achieve any change in the text agreed between the two governments.  Moreover, as pointed out below, under the Trade Bill the agreement can be implemented into UK law by Ministerial regulation, and without Parliamentary debate.

For readers of this blog, the interesting chapter is chapter 12, which deals with subsidies.  There, the text is unchanged as compared to the EU/Japan Economic Partnership Agreement.  However, since the public position of the current government is that it wishes to end the application of the State aid regime to the UK as from the end of transition, subject to commitments that it makes in free trade agreements, the commitments made by the United Kingdom in this agreement assume a particular interest.

Article 12.1 is an introduction: it notes that subsidies may be granted where necessary to achieve public policy objectives but commits each party “in principle” not to grant subsidies where it finds that they have or could have a significant negative effect on trade or investment between the United Kingdom and Japan.  One can also note as an introductory matter the point that Article 12.4 provides that the chapter does not affect either party’s rights and obligations under the WTO Agreement on Subsidies and Countervailing Measures (the SCM Agreement), Article XVI of GATT or Article XV of GATS (which both deal with subsidies). 

Articles 12.2 and 12.3 deal with scope and definitions.  The concepts of “subsidy” and “specific subsidy” are taken from the WTO Agreement on Subsidies and Countervailing Measures, but are extended to cover services.  The chapter is stated in Article 12.3.1 to apply to specific subsidies (which is a concept broadly similar to that of a “selective advantage” in EU State aid law) that are related to “economic activities”, defined as the offering of goods and services in a market, excluding “education provided under the domestic educational system” of the parties. 

Article 12.3 then lays down some general exceptions (as well as some exceptions from particular parts of the chapter, which I deal with below). Article 12.3.2 excludes, save for a requirement of transparency and a requirement not to go beyond the stated objective, “subsidies granted to enterprises entrusted by the government with the provisions of services to the general public for public policy objectives”: that covers much of the territory covered by the concept of “services of general economic interest” in EU State aid law.  Article 12.3.3 excludes subsidies granted to compensate for the damage caused by natural disasters or other exceptional circumstances, which covers the ground of Article 107(2)(b) TFEU (a provision much used this year in relation to the Coid-19 pandemic).  And Article 12.3.7 excludes audio-visual services (broadcasting).

Finally, on the topic of general exceptions, Article 12.9 incorporates Article XX GATT and Article XIV GATS into the chapter: the effect of that is to allow the parties to rely, subject to the requirement of necessity, on the broad range of public policy considerations that, under those provisions, can justify what would otherwise be infringements of WTO rules (although it is hard to see how those exceptions would apply in practice to the types of damaging subsidy covered by the prohibition in Article 12.7, discussed below).

Article 12.5 and 12.6 deals with “soft” obligations: notification and consultation.  Each party has to notify to the other (in English) every two years of details of any specific subsidy granted or maintained by that party.  That can be done by a public website (Article 12.5.2): but the agreement imposes no requirement for there to be a public website or for any other form of publication, and notification can be done by a private communication.  In relation to services, the notification provision applies only to certain services sectors listed in Article 12.5.3. 

As for consultation, either party can raise with the other any case where it considers that the other party’s subsidy has or could have a significant negative effect on its trade or investment interests.  There is then a requirement to consult and for the party at the receiving end of the complaint to provide information about the subsidy.  Article 12.6.5 finally requires the party complained about to afford “sympathetic consideration” to the other party’s concerns.  Further “any solution shall be considered feasible and acceptable by the requested party”: an oddly-drafted provision that presumably does not force the party complained about to accept whatever solution the other party comes up with, however bizarre, but rather requires the party complained about to give sympathetic and serious consideration to the feasibility and acceptability of any solution proposed.

These “soft” provisions do not apply to subsidies of below 450,000 SDRs (about £490,000): Article 12.3.4, and the consultation provision does not apply to various agricultural and fish products (Article 12.3.5).

Article 12.7 deals with “hard” obligations: prohibited subsidies.  As a threshold condition, the Article applies only to subsidies that could have a significant effect on trade or investment between the United Kingdom and Japan.  Prohibited subsidies are ones which (a) involve unlimited public guarantees or (b) involve subsidies for restructuring ailing or insolvent enterprises where there is no credible restructuring plan to which the assisted enterprise or its owners makes a substantial contribution (though the plan can be provided within a reasonable time after support is given). 

Article 12.7 does not apply to subsidies granted at below central government level: Article 12.3.8.  However, Article 12.3.8 goes on to provide that each party must take “such reasonable measures as may be available to it to ensure the observance of the provisions of this chapter by sub-central levels of government”.  In a UK context, given that clause 50 of the Internal Market Bill will make subsidy control a reserved matter to which the Sewel convention will not apply and on which Westminster can legislate freely, that would appear to require central government to legislate so as to ensure that the devolved governments observe the Article 12.7 prohibitions (as well as the other requirements of the chapter): given that legislation is “available”, it is hard to see that a failure to legislate would be “reasonable”. 

Finally, Article 12.8 is a use provision that requires the parties to ensure, generally, that subsidies are used only for the specific purpose for which they were granted.

Almost all of the chapter – apart from the obligation in Article 12.6.5 – is subject to the dispute resolution mechanism (by arbitration panel) set out in Chapter 22. 

As with the rest of the Agreement, the Government will have power, under clause 2 of the Trade Bill going through Parliament, to implement this chapter by regulations.  On the assumption that clause 50 of the Internal Market Bill becomes law, the devolved governments will have no competence to make regulations, so that any regulations implementing it will be UK-wide and made my UK ministers.

Finally, those reading this blog will know that subsidies are a key area in the EU/UK trade negotiations.  The prohibtion elements of Chapter 12 go beyond what the United Kingdom was, in February 2020, prepared to offer the EU in terms of substantive commitments on subsidies (although the UK position did refer to the EU/Japan agreement as a precedent, it referred only to the consultation provisions of chapter 12).  Inevitably, since the terms of Chapter 12 became known, the UK position has shifted (it was not possible to explain why the UK was prepared to make commitments to Japan that it was not prepared to make to the EU).  Nonetheless, it is hard to see that the provisions of Chapter 12 meet EU concerns about the ability of the United Kingdom – a much larger trading partner for the EU than is Japan – to use the zero-tariff access for which it is asking (as well as benefits such as financial and data protection equivalence, road transport and so on) to distort the EU internal market by subsidising relatively freely.  The subsidies prohibited under the chapter do not include the vast majority of harmful subsidies (including hand-outs or tax-breaks to favoured but solvent businesses).  In relation to those other subsidies, all the chapter offers is notification and consultation rights: the EU will not regard those rights as adequate.  Given the scale of EU/UK trade, the EU will insist on commitments not present in the UK/Japan agreement: in particular, a wider prohibition regime, an independent subsidy regulator to deal with cases requiring a balance between distortion of competition and public policy, and third party rights to enforce the prohibition in court.  Whether the current UK government is prepared to make those commitments remains to be seen.

GEORGE PERETZ QC

24 October 2020

Posted in Brexit issues, Free Trade Agreements, WTO anti-subsidy rules | Leave a comment

Leading UK lawyers write to PM on subsidy control after transition

On 18 September, a number of leading lawyers with expertise in the area of subsidies and State aid, many of them members of UKSALA and with a wide spectrum of views on Brexit, wrote a joint letter to the Prime Minister offering to assist the UK government in developing a new UK regime to govern the granting of subsidies, building on the commitment made by the Conservatives during the 2019 election campaign.  The joint letter can be read here.

UK Domestic Subsidy Control letter 18 September 2020 (002)

As is well-known, the issue of subsidy control is a key issue to the EU/UK negotiations of a free trade agreement.  Subsidies are likely also to be a key issue in trade negotiations with other countries, and, as a member of the WTO, the UK will need to operate within the framework of the WTO Agreement on Subsidies and Countervailing Measures, as well as being involved in possible changes strengthening that agreement.    Further to the Conservatives’ statement during the election, the Government has repeatedly stated that it intends to develop a UK subsidy regime, though BEIS recently announced that it is proposing to consult next year on the possibility of further legislation.

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The future of State aid law in the UK – should the UK adopt strong or weak rules?

By Jonathan Branton and Alexander Rose, DWF Law LLP

The Financial Times reports that the UK Government is split on the design of the UK’s future State aid regime, with a faction led by Dominic Cummings arguing that the UK should adopt a “vague and non-statutory” regime.  An alternative group, said to include Chancellor of the Exchequer, Rishi Sunak, is championing strong statutory State aid rules.  The Prime Minister has yet to indicate his position, beyond the statement in his Greenwich speech on 3 February 2020, that the UK shall continue to have subsidy control rules after the transition period ends, but not those of the European Union.

The report comes at a time when it appears that progress is slowly being made with the EU on a trade deal.  Reuters reports that the EU now recognises the UK will not follow EU State aid rules once the Transition Period ends and David Frost appears to have successfully argued that the CJEU will not have oversight of any future arrangements.   However, it is recognised that a trade agreement will only be reached if the UK can put forward a subsidy regime which provides sufficient assurance to the EU that businesses will compete upon a “level playing field”.

Even putting aside the EU dimension, there are good arguments for having in place a domestic State aid regime” wrote former ERG Treasurer, David Gauke in an article published on the Conservative Home website at the weekend.  In particular, effective subsidy controls help ensure taxpayers’ money is spent wisely and are a means to ensure the State’s finite resources are allocated productively and as evenly as possible in order to maximise economic growth.  Other reasons for the UK adopting a meaningful post-Brexit State aid regime include enabling the Public Sector to avoid subsidy auctions between different parts of the UK, coordinate spending across the UK’s 650+ public bodies,  protect against cronyism (NB. it is easy to foresee the potential scandals arising from unfettered grant awards with accompanying accusations alleging undue influence etc).

Having a domestic State aid regime across the UK’s own union is also vital for consistency with the rest of the UK’s pre-existing competition regime (ie. merger control and other prohibitions of anti-competitive behaviour).  It should be recalled here that all competition laws pursue the same ultimate agenda of preservation of a level playing field in which private investment is incentivised and open competition can thrive.  Why spend vast resources preventing suspect mergers, for example, when competition can just as easily be heavily disrupted by unregulated and uneven State handouts?

Dominic Cummings argues the UK should have weak State aid rules in order to make the most the opportunities of Brexit, although even while having the same State aid laws, countries like Germany have shown that they will spend proportionally much more then the UK, which is a political choice not law.

In a “no deal” scenario, the Cummings position doesn’t appear sustainable – after all with an 80 seat majority the Government will be able to design its own State aid rules, tailored to its own economic objectives.  In practical terms, if Central Government wanted to back a novel initative such as the Advanced Research Projects Agency it could specify that this to be a legitimate (and therefore lawful) investment when setting up its regime.  If the Government appointed a regulator and subsequently did not agree with a particular decision, then Parliament would have the ability to overrule such decision, or Parliament could adopt a law exempting a particular project from usual subsidy scrutiny to begin with.  In this way, the UK could have a regulator and regime to govern the vast majority of State interventions but reserve the ability to go outside this for a few key central government initiatives when necessary.

In the context of trade negotiations, the Cummings position makes more sense.  As an act of brinksmanship, implying that the UK will seek to undercut the EU seems astute.  The EU has itself stated how much it wishes to avoid this scenario, even though history suggests it is unlikely, noting again the German example mentioned above, when for example in 2018 as a proportion of GDP it spent four times as much on State aid than the UK, while acting under the same laws).

There does come a point, however, when the UK will need to ‘play its hand’ and reveal the detail of its intended State aid/ subsidy regime.  This is necessary in order to move forward in the EU trade negotiations and to navigate Parliamentary procedure (noting that if the new regime is particularly ambitious that it would be prudent to carry out a consultation).  As Tim Nixon points out in the Times, “the priority for the government should be clear: regardless of the outcome of the EU negotiations, it needs urgently to put in place a robust, independent, rules  based domestic anti-subsidy regime to become effective at the start of next year”.  It is also necessary in order to create legal certainty (avoiding some sort of vacuum from 1 January 2021) thus allowing investments to proceed, safe in the knowledge that State support may be safely received and spent without fear. We believe that time has come and look forward to the Government unveiling details of its new UK subsidy regime.

By far the simplest option (especially given the pressing urgency) would seem to be to start with the existing regime the UK already has and which the UK has been heavily involved in developing over many years, and simply convert it to being administered by and for the UK.  This may then be adjusted once the UK has had time to consult and consider properly which areas it wishes to prioritise and what strategic aims and policy agendas it most wishes to pursue, eg. regional investment and R&D.  Starting with something like the regime it already works under might also be considered most likely to facilitate agreeing a manageable free trade deal with the EU in the time afforded.  That is not an insignificant consideration.

Indeed, appointing a properly resourced regulator and setting out clear processes (and timescales) for its decision making would appear to meet the terms for a new State aid regime that were circulated to the press during the 2019 election campaign.  This would include clearly defining what constitutes a regulated subsidy (and thus also what is not), what constitutes a permitted subsidy and ideally setting out a procedure for regulating and subjecting to further scrutiny the largest and most controversial interventions.  This could create a faster decision making process and achieve greater certainty for those considering investing in the UK.  A mechanism whereby Parliament could vote to overrule a decision by the regulator not to approve a significant investment would achieve the objective of ensuring “greater discretion over whether or not an aid is appropriate“.  Finally, we note and support the commitment to “develop these rules in full consultation with British Business” who will surely want to know terms on which they can receive Government support but also raise concerns when their competitors receive the same.

 

Jonathan Branton and Alexander Rose, DWF Law LLP

4 August 2020

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Squaring the circle: Level playing field provisions and the negotiation of a UK-EU free trade agreement

Note: We are delighted to publish this article by Totis Kotsonis (partner at Pinsent Masons): the article was originally published on 3 March 2020 on on the Kluwer Competition Law Blog but retains its relevance as an important contribution to the discussion of a UK anti-subsidy regime after the end of transition and what terms relating to such a regime should be incorporated into the UK/EU free trade agreement.

 

Whilst the EU-UK trade negotiations have barely commenced, one thing is already quite clear: the two sides are poles apart on the key issue of level playing field (LPF) provisions and the extent to which these should feature in a future EU-UK free trade agreement.  The aim of these provisions, as originally set out in the Political Declaration which the two sides agreed in October 2019,[1] would be to ensure open and fair competition between the UK and the EU essentially by providing for the maintenance of regulatory convergence in areas such as State aid, competition, social and environmental standards.

The UK Government has since made it clear that it does not consider such obligations as either necessary or reasonable given that it is seeking a trade deal which is no more ambitious than that which Canada has agreed with the EU.  Equally, it opposes such commitments on the basis that any trade agreement with the EU should respect the UK’s regulatory autonomy.  For its part, the EU considers that robust LPF provisions would be necessary in relation to any trade deal with the UK, given the latter’s geographic proximity and the interconnectedness of the UK and EU economies.

Unfortunately, this issue risks becoming a deal breaker and finding a compromise would be challenging given how entrenched the two sides seem to be in their respective positions.  However, difficult as this might be, it should not be impossible to come to an arrangement which recognises each side’s regulatory autonomy but also facilitates regulatory alignment.

A possible way of doing this is considered below.  However, first, it is important to consider the context and understand each side’s position and room for manoeuvre on this issue.

 

Context matters

According to the Political Declaration, a future EU-UK trade relationship should be underpinned by robust LPF commitments in the form of “common high standards applicable in the [EU and the UK] at the end of the transition period.”[2]  No doubt, one side would be keen to stress that this document is not legally binding, and in any event provides for the precise nature of these commitments to be “commensurate with the scope and depth of a future relationship”.  Equally, the other, would be quick to point out that the Political Declaration was agreed in good faith and recognises the need for “robust” LPF commitments so as to “prevent distortions of trade and unfair competitive advantages”.[3]

Ultimately, arguments of this kind will not prove particularly helpful in advancing negotiations on this issue.  Instead, it is important for each side to recognise that the other side’s position is legitimate.  It is legitimate for the UK to choose regulatory autonomy over a deeper trade relationship with the EU as it is legitimate for the EU to insist that any privileged access[4] to its market should be conditional on robust LPF commitments.

At the same time, it is important that both sides recognise that there is room for them to move away from their respective positions on this issue without compromising their respective interests.  For example, while the EU might be rightfully concerned that, absent appropriate LPF commitments, granting any privileged market access to a major and geographically proximate trade partner, would lead to unfair competition, it should be possible to address these concerns without the UK having to adopt EU rules and regulations in its domestic legal order.  In fact, the EU has already modified somewhat its initial position on this issue.  However, as explained below, further steps in that direction should be possible and appropriate.

As to the substance of the UK’s concerns in this context, there are arguably two subtly distinct issues here.  First, as a matter of principle, a future free trade agreement with the EU should not constrain the UK’s right as a sovereign state to regulate domestically as it sees fit.  Second, the UK does not accept that LPF commitments should, in any event, involve the UK having to adopt the rules and standards of the EU – a separate sovereign entity.

In line with comments above, the UK’s stance would seem stronger on the second issue.  At the same time, the UK’s position on the principle of regulatory autonomy merits review and reassessment within a wider context.  This is considered below.

 

A matter of principle, a matter of interest

First, it is important to acknowledge that international treaties, freely entered by sovereign States, involve the creation of both rights and obligations and that compliance with those obligations constrain the ability of otherwise sovereign parties to act domestically in a manner which is inconsistent with those commitments.

For example, the ability of the UK parliament to legislate so as to limit the award of public contracts to UK suppliers only, is limited substantially by the UK’s obligation under the plurilateral Agreement on Government Procurement (GPA)[5] to allow suppliers from 47 other countries, including all EU Member States, to compete for important UK public contracts above certain value.  Similarly, the UK parliament cannot legislate so as to raise unilaterally the contract values which trigger this obligation as these are set at a GPA level.  However, by accepting these obligations (and by implication constraining its ability to legislate in a manner which is inconsistent with them), the UK has secured the important benefit of access to the public procurement markets of 47 other countries for its own domestic suppliers.

If the principle of rights in exchange for commitments is valid and relevant, then the focus moves to the question of whether the type of commitments which the other side is seeking – in this case, the EU – are fair and proportionate.  However, in the context of negotiations between two sovereign parties this issue is ultimately irrelevant.  Each party is negotiating with a view to advancing its own interests to the best of its abilities.  To the extent that a party considers that the balance between rights and obligations on offer is unacceptable it has the option of walking away from the negotiations.  Ultimately, the distinction between commitments which are acceptable and those which are not, would normally depend on what is at stake and, more specifically, the relative importance of what a party stands to lose by choosing to abandon the negotiating table rather than accept the commitments that the other side is seeking (i.e. in negotiation parlance, their respective “best alternative to a negotiated agreement”).

In this regard, the principle that both the UK and the EU should commit to a set of “common high standards” aimed at ensuring open and fair competition between them should not be as controversial as it might first appear, not least in view of the UK’s role in shaping many of these standards over the years and the country’s excellent record in terms of compliance.  Indeed, in recent pronouncements, the UK Government has tried to dispel concerns that in seeking to retain regulatory autonomy it intends to relinquish high standards in areas such as State aid, labour and environmental laws.[6]

The issue of subsidies is, in fact, instructive.  There is no obvious interest for the UK Government to abandon its traditionally strict subsidies discipline.  Indeed, compliance with strict limits on the State’s ability to distort competition through State aid interventions constitutes an indispensable part of the UK’s world-class competition regulatory regime, which has deservedly led to the UK’s reputation as a place which is “open for business” and where enterprises can compete on the basis of a level-playing field.  A more permissive subsidies regime would ultimately damage the competitiveness of the UK economy by discouraging enterprises more efficient and innovative.  It could also lead to a domestic subsidies race to the bottom with devolved administrations competing with each other to attract investment or support local industries.

These issues would not have escaped the UK Government.  At the same time, there are a number of advantages in enshrining strict anti-subsidy obligations in an international treaty.  For example, this would make it more difficult for future Governments, which might perhaps be inclined to adopt a more dirigiste approach to the management of the economy, to change domestic laws so as to make it easier to grant subsidies.  Equally, enshrining these obligations in an international treaty would enable the Government to diffuse pressure from specific industry groups or other lobbies for the State to intervene, using taxpayers’ money, so as to support uncompetitive businesses or failing industries.

At the same time, given the UK Government’s position that a trade deal with the EU should not impinge on the UK’s regulatory autonomy, it would seem very unlikely that the UK would agree to LPF provisions which require it to apply domestically EU rules and regulations.  As noted earlier, the EU has already softened its stance on this issue in certain respects.  More specifically, whilst the EU is asking that the UK should apply EU State aid rules domestically, in relation to other areas, it is proposing that in upholding “common” high standards and “corresponding” high standards “over time”, EU standards should constitute “a” reference point.[7]  Although not entirely unambiguous,[8] this position is less maximalist than it could have been[9] and it is helpful as a starting point from which to try and reach a compromise.

   

A possible way forward

Given this context, a possible way forward might lie in the two sides agreeing to maintain common (or corresponding) high standards in certain regulatory areas but without this involving an obligation to maintain the same legislation.  The principle underlying this commitment would be that the effect of their respective policies should be equivalent, with a view to ensuring that trade between the parties is carried out under conditions of open and fair competition.

In this regard, the two sides could also agree that, for a policy not to be deemed equivalent and consistent with the commitment to maintain common high standards, evidence should be required to demonstrate that its effects are harmful to open and fair competition between them.  This is distinct from an approach where harmful effects, and therefore breach of the LPF commitments, could be assumed purely on the basis that non-equivalence in the scope or substance of the respective laws of the two sides, has been identified.

As a counterweight to this less stringent approach, the parties could agree to more effective trade defence provisions, including the ability to take unilateral interim measures, as part of wider dispute resolution arrangements to deal with LPF commitment disputes.  It is true that this approach would go beyond the UK’s position that any commitments on subsidies, labour and the environment, for example, should be outside a trade agreement’s dispute resolution mechanism.[10]  However, this would seem a reasonable compromise to make in the interest of reaching an overall agreement, given that, as explained below, the mechanism may be designed in a way which does not impinge on regulatory autonomy.

In this regard, an effective dispute resolution mechanism could be modelled partly on the provisions of Articles 13 and 14 of Annex 4 to the Ireland/Northern Ireland Protocol in the non-ratified Withdrawal Agreement of November 2018, but with such mechanism being actionable by either side.[11]  On that basis, if either party considers that the other has relaxed relevant domestic rules and regulations in a way which breaches the obligation to maintain common high standards in agreed policy areas, that party may request a consultation within a Joint Committee[12] with a view to discussing the other side’s concerns and finding a commonly acceptable solution.

If the Joint Committee fails to resolve the dispute, the party asserting a breach of the commitment to maintain common high standards (the “LPF commitments”), could then adopt unilaterally “appropriate remedial measures” pending resolution of the dispute via arbitration.

Specific rules would have to be agreed as regards the establishment, composition and powers of an arbitration panel, the rulings of which would ordinarily be expected to be binding (but see further below).  That would mean that, where the panel finds that a party has breached the LPF commitments, that party would be required to take measures to comply with the ruling.  On the other hand, where the panel finds against the complainant party, the latter would be obliged to cease any unilateral remedial measures it might have taken.  At the same time, the other party could be permitted to take appropriate and time-limited remedial measures itself to address any harmful effects already suffered as a result of the complainant party’s unilateral interim measures.

Although it would render the system more complex, consideration could also be given to the possibility of the arbitration panel rulings being advisory rather than binding, in cases where the panel finds in favour of the complainant party.  Under this scenario, the party which is found to have breached LPF commitments would have the option of complying with the arbitration panel’s ruling, and the remedial measures which it proposes.  If the ruling is complied with, the interim remedial measures that the complainant party might have taken should cease.  However, if the party which is found to have breached the LPF commitments chooses to disregard the panel’s advisory ruling, the other party can continue to apply the same or other appropriate countervailing measures to address the continuing harmful effects of that breach.

On the basis of this approach, the regulatory autonomy of the parties would not be affected as they would have the option of disregarding the panel’s ruling in these circumstances, and accept the consequences that this would have on access to the other party’s market as a result of the imposition of countervailing measures.  At the same time, the ability of the other party to put in place countervailing measures should provide sufficient incentives for both parties to maintain their commitments in this regard.

It would be for the party applying the countervailing measures to decide, perhaps within certain predefined parameters that the parties could agree, what these might entail.  For example, these might not be restricted to imposing (or raising) tariffs on specific goods but could also involve restricting the other party’s access to its market, or aspects of its market, in some other respect.  Under this scenario, the other party could then have the right to trigger the dispute resolution mechanism, involving initially Joint Committee consultations, over the appropriateness of the countervailing measures, with an arbitration panel being set up to consider the matter where the Joint Committee fails to resolve the dispute.  The panel’s ruling on the appropriateness of the countervailing measures should be binding.  In this regard, consideration should also be given to the question of whether the application of countervailing measures should be stayed or not be put into effect until the conclusion of the dispute resolution process.

 

The question of harmful effects and other relevant considerations

Equally crucial in this context, would be the question of how to establish that a new measure or policy change by one side, constitutes a breach of the commitment to maintain common high standards, in that it is harmful to open and fair competition.  For example, it would seem reasonable that this should involve not only consideration of the harmful effects on competition that have already accumulated but also the harmful effects that are likely to accrue if the measure or policy in question were to remain in place.

Ultimately, the question of how to demonstrate the presence of harmful effects should be determined primarily by reference to economic rather than legal considerations.  In this regard, given that the UK would no longer be part of the Single Market, demonstrating distortions of competition, or the threat of such distortions, could merit a higher evidential threshold than the question of whether a measure distorts or threatens to distort competition within the Single Market under EU law.

Similarly, EU Court of Justice rulings should not be relevant in the context of a dispute resolution system which would not be concerned with the interpretation of EU law but with the effects of a particular policy on open and fair competition between two parties in the context of a free trade agreement.  This would be distinctly different from a situation where both sides to the agreement formed part of the Single Market or aspects of it.

Separately, careful consideration should also be given to the question of whether, from a legal perspective, harmful effects should be deemed to have been established when the economic analysis demonstrates an appreciable effect on competition between the parties, with concomitant consideration of what that might mean.

It would, of course, be for the party asserting that the other has breached the obligation to maintain common high standards in a way which is harmful to competition, to provide relevant evidence to that effect, both within the context of Joint Committee consultations and, if necessary, submissions to the arbitration panel.

Finally, the two sides would need to agree on how to deal with circumstances where one side amends its existing rules so as to adopt a stricter approach in relation to a particular policy area which is subject to LPF commitments.  It would be important to establish whether this should automatically trigger an obligation on the other to adopt measures of an equivalent effect (but with the option of not doing so subject to countervailing remedial measures by the other) or whether the LPF system should be based solely on an agreement for non-regression as regards certain rules and standards that apply at the end of the transition period.

 

A matter of importance

It should be obvious from the above brief outline that devising a system which respects the regulatory autonomy of each side, whilst also ensuring access to each other’s market on terms which provide for open and fair competition, would be complex and might necessitate the consideration of novel approaches.  Ultimately, the wider benefits that would ensue for both parties from trade and co-operation within the context of a comprehensive free trade agreement, justify the further careful consideration of possible ways to bridge the gap between them, not least on the crucial issue of LPF commitments.

Totis Kotsonis

 

[1]           Political Declaration setting out the framework for the future relationship between the European Union and the United Kingdom, 17 October 2019.

[2]           Ibid., at para 77.

[3]           Ibid.  Para 21 also provides that “…with a view to facilitating the movement of goods across borders, the Parties envisage comprehensive arrangements that will create a free trade area, combining deep regulatory and customs cooperation, underpinned by provisions ensuring a level playing field for open and fair competition…”

[4]           That is to say, access which goes beyond trading under WTO terms.

[5]           The GPA is an agreement between certain WTO members, including the EU, the United States, Canada, Japan and South Korea.  It seeks to achieve greater liberalisation and expansion of world trade by means of the creation of an “effective” multilateral framework for government procurement.  This involves GPA parties opening up their public procurement markets, at least partly, to each other’s suppliers and undertaking to ensure the conduct of transparent, impartial and fair public procurements.

[6]           See in particular the Prime Minister’s speech in Greenwich on 3 February, https://www.gov.uk/government/speeches/pm-speech-in-greenwich-3-february-2020.

[7]           Annex to Council Decision authorising the opening of negotiations with the United Kingdom of Great Britain and Northern Ireland for a new partnership agreement, 25 February 2020, para 97. https://www.consilium.europa.eu/media/42736/st05870-ad01re03-en20.pdf.

[8]           Adding further to this ambiguity, the same paragraph also indicates that an agreement on LPF provisions should “rely” on “appropriate and relevant” EU and international standards, a reference which might suggest EU standards constituting more than a reference point in at least some areas.  Whether this should be read as a specific reference to State aid or whether it is intended to relate to other policy areas also is currently unclear.

[9]           Recent EU association agreements, incorporate requirements for the approximation of EU law.  This essentially involves trading partners having to implement EU laws domestically in a number of policy areas and to keep such domestic legislation in line with EU legislation as this is amended over time.  This might be seen as a policy which is specific to European countries aspiring to join the EU.  However, it could also be interpreted more widely as an EU policy which seeks to maintain, to the extent possible, regulatory alignment with neighbours with privileged access to its market.

[10]          The Future Relationship with the EU: The UK’s Approach to Negotiations, 27 February 2020, paras 65, 68, 76, 78 and 81. https://www.gov.uk/government/publications/our-approach-to-the-future-relationship-with-the-eu.

[11]          These provisions were drafted specifically in relation to State aid compliance by the UK and were actionable by the EU alone.  However, they can be adapted accordingly for the purposes of compliance with LPF commitments in all agreed areas and made actionable by both sides.

[12]          The Withdrawal Agreement of 17 October 2019 incorporates provisions (Articles 164 – 166) for a Joint Committee with responsibility for the implementation and application of that Agreement.  The same or a parallel Joint Committee could be set up along similar lines for the purposes of the implementation and application of the LPF commitments or the trade agreement more generally.

Posted in Brexit issues, WTO anti-subsidy rules | Comments Off on Squaring the circle: Level playing field provisions and the negotiation of a UK-EU free trade agreement

Compromise Position for Subsidy Control in a UK/EU FTA

James Webber[1] 

The Government has an announced intention to introduce a subsidy control regime[2]. This will be strongly informed by the Agreement with the EU – which will inevitably need to be reached first. In my view, the subsidy control provisions of an FTA with the EU should only bite on subsidies that appreciably distort competition between the UK and the EU. This is consistent with the findings of the House of Lords Internal Market Sub-Committee; subsidies below this threshold are not the business of a trade agreement[3].

I think such an Agreement should accord to the principles I describe in this note. To stress test the idea I have translated these principles into suggested legal drafting in the attached Annex .  No doubt this can be improved on. My goal in doing so is to focus discussion on a detailed compromise proposal and to flush out the trade offs and questions embedded within it. The proposal is intended to be one that respects the sovereignty of each side but which also creates a structured framework for ensuring a level playing field in subsidy control.

Definition of Subsidy

The definition of subsidy would draw on both the EU State aid rules and the WTO SCM Agreement – the only two systems of international subsidy control in the world. This is consistent with the EU’s negotiating directive which states that “the envisaged agreement should uphold common high standards and corresponding high standards over time with Union standards as a reference point in the areas of State aid…” [emphasis added].

The EU definition of State aid has substantial merit as a reference point. In particular, the concepts of advantage, State resources and State imputability are all well developed, relatively stable and overlap almost completely with the WTO concept of subsidy. The legal certainty they bring would be valuable to enterprises and public administration on both sides.

The EU definition however also has frailties that ought not to be brought over. A series of ECJ judgments have altered the definition of “specificity” and made this concept excessively complex and unpredictable. In addition, since the governing principle of the UK/EU subsidy control arrangements is that they should only bite on measures that actually effect trade and competition, the current EU approach to effect on trade and competition within the definition of State aid cannot be used.

Specificity

Specificity is the term used in subsidy control to separate measures that are normal public policy (corporation tax rates or decisions to build a new motorway) from subsidies.  The reason it is important is that many Government policies advantage companies unequally. Does building a new motorway junction near an Amazon distribution warehouse constitute a subsidy to them? Does allowing faster amortisation of R&D capital expenses – depressing taxable profit – constitute a subsidy for research heavy companies?

The concept of ‘specificity’ polices this line between general policy (even if not all benefit equally) from actual subsidy. Historically whether a measure was specific was measured against availability. If it was generally available then it was not specific. Recent ECJ case law – mainly in an attempt to tackle disagreeable tax measures – has tried to redefine specificity by moving away from a test of availability and considering whether the measure is an exception to a “reference framework”[4]. This change introduces a great deal of complexity. Broadly speaking, a measure is considered specific if it deviates from a reference framework where that deviation is not justified by the ‘objectives’ of the reference framework. What does that mean? Are a series of tax provisions that differentiate between two taxpayers considered together as ‘the reference framework’ – if so there is no exception or deviation that could be considered a specific measure? Or do we pick out the provision that treats taxpayers in a certain situation more generously and say that is an ‘exception’ to the reference framework? If the latter, how can we predict whether the Court or Commission will consider the exception to be justified by the objectives of the reference framework? Indeed do we even know what the objectives are? In the Brauereri case, Germany, the Commission and the taxpayer had three different (but arguably equally valid) views on what the ‘objectives’ of the tax measures in question were.[5]  It becomes excessively difficult to predict whether a measure is a subsidy or not.

Recent cases have also started to see a confusion develop between the concept of advantage and specificity.[6] In these cases, the existence of an advantage results in a presumption of specificity – effectively merging the previously separate criteria together.  This is also very undesirable.  Specificity is a vital and separate element in the test for State aid.  To extend the analogy above, a business may get an obvious advantage from a new motorway junction or flood defences built on the seaward side of their premises. However, it is inappropriate to claw that cost back from the business concerned after the event – which is the implication of finding the advantage is specific and therefore State aid.  The business concerned may not even have been asked.  Had it known the risks, it may have preferred the extra costs of driving to the next junction or flood insurance etc.

Eventually the ECJ will have to straighten out its jurisprudence in these areas but, in the meantime, there is no reason to import the confusion into a UK/EU FTA.

In my view, specificity should have its traditional meaning in the subsidy control provisions of the UK/EU FTA. A measure is specific if it is not generally available. The WTO SCM Agreement definition of specificity therefore is a more suitable basis for catching such measures.

Effect on trade and competition

The other area where the EU definition of State aid cannot be used in a UK/EU FTA is in relation to effect on trade and competition. While these are two separate limbs of the formal definition of State aid in the TFEU, they do not have either a separate or practical meaning. According to established ECJ case law, any aid measure in a market open to competition can effect trade and competition – regardless of whether there is any actual such effect.

Since the governing principle of the UK/EU subsidy control arrangements, in my view, is that they should only bite on measures that actually effect trade and competition, such a definition is unworkable.

Effect on competition and trade can be dealt with in the FTA using the following framework:

  • First, safe harbours should be agreed which would not lead to appreciable effects on competition and trade. This will include any aid below a sum, indexed each year. This sum would have to be material – say in order of €50/€75m per measure. In addition, categories of aid should be noted as not liable to affect competition and trade, for instance competitively tendered infrastructure projects or aid for non-traded goods and services (such as toll roads, 5G rollout or railway franchises).
  • Second, there should also be features, which would lead to appreciable effect on competition and trade. These could track what the Commission currently calls “manifest negative effects” in its common assessment principles – such as aid explicitly to move jobs or investment from the UK to the EU or vice versa. Alternatively, aid that is demonstrably unnecessary (such as that paid to support investment where the decision to invest had been made before aid was offered).
  • Third, aid outside the safe harbour but not caught by manifest negative effects would be subject to an assessment regarding the effect on trade and competition. At the level of determining whether a particular measure is a subsidy / State aid, such an approach is alien to the EU since the effect on trade and competition criteria in Article 107 TFEU do not have a practical meaning.[7] This said, the Commission’s compatibility assessment (i.e. once aid is notified is it permissible) does look more closely at effects on competition – and the State aid modernisation process over the last decade or so has increased the use of economic analysis to assess effects.

Analytically, therefore, it is perfectly possible to assess the effects on competition and trade of a subsidy. It would require the CMA in the UK and the Commission to investigate and find a reasonable likelihood of trade and competition distortion – a similar evidence-based, forward-looking analysis as used in the merger regime. In a UK context, the Office of Fair Trading and HM Treasury produced a short readable study titled “Guidance on how to assess the competitive effects of subsidies” in 2007, explaining how this can be done in the context of UK Green Book assessment.[8]  It is worth noting that – as with EU State aid currently – it is not necessary in my view to attempt to separate the analysis of trade and competition for this purpose. The concepts are best understood and assessed together.

Objectives of Common Interest

 Once effects on competition and trade are found, they could then be justified as a proportionate way to achieve agreed common goals – such as sustainable development or climate change. This ‘balancing’ exercise is how the EU State aid regime works today. One potential difficulty is that the WTO SCM Agreement does not anticipate such balancing to make otherwise prohibited or actionable subsidies allowable.

This is a legitimate point, but a UK/EU FTA containing such a provision would be no more egregious than the EU’s system of State aid is today. Moreover, the UK/EU FTA only effects the subsidy arrangements between each other.  It does not affect remedies available (including countermeasures) to other signatories to the WTO SCM Agreement against subsidies the UK and EU consider to be proportionate to a common interest.

In any event, the FTA could be expressed as without prejudice to the WTO SCM Agreement.

Competent Authority

Each side will have a competent authority capable of investigating aid to assess effects and considering whether aid is a proportionate way to achieve common objectives. That would be the Commission for the EU and, in my view, the CMA for the UK.

The competent authorities could require changes to the aid proposals – such as awarding it on a non-discriminatory basis or requiring modifications to the scheme – such as reducing its scale, preventing overcompensation or allowing clawback.

The competent authorities would have the ability to order that aid that does create distortive effects and is not a proportionate way to achieve common objectives, shall be prohibited or recovered insofar as paid. In each case, this would be limited by the constitutional position of both competent authorities – i.e. the CMA could not contradict a clear Act of Parliament granting such aid.

Remedies

If either party considers a competitive effect exists that disturbs the level playing field, and which is not justified by an objective of common interest, it could take unilateral action. First, they have the right to appeal through each jurisdiction’s domestic courts. The effectiveness of the system would be enhanced if private parties from each jurisdiction could also bring such claims in the domestic legal system of the UK and before the CJEU respectively.

Second, each side would also then retain unilateral tariff measures to permit proportionate retaliation. Such countermeasures are to the fullest extent possible focused on the same beneficiary or sector that received the aid complained of and should be proportionate, meaning they should not exceed the harm caused to competition by the subsidy complained of – again taking into account any objective of common interest.

The UK should be willing, in my view, to submit the substance of any dispute (i.e. whether a subsidy measure is allowable under the Agreement) to binding independent dispute resolution mechanism (“DSM”). The EU is very unlikely to agree to that as it risks conflicting with the supremacy of the ECJ. A Member State measure that has been approved as State aid by the Commission and upheld by the ECJ could be attacked by the DSM in the UK/EU FTA.

This difficulty can be avoided if the reference to the DSM was limited to arguments that the retaliation is disproportionate or not justified. This takes the EU’s decision to find an aid measure compatible with its single market out of the DSM. Rather it would be the UK or EU’s decision to impose countermeasures against the other that was before the DSM.  Such countermeasures are idiosyncratic to the UK/EU FTA – they do not exist under the Treaties. As such, the DSM cannot call into question the Commission and Court’s approval of a State aid measure under the TFEU.

Northern Ireland

This proposal is intended to supersede Article 10 of the Protocol on Ireland and Northern Ireland whether pursuant to Article 13(8) of that Protocol or otherwise.

UK Domestic Regime 

The FTA with the EU does not answer – and neither should it answer – all the design questions with respect to a domestic UK subsidy control regime. That topic is beyond the scope of this note except to say that large procedural and substantive improvements over the current State aid regime are possible and can be adopted while complying with the terms of the UK’s obligations under the FTA text below.

 

1 July 2020

 

 

 

[1] Partner, Shearman & Sterling, Brussels & London

[2] “The UK will have its own regime of subsidy control” : Chapter 20, The Future Relationship with the EU: the UK’s Approach to Negotiations, February 2020

[3] See Letter from Baroness Donaghy to Paul Scully MP, 3 April 2020 at paragraph 44: “We endorse the statement by James Webber that “subsidy control between trading partners only really needs to catch subsidies that distort that trade, and anything that happens beneath it is really not the business of a trade agreement”

[4] The comparison of these two methods is helpfully explained by Advocate General Oe in his opinion in C-374-17 Finanzamt B v A Brauerei

[5] Ibid paragraph 132-134: In the Commission’s view the objective was to maximise the tax take; Germany’s view the objective was to reflect fairly the ability to pay; the taxpayer’s view the objective was to tax the change of control in land (which they said hadn’t occurred)

[6] Joined Cases T‑755/15 and T‑759/15, Luxembourg v Commission and Fiat Chrysler Finance Europe v Commission, Judgment of 24 September 2019, ECLI:EU:T:2019:670

[7] Evidence of George Peretz QC to the House of Lords Internal Market Sub-Committee: Mr Peretz noted that “analysis of [this] effect on trade” takes place “at an astonishingly superficial level”, see Letter from Baroness Donaghy to Paul Scully MP, 3 April 2020

[8] Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/191490/Green_Book_supplementary_guidance_assessing_compeition_effects_subsidies.pdf

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EU White Paper on foreign subsidies: levelling the playing field or crossing the line?

Summary of the proposals

On 17 June, the Commission published a White Paper on “levelling the playing field as regards foreign subsidies”. The Commission identifies a number of problems that foreign subsidies can cause in the EU internal market:

  • foreign subsidies to companies active on the internal market – either directly to a company established in the EU or to its parent located outside the EU – can have the same distortive effects as an equivalent subsidy by a Member State;
  • subsidies may assist a foreign company in bidding in EU procurement markets – and, perhaps looking at China, the Commission observes that such subsidies may be used to gain strategic footholds in critical EU infrastructures; and
  • subsidies may assist foreign companies in acquiring EU undertakings.

The Commission argues that existing tools do not deal with those issues.  State aid rules apply only to EEA Member States (and to some others, such as Turkey, Ukraine and accession states).  Merger and anti-trust rules do not directly address the issue.  EU public procurement rules do not address the issue either and attach no legal consequences to the existence of a foreign subsidy.

The EU is able to impose countervailing measures under the WTO Subsidies and Countervailing Measures Agreement (“SCM Agreement”). But the Commission argues that those mechanisms suffer from numerous weaknesses and gaps.  They do not apply to services or investment flows.

The Commission therefore puts forward three proposals.

The first would address foreign subsidies that benefit undertakings established in the EU, possibly extending to undertakings active in the EU internal market but not established there.  There would be a class of subsidies that would be presumed to distort competition in the internal marker (export financing, subsidies to ailing firms, unlimited guarantees, selective tax reliefs, and subsidies directly targeted at acquisitions).  Other subsidies would be looked at in more detail to establish a distortive effect.  The subsidy would then be evaluated, balancing possible positive impacts on the EU against distortions.  There would be powers of investigation, particularly aimed at undertakings with a presence in the EU. But those powers would be supplemented by a power to act on the basis of the facts available if information was not supplied (very likely where the undertaking had no real establishment in the EU): in that regard, the Commission notes that it could draw on its experience of finding foreign subsidies when examining whether to impose countervailing duties under the SCM Agreement (a remark that may not entirely reassure anyone concerned that action under the new regime might not always be based on robust evidence and rigorous economic analysis).  If a distorting foreign subsidy were found, “redressive measures” could include not just a requirement to repay the subsidy to the foreign government (which the Commission notes might be difficult to enforce), but also a requirement to pay the subsidy to the EU or Member States affected, or divestment or structural remedies.  Both the Commission and Member States would have power to apply the new rules.

On mergers, the Commission suggests a regime under which companies that had received foreign government financing would be required to file an information notice with the enforcing authority (it is suggested that that should be the Commission) before completing an acquisition in which it provided basic information about its financing and the proposed transaction.  The authority would consider whether any distortion caused by the financing could be addressed by commitments or whether the transaction should be prohibited.

Finally, on procurement, the Commission suggests that EU procurement rules should require the exclusion of bidders that had received distortive foreign subsidies: bidders would be required to disclose such subsidies under penalty of fines, termination of any contract obtained, or exclusion from bidding for further contracts for a fixed period.

The definition of “subsidy” would be based on the definition in the SCM Agreement, but extended to services.

Comment from a UK perspective

As a non-Member State, the United Kingdom will have no say over the progress of these proposals.  But it will be heavily impacted by them.  In principle, any subsidy granted by the UK government or any other UK authority to a business with EU operations or an EU subsidiary could give rise to EU action under these provisions – and in some cases the recipient of the UK subsidy could be ordered to pay it to the EU or a Member State.  Given the volume of UK exports of goods and services to the EU and the extent of UK ownership of EU businesses, that risk is very real indeed and would be a significant deterrent to any company with interests in the EU that was contemplating receiving UK subsidies.

What policy conclusions follow?

First, these proposals show that the idea, still occasionally floated, that the UK government could, after the end of transition, throw off the State aid rules and freely subsidise as it likes is, ultimately, an illusion: not only will the EU insist (as it has done) that the United Kingdom accept constraints on its ability to subsidise UK industry as part of any free trade agreement, but the EU is showing its determination, even in the absence of such an agreement, to do what it can to protect itself vigorously against any such policy – and the reality is that it can do a lot, given the volume of UK trade with, and investment in, the EU.  Whether the United Kingdom thinks that the EU’s position is reasonable or not is ultimately beside the point: if the EU decides to go down this route there is little that the UK Government can do apart from live with the consequences.

Second, the EU is not just showing some stick but also some carrot: thus, at section 6.8, it states that where it enters into a bilateral agreement that includes commitments by the third country to operate rules similar to the State aid rules:

“if during any action under a new instrument it appears more appropriate to address the distortion created by the foreign subsidy under the dispute settlement or consultation provisions of the respective trade agreement, the action under such a new instrument could be suspended. The action could be resumed to impose redressive measures or adopt commitments in two alternative scenarios: (1) the dispute settlement under the trade agreement has been concluded and has led to the finding that there is an infringement, but the infringing party does not take corrective actions; (2) within 12 months from the suspension of the action, the distortion caused by the foreign subsidy has not been eliminated.”

Or, put more crudely, if the United Kingdom commits to operate rules similar to State aid rules, the EU can hold off taking action on UK subsidies if it is able to raise the issue with the United Kingdom and the United Kingdom is able to address the issue under its own rules. That is a further reason for the United Kingdom to have in place an effective anti-subsidy regime.

It would of course be wrong – and somewhat reminiscent of Monty Python’s “News for Parrots” sketch – to read the White Paper solely from a UK perspective.  Indeed, as noted above, in many respects its target lies some 8,000 kilometres to the east.  But its publication at the present delicate stage of the negotiations between the UK and EU should, and is no doubt intended to, spark some reflection in the current UK government as to whether its stance of refusing to offer any significant commitments in relation to subsidies is at all sustainable.

George Peretz QC

(Original article on www.eurelationslaw.com)

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Does Covid-19 provide the UK with a basis for denouncing the Northern Ireland Protocol?

In a recent blog post for Global Vision, Professor David Collins argued that the Covid-19 crisis provides a basis in international law for the United Kingdom to withdraw from the Ireland/Northern Ireland Protocol (“the Protocol”), which forms part of the Withdrawal Agreement between the United Kingdom and the EU (“the WA”).

There are two premises for Professor Collins’ argument, both of which are correct.  The first is that the Covid-19 crisis is likely to require large grants of notifiable State aid (i.e. aid falling outside existing block exemptions).  The second is that under Articles 10 and 12 of the Protocol, the full panoply of EU State aid law – including the requirement to notify to the Commission, the duty on national courts to provide effective remedies for unlawful (non-notified) State aid, and the powers of the Commission to order repayment of unlawful aid – applies to the United Kingdom after the end of transition in relation to measures that have a potential effect on trade in goods between Northern Ireland and the EU.

As Professor Collins rightly points out, it is likely that, because of the low threshold set by the “effect on trade” test, Article 10 will catch any UK measures of the scale required to deal with the Covid-19 crisis.  (Concerns about the scope of Article 10 have also been expressed by the House of Lords EU Committee, which stated in April that “It is troubling that no one we heard from thought that the UK Government had a clear understanding of what state aid provisions it had signed up to in the Protocol”).

On the basis of those correct premises Professor Collins then argues that the United Kingdom could withdraw from the Protocol on the basis of Article 62 of the Vienna Convention on the Law of Treaties (“VCLT”), which allows a party to a treaty to withdraw from it, subject to certain conditions, on the basis of a “fundamental change in circumstances” which could not have been foreseen by the parties.  The claim is that the United Kingdom could not have foreseen that the Covid-19 crisis would require huge amounts of notifiable State aid falling within Article 10 and therefore subject to approval by the Commission.

One initial difficulty with that claim is that Articles 1, 3, and 5 of the VCLT make it clear that the VCLT does not apply to a treaty between a State and an international organisation such as the EU.  Nonetheless, it is fair to observe that Article 62 is usually regarded as codifying a customary rule of international law applicable to all treaties: see the judgment of the International Court of Justice (“ICJ”) in Fisheries Jurisdiction at §36, and see also the Court of Justice of the EU’s (“CJEU”) judgment in Case C-162/96 Racke at §53.

However, it is also important to bear in mind that the rule expressed in Article 62 is, in the words of the CJEU at §§49-50 of Racke “an exception to the pacta sunt servanda principle, which constitutes a fundamental principle of any legal order and, in particular, the international legal order. Applied to international law, that principle requires that every treaty be binding upon the parties to it and be performed by them in good faith (see Article 26 of the [VCLT]).  The importance of that principle has been further underlined by the [ICJ], which has held that ‘the stability of treaty relations requires that the plea of fundamental change of circumstances be applied only in exceptional cases’.”

The CJEU was there referring to the ICJ’s 1997 judgment in Gabčíkovo-Nagymaros Project between the Republic of Hungary and the Slovak Republic. That case concerned a treaty between the Czechoslovak Socialist Republic and the Hungarian People’s Republic entered into in 1977 relating to extensive works on the Danube.  By the time of the ICJ judgment, Czechoslovakia had dissolved and both Hungary and Slovakia had transformed not just their names but their economic and political systems beyond anything remotely foreseeable in 1977, with major implications for the profitability of the project.  Further, ecological and environmental knowledge had greatly developed over that period.  Nonetheless, the ICJ at §104 rejected Hungary’s attempt to rely on the Article 62 principle, holding: (a) that even a major a change in profitability was not enough to amount to a fundamental change radically transforming the parties’ obligations; (b) that developments in environmental knowledge were not unforeseeable; (c) that in any event the treaty contained mechanisms to accommodate change and which made it possible for the parties to take account of such developments and to apply them when implementing relevant treaty provisions; and (d) that as an overarching point (picked up by the CJEU in Racke) “the stability of treaty relations requires that the plea of fundamental change of circumstances be applied only in exceptional cases.”

That all means that the barrier facing an attempt by the United Kingdom to rely on the Article 62 principle is a very high one.  In my view, it could not plausibly be overcome.

First, the United Kingdom’s obligations under the WA (of which the Protocol is but part) have to be seen as a whole.  Article 10 is but a fraction of the United Kingdom’s obligations under the WA.  It is not plausible that the fact that Article 10 will apply to more State aid measures than the UK Government could have predicted in January 2020 would need to be implemented is in itself, in the context of a wide-ranging and complex treaty covering many UK obligations, sufficient to amount to a radical transformation in those obligations.  Indeed, it is notable that Professor Collins confines his claim to a claim that the United Kingdom could withdraw from the Protocol alone: but the Protocol is itself expressed to be an “integral part” of the WA (see Article 182), and it is not at all clear on what basis the United Kingdom could renounce the Protocol while leaving the rest of the WA (many of whose provisions benefit the United Kingdom) untouched.

Second, even the claim that the Covid-19 crisis entails a radical transformation in the United Kingdom’s obligations under Article 10 needs to be examined carefully.  Such a claim might be plausible if the effect of Article 10 would be to preclude the United Kingdom from taking essential measures to support businesses affected by the crisis. But the facts are that since the crisis started the UK Government, under the EU State aid regime during the transitional period, has been able to implement huge amounts of State aid with the approval of the Commission – and it is plain from a cursory scrutiny of Commission decisions during the crisis that all Member States have been permitted to grant very large amounts of aid going in some cases well beyond what the United Kingdom has yet chosen to do.

It is also critical to remember here that EU control of State aid is control under law: so, for example, Article 107(2) TFEU requires clearance of aid that compensates businesses for losses caused by a natural disaster such as Covid-19; and even where aid goes beyond that, the Commission has (broadly speaking) to balance the public policy benefits of the aid against its distortive effects and is also required to apply a consistent policy framework to all Member States (including, for these purposes, the United Kingdom).  Against that background, it is hard to see how the fact that the United Kingdom is (because of Covid-19) more likely to need clearance of large amounts of State aid than would have been predicted in January 2020 amounts to a radical change in UK obligations (the fact that large amounts of aid would be likely to need such clearance being clear, as Professor Collins himself asserts, from the text of Article 10).

A further point is that, though Covid-19 can be regarded as unforeseeable, the possibility of economic or natural crises requiring large amounts of aid cannot be described as unforeseeable (indeed, three such events have occurred in the last two decades – the 2008 financial crash, and 9/11 and the Icelandic volcano eruption, both of which required large support for the aviation sector).  From that, the conclusion follows that the State aid regime imposed by Article 10 is (to pick up on the language of the ICJ in Gabčíkovo-Nagymaros)well capable of accommodating change and makes it possible for the parties to take account of such developments and to apply them when implementing relevant treaty provisions.

Professor Collins’ suggestion that the Covid-19 crisis provides any basis for the United Kingdom to resile from the Protocol is therefore in my view hopeless. It would also suffer from the practical difficulty that the UK Government could not run the argument without in effect conceding the interpretation of Article 10 that it has to date been reluctant to concede.

Nonetheless, his blog does serve the useful function of increasing public awareness of what the current UK Government agreed in Article 10. It is hard to see that Article 10 produces a satisfactory result, particularly if the UK Government wants to operate a different type of domestic anti-subsidy regime: as Lady Bracknell might have said, to have one anti-subsidy regime may be a necessary misfortune, but to have two running in parallel looks like carelessness.  Re-negotiation of Article 10 should therefore be a priority: and is a realistic objective if the UK Government is prepared to enter into binding commitments to an effective anti-subsidy regime that protects the EU’s interests while giving the United Kingdom the flexibility to avoid some of the problems of the EU regime.

 

George Peretz QC

(copy of a post on http://www.eurelationslaw.com)

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BEIS responds to the House of Lords EU Committee letter on level playing field issues

The House of Lords EU Committee yesterday published BEIS’ response to the Committee’s letter on the Government’s position on level playing field commitments – a key issue in the negotiations between the United Kingdom and the EU on their future relationship. I discussed the Committee’s letter here.

One concern raised by the Committee was the uncertainty about the Government’s plans for a future anti-subsidy regime – plans sketched out, but only very vaguely, during the Conservative election campaign. BEIS refers to there being “several complexities” in devising such a regime: a comment that is certainly accurate but which raises the question of why, given those complexities, the Government is not now consulting widely about its proposals or the various options it is considering. A new regime that seeks to grapple effectively with these complexities is unlikely to work well if produced like a rabbit from a hat weeks before it is due to come into force: and time is now pressing, given that the new regime will need to come into force on 1 January, with authorities and businesses needing to have some idea of the shape of the new regime well before then in order to plan new projects. The letter is also vague not only about whether the CMA will have a role in the new regime but also about whether there will be any authority at all: but setting up new powers and new teams takes time. None of this looks like good government.

One excuse for the delay is, however, interesting: it is that policy is being “developed in tandem” with the EU negotiations. That excuse only makes sense if the policy is likely to be affected by the negotiations – which effectively concedes the obvious though so far vigorously resisted point that the UK subsidy regime has to be on the table in those negotiations: see my analysis  of the only likely way through on this issue. The letter, however, studiously avoids answering the Committee’s point that agreement could in principle be reached as to a set of common anti-subsidy rules while not tying the UK to the specifics of the EU regime.

On the Northern Ireland Protocol, the Committee accurately noted that “It is troubling that no one we heard from thought that the UK Government had a clear understanding of what state aid provisions it had signed up to in the Protocol.” There is no sign in the BEIS letter of any clearer understanding (or at least admission) of its substantial effects – discussed in my pieces already referred to. Instead of setting out any analysis, the letter merely confines itself to an anodyne record of meetings of the Joint Committee. That is simply not good enough, and reinforces the widespread belief that the Government did not understand what it was signing up to when it concluded these provisions.  Nor does the Government react to the Committee’s view that renegotiating these provisions with the EU needs to be a priority – the suspicion being that its refusal to accept that point is because the United Kingdom could only hope to succeed in persuading the EU to agree if it offered significant concessions on a general UK subsidy regime.

All in all, this is a disappointing response to a serious letter by a cross-party committee that included several passionate supporters of Brexit. It leaves the question of a future anti-subsidy regime up in the air – an uncertainty that will soon start to be seriously disruptive – and gives the impression that the government is both deeply secretive and making up policy on serious and important matters on the hoof.

 

George Peretz QC

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AG opinion in Hinkley Point C state aid challenge

Thanks to Tim Johnston, Brick Court Chambers for sending in this comment on the AG opinion in Case C-594/18 P

On 7 May 2020 Advocate General Hogan handed down his Opinion in Case C-594/18 P, Austria’s challenge to the European Commission’s Decision that the UK Government could lawfully grant State aid to support the construction of Hinkley Point C nuclear power station. Continue reading

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Covid-19 State aid measures

For those of you interested in Covid-19 State aid measures, Oxera has recently published two articles on the subject, with practical guidance. These are available here:

https://www.oxera.com/wp-content/uploads/2020/04/Oxera-COVID19-1.pdf

https://www.oxera.com/wp-content/uploads/2020/05/Practical-guidance-on-the-new-State-aid-rules-on-public-recapitalisations-1.pdf

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