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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Is there any scope for agreement between the EU and UK on subsidies?

It is a truth universally acknowledged that the gap between the EU’s position and that of the UK on level playing field commitments, and in particular State aid, is the largest obstacle to the conclusion of a final relationship agreement between them.

The 2019 Political Declaration, signed up to by both sides, said this: –

  1. Given the Union and the United Kingdom’s geographic proximity and economic interdependence, the future relationship must ensure open and fair competition, encompassing robust commitments to ensure a level playing field. The precise nature of commitments should be commensurate with the scope and depth of the future relationship and the economic connectedness of the Parties. These commitments should prevent distortions of trade and unfair competitive advantages. To that end, the Parties should uphold the common high standards applicable in the Union and the United Kingdom at the end of the transition period in the areas of state aid, …. The Parties should in particular maintain a robust and comprehensive framework for competition and state aid control that prevents undue distortion of trade and competition; … In so doing, they should rely on appropriate and relevant Union and international standards, and include appropriate mechanisms to ensure effective implementation domestically, enforcement and dispute settlement. The future relationship should also promote adherence to and effective implementation of relevant internationally agreed principles and rules in these domains …

But the EU and UK interpretations of that paragraph look very different.  On the UK side, the Johnson Government’s position is that, since it aims for a relationship similar to other free trade agreements entered into by the EU, such as CETA with Canada, it should contain no provisions in relation to subsidies on either side that go beyond those in CETA.  So, at Chapter 20 of its explanation of its negotiating position published in February 2020 it states that: –

  1. The UK will have its own regime of subsidy control. The Agreement should include reciprocal commitments to transparency about the award of subsidies which go beyond the notification requirements set out in the [SCM Agreement]. This should include an obligation on both parties to notify the other every two years on any subsidy granted within its territory, applying to goods or services, in line with EU-Japan EPA [or CETA]. The Agreement should also include the right to request consultations on any subsidy that might be considered to harm the interests of the parties.
  2. In line with precedent such as CETA and the EU-Japan EPA, the consultation commitment should not be subject to the Agreement’s dispute resolution mechanism outlined in Chapter 32.

On the other side, the Council Directives for the negotiation of a new partnership with the United Kingdom state that: –

  1. The envisaged partnership should ensure the application of Union State aid rules to and in the United Kingdom. For aid granted by the United Kingdom affecting trade between Great Britain and the Union, the United Kingdom should set up an independent and adequately resourced enforcement authority with effective powers to enforce the applicable rules, which should work in close cooperation with the Commission. Disputes about the application of State aid rules in the United Kingdom should be subject to dispute settlement.

The Commission has translated that into legal text (see Chapter two, Section 1), which would require the UK: to set up a domestic, operationally independent, State aid authority with equivalent powers to those of the Commission; to give effect to all extant State aid law in its domestic law; and to ensure that UK courts could apply the State aid rules and make references to the Court of Justice of the EU for a preliminary ruling.  Those provisions resemble the “backstop” provisions for Great Britain agreed by the May Government in 2018, except that, under the EU’s current proposals, the independent UK State aid authority would not be bound to submit all its decisions to the Commission or to take “utmost account” of its opinions: cooperation would be voluntary, and the UK authority could, but would not be obliged to, seek the Commission’s opinion before taking decisions.

The wide gap between the parties can be characterised in this way.  The Johnson Government sees the EU State aid regime as a significant constraint on sovereignty and on industrial policy (even though in practice the limits that it sets are ones that neither it nor a future Labour Government are likely to exceed).  On the other hand, the EU can see a future UK Government freed from the State aid rules will be able to subsidise in ways that – given the UK’s proximity and the extent of the trade relationship – seriously harm the EU while being able to “free-ride” on the fact that EU Member States will be largely unable (given the constraints of EU State aid rules) to use subsidies in ways that harm the UK: a result that is politically unacceptable to the EU and its Member States, and which is not made more acceptable by the EU’s ability under WTO rules to respond to such subsidies by countervailing duties (a response that is inevitably slow and imperfect, and which amounts to putting out the fire rather than stopping the fire from starting at all).

 Given that wide gap, is agreement possible at all?

The starting point for some optimism is to observe two important aspects of the Johnson Government’s position – one openly acknowledged, the other obfuscated.

The openly acknowledged aspect is that the Johnson Government is committed to a domestic anti-subsidy regime for a variety of domestic policy reasons (in particular, though this is not openly articulated, the need to prevent the devolved administrations from using their tax and spending powers in ways that harm other parts of the UK, for example by engaging in “subsidy races”).  That a domestic anti-subsidy regime, albeit one based on WTO anti-subsidy rules rather than EU State aid rules, is needed after transition is an underlying premise both of the Conservatives’ election promises and of the paper by James Webber that seeks to develop those proposals.  Moreover, as I point out in my brief analysis of the Webber paper (on the same link), if you are turning WTO anti-subsidy rules into a domestic regime, then you are (presumably) wanting to create a regime that is enforceable and has teeth (otherwise why bother?) and not wanting one that bites only if it has a provable effect outside the UK (which would make it very weak as a form of domestic anti-subsidy control that could be counted on to restrain the devolved governments).  And if you are wanting to create an enforceable version of the WTO anti-subsidy rules that bites when a subsidy has an adverse effect on competition in the UK and without the need to prove a measurable impact outside the UK, then what you end up with (given that the substantive WTO and EU concepts of “subsidy” and “State aid” are very similar) is a regime that looks very like the EU State aid rules in different clothes.

The obfuscated aspect of the Johnson Government’s position is that it has in effect agreed, to a very significant extent, to remain in the EU State aid regime as part of the Northern Ireland/Ireland protocol, Articles 10 and 12 of which effectively keep the whole UK in the EU State aid regime in perpetuity (unless the EU agrees otherwise) to the extent to which any UK measure has a potential effect on trade in goods between Northern Ireland and the EU – a low threshold the height of which, under the Protocol, is entirely under the control of the Commission and Court of Justice of the EU.  In its letter to the Government earlier this month (which I summarised here) the House of Lords EU Committee expressed its concerns as to the extent to which that agreement has “sold the pass” on State aid and stated 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, and that the regions and devolved nations we heard from were not clear on how the Protocol might affect them. How is the UK Government working now to ensure that the UK-wide implications of the Protocol in a state aid context are fully understood?

The importance of the Protocol for the negotiations is that the last thing any sensible person would want for the UK is two anti-subsidy regimes: to have one anti-subsidy regime is probably inevitable, but, as Lady Bracknell might have said, to have two different ones, both of which will apply to a wide range of measures, looks like carelessness.  That point was accepted by the House of Lords EU Committee, which stated that “it should be a key UK priority to renegotiate provisions on state aid in the Protocol as part of the future relationship agreement with the EU, or negotiate alternative arrangements for Northern Ireland-Republic of Ireland trade, as envisaged in the previous Withdrawal Agreement, which would replace the Protocol entirely.”  But once you accept that that should be a key UK priority, it puts the UK in the role of demandeur: it has a key ask, which the EU can refuse – and is likely to refuse unless and until it is satisfied that the UK anti-subsidy regime has teeth and will protect the EU’s interests in ensuring that the UK is not in a position to free-ride on the EU State aid rules.  The logic is that the UK will need to make concessions in this area in order to ameliorate the effect of the Protocol.

On the other hand, it is hard to see that the EU could expect the Johnson Government to accept the continued role for the Court of Justice of the EU set out in its current draft agreement.  It would not just be pro-Brexit ideologues who found it difficult it to justify a situation in which courts across the UK were bound to follow, in sometimes critical questions of national policy, the rulings of what will after the end of transition be on any view a “foreign court”.  And it may be noted that there are no such provisions in, for example, the agreement between the EU and Ukraine.  Further, insistence on the UK maintaining the EU State aid rules in full – rules that are not on any view beyond sensible improvement and over which the United Kingdom will have no say – is almost certainly unacceptable to the United Kingdom (and not just to its current Government).

So what type of agreement could be reached that respects both the EU’s wish to prevent the UK from free-riding and the Johnson Government’s emphasis on regulatory self-government?

On the UK side, the first step is to acknowledge both that the EU has legitimate concerns and that (given its own wish to have an anti-subsidy regime).  Against that background – and given the need in any event to modify the effect of the Protocol, it is hard to see any objection beyond rigid dogmatism to a commitment – in some broad form – to maintain and enforce a set of anti-subsidy rules that had equivalent effect to the State aid rules in terms of preventing subsidies that harmed other European countries while retaining the ability to adapt those rules (particular in the area of procedure and remedies, subject perhaps to an overriding principle of effectiveness).  Such a commitment would appear to meet the essential objective of the EU in preventing free-riding and harmful subsidies by the UK.

That thought is developed by Totis Kotsonis in an interesting blog, where he suggests that it would be possible for both sides to agree that their regimes should be equivalent in effect, with the onus being on the complaining party to demonstrate a lack of equivalence by reference to actual effects.  Such a provision would (contrary to the current UK position) be subject to dispute resolution through the Joint Committee, with the possibility (if that fails) of unilateral interim measures such as countervailing duties as an interim measure pending arbitration (which, since it would not involve questions of EU law, but rather adjudication on whether the measure at issue had sufficient distortionary or anti-competitive effect to amount to a breach, would not require a reference to the Court of Justice).

Of course, the issue of subsidies is only one aspect of a wide-ranging negotiation between the EU and the UK: a negotiation whose future course is difficult to predict given the huge but as yet unknowable effects of the Covid-19 pandemic.  So any crystal-ball gazing is likely to be as unreliable a guide to the future as that of Sybil Trelawney.  But if there is to be agreement on subsidies, it will have to respect the essential interests of both sides, as well as some abandonment of positions that are simply not going to be accepted by the other side.  And the suggestion put forward here looks at the moment like a reasonable outline of what could be agreed if both sides accept that reality.

 

GEORGE PERETZ QC

 

14 April 2020

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House of Lords EU Internal Market Select Committee writes to BEIS about the UK anti-subsidy regime after transition

On 2 April, the House of Lords EU Internal Market Sub-Committee wrote to Paul Scully MP, the Minister for Small Business, Consumers and Labour Markets about the Government’s plans for a UK subsidy regime after Brexit and the Goverment’s approach to level playing field commitments and subsidies/State aid in the final agreement with the EU.  The Sub-Committee has been conducting an inquiry into level playing field commitments and State aid.  The letter is here.

The letter sets out some conclusions and asks questions.  As to conclusions, the letter records at §44 the Committee’s view that “within the range of options offered by
existing EU agreements, there is scope to develop a set of common rules
on subsidy control that could give the UK and EU reassurance about each
other’s use of subsidies, without tying the UK to the EU state aid regime.
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’.

Domestic anti-subsidy regime

The Committee agrees that some form of domestic subsidy regime will be needed, and that there are opportunities to improve on the EU State aid regime: see §§67-69: –

67. On balance, however, witnesses felt that some form of subsidy control will be
required. The two most compelling reasons put to us for that were the need to
ensure transparency over the use of public money and to avoid a race to the bottom
among devolved and regional authorities, with witnesses pointing to the example of
Amazon in the US, which “held an auction” among cities to find “who could give the
greatest incentive” to the firm.

68. We reiterate our previous conclusion that exiting the EU presents the UK
Government with an opportunity to reshape the domestic state aid
framework around its economic and industrial policies, as done by the EU
in designing its own regime. We are concerned that the Government has
not acted swiftly enough to seize the opportunities in these areas.

69. In respect of the design of that domestic state aid policy, our witnesses seemed to
agree that more flexibility and a less complex system would be beneficial to aid
grantors and aid recipients alike.”

The Committee asks (§§47 and 49) the Government a set of questions about its plans to replace the State aid rules with a regime based on WTO concepts.  Will there be room for complaints and private action by individual firms under the new regime?  (As I pointed out in an earlier blog, the substantive difference between the concept of “subsidy” in WTO rules and the concept of State aid is not that great; the real difference between the regimes lies in enforcement and in the general requirement in WTO law for a subsidy to injure industry in another State before it is actionable – a requirement which is presumably not going to be part of a regime whose purpose is designed to protect the UK’s internal market.)  And when is the Government going to put forward legislation?

Finally, on the creation of the new regime, the Committee criticises the failure of the Government to consult in any meaningful way with the devolved Governments: –

85. We were deeply concerned by the strong representations made to us by the
Scottish and Welsh Governments about the UK Government’s lack of engagement
on the UK’s negotiating position or the development of a new subsidy control policy.
Both witnesses highlighted that, despite pledges to the contrary by the previous
Government, there has been no meaningful engagement through the Joint Ministerial Committee on European Negotiations.

86. We strongly reiterate the recommendation in our 2018 report that the
Government should involve and secure the support of the devolved
administrations in devising the future UK state aid or subsidy control
framework. It is disappointing that, almost two years later, the
Government has not been able to build a consensus with the devolved
nations about how to approach this issue.

87. We would welcome an update on how the Government proposes to
engage with the devolved administrations and, specifically, how you are
working to resolve the issue of whether state aid is a reserved matter.

88. What immediate steps does the Government plan to take to develop an
appropriate mechanism for designing a UK state aid policy collaboratively
with the appropriate representatives from the devolved nations and the
regions?

Nor is the Committee happy with the Government’s failure to explain what role the CMA will play in the new system – see §91: –

“We note with some frustration that it remains unclear what the Government’s intentions are with regards to the CMA’s role, or if the Government has considered the pros and cons of different roles the CMA might be given. For example, should the CMA have an advisory role, or should it be directly responsible for approving state aid or subsidies? We are concerned that lack of consideration of different options and the Government’s reticence to develop and communicate its own subsidy control policy have put the CMA in a challenging position.”

The Northern Ireland Protocol

The Committee expresses considerable concern about the wide effect of Article 10 of the Ireland/Northern Ireland protocol, citing my oral evidence (Q17), in which I said: –

“The key provision of the protocol is Article 10, which provides
that any UK measure that has an effect on trade in goods between
Northern Ireland and the EU—and therefore Ireland in particular,
obviously—is subject to the full panoply of the EU state aid regime from
the end of transition onwards. I have no evidential basis for this, but I
have a hunch that, when the UK Government signed up to that, they did
not quite understand what they were signing up to. When a number of us
in the state aid community saw that provision, there was a certain
amount of jaw-dropping. I am not entirely certain that it was understood
by the Government at the time. There was a certain amount of jaw-dropping, first, because it applies to any UK measure. It is not confined to things done by the Northern Ireland Administration or to Northern Irish measures; it potentially affects anything that the UK Government does. A UK measure is anything that any
UK public authority does. That is point one. Secondly, the effect on trade criterion, a crucial jurisdictional hinge, in state aid is notoriously low. You do not need evidence to prove an effect on trade. If you look at a lot of Commission and European court decisions, analysis of the effect on trade is at an astonishingly superficial
level. It does not involve panoplies of economic evidence; it is done on
the basis of a couple of lines of generic reasoning and is notoriously low.
It does not take much to prove an effect on trade.”  

The Committee puts what I respectfully suggest are an excellent couple of points to the Government (§§56 and 57): namely: “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, and that the regions and devolved nations we heard from were not clear on how the Protocol might affect them. How is the UK Government working now to ensure that the UK-wide implications of the Protocol in a state aid context are fully understood?“; and “We agree that it should be a key UK priority to renegotiate provisions on state aid in the Protocol as part of the future relationship agreement with the EU, or negotiate alternative arrangements for Northern Ireland-Republic of Ireland trade, as envisaged in the previous Withdrawal Agreement, which would replace the Protocol entirely.”

The UK’s continuing interest in EU State aid law

Finally, the Committee makes a point that is often forgotten, namely that the EU’s controls on subsidies will remain a matter of key UK interest given our proximity and the large volume of trade with the EU.  The Committee therefore asks the Government how it envisages institutionalising consultation on developments in EU State aid law – important given that (see §§ 48 and 62).

Conclusion

The Committee’s letter sets out a large number of issues about the Government’s plans for State aid after transition, which are still vague only 8 months before they are supposed to come into force (and with progress on them unlikely for a while given the Government’s obvious concentration on the Covid-19 crisis).  It is increasingly hard to see how they can be resolved sensibly in sufficient time to get a regime up and running for 31 December 2020.  Further, since some clarity about the UK’s intentions will be essential in order to reach any form of agreement on anti-subsidy commitments with the EU (at the very least, the EU will want a clear understanding of what UK regime will be in place), let alone to persuade the EU to re-negotiate the State aid provisions of the Northern Ireland Protocol, it is even harder to see how those negotiations will be concluded in tiem for a treaty to be ratified and in place by that time.  The arguments for agreeing an extension to the transition period therefore appear to me to be overwhelming.

George Peretz QC

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State aid rules and Covid 19: a brief guide for journalists and non-specialists

Why do the EU State aid rules apply here?

 The formal definition of a State aid is that it is an advantage granted by a public authority, that selectively benefits certain undertakings, and affects competition and trade between Member States.

Many of the things governments will need to do in response to Covid 19 will be State aid.  Tax holidays, guarantees for loans, and direct grants are all advantages, whether benefiting companies or the self-employed.  And the scale of the measures will affect competition and trade between Member States.

But not all of them will be State aid.  A tax holiday or deferment for everyone, a wage subsidy for all workers, or a reduction in VAT rates or business rates for everyone, will not be “selective”, as they benefit all businesses alike.

That said, a package designed to help small businesses, or particular sectors (transport or hospitality), or to rescue particular businesses, will be State aid.

Why do the EU State aid rules still affect the UK?  I thought we had Brexit on 31 January?

The UK has agreed a transition period during which it remains treated for almost all purposes as part of the EU.  During that period EU still applies in the UK as it did while the UK was a Member State.  The present Parliament voted for that in the Withdrawal Agreement Act 2020, which makes it clear that EU law remains binding in the UK during the transition period.  The transition period is due to end on 31 December 2020, and the Government is currently still committed to that, though many people believe that the present crisis will require an extension as Government and business are too focused on the current crisis to be able at the same time to prepare for the changes that will be needed when transition ends and (we hope) a new agreement between the EU and UK comes into force.

What happens if the Government decides on a measure that amounts to State aid?

 The basic rule is that unless a State aid fits within various “block exemptions” laid down in EU legislation, it has to be notified to and cleared by the Commission before it is put into effect.  Normally, most aid that is granted fits within the block exemptions.  But measures on this scale won’t.

The Commission has power to clear aid that is necessary to “remedy a serious disturbance in the economy of a Member State”.  The Commission has made it clear in guidelines that it agrees that Covid 19 has caused a “serious disturbance”.

Those guidelines set out a list of criteria that, if met, will lead to an automatic “tick box” clearance decision.  Those criteria are: aid of less than €800,000 per business; that there be a formal scheme with a budget; and that grants stop being given by 31 December 2020.  (There are slightly different rules for aid to the agricultural sector, and more complicated criteria for loan guarantees and loans at subsidised rates.). Applying this guidance, the Commission has already (within 4 days of notification) approved the sweeping French government scheme for loan guarantees.

But it is very important to note that aid going well beyond those criteria can and will be approved swiftly.  Paragraph 14 of the Commission’s guidelines records, for example, that “Member States can notify to the Commission aid schemes to meet acute liquidity needs and support undertakings facing financial difficulties, also due to or aggravated by the COVID-19 outbreak”, and paragraph 15 points out that “Member States can also compensate undertakings in sectors that have been particularly hit by the outbreak (e.g. transport, tourism, culture, hospitality and retail) and/or organisers of cancelled events for damages suffered due to and directly caused by the outbreak. Member States can notify such damage compensation measures and the Commission will assess them”.

Won’t all this just lead to delay?

Not really.  Any measure involving spending huge sums of public money has to be worked out in at least some detail: criteria have to be fixed and so on.  That takes some days to do, with the best will in the world.  And in many cases Parliament will have to approve the measure in legislation (either by a statutory instrument or in some cases passing primary legislation).  That takes a bit of time.  And in the meantime the Government can approach the Commission to let it know what it is proposing.  It is clear that the Commission is very conscious of the huge problems that are being caused and the need for urgent measures and will clear these proposals very quickly – within days.  Indeed, during the banking crisis, it approved one rescue package overnight.

Isn’t this all just pointless Euro-regulation, stopping democratically-elected governments doing what they think best for their people?

Not really.  The need for these measures national governments is obvious.  But in a single market, huge grants given by one Member State to its businesses can easily overspill and hurt the economies of other Member States.  And if there were no controls at all, Member States might use the Covid 19 emergency as cover to grant subsidies that are not really about dealing with this crisis at all.  The Commission can check that that is not happening.

Can’t the UK just ignore these rules?

If the UK granted State aid that should have been cleared first by the Commission and wasn’t, then the aid would be unlawful.  In principle, either the Commission or a UK court (at the request, for example, of a business that did not qualify for a grant or was otherwise unhappy with the scheme) would have to require the scheme to stop and any aid granted under it to be repaid.

In any event, the UK government has a good record of compliance with the State aid rules and generally takes seriously its obligations to comply with the law (including international law).  That record is an asset when trying to negotiate trade agreements with other countries, as the UK wants to do after Brexit.  Anyway, I am glad that the government respects the law, even in a crisis, as I may need the government to respect the law when it deals with me, even in a crisis.  Aren’t you?

 

GEORGE PERETZ QC

 

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UKSALA event on UK subsidy control after Brexit now available to watch online

Particularly at the moment when we are all more or less confined to our homes, we are grateful again to Shearman & Sterling for making available a full video recording of the UKSALA panel discussion of UK anti subsidy law after transition for those who missed it (or those who would like to watch it again).

The link is here.

 

George Peretz QC

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Covid-19 state aid temporary framework

Hot off the press, here is yesterday’s temporary state aid framework adopted by the Commission:

https://ec.europa.eu/competition/state_aid/what_is_new/sa_covid19_temporary-framework.pdf

 

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UK subsidy control after Brexit: reading list

We are looking forward to seeing many UKSALA members at the seminar on Wednesday hosted by Shearman and Sterling, on the subject of UK subsidy control after Brexit (details here). The event is now full but there is a waiting list, so if you would like to come but have not already registered please do ask to be added to that list and you will be notified if you have a place.

In the meantime there is a page of reference materials here, including the withdrawal agreement documents, the materials setting out the EU and UK negotiating positions, and various commentaries and reports.

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Supreme Court permits enforcement of Micula brothers’ ICSID award

Many thanks to Marie Demetriou QC and Hugo Leith for this summary of yesterday’s Micula judgment

Yesterday the Supreme Court gave judgment in Micula v Romania, lifting a stay on the enforcement of an ICSID (International Convention for the Settlement of Investment Disputes) arbitral award. In doing so it rejected the argument that EU law requires enforcement to be stayed in circumstances where there are live proceedings in the European Court to determine whether payment of the award would constitute unlawful State aid and disagreed with both Blair J at first instance and the Court of Appeal.

Continue reading

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House of Lords EU Internal Market subcommittee launches short inquiry on LPF commitments with focus on State aid

The House of Lords EU Internal Market subcommittee has launched an inquiry into level playing commitments in the EU/UK post-transition agreements.  The announcement made the following observations: –

Background

The Commission’s draft mandate for negotiations with the UK shows that the EU is likely to seek strong ‘level playing field’ commitments as part of a future UK-EU agreement. From the EU’s perspective, these would act as safeguards against the UK deregulating in areas such as state aid and labour standards, and so competing on unfair terms with the EU. The Government has indicated that, while the UK will maintain high regulatory standards, it will not accept any level playing field commitments beyond those generally included in trade agreements.

A key focus of the level playing field debate is the future of state aid control in the UK. There is, as yet, no legislation in place establishing a domestic regime after the end of the transition period. At the same time, if the Protocol on Ireland / Northern Ireland were to enter into force, EU state aid rules would continue to apply to the UK in respect of aid measures affecting trade between Northern Ireland and the EU. 

Scope of the inquiry

As part of this short inquiry, the Sub-Committee intends to explore three related themes:

  • What level playing field commitments are and how they operate in EU free trade agreements, especially as regards social and labour rights and state aid; 
  • The EU’s approach to state aid rules and possible reforms at EU level; and 
  • What opportunities are open to the UK in formulating its own state aid policy, in particular for supporting wider objectives such as “levelling up” the country and meeting climate targets.

The Sub-Committee expects to take oral evidence from late February through most of March, with a view to publishing a long letter to the Government in April.

 

For those interested in following its inquiry, the website is here.

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Paper by James Webber on the UK anti-subsidy regime after Brexit

James Webber has recently published an interesting contribution to the debate on the nature of the UK anti-subsidy regime after Brexit, which can be read here.  It has been covered in the Daily Express (not previously a journal noted for its detailed coverage of State aid law).

In essence, James argues that: –

  • it is essential that any level playing field commitment by the UK in this area avoid reference to State aid rules, as that will inexorably mean that the final arbiter of the meaning of those rules in the UK will be the ECJ;
  • that in any event it would be preferable to base a UK regime on the WTO anti-subsidy regime because the State aid rules: –
    •  have too wide a reach (particularly in relation to infrastructure and tax), and therefore require a complex exemption regime that is over-prescriptive; and
    • are unclear; and
  • that the procedures for clearance are slow and inconsistent.

One point that James rightly highlights, in my view, is that the effect of Articles 10 and 12 of the new Northern Ireland protocol (which have continuing direct effect in the UK post-transition via section 7A of the EU Withdrawal Act 2018 as amended and are thus directly enforceable in UK courts and override any contrary UK legislation) is to preserve the application of EU State aid rules in the UK to a much greater extent than has been appreciated.  That is because the Articles apply to any UK measure (whoever the UK public authority is and whoever the beneficiary is) that has an effect on trade in goods between Northern Ireland and the EU27 – in particular Ireland.  Since “effect on trade” is a notoriously low and imprecise threshold (it includes potential effect) the provisions will extend to a range of UK measures, almost certainly including general tax measures whose beneficiaries include goods suppliers in Northern Ireland and grants to GB firms that have a presence on goods markets in Northern Ireland.  Moreover, since the ultimate arbiters of the test will be the UK courts, the Commission and ultimately the ECJ, the UK Government has no control over the interpretation of the test.

The fact that the UK Government has already accepted these provisions rather complicates any attempt by the UK now to resist some form of State aid commitment in the final agreement with the EU: there would be obvious difficulties in trying to operate a domestic regime that worked rather differently together with an EU regime that simultaneously applied to many important UK measures (as Lady Bracknell might have said, to have one anti-subsidy regime may be necessary; to have two looks like carelessness).  James therefore suggests a determined attempt by the UK to negotiate these provisions away or to try to limit their scope.  However, the EU can always resist any attempt to revisit these provisions, and unilateral UK attempts to limit their scope such as those suggested in the paper are likely to be contrary to the legally-binding Withdrawal Agreement, as the paper implicitly accepts: and the UK Government may consider that it would not be an ideal start to its negotiations of other free trade agreements for it to appear to be trying to evade obligations that it has voluntarily, if perhaps unreflectively, accepted under existing agreements.

In any event, I am unconvinced by the case for wholesale replacement of the State aid rules by a WTO-based regime.

First, it does not seem to me to be inevitably the case that accepting those rules as the basis for the new regime means accepting Commission and ECJ jurisdiction.  The EEA State aid regime, after all. operates with separate authorities and courts, albeit with a requirement of homogeneity.  One could certainly imagine an agreement by the UK to base its regime on the State aid rules but with some freedom (the extent of which could be negotiated or be subject to the possibility of retaliation by the EU if it disapproved) to develop and modify those rules to suit its own conditions.  The UK would then not be applying the EU State aid rules but its own State aid rules sharing a common history with the EU State aid rules but separate from them (just as Australia inherited English common law but has interpreted and developed that common law in its own way).

Second, the paper simply assumes without arguing that the WTO anti-subsidy rules are clearer and less extensive (in areas such as tax policy) than EU State aid rules.  But that assumption is not necessarily correct.  The WTO rules do not, it is true, apply to services (a point discussed in the paper); but the paper contemplates their being extended in the domestic regime to cover services (for sensible reasons, in my view).  But many of the basic WTO concepts are very similar to those in EU State aid law.  And there is no doubt that WTO anti-subsidy rules do in principle apply to tax measures (for the obvious reason that a tax waiver or rebate is exactly the same in economic effect to a grant).  The real reason why WTO anti-subsidy rules are not routinely worried about is that enforcement is weak, being a matter of international action at State to State level; while EU State aid rules are enforceable in national courts and by the Commission (which is given considerable powers of enforcement) and result in the unwinding of aid and the payment of damages.  Once you make WTO anti-subsidy rules actionable in national courts – as seems to be the intention – then it is not at all clear that their effect would be substantially less than those of EU rules; and precisely what their effect is would have to be litigated (given the relative paucity of WTO case-law), making it distinctly questionable whether those rules offer any advantage in terms of clarity.

That said, it is certainly possible to make the case that EU State aid rules have been extended too far in areas like infrastructure investment and tax rulings  But (subject to the agreement reached with the EU) it would always be possible for the UK to legislate so as to tidy up or limit the reach of State aid law in those areas, while leaving the basic structure in place.  Further, again subject to whatever agreement is reached with the EU, it would also be possible to legislate to improve remedies and procedures.

Finally, it is I think important not to get carried away by the idea that the EU’s concerns here amount to economic imperialism.  In any negotiation, it is important to understand and respond to the legitimate concerns of your opposite number.  Here, the EU’s concern emerges when you ask yourself why the UK is not – given its traditionally laissez-faire rather than Colbertist approach to industrial policy – concerned about (for example) French subsidies.  The answer is that it does not need to be, since EU State aid rules largely do that job.  So the EU’s concern is, at bottom, a concern that in a zero-tariff, zero-quota, wide access FTA the UK could free-ride: it could cheerfully subsidise its industries exporting to the EU while remaining free from concerns that EU Member States could do the same to it.  That outcome would be almost impossible for any EU politician to sell to her domestic audience: and unless theUK acknowledges that reality and is prepared to offer commitments that genuinely address that concern and which are not simply versions of “trust us” – assurances which are in any event cast into doubt by some of the Prime Minister’s more Gaullist utterances about industrial policy – it is hard to see that negotiations for a free trade agreement with the EU are likely to be successful.  Moreover, failure to reach a sensible accommodation with the EU in this area is likely to lead to extensive use of trade remedies – countervailing duties permitted under WTO rules – by the EU against the UK: and it is in neither party’s interest, nor consistent with the “great neighbour” vision of the UK proclaimed by Steve Baker MP in the Express article, for the EU and UK to spend the next few years imposing trade remedies on each other.

George Peretz QC

PS those interested by these issues may want to sign up for our event on 4 March (where both James and I are panellists): though there is now a waiting list.

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