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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