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.




14 April 2020

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