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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