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 Covid-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).

Articles 12.5 and 12.6 deal 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 for domestic implementation, 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, as for implications for the EU/UK trade negotiations, those reading this blog will know that subsidies are a key area in those negotiations.  The prohibition 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.


24 October 2020

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