EU-UK trade negotiations’ health check: Is state aid control really worth the trouble?*
- On 7th September 2020, the eighth round of trade negotiations between the EU and the UK will take place. With the seventh round completed few days ago, at the time of writing, an agreement seems very distant. (https://www.ft.com/content/f6c2ef12-56eb-4adc-afec-6363ee5fd379). The lack of “any tangible progress” in the negotiations is even leading to scrapping the Brexit negotiations off the agenda from diplomatic meetings in Brussels (https://www.theguardian.com/politics/2020/aug/26/germany-scraps-plans-for-brexit-talks-at-eu-ambassadors-summit).
- State aid rules somehow have become one of the most contentious issues in the EU-UK negotiations, a true deal-breaker. The EU insists on the adoption of the whole package based on the system of control applicable in the EU. The UK instead proposes a ‘light touch’ approach, which means that how we spend our money should not be anyone’s business, especially the EU (https://www.telegraph.co.uk/politics/2020/07/30/post-brexit-state-aid-regime-none-brussels-business/). Statements such as this are completely at odds with the fact that national economies, and especially those of the UK and the EU, are highly integrated and each other’s policies may distort, even significantly, each other’s markets. This is indeed the reason why countries, and the UK and the EU are no exception, negotiate trade deals.
- So is state aid control really worth the trouble? Perhaps it is just a self-preservation instinct as both of us work in this area but, in our view, it is in both parties’ interest to find a compromise. (https://uk.reuters.com/article/uk-britain-eu-stateaid/eu-eyes-softening-key-state-aid-demand-in-brexit-talks-sources-idUKKBN24Z1MF). Whilst it is understandable that the EU is insisting on a robust system of control to preserve a regulatory level playing field, and to prevent a much looser UK system resulting in an anti-competitive impact on EU companies, the UK has no net gain in undermining a system which it shaped so heavily, and which guarantees effective scrutiny of some of the other big spenders, such as Germany, France and Italy (https://www.gov.uk/government/speeches/pm-speech-in-greenwich-3-february-2020).
- It is also a mistake to simply think that a no deal fallback option to World Trade Organization (‘WTO’) terms would be beneficial to the UK. Bizarre narratives stating that EU State aid control would be unclear, expansive and fundamentally pliable, whereas WTO subsidy laws would be clear, have no problems of interpretation and be fit-for-the-job, in fact almost perfect, do not correspond to the real world. The WTO subsidy rules do not bite, their scope is limited and the system does not prevent damage since it is only reactive (which greatly differs from the EU State aid system, its preventive control and its retroactive recovery). The only remedy available to both parties when things go wrong is to trigger defensive and retaliatory measures, which are measures that, crucially, do not guarantee access to the other side’s market, which is one of the UK’s objectives.
- The WTO Appellate Body, supposedly the ‘world trade court’, has now even been suspended. In 2017 the US, EU and Japan started talks which aimed, among other things, at strengthening the rules on industrial subsidieshttps://www.reuters.com/article/us-trade-wto-subsidies/us-eu-japan-agree-new-subsidy-rules-with-china-trade-in-focus-idUSKBN1ZD1RM). Similarly, in June 2020, the EU Commission adopted a White Paper on a level playing field regarding foreign subsidies (https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1070). Certainly, the motivation of these initiatives is the need to address the specificities of Chinese capitalism and its trade-distorting subsidies. Still, their broad premise is that the current rules on subsidies in the WTO do not work properly in capturing and regulating subsidies.
- An agreement on state aid control would instead have the distinct benefit of facilitating an important trade deal with the EU and guaranteeing UK companies a significant access to what still is the biggest market for them. It would, however, be unrealistic to imagine an entire transplant of each and every EU rule to a third country such as the UK. The question would then be how to find a point of equilibrium. It should be expected that certain rules of EU state aid law, which may make good sense in the context of a single market, would need to be reassessed in the context of a bilateral trade relationship. The new generation of Free Trade Agreements (‘FTAs’) concluded by the EU –with Singapore or Vietnam for example – despite borrowing heavily from the EU system of State aid control, provide that subsidies should not be granted when they negatively affect, or are likely to affect, competition and trade between the two contracting parties. These thresholds are certainly more appropriate to a trade agreement than the looser legal tests of effect on intra-EU trade used to capture state aid in the EU internal market.
- The real question that should occupy both parties should not be about the substance of the disciplines (what subsidies are permitted and what are not). In this respect, we note an increasing convergence between the FTAs recently signed by the EU (Singapore or Vietnam) and the main principles of EU State aid disciplines – almost towards the creation of a ‘common law’ of state aid. The EU is following this approach also in the pending negotiations with Australia and New Zealand. One noticeable exception is the agreement with Canada (CETA) which essentially replicates WTO rules. If the disciplines should not be the real bone of contention, then the real question is institutional and refers to the design of the body that should oversee the enforcement of subsidy rules in the UK, the cooperation mechanisms with the EU Commission, and, last but certainly not least, how an effective system of dispute settlement can be guaranteed.
- Even in a no deal scenario, a domestic system of control on public spending should still be introduced. Current government thinking, that ‘you’d have a regime based on some ‘administrative principles’ but it would all be very vague and non-statutory, with a watchdog-type body that would only provide ‘persuasive force’, (https://www.ft.com/content/e29430c7-9dae-440e-8093-74f705ce62c3) unfortunately, does not make much sense. A system, intentionally vague, non-enforceable and administered by a seemingly weak institution, would simply not be good enough as it would most likely bring a high degree of uncertainty, which is not good for business.
- There is, finally, a very compelling reason why state aid rule rules are necessary in a modern democracy: fairness. The existence of rules on the transparency and accountability of spending decisions contribute to controlling lobbying industries and interests, while ensuring the adoption of more virtuous economic policies to support the growth of a green economy, facilitate research and development and innovation, and at the same time guaranteeing geographical solidarity between the different areas of the UK.
No government can be against this, regardless of whether the rules to ensure it are EU-derived or not.
* This piece is an expanded and updated version of an editorial published on The Independent on 15th August 2020 (https://www.independent.co.uk/voices/state-aid-rules-control-brexit-uk-eu-negotiations-a9668366.html).