Post Brexit: State Aid and a ‘level playing field’

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A fundamental principle of free trade is that Governments must not subsidise companies or business sectors that would give any advantage when trading in a partner state.

The UK – as a member of the EU – was party to:

  • the EU bloc-wide regime on restricting trade-distorting ‘state aid’; and
  • the EU umbrella agreement with the WTO on Subsidies and Countervailing Measures.

The UK has never had its own domestic legislation addressing state aid – and operates under the EU-wide state aid rules.

EU and WTO state aid rules apply to the UK till the end of the transition period on 31 December 2020.  Thereafter, the UK government has announced that its commitments under the WTO will be the foundation for a future UK independent subsidy ‘regime’.

Although the Government intends to set independent UK subsidy regime, both EU state aid rules and the WTO Agreement on subsidies and countervailing measures will remain relevant in the UK.  The extent of this effect will depend upon the result of the UK-EU future relationship negotiations.

This briefing looks at: what EU state aid rules mean; some recent changes brought about in response to the coronavirus outbreak; state aid rules during the transition period – and the settlement of ‘ongoing’ disputes; and the main principles of the WTO Agreement on Subsidies and Countervailing measures.

EU and ‘State Aid’

EU Member States sometimes use public resources to intervene in their national economies by assisting companies or industries.  This can range from a government tax relief scheme for investors, to a local authority giving a subsidy to a property developer.  Such ‘state aid’ is normally prohibited if it threatens to distort trade and competition between firms, through for example, discouraging investment and increasing costs to consumers.  EU state aid rules aim to create a level playing field so that, for example, French firms can compete fairly with German ones.

The EU and its Member States also use state aid as a policy tool.  Exemptions to the EU state aid rules allow for certain beneficial interventions. For example, state aid might be necessary and justified to address a market failure, as when small and medium enterprises (SMEs) have difficulties finding investment capital.   It may also be necessary to achieve policy goals such as regional economic development or environmental protection.  Governments can, for instance, use state aid to stimulate businesses to invest in less developed areas or the development of advanced environmentally friendly technologies.

The European Commission is empowered to assess cases of state aid.  It can ‘approve’ them, or it can enforce stringent ‘claw-back’ mechanisms when state aid is deemed unlawful.

An EU Member State cannot pay out state aid unless a scheme or an aid measure is approved by the European Commission.  Policymakers must ensure that support is legal and compliant with EU guidelines.  However, there are many exemptions, including the ‘de minimis’ rule (assistance worth less than €200,000 over three years) and the General Block Exemption Regulation.  These exemptions generally allow smaller schemes to be set up without a prior notification in Brussels.  In addition, EU state aid rules do not restrict support are open to all businesses – such as a general reduction in rates of corporation tax, or changes in employment law.

The European Commission is presently re-evaluating state aid rules.  This is expected to result in amended rules in several areas, including energy and environmental aid.  There will also be more flexibility towards transnational projects supporting strategically important technologies and value chains.

The EU has temporarily relaxed the usual state aid restrictions to give Member States more flexibility to support their economies in response to the coronavirus outbreak.

During its time as an EU Member State, successive UK governments have supported rigorous state aid controls – and have avoided subsidising particular industries or companies.

The UK public sector has spent less in business support than most other EU countries.  In 2018, the UK spent 0.38% of GDP on state aid (excluding railways, and agriculture and fisheries), while France spent 0.79% and Germany 1.45%.

During the transition period, the UK continues to apply EU state aid rules and regulations and the EC continues to assess and approve UK state aid measures.  The Commission will be able to finish ongoing procedures and take follow-up action for up to four years beyond the end of the transition.  After that date, the Commission will also have power to initiate new examinations of UK aid, which authorities may have paid to businesses prior to the end of transition.

The Protocol on Ireland and Northern Ireland foresees that EU state aid law will apply in Northern Ireland with regard to trade in goods and electricity between Northern Ireland and the EU.  The European Commission remains the enforcement authority.

World Trade Organisation – Agreement on Subsidies and Countervailing Measures

In addition to EU state aid rules, the UK is party to the WTO Agreement on Subsidies and Countervailing Measures and the UK government has announced that its commitments under the WTO will play an important role in the future UK subsidy regime.

Under the Agreement, some subsidies are prohibited outright while the remainder are ‘actionable’ – meaning that the subsidy is allowed but other countries can take certain actions if the subsidy ‘harms’ them.  Other countries can protect their industries by taxing imports of subsidised goods – known as imposing a ‘countervailing duty’.

The definition of a ‘subsidy’ under the WTO regime is broadly similar to ‘state aid’ in EU law.  The EU rules are, however, a lot more stringent than the WTO rules on subsidies.  The key differences are:

  • The default position under WTO rules is that subsidies are generally allowed, while EU rules consider subsidies to be generally unlawful;
  • WTO rules apply only to goods.  EU rules also apply to services;
  • EU rules are applied ‘prospectively’ – legality must be proven before the awarding any support.  WTO rules are ‘reactive’ and only triggered if a member country lodges a complaint;
  • WTO rules rely on state-to-state enforcement.  EU rules provide for remedies to businesses and individuals;
  • Under EU rules, each recipient business has to repay illegal state aid.  There is no such mechanism to redress anti-competitive effects under the WTO rules.

In 2018, the UK committed to uphold and trade within WTO rules in its own right as an independent state.  If the UK and the EU do not reach a free trade agreement by 31 December, WTO rules will apply equally to all trade in goods – be it with an EU member or any of the other 160+ WTO member states across the rest of the World.

References

http://researchbriefings.files.parliament.uk/documents/SN06775/SN06775.pdf

The UK-EU future relationship negotiations – ‘Level playing field’ https://commonslibrary.parliament.uk/research-briefings/cbp-8852/

https://www.wto.org/english/thewto_e/countries_e/united_kingdom_e.htm#:~:text=The%20United%20Kingdom%20has%20been%20a%20WTO%20member,Communities%20for%20legal%20reasons%29%20in%20its%20own%20right.

Post Brexit: As time runs out to reach a ‘deal’, no shift in UK’s approach despite “significant areas of disagreement”

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The next – and ninth – negotiating round on the future relationship resumes in Brussels between 28 September and 2 October.  The results feed directly into the 27 European Heads of State – meeting as the ‘European Council’ on 15-16 October – when they are scheduled to decide whether a ‘deal’ has been reached in time for implementation at the end of the ‘transition period’ midnight (CET) 31 December.  ‘No-deal’ remains the default if there is no agreement on all negotiating points or the EU Council, each of the 27 EU states, the European Parliament – and not forgetting Parliament in the UK.

After eight negotiating rounds between March and September 2020, both sides acknowledge that whilst progress has been made, “significant areas of disagreement remain”.  The three key areas are: ‘Level playing field and state aid’; ‘fisheries’; and ‘governance’.  These are further detailed, below.

At the end of ‘Round 8’, the EU’s chief negotiator Michel Barnier accused the UK of “refusing to include indispensable guarantees of fair competition in our future agreement, while requesting access to our market”.  He said the UK had “not engaged in a reciprocal way on fundamental EU principles and interests”.

Lord Frost, the UK’s chief negotiator, said the UK had “consistently made proposals which provide for open and fair competition, on the basis of high standards, in a way which is appropriate to a modern free trade agreement between sovereign and autonomous equals”.

The EU has stated that an agreement needs to be reached by the end of October 2020 to allow time for ratification before the end of the transition period on 31 December 2020.  Boris Johnson has said that if agreement is not reached by the time of the European Council meeting on 15 to 16 October 2020, both sides should accept there will be no agreement and “move on”.

If there is no agreement, the UK Government has stated that their trading relationship with the EU would rest on the withdrawal agreement and “would look similar to Australia’s.”  Australia has no free trade agreement with the EU – although negotiations for one have been ongoing since July 2018.  An ‘Australia-style’ arrangement would mean the UK would trade with the EU on WTO terms.

Johnson says that a trading arrangement like Australia’s would be a “good outcome” for the UK – although the Government would “continue to work hard throughout September to reach a deal with the EU.”

This was within days of the Government laying the ‘UK Internal Market Bill’ before Parliament – which has instantly and dramatically affected the atmosphere of negotiations.  The bill contains measures that would enable ministers to disapply or reinterpret aspects of the Northern Ireland Protocol that was agreed between the UK and the EU as part of the Withdrawal Agreement – enshrined into an EU-UK Treaty in October 2019.  Ministers may involve these measures “notwithstanding any relevant or international or domestic law with which they may be incompatible or inconsistent”.  The Northern Ireland Secretary has acknowledged that “this does break international law in a very specific and limited way”.

Some aspects the protocol are still to be agreed by the Joint Committee established under the Withdrawal Agreement.  Boris Johnson has argued that the controversial provisions in the bill are needed because negotiations in the Joint Committee “risk coming unstuck”.  He said: “We are now hearing that unless we agree to the EU’s terms, the EU will use an extreme interpretation of the Northern Ireland Protocol to impose a full-scale trade border down the Irish Sea”.  Mr Johnson told the Commons Liaison Committee he did not believe the EU was negotiating in good faith.

Ursula von der Leyen, President of the European Commission, spoke about trust between the UK and the EU in her State of the Union address this week.  She said it was: “a matter of law, trust and good faith” that the Withdrawal Agreement could not be “unilaterally changed, disregarded, disapplied”.

Maroš Šefčovič, the EU co-chair of the Joint Committee, said the Government had “seriously damaged” trust between the UK and the EU by putting forward the bill – calling on the UK Government to withdraw the measures from the bill by the end of September at the latest.  He said that the EU would “not be shy in using” mechanisms and legal remedies in the withdrawal agreement to address any violations of its provisions.

Our view is that unless the bill it is withdrawn from Parliament, the EU will take the UK to court.  We see no sign that the Government is considering such a withdrawal.

Background

The UK and the EU set the framework for the future relationship negotiations in a political declaration that set the parameters of: “an ambitious, broad, deep and flexible partnership across trade and economic cooperation with a comprehensive and balanced free trade agreement at its core, law enforcement and criminal justice, foreign policy, security and defence and wider areas of cooperation”.

The ”significant areas of disagreement” in more detail

Level playing field and state aid: The EU is seeking level playing field commitments to ensure common standards in areas such as state aid, workers’ rights and the environment. It says these are necessary to prevent trade distortions and unfair competition, particularly given the proximity and interconnectedness of the UK and EU economies. The UK maintains it will not accept provisions that bind it to EU laws and standards. It says the proposals it has put forward are closely modelled on arrangements the EU has already agreed with similar countries such as Canada.

Fisheries: The EU wants to maintain its access to UK waters on the basis of historic fishing patterns. The UK emphasises its sovereign control over its own waters, and wants fishing quotas to be negotiated on an annual basis.

Governance: The UK has proposed separate governance arrangements for the various draft agreements it tabled. The EU is seeking an overarching governance structure for the future relationship with “horizontal dispute mechanisms” that would allow cooperation to be suspended in one sector in response to an unresolved dispute in another area.

What the UK and the EU each wanted from a ‘deal’

The UK negotiating brief was to achieve a Canada-style free trade agreement – with other areas of cooperation covered in separate treaties:

“As [the political declaration] makes clear, a Comprehensive Free Trade Agreement (CFTA) should be at its core.  This Agreement should be on the lines of the FTAs already agreed by the EU in recent years with Canada and with other friendly countries […]  The CFTA should be supplemented by a range of other international agreements covering, principally, fisheries, law enforcement and judicial cooperation in criminal matters, transport, and energy […]  All these agreements should have their own appropriate and precedented governance arrangements, with no role for the Court of Justice.”

In written statements, Boris Johnson set out the UK’s red lines: “Any agreement must respect the sovereignty of both parties and the autonomy of our legal orders.  It cannot therefore include any regulatory alignment, any jurisdiction for the CJEU [Court of Justice of the European Union] over the UK’s laws, or any supranational control in any area, including the UK’s borders and immigration policy.”

He also said some areas of future cooperation would not need to be managed through an international treaty. The UK would develop its own separate and independent policies in areas such as immigration, competition and subsidy, the environment, social policy, procurement and data protection.

The EU explained it intended to negotiate the future partnership as a package covering general arrangements (values, principles and governance), economic arrangements (trade, level playing field guarantees and fisheries) and security arrangements (law enforcement and judicial cooperation in criminal matters, foreign policy, security and defence).

References

https://lordslibrary.parliament.uk/the-uks-approach-to-negotiating-the-future-relationship-with-the-eu/?utm_source=UK+Parliament&utm_campaign=ecde383ce9-eudigest_210920&utm_medium=email&utm_term=0_77d770157b-ecde383ce9-102411877&mc_cid=ecde383ce9&mc_eid=1037596b66

https://commonslibrary.parliament.uk/research-briefings/cbp-8920/

Post Brexit: Road, Rail and Maritime Transport

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The House of Lords has the task of forensically examining all aspects of the Government’s plans and preparations for the end of the Brexit transition period – 23:00 GMT on 31 December 2020 – now just 15 weeks away. They will re-visit the subject on Monday 21 September 2020.

Their work to date has assumed – as set out in the formal response in July to their previous report from Chris Grayling, then Secretary of State for Transport – that there will be a “smooth and orderly withdrawal” from the EU, including agreement on road, rail and maritime matters.

Their scope was “surface transport issues – primarily in the context of a negotiated Brexit” – but they also examined ‘no-deal’ preparations on both sides of the Channel.

They reported that some of the contingency options to maintain connectivity in a no-deal scenario – or in a negotiated Brexit that did not include comprehensive transport arrangements – were already established and “could be relied upon over the long term” (for example those in relation to some international bus travel).  Other contingencies took the form of “temporary legislative measures designed to avoid a ‘cliff edge’”.  Examples of the latter included measures allowing temporary market access for hauliers.

The report highlighted routes by which both types of arrangements could be improved, whether in the context of a negotiated or no-deal end to Brexit transition.

Report in summary

The report included 43 detailed conclusions and recommendations spanning a variety of issues relating to surface transport.  These included issues not only affecting the road, rail and maritime sectors, but also those relating to the specific situation on the island of Ireland and certain “cross-modal” matters such as communication with businesses, passenger rights and infrastructure investment.

In respect of rail and maritime matters, the committee noted the then Government’s stated intention to pursue bilateral agreements on UK-EU rail links, namely the connection between Kent and northern France and the Belfast-Dublin Enterprise Line.  It also noted that maritime transport is largely underpinned by international law, meaning that after Brexit UK and EU maritime operators would, in most respects, be able to access each other’s ports as had been the case during the UK’s membership of the bloc.

However, on road transport the committee said that it was “difficult to overstate the importance of future arrangements to preserve UK-EU market access for hauliers” and called on the Government to work closely with the road haulage industry to make clear its priorities for future arrangements.  It also urged an agreement on reciprocal market access for bus and coach travel; the principle of seeking agreement on mutual recognition in vehicle standards; and continuity in the present arrangements for private motorists.

On the specific circumstances on the island of Ireland, the committee called on the Government to seek agreement on maintaining the existing rights of bus and coach operators and hauliers.  On other matters, the committee urged the Government to continue its “high level of engagement” with stakeholder groups.

Background

The renegotiated Withdrawal Agreement and associated Political Declaration of October 2019 included reference to modes of surface transport in line with its predecessor document.  It stated the following in respect of future road, rail and maritime arrangements:

Road: “The parties should ensure comparable market access for freight and passenger road transport operators”, subject to certain underpinnings and obligations, and “should consider complementary arrangements to address travel by private motorists”.

Rail: “The parties agree that bilateral arrangements should be established, as appropriate, for cross-border rail services, including to facilitate the continued smooth functioning and operation of rail services, such as the Belfast-Dublin Enterprise Line and services through the Channel Tunnel”.

Maritime: “The parties note that passenger and cargo connectivity in the maritime transport sector will be underpinned by the international legal framework” and “should also make appropriate arrangements on market access for international maritime transport services”. In addition, the future relationship “should facilitate cooperation on maritime safety and security […] consistent with the United Kingdom’s status as a third country”.

However, neither the UK nor the EU brief to their respective negotiating teams featured maritime or rail issues prominently.  Road transport, on the other hand, received more attention.

The UK position was essentially that UK and EU road haulage and passenger transport operators “should be entitled to provide services to, from and through each other’s territories with no quantitative restrictions”.

By contrast, the EU position was that while it envisaged open market access for bilateral road freight transport, UK road haulage operators “should not be granted the same level of rights and benefits” as those enjoyed by EU hauliers when travelling within the territory of a member state or from one member state to another.  It called for level playing field rules to apply to operators and drivers, and non-regression on current standards.

Status of UK-EU negotiations with 100 days until the end of transition arrangements

Transport has been the subject of talks during several rounds of the negotiations to date.  However, it has been reported that road haulage remains a “point of friction”.

On 2 September 2020 the EU’s chief negotiator, Michel Barnier, elaborated on the EU’s reservations about the UK’s requests in this area during a speech at the Institute of International and European Affairs in Dublin.  He noted that while the UK wanted a “clean break” from the EU, this did not appear to extend to areas such as transport in which British negotiators were “still seeking continuity”.  Arguing that UK demands on road haulage were too close to single market rights, Mr Barnier said:

“The UK Government is still looking to keep the benefits of the EU and of the single market, without the obligations.  The UK often says it would be in the EU’s interest to grant it a special status in these strategic areas of cooperation [transport, energy, goods conformity assessments and on aspects of police and judicial cooperation].  But, frankly speaking: is it really in the EU’s long-term economic interest?  For instance, …British proposals on road transport would allow British truckers to drive on EU roads without having to comply with the same working conditions as EU drivers.”

In a post-negotiation statement on the eighth round of talks issued on 10 September 2020, Barnier said that the UK; “had not engaged on … level playing field requirements” in connection with transport matters.

The UK’s chief negotiator, Lord David Frost, set out the Government’s position on the state of the negotiations generally. He is reported as having said the Government was “not going to accept provisions that lock [the UK] into the way the EU do things”.

There is a perfect storm brewing combining the effects of:

  • a no-deal end to Brexit transition;
  • a new set of requirements for goods movements reporting – along with a supporting software system that it appears will not be ready, let alone tested, by 31December;
  • potential interruptions due to response to terrorist threats – such as occurred on 16 September causing “operation stack” to be deployed; and
  • increasing reluctance of drivers to travel for extended periods abroad due to Covid-19 concerns.

Transport, logistics and supply chains will be severely stretched and tested in the Christmas and New Year period between Great Britain and Europe.  Delays and disruption to continuity are now all but inevitable – it is a question of degree with ‘deal or no-deal’ a key factor.  The situation between Great Britain and Northern Ireland, and between Northern Ireland and Ireland is even more fraught.

References

https://old.parliament.uk/documents/lords-committees/eu-internal-market-subcommittee/future-uk-eu-transport-arrangements/190720-ChrisGrayling-BaronessDonaghy-Gov-Response-to-Transport-Report.pdf

https://www.brexit-partners.com/blog/2020/8/19/uk-government-unveils-strict-new-cross-border-plans-from-1-january-2021-deal-or-no-deal

https://www.brexit-partners.com/blog/2020/5/11/parliamentary-scrutiny-highlights-continuing-brexit-uncertainty-for-business-and-citizens-in-britain-and-northern-ireland

Photo:  PA/BBC