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