As we observed in our previous note ‘Brexit and State aid – can the WTO fill the gap?’, it is highly unlikely that the UK will have complete freedom to grant subsidies to UK companies following Brexit. It also seems increasingly unlikely that the WTO rules will simply fill the gap left by EU State aid rules.
Recent developments have reinforced this view.
On 2 November, as part of its inquiry into the impact of Brexit on UK competition policy, the House of Lords EU Internal Market Sub-Committee published written evidence from the Department for Business, Energy and Industrial Strategy (BEIS). On the same day, it also heard BEIS members, including Margot James MP, the Minister for Small Business, Consumers and Corporate Responsibility. The transcript of the oral evidence was published on 6 November.
The UK has already signalled that it might be prepared to comply with (some form of) EU State aid rules following Brexit. As we noted in our previous note, the Prime Minister hinted at this possibility in her Florence speech. Margot James emphasised this point in her evidence to the Committee, quoting the Prime Minister’s statement that it would be a “serious mistake” for the UK to seek to compete with other countries’ industries by unfairly subsidising its own. Margot James noted that open markets, and competing on a level playing field, are a guiding principle for the UK Government. She added that the Government is concerned with ensuring a level playing field domestically, within the UK, as well.
BEIS implicitly acknowledges that State aid provisions are likely to feature in any EU-UK trade agreement. The EU negotiating mandate already explicitly refers to State aid in the context of any future trade agreement with the UK. The BEIS written evidence notes a trend towards increasingly extensive provisions (and restrictions) on subsidies in Free Trade Agreements (FTAs) concluded by the EU, the most recent being the FTA agreed in principle with Japan.
Margot James stated in her evidence that she could not comment in detail on State aid provisions given the ongoing negotiations between the EU and UK. She did however tellingly note that the Government “want[s] to maximise access to the single market” and suggested that an agreement on State aid might be one of the “trade-offs” required for that purpose, at least during the transition period. The EU (Withdrawal) Bill enables the UK to preserve EU State aid rules and give a UK authority the power to enforce these rules. Which authority that might be (and whether it might remain the European Commission for at least a period of time) is a question raised by the Committee which remains unanswered.
Longer term, Margot James acknowledged that State aid is often an important part of FTAs and likely to be subject to negotiations in FTAs the UK hopes to secure with other countries. State aid and subsidies are intensely political issues. This has recently been brought into sharp relief by the US proposal to impose tariffs of 300% on Bombardier aircraft, produced in part in Northern Ireland, in response to what it considers to be unfair subsidies granted by the UK and Canada. The EU State aid rules have to some extent managed the political aspects of such disputes. Nonetheless, and regardless of whether the UK adopts EU State aid rules or a lesser version, with the EU and/or with other countries, what is clear is that the UK will not be completely free to grant subsidies to UK industries after Brexit, and will always need to carefully weigh the political and trade implications of doing so.