Can the UK ignore State Aid after Brexit?

The recent tussle between the United States, Canada and the EU28 (including, for now, the United Kingdom) over the United States’ threat to impose tariffs of 300% on Bombardier aircraft shows in sharp relief the very different State Aid regimes and remedy mechanisms between the world’s major trading blocs.

Within regulatory circles it is widely acknowledged that the European Union has a unique State Aid regime, which has evolved over the past 60 years of European Court of Justice jurisprudence to become a complex and sophisticated instrument of law.

Despite the publically expressed hopes and wishes of certain UK Members of Parliament, whatever the ultimate outcome of the UK/EU Brexit negotiations, the UK will – in all scenarios – continue to rely upon international trade and, as such, will have to remain in that hackneyed phrase, regulatory alignment with global rules on restricting state subsidies to commercial entities – lest the UK suffer retaliatory measures from trading partners.

As the logical consequence of the UK’s current membership of the EU, there is no domestic UK legislation governing State Aid, nor do any UK government bodies (e.g. the Competition and Markets Authority) enjoy any jurisdiction over State Aid issues.  Given that Ministers are on public record as saying it would be a “serious mistake” for the UK to engaged in a subsidy race-to-the bottom with other countries industries in order to gain competitive advantage.

Therefore, as night follows day, the UK is going to have to establish a domestic State Aid regime to replace the functions currently undertaken by the European Commission on behalf of all Member States.  To date, there is little evidence that preparatory work is being underway for the repatriation of State Aid competencies from Brussels to London.

In any event, it is highly unlikely that the UK will enjoy complete autonomy to set its own State Aid regulatory regime or to enjoy near total freedom to grant subsidies to companies after March 2019 as it will still have to ensure that any domestic State Aid regime meets the UK’s international trade agreements obligations, in particular the World Trade Organisation’s Agreement on Subsidies and Countervailing Measures (the “SCM Agreement”).

This point was implicitly acknowledged by the Department for Business, Energy and Industrial Strategy (BEIS) in its evidence to the House of Lords EU Internal Market Sub-Committee in November 2017,  that provisions controlling subsidies are likely to form part of any UK-EU Free Trade Agreement (FTA), as they have done with the EU’s FTAs with South Korea, Switzerland, Canada and – most recently – the FTA ‘in principle’ reached between the EU and Japan.

Indeed, the Article 50 negotiating mandate given to Michel Barnier by the European Council makes explicit reference to State Aid as an area which will have to be negotiated and agreed within the context of any future trade agreement with the UK.   It is inconceivable that in any situation other then the most chaotic of Brexits that any UK-EU trade agreement would not included similar, or enhanced subsidy control measures.

Whilst, at first glance, there seem to be a high degree of commonality between the EU’s and WTO’s regulatory requirements; for example, a subsidy is defined as a financial contribution, income or price support which confers a benefit and a financial contribution can include foregone revenue, loans and guarantees.  The WTO’s ban on specific subsidises (be it towards an enterprise, industry, group of industries or national industries) bears close similarity with Article 107 TFEU’s prohibition on selectivity.  Nevertheless, there are crucial differences.

Firstly, there are only two categories of prohibited subsidies under the SCM Agreement;

  1. export subsidies; and,
  2. import-substitution subsidies (which discriminate on grounds of national origin)

Otherwise, subsidies can only be addressed by the WTO if they are specific and have an adverse effect on the economy of another WTO member state.  Any WTO member complaining about prohibited subsidies has to demonstrate the adverse effects on its interests, otherwise the subsidy in question is deemed to be permissible.  Subsidies which are generally available in the economy according to objective criteria are not considered specific, and therefore, not actionable under the SCM Agreement.  Furthermore, the WTO’s rules only apply to goods and not services.

Another crucial area of differentiation between the two regimes relates to enforcement.  The SCM Agreement only allows for the ex-post control of subsidies, in other words: a subsidy can only be challenged after it has been awarded.

A WTO member state who feels that it has been disadvantaged has two options: resource to the WTO’s dispute mechanism, a referral that can only be made by a WTO member state (as opposed to complaints by disadvantaged enterprises, individuals, sectoral bodies et al under the EU’s State Aid system) and where enforcement of rulings can be haphazard, dependent to greater or lesser degrees on political will of WTO states.

Alternatively a WTO member state may, as was demonstrated in the Bombardier case, launch its own investigation and impose countervailing measures on the imported goods which it feels are harming its domestic manufacturers, typically in the form of import duties.  There is no mechanism whatsoever for the recovery of illegal subsidies under the SCM Agreement.

A WTO member can only seek the withdrawal of the subsidy or the removal of its adverse effects under the WTO’s dispute settlement procedure or remedy the effects itself by imposing countervailing [import] duties, albeit only after it has investigated the measure.

Taking all these factors into account, it is clear that the UK will be both unlikely and unwilling to completely step aside from State Aid and subsidies in the post-Brexit trading environment it will find itself following expiry of the two-year Article 50 notice period (subject to any transitional agreement that may – or may not – be agreed between the UK and the EU).

The WTO subsidy regime is a far looser form of control than what is currently enforced at EU level by DG-Competition.  Whilst this may be welcomed by elements of the pro-Brexit lobby across both wings of the political spectrum, it remains very much an open question on how the WTO’s subsidy control regime with its lack of a judicially led enforcement mechanism, the exclusion of services (the bulk of the UK’s GDP) and ex-post control will ‘fit the gap’ by the EU’s State Aid regime.  A regime which the UK has been remarkably effective at complying with, spending only 0.35% OF GDP on State Aid in 2016, compared to an EU average of 0.67% in the same period (1).