In no other area of the so-called level playing field did Brussels’ opening position overreach so ridiculously. Indeed, the EU’s position was so extreme it breached the Withdrawal Agreement in my view – since the EU was supposed to be committed to using its best endeavours to respect the UK’s sovereignty. Seeking to impose your laws over another country is not respectful of that country’s sovereignty. It was a misjudgment which has poisoned the talks all year. The UK wants the same deal as Canada – which like almost all free trade deals – has no significant State Aid provisions. This is perfectly reasonable.
Unfortunately the Government also badly needs to get rid of the Northern Irish Protocol, especially its State Aid provisions which – unbelievably – gave the EU control over many UK public spending decisions.
By far the best way to get rid of the Protocol is a new agreement with the EU.
Given that State aid is so important to the EU, the UK needs a compromise it can live with. The Government has struggled all year to articulate what that would be.
The difficulty is hard to understand. A solution – fully consistent with the UK’s sovereignty and the legitimate aspect of the EU’s request for a level playing field – is within reach and has been for months.
The pro-Brexit think tank Centre for Brexit Policy set it out in a paper I contributed to in the summer. The Government should grasp it with both hands now.
State Aid rules prevent governments subsidising their industry at the expense of other countries – unless the subsidy is needed to help a common goal (energy transition, levelling up, R&D etc).
Such rules are a good idea – they stop Edinburgh and Newcastle using taxpayers’ money to ‘bid’ against each other for investments. They also help stop waste and corruption – bungs to politically well-connected businesses.
The UK gives out much less in subsidy than many European countries, any rules we agree with the EU would constrain them as much – if not more – than us.
So what’s the problem? The problem – and the reason State Aid has become so contentious – is who gets to decide which subsidies are allowed and why.
The EU system works by giving this power to the European Commission and European Court of Justice.
That obviously won’t work for the UK. How can an independent UK system and the EU’s State Aid regime provide each other with a “level playing field” – without harming either sides’ independence?
The solution works like this:
Step 1: Both sides have a State Aid regulator. In the UK this could easily be the existing Competition and Markets Authority.
Step 2: Both sides have to agree what subsidy or aid means. The current EU definition needs tweaking as it is too broad for a trade agreement, but there is a lot of common understanding on what needs to be covered and a UK/EU Free Trade Agreement chapter on subsidies would be a massive advance on any other EU FTA or the World Trade Organization rules.
Step 3: Both sides agree on the sort of policy goals subsidies can be used to advance. Levelling up, climate, R&D, emergency response, rescuing strategic industry or banks etc. This is surprisingly straightforward too. The EU already has a very extensive list of goals that subsidisation is used to pursue.
Step 4: Set up three categories of subsidy: those that are harmful; those that are not harmful; those that need to have their effects be examined.
Harmful subsidies are easy to spot. Those that move jobs (rather than create new ones) from Sunderland to Eastern Europe; or those that subsidise activity that would happen anyway for example. The EU has defined these well over the past few decades.
Non-harmful subsidies are easy too. The EU has also defined these via blanket exemptions for many types of subsidy in Europe – over 90 percent of subsidy in the EU is given under such an exemption. The UK and EU need to decide how much each company could receive without harming trade. This can be higher than when the UK was a Member State – because the EU and UK have a customs border between them.
Any other subsidy needs to have its effects on competition and trade looked at – by the CMA in the UK and the Commission in the EU. If there are such effects, then each side can look at whether the goal the subsidy is pursuing outweighs them.
The last piece is what happens in a disagreement. Rather than going to the European Court, we should agree to use each other’s domestic court systems. But if after that there is still disagreement, the complaining side could use proportionate tariffs to retaliate against the other.
Such a system is well within reach. It would create a genuine level playing field while allowing the UK and the EU to remain sovereign equals. It has the support of Brexiteers. The Government should propose it as soon as possible.
James Webber is an EU lawyer and partner at Shearman & Sterling LLP. He was also the co-author of the Centre for Brexit Policy paper “Replacing the Withdrawal Agreement: How to ensure the UK takes back control on exiting the transition period”