Shearman And Sterling

London skyline, Europe

Jul 02, 2020

London Partner James Webber Proposes a Compromise Position for Subsidy Control in a UK/EU Free Trade Agreement

Subscribe

Jump to...

 

LONDON PARTNER JAMES WEBBER PROPOSES A COMPROMISE POSITION TO SUBSIDY CONTROL IN A UK/EU FREE TRADE AGREEMENT

The U.K. Government has an announced intention to introduce a subsidy control regime. Having such regimes in place both in the U.K. and the EU (the State aid regime) creates the space for a compromise solution.

James Webber proposes a compromise that is built on three principles:

  • The recognition that as EU State aid rules cannot continue to apply in the U.K., the U.K. needs its own regime. The U.K.’s subsidy control regime will need to be shaped by the future Free Trade Agreement (FTA) with the EU.
  • The subsidy control provisions of an FTA with the EU should only bite on subsidies that appreciably distort competition between the U.K. and the EU — that is what is necessary to create a ‘level playing field.’
  • Accepting that the EU cannot agree to dispute settlement that interferes with its legal autonomy. Therefore, enforcement will need to be via participation in each other's domestic processes, political discussion in joint committee and, ultimately, proportionate tariff retaliation.

How the proposal works:

  • The definition of subsidy would match the EU State aid rules except in two respects:
    • First, specificity i.e. the dividing line between a general Government policy (such as tax rates or building motorways) and a policy that benefits specific companies (such as a bail out for a struggling business). Given the legal uncertainty around the concept in EU State aid, the World Trade Organisation’s Subsidies and Countervailing Measures approach is a more appropriate basis in this regard.
    • Second, effect on trade and competition. Establishing real effects on trade and competition is the guiding principle in the U.K./EU FTA — but the definition of EU State aid does not require practical consideration of either.
  • It will introduce a new three part framework for thinking about effects of subsidies: (i) aid that causes negative effects; (ii) aid that does not cause negative effects and; (iii) aid that needs to be looked at on the evidence.
  • Objectives of common interest: If found, effects on competition and trade could be justified as a proportionate way to achieve agreed common goals such as sustainable development, space research or climate change — in the same way the EU State aid rules work today.
  • Competent authority: Each side will have a competent authority capable of investigating aid to assess effects and to consider whether aid is a proportionate way to achieve common objectives. Each side will be able to participate in the processes of the other.
  • Remedies: If either party considers a competitive effect exists that disturbs the level playing field and which is not justified by an objective of common interest, it could take unilateral action. First, they have the right to appeal through each jurisdiction’s domestic courts. Second, would be political discussions in a joint committee and lastly, each side would also retain the ability to implement unilateral tariff measures to permit proportionate retaliation.
  • There is a role for a dispute settlement arbitration if either side believes that the retaliation of the other is excessive. Since retaliation is a feature of the EU/U.K. FTA rather than the EU Treaties, there is no conflict with the EU's internal legal autonomy.
  • Northern Ireland: This proposal is intended to supersede Article 10 of the Protocol on Ireland and Northern Ireland — which is neither legally nor practically sustainable.

To focus discussion on a detailed compromise proposal, the post includes an annex with suggested legal drafting. His proposal intends to respect the sovereignty of each side, but also to create a structured framework for ensuring a level playing field in subsidy control.

James Webber details his thinking in the post Compromise Position for Subsidy Control in a U.K./EU FTA on the U.K. State Aid Law Association’s blog.

Authors and Contributors

James Webber

Partner

Antitrust

+44 20 7655 5691

+44 20 7655 5691

+32 2 500 9800

+32 2 500 9800

London

Practices

Regional Experience