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Subsidies in the EU-UK Trade Agreement: a codification of the EU acquis on State aid. How will the UK system work?

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After a period of uncertainty (and some last-minute drama), the European Commission and the United Kingdom reached an agreement on the trade deal that will, if ratified, govern the economic relationship between the two parties from 1 January 2021. The time was unusually short for the task, but the negotiators managed to deliver. It is a remarkable feat for which they deserve praise.

As an academic teaching and doing research in the area, I followed with particular interest the developments relating to State aid. The issue was regularly mentioned by the press as one of the sticking points in the negotiations. It could not have been otherwise: any trade agreement worthy of the name should have a system to control the award of subsidies and similar measures. The need for it was even more pressing in this case given the geographic proximity and the volume of trade involved.

The negotiation around subsidies focused on the UK’s refusal to build it expressly around EU law concepts and its reluctance to accept a regime based on an independent authority controlling, ex ante, the compatibility of measures adopted by State authorities. It has been reported that the UK insisted on having light-touch and relatively unintrusive provisions, such as those found in the Canada-EU trade agreement (CETA).

A look at the agreed text (see here), pp. 184 shows that the chapter on subsidies is considerably longer and more prescriptive than that found in CETA (or indeed the EU-Japan agreement). In fact, the single most notable aspect of the chapter is how much of the EU acquis has been codified, even if in an unusual way.

Formally speaking, EU law concepts have been avoided. In substance, however, the chapter is obviously and extensively inspired from it. Codifications of the EU acquis that had only found their way, so far, in soft law instruments, are now part of the instrument around which the EU relationship with the UK will presumably revolve in the short to medium term.

A codification of the EU acquis

As one might have anticipated, the words ‘State aid’ (and the EU law baggage that comes with them) are avoided in the text. Crucially, however, the agreement does not simply define the notion of subsidy by reference to the WTO model (as CETA, for instance, does). The notion is defined relatively extensively around four conditions: (i) State resources, (ii) economic advantage, (iii) specificity, and (iv) effect on trade or investment between the parties.

Crucially, the notion of specificity (which might make one think of the WTO model) is fleshed out by reference to the three-step test that is well known to all EU State aid lawyers. You will find the essence of the European Commission Notice on the notion of aid (and its references to the normal taxation regime as well as to geographic selectivity and the principles inherent to the design of the system) in the agreement.

This is not the only aspect that EU State aid lawyers will find familiar. The whole agreement is peppered with concepts and approaches borrowed from the case law and the administrative practice of the European Commission. I will note in particular that the principles for the award of subsidies are directly inspired from the approach to the compatibility assessment (including the famous incentive effects) that has been part of the EU landscape since the launch of the State aid Action Plan back in 2005.

It is desirable that EU law concepts would find their way in the final version of the agreement. This chapter would not be effective if the parties were able to define the notion of subsidy in fundamentally divergent ways, or if the criteria to identify the instances in which such subsidies are acceptable varied too much. As the mature and developed system (with the UK’s decisive input over decades), it is only natural that EU law provides the starting point.

Effects on trade or investment: a dual threshold

A crucial discussion in the months preceding the agreement related to the threshold of effects. The threshold in the EU regime is notoriously low, which means that it rarely ever plays a role when deciding whether intervention by public authorities qualifies as State aid within the meaning of Article 107(1) TFEU.

Some commentators see a flaw in this feature of the EU system, and hoped that the EU-UK agreement would introduce a threshold requiring a meaningful assessment of effects to decide whether a measure amounts to a subsidy.

The agreement, however, does not require that the effect on trade or investment be ‘material’ or ‘significant’ for a measure to fall under the definition of subsidy. It is sufficient, in this regard, to show that intervention ‘could’ have such an effect. The threshold does not come across as fundamentally different from that found in the EU system (which, again, is natural and arguably desirable).

Crucially, the parties must fulfil some of their obligations without ascertaining whether the effects on trade or investment are material or significant. The principles for the award of subsidies (that is, the compatibility assessment) is not contingent on such an evaluation. The same is true of the transparency obligations that require the parties to keep a record of the subsidies they grant.

Evidence of the significant effects of the subsidy is relevant in another respect, however. If one of the parties wants to take remedial measures against the other, it will have to show, on the basis of facts, that there is at least a ‘serious risk’ that the subsidy will have a ‘significant negative effect’ on trade and investment. This threshold is clearly higher than that needed to show that a measure amounts to a subsidy within the meaning of the agreement.

As can be seen, there appear to be two thresholds of effects: a low one, which is relevant to decide whether or not a measure falls within the scope of the definition; and a high threshold (‘significant negative effects’), to decide whether or not the subsidy, once qualified as such, warrants remedial intervention.

This dual threshold looks like a function of the hybrid nature of the system and the divergent starting points in the negotiation: the EU expressed a preference for a regime based on its own model (in which the effect on trade plays no meaningful role), whereas the UK favoured one inspired from the WTO regime (in which evidence of significant effects is a precondition to take action).

In a way, this duality is the trace of the initial disagreement. As such, it might lead to confusion and perhaps even to disputes about the appropriate interpretation of the relevant provisions.

Will the UK adopt a regime for the ex ante control of subsidies?

The available information suggests that the UK insisted on not being required to set up a system for the ex ante control of subsidies. In the exercise of its sovereignty, it argued that it should be able to opt for an ex post one instead. Formally speaking, the agreement does not mandate the setting up of an ex ante model. It merely requires to create an independent authority, which can be expected to play a major role in the interpretation of the notion of subsidy and in relation to the transparency obligations.

If one reads the chapter as a whole, one gets the impression that the path of least resistance would be to award ex ante powers to the independent authority. It would be the most obvious way to fulfil the different obligations that stem from it (in addition to the transparency obligations mentioned above, one needs to consider the fact that courts may be involved in subsidies cases) and to provide legal certainty. It looks like we will have to wait and see which way the regime goes.

Written by Pablo Ibanez Colomo

28 December 2020 at 9:51 am

Posted in Uncategorized