Is it correct that the UK poses a more competitive threat to the EU than Canada, Singapore or Japan? If that is correct, should the UK accept loss of sovereignty over a key part of UK industrial policy as the price of a free trade agreement with the EU?

Looking at the EU negotiating mandate for a future arrangement with the UK, it seems clear, as a starting point, the EU will only give the UK preferential access to the EU market (e.g. tariff free access for goods) if the UK accepts that there is a “level playing field” between the both parties. As a very specific example of this “level playing field”, the EU mandate states:

The envisaged partnership should ensure the application of Union State aid rules to and in the United Kingdom. For aid granted by the United Kingdom affecting trade between Great Britain and the Union, the United Kingdom should set up an independent and adequately resourced enforcement authority with effective powers to enforce the applicable rules, which should work in close cooperation with the Commission. Disputes about the application of State aid rules in the United Kingdom should be subject to dispute settlement.

It is important to note that the EU is not required to conclude a free trade agreement with the UK. While any FTA must conform to Article XXIV of the GATT (and Article V of the GATS), provided those conditions are met, the EU can attach whatever additional conditions it likes to any future trade arrangement with the UK.

There are a number of points to make about this objective.

First, it goes beyond what is found in “equivalent” agreements with, for example, Canada Singapore, and Japan.

Second, it appears to require the UK to accept EU state aid rules as the basis for UK law, and, in principle accept any changes in EU state aid law without having any right to be consulted on those changes.

Third, the UK is required to set up an agency with appropriate powers to enforce these rules.

Finally, any dispute about how the UK operates these rules is subject to “dispute settlement”.

Apart from subjecting these rules to the jurisdiction of the CJEU, it is difficult to conceive of an objective that could be more calculated to achieve a fulsome rejection from the UK, possibly calling into question the whole basis for an agreement.

Let’s go through these points in turn.

Does the EU usually require FTA partners to follow EU state aid rules? The answer is no. The EU is normally happy for its FTAs to use the WTO Subsidies and Countervailing (SCM) Agreement as a reference point. The GATT provisions on subsidies as built out in the SCM Agreement is, in effect, the starting point for EU state aid rules. However, EU state aid rules (i) have become much more detailed both in terms of substance and interpretation; and (ii) are subject to very specific enforcement powers not found in the WTO system, in particular an ability to take action against EU Member States to recover unlawful aid from the recipients.

Can the EU justify why it is happy to offer the WTO subsidy framework to Canada, Japan and Singapore, but only adherence to EU state aids to the UK? M. Barnier has offered the geographic proximity of the UK to the EU, and the relative strength of the UK economy as the main reasons. Do these arguments stand up to real scrutiny? Is the UK really so much more of a threat because of its location, than Canada, Japan and Singapore?

In any event, the UK is very unlikely to accept: (i) that it is in a worse position on industrial policy and subsidies than other comparable EU trading partners; or (ii) that the UK left the EU to regain economic and legislative autonomy only for this to be retained by the EU in an FTA.

Second, the UK has made it abundantly clear that it is not going to accept being held to EU laws or standards going forward. So, while in principle, future UK law on subsidies will start out as EU state aid law, the UK takes the view that it should be able to adopt its own policy on subsidies after the Implementation Period.

Third, and following on from the second point, the UK will want to be able to have full autonomy as to how it operates its own subsidy policy, including whether or not to have a specific administrative body, and whether to have formalised enforcement powers.

Finally, the UK cannot really object to subsidies being a matter that can be raised to whatever dispute settlement process is set up under any agreement. However, the UK will be very reluctant to have any input from the CJEU, or for the substantive standards to be EU state aid law as opposed to the WTO SCM Agreement.

So will the UK accept the EU position? While both sides are ultimately going to take the view that everything is to be negotiated, and based on the earlier experience with the Withdrawal Agreement that “red lines” at this point are counterproductive, it does seem to be the case that the EU position, without further justification from the EU, will not be accepted by the UK. Will the EU stick to its position so that the UK has to reject the whole deal, or will subsidies get traded for something? Watch this space.