One Agreement, Two Parallel Systems: Subsidies in the Trade and Cooperation Agreement between the EU and the UK

The agreement on subsidies allows the UK to deviate from EU State aid rules.

Introduction

After the exit of the United Kingdom [UK] from the European Union [EU] on 31 January 2020, EU State aid rules continued to apply to the UK during a transitional period that came to an end on 31 December 2020. In the closing days of 2020, the two sides succeeded to conclude a 1250-page “Trade and Cooperation Agreement” on the rules and arrangements that would apply after 1 January 2021. Rather unusually, the Agreement that was signed only on Wednesday, 30 December 2020, by the UK Prime Minister, Boris Johnson, and the President of the European Commission, Ursula von der Leyen, applies “provisionally” as of 1 January 2021 [Article FINPROV.11(2) of Part Seven of the Agreement] before it is ratified by the two Parties.

This article reviews the provisions on subsidies in the Trade and Cooperation Agreement between the EU and the UK. The text of the Agreement was published in OJ L 444, 31 December 2020, pp. 14-1462.[1]

As is well-known, subsidies were one of the three main issues of disagreement between the two sides; the other two were fisheries and governance. The UK objected to being bound to EU State aid rules whose ultimate interpretation is the prerogative of the Court of Justice of the EU. Therefore, the question that naturally arises now is whether the UK has achieved its objective. The answer is neither unequivocally yes, nor no.

To appreciate whether the UK succeeded not to cross its red lines, let’s see where the UK interests lie. A good indication of that is the objectives of the UK’s State aid measures. The Commission’s 2019 Scoreboard reveals that in 2018 the top six objectives were:

Environmental protection and energy: EUR 4376 million

Research & Development: EUR 1891 million

SMEs & risk capital: EUR 1281 million

Culture & heritage: EUR 1099 million

Regional development: EUR 248 million

Damage from natural disasters: EUR 206 million

[the amounts for other objectives were significantly smaller]

In relation to the above six policy objectives, the Agreement has specific rules only on environment and energy. These rules are very general and are confined to stating basic principles such as necessity and proportionality.

The Agreement is organised in seven parts, 49 annexes and three protocols. Each part is divided in titles. However, Part Two, in which the rules on competition and subsidies are to be found is divided first in Headings and then in Titles. No other Part has Headings. The reason is that Part Two makes up the bulk of the Agreement containing about 65% of the text before the technical annexes and protocols. The Agreement is accompanied by Joint Declarations, two of which refer to subsidies: Joint Declaration on Monetary Policy and Subsidy Control and Joint Declaration on Subsidy Control Policies.

The substantive rules on subsidies are in Title XI on Level Playing Field for Fair and Open Competition and Sustainable Development of Heading One on Trade of Part Two on Trade, Transport, Fisheries and Other Arrangement”.

Title XI is composed of nine chapters. Each chapter contains one article which entails that there are nine articles in Title XI. Each article is divided into several sub-articles.

Part one of the Agreement lays down common rules and institutional provisions and establishes Committees which, among other things, enable the two Parties to resolve differences before launching the formal dispute-settlement procedure. One of those Committees is responsible for subsidies. Part six of the Agreement governs the settlement of disputes including any that may arise with respect to subsidies. However, certain aspects of subsidies fall outside the scope of the standard dispute settlement procedure.


– Ad –

Post-Brexit: Quo Vadis State Aid? Free Online Session, Thursday, 21 January, 14 – 15:30 CET

14:00 Welcome Note by Lexxion Publisher
14:10 Several short presentations by representatives
Alexander Rose, Legal Director, DWF Law LLP, United Kingdom
George Peretz QC, Monckton Chambers, UK
Nicolas Rey, International Relations, Policy and Strategy, DG COMP – Directorate-General for Competition, European Commission, Brussels (among others)
15:00 Discussion and Exchange of Views
15:30 End of Online Session
 
Register now


The provisions of the Agreement on subsidies

It should be noted at the outset that the Agreement avoids any EU-specific terminology. It does not cite any EU Treaty articles, current regulations or guidelines on State aid, even as reference or aid to the meaning of its various concepts and terms. Chapter three, Title XI, of Part two of the Agreement, applies to subsidies, not State aid. Unlike other trade agreements concluded by the EU and third countries, the words “State aid” appear nowhere in the Agreement [with the exception of an unrelated reference to the provisions of a Member State on social security].

There are other striking examples of avoidance of EU terminology. Instead of using the well-understood concept of “undertaking”, the Agreement refers to “economic actors” and defines them exactly in the same way as undertakings in the EU case law. “Undertakings in difficulty” are referred to as “ailing economic actors”. “Services of general economic interest” are called “services of public economic interest” even though their providers carry out “public service obligations” as in the EU.

Chapter three contains a single article – Article 3 – whose main contents are the following:

  1. It defines the concept of subsidy and the principles by which subsidies are to be assessed.
  2. It identifies subsidies which are prohibited, subsidies which are subject to conditions and subsidies which are not covered by Chapter three.
  3. It establishes procedures for transparency in the granting of subsidies, consultations on subsidy control and dispute settlement.
  4. It requires the establishment of independent authorities in subsidy-control regimes and defines the role of national courts.
  5. It creates obligations for recovery of subsidies and rights for remedial measures [i.e. retaliatory actions].

The Agreement does not appear to require notification of subsidy measures to a competent authority before their implementation. If the UK imposes such a requirement on subsidy-granting authorities, it will be a unilateral act, not mandated by the Agreement.

Article 3.4(1) lays down the principle that “subsidies are not granted” where they have a “material” effect on bilateral trade or investment. Without explicitly stating so, it allows subsidies that pursue a public policy objective, comply with certain principles, such as those of necessity and proportionality, and generate positive effects that outweigh their negative effects on trade and investment.

While a subsidy is defined as public funding that has an “effect” on trade or investment, subsidies are not to be granted only if they have a “material effect” and subsidies which are prohibited or subject to conditions by the Agreement may be granted if they have no “material effect”. In other words, any subsidy in any form escapes from the obligations laid down in the Agreement if it has no “material effect” on trade or investment.

The Agreement sets monetary limits or thresholds which appear to be more generous for the UK. These thresholds are the following [1 Special Drawing Right = 1.18 euro]:

SDR 325,000 [or EUR 383,500] for subsidies which are de minimis in nature, even though the Agreement does not call them as such. In the EU the comparable threshold is EUR 200,000 in Regulation 1407/2013.

SDR 15 million [or EUR 17.65 million] for reporting of subsidies for public service obligations [“transparency” requirement]. In the EU the comparable threshold is EUR 15 million in Decision 2012/21.

SDR 750,000 [or EUR 885,000] for SGEI de minimis subsidies. In the EU the comparable threshold is EUR 500,000 in Regulation 360/2012.

An unusual feature of the Agreement is Article 3.7 (Chapter three, Title XI, Part two) which imposes an obligation on the UK to provide information on subsidies to any interested party. This creates rights for interested parties that they do not enjoy in the EU.

However, there is a provision in Article 3 that may necessitate the creation of similar rights in the EU too. Article 9 of the General Block Exemption Regulation [Regulation 651/2014] requires Member States to publish information on all individual awards of aid exceeding EUR 500,000. The rule on “transparency” of subsidies that is laid down in Article 3.7, Title XI, of the Agreement has no minimum threshold. Moreover, the publication obligation of EU Member States is currently confined to aid granted on the basis of the GBER, while the transparency obligation applies to all subsidies.

Perhaps the right of interested parties in the UK to access information on subsidies is intended to counter-balance the absence of an obligation for prior notification of subsidies. However, the Agreement is silent on this point. It will be interesting to see what is the combined effect in practice of the right of access to information and the absence of notification obligation.

A negative aspect of the Agreement is that it uses terms whose meaning is left undefined. These terms have not been interpreted in the EU case law on State aid, so their application in practice may prove to be problematic. Here is a list of such terms:

“Temporary” subsidies: Article 3.2(3) on temporary subsidies for economic emergencies.

“Effective” remedy: Article 3.2(3) on temporary subsidies for economic emergencies.

“Material” effect on trade or investment: Article 3.4(1) on principles that apply to subsidies.

“Ailing” economic actor: Article 3.5(3) on subsidies subject to conditions.

Effects that do not “exclusively” accrue to the subsidy-granting state: Article 3.5(13) on large cross-border projects.

“Appropriate role” for the independent authority: Article 3.9

Another negative aspect of the Agreement is that, unlike the EU system of State aid control where the distortion of competition caused by State aid is remedied by recovery of the aid, the Agreement leaves it to the Parties to take remedial measures [i.e. retaliatory action] when they are harmed by the subsidies of the other Party. This is an inefficient system because it counters one distortion by creating another.

In order to take remedial action, a Party has to demonstrate that four conditions are fulfilled: 1) a subsidy exists or has been granted, 2) it “causes” or there is a 2a) “serious risk” that it will cause 3) a “significant” 4) negative effect. Causality is always difficult to prove. The existence of “serious risk” of a “significant” negative effect will also be difficult to prove and will depend to a large extent on subjective judgment. This raises an important question: Will it make it easier for the UK to grant subsidies as it will be harder for the EU to retaliate? [It is unlikely for the EU to change its rules to allow more State aid].

The table below summarises the main provisions of the Agreement concerning subsidies. The “specific” rules laid down in the Agreement are no longer than a few paragraphs each and are confined to stating general principles such as necessity and proportionality and avoidance of granting subsidies which are devoid of incentive effect.

Subsidy control: Scope, principles, exceptions, specific rules, prohibitions, remedies

Scope & principles Exceptions Specific rules Prohibited subsidies Remedies
Subsidies are:

-public resources which

-confer a selective

-advantage that

-affects trade

 

Compensation for natural disasters

& exceptional occurrences

Compensation for services of public economic interest The prohibition does not apply if the effect on trade is not material Do not apply to temporary subsidies for economic emergencies
Subsidies are not granted where they have a material effect on trade or investment

 

Subsidies of social character Subsidies for rescue and restructuring Unlimited state guarantees Individual subsidies and recovery of subsidies fall outside the scope of Arbitration Tribunals

 

Temporary subsidies for economic emergencies Subsidies for banks, credit institutions and insurance companies

 

Export subsidies [but not export credit]
Subsidies below SDR 325,000

[~ EUR 383,500]
Subsidies for large cross-border projects Subsidies stipulating the use of domestic products

 

Subsidies to the audio-visual sector Subsidies for energy and environment

 

Subsidies to regional airports and air carriers for new routes

 

Bearing in mind that the indispensable and essential elements of the EU’s block exemption regulations and guidelines are definitions of eligible costs and maximum rates of aid intensity, the Agreement allows the UK to define its own eligible costs and rates of aid intensity. All thresholds are to some extent arbitrary. In the absence of a central authority that can define common rules which are supposedly objective, it will be within the discretion afforded to the UK to set, for example, the maximum aid rate for industrial research to 60% instead of 50%, include as eligible costs the expenses for first industrial deployment [which are anyway allowed in the guidelines for projects of common European interest] in the case of experimental development and raise the ceiling of ancillary activities from 20% to 30%. For sure, the UK may now grant larger subsidies to its companies in comparison to those which are allowed in the EU without flouting either the letter or spirit of the Agreement.

Lastly, the Joint Declaration on Monetary Policy and Subsidy Control clarifies that monetary policy operations [e.g. the granting of emergency liquidity assistance to banks] do not constitute subsidies.

The Joint Declaration on Subsidy Control Policies confirms that necessary and proportional subsidies may be granted for 1) the development of disadvantaged areas, 2) infrastructure investments and operating costs of regional airports, road infrastructure projects, dredging and infrastructure projects of ports, 3) research and development.

Conclusions

The inevitable conclusion is that the UK has succeeded to untether itself from the EU’s State aid rules.

The Agreement defines principles which are sensible [e.g. necessity and proportionality] and from which the UK will have no reason to deviate.

However, where the UK has strong interests [e.g. environment and energy, R&D, SMEs, culture], the specific provisions of the Agreement [e.g. environment, energy, banks and regional airports] are too general or non-existent. The corresponding provisions in the EU are much more complex [e.g. environment and energy]. This means that the Agreement provides ample room to the UK to deviate from specific EU rules. Other EU rules of interest to the UK are very generous [e.g. R&D, SMEs]. Again, the UK will not be constrained in any significant way in laying down its own rules.

The use of novel terms by the Agreement [e.g. material effect, serious risk to cause significant negative effects] will make it harder for the EU to prove that UK subsidies harm its companies.

Of course, it will all depend on how and for which purpose the UK decides to use public money to support its companies. The spirit of the Agreement is that subsidies should aim to remedy market failure and should generate more benefits than harm. The UK can respect its spirit without copying EU rules. This does not mean that bilateral trade and competition will not be affected.

[1] The Agreement can be accessed at:

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.L_.2020.444.01.0014.01.ENG&toc=OJ%3AL%3A2020%3A444%3ATOC


Photo by DANIEL DIAZ on Pixabay.

Tags

About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He presently holds positions at the College of Europe and the University of Maastricht. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

Related Posts

11. Jun 2020
Guest State Aid Blog by Erika Szyszczak

When State Aid Gets Political

We are happy to receive a guest comment on the EU – UK post-Brexit trade negotiations from Professor Emerita, Erika Szyszczak, who is a Fellow of UKTPO at the University of Sussex. This is a longer version of an earlier Blog published on the UKTPO website. Control over State aid is a stumbling block for the future of an EU […]
28. Jan 2020
State Aid Uncovered by Phedon Nicolaides

State Aid Rules in the UK after Brexit: Alignment or Divergence?

The current rules will apply at least until 31 December 2020. Introduction On Saturday, 1 February 2020, the United Kingdom will no longer be a Member of the European Union. Will it then have to abide by EU State aid rules? According to the Agreement on the Withdrawal of the UK from the EU, the whole of the UK will […]
05. Dec 2019
State Aid Uncovered by Phedon Nicolaides

Will Brexit Usher in Protectionism?

The Financial Times reported on Friday, 29 November 2019, that the Conservative party in the UK announced that it would establish a different state aid system to “protect British industry after Brexit”. The Prime Minister, Boris Johnson, was quoted to have said at a press conference on the same date that the new state aid system would make it “faster […]
20. Nov 2018
State Aid Uncovered by Phedon Nicolaides

State Aid Provisions in the Draft Agreement on the Withdrawal of the UK from the EU

The agreement on the withdrawal of the UK from the EU requires compliance with EU State aid rules.   Introduction   On 14 November 2018, EU and UK negotiators finalised the text of the Agreement on the withdrawal of the UK from the EU.[1] The Agreement has to be ratified by the UK and the other 27 Member States. Given immediate […]
13. Aug 2018
State Aid Uncovered by Phedon Nicolaides

State Aid Control in the UK after its Exit from the European Union

After its withdrawal from the EU, the UK is likely to maintain a State aid regime that is similar to that of the EU.   Introduction   In seven months’ time, on 29 March 2019, the UK will leave the EU. But its withdrawal from the EU will not bring to an end compliance with EU rules. The UK is […]
02. May 2018
State Aid Uncovered by Phedon Nicolaides

Compensation for Public Service Obligations

Compensation for public service obligations may be fixed at less than the net extra costs of the provider of the public service to induce it to become more efficient.   Introduction   Every three years the UK determines the compensation it provides to the Post Office Limited (POL) for the extra costs of the public services it provides. Commission decision […]
26. Apr 2017
State Aid Uncovered by Phedon Nicolaides

A Postscript on Brexit and State Aid

A short note on the previous blog post on State aid control in the UK after its withdrawal from the EU.   A few weeks ago, I wrote an article on State aid control in the UK after its withdrawal from the European Union [http://stateaidhub.eu/blogs/stateaiduncovered/post/8330]. In that article I suggested that the UK would maintain the same or a similar […]
04. Apr 2017
State Aid Uncovered by Phedon Nicolaides

State Aid on the Day after the Exit of the UK from the EU

The UK will “take back control” over State aid. With it will come the challenge of following EU law and practice. Introduction Last June I wrote an article on how the withdrawal of the UK from the EU could affect the application of State aid rules in the UK. The article concluded with the following prediction. “The UK will soon […]
05. Jul 2016
State Aid Uncovered by Phedon Nicolaides

PART II: Combining Infrastructure Aid with SGEI Aid

After the spontaneous words on Brexit and State aid last week, I continue with the 2nd part of the post on infrastructure and SGEI today. A provider of services of general economic interest may receive both investment aid and compensation for the extra costs of public service obligations.   Part II: SGEI[1] Member States are free to determine the services […]
27. Jun 2016
State Aid Uncovered by Phedon Nicolaides

Brexit and State Aid: The Day After

The second part of the Lithuanian measure on the LNG terminal was scheduled to be published this week. In view of the referendum in favour of exit of the UK from the EU, the second part of the Lithuanian measure will be published next week. Instead, this week the focus is on the impact of Brexit on State aid. Introduction […]