UK: Brexit: Implications For State Aid/Control Of Subsidies

In a referendum on June 23, 2016, voters in the United Kingdom voted to leave the European Union. The UK government is currently expected to trigger the Article 50 process to formally exit the EU in the spring of 2017. Once it does so, the UK will cease to be a member of the EU within two years from the date that it has given notice under Article 50 of the Treaty of European Union, unless the EU Member States (i.e., the UK plus the 27 remaining EU Member States) unanimously agree to extend that time period. This is the sixth in a series of briefing notes prepared by WilmerHale's Brexit team discussing the potential legal and regulatory implications of a future Brexit for the UK and the EU.

A future Brexit is likely to have significant potential impact on the monitoring and control of subsidies or other forms of aid granted by the UK and/or the remaining EU-27 to individual companies or entire sectors of industry, or to promote specific policies (e.g., renewable energy). Until Britain leaves the EU, all of these types of subsidies—both within the UK and in the other 27 EU Member States—are subject to the discipline imposed by EU State aid law, briefly summarized below. If a "hard Brexit" occurs, with the UK leaving the EU without a customs or trade agreement in place that extends to subsidies, the fallback rules controlling subsidies granted by the UK will be the World Trade Organization's (WTO's) Agreement on Subsidies and Countervailing Measures, and EU State aid rules would no longer apply to the UK. UK companies (like a company from any jurisdiction that competes with EU companies) would still have access to EU State aid rules to complain about State aid granted by EU Member States, but EU companies would not have access to a similar mechanism for UK government subsidies, unless some sort of post-Brexit regime is agreed upon. While WTO subsidy rules—which include both state-to-state dispute settlement proceedings and an option for governments to put in place anti-subsidy and anti-dumping mechanisms for companies to complain about subsidies by foreign governments—would continue to be available, if EU State aid rules no longer applied in the UK, subsidies for UK companies would be under significantly less systematic and pervasive scrutiny than at present. Going forward, the UK will have to decide whether and to what degree it wishes to impose discipline akin to EU State aid rules on subsidies granted to UK companies by UK governmental authorities, and the EU will need to decide to what extent it requires the UK to do so as part of a post-Brexit deal.

This alert explains key differences between EU State aid rules and the WTO anti-subsidy regime. It then examines various free trade agreements that have been concluded recently by the EU with third countries to see what types of State aid discipline have been agreed upon, and whether those provisions could serve as a model for any UK-EU agreement governing this issue.

As a working hypothesis, the more the UK continues to be fully integrated into the EU's Single Market after Brexit, the more likely it is that the UK will have to adopt rules on the control of State aid. This is because State aid discipline belongs to the mechanisms put in place by the EU to ensure a level competitive playing field across the economies of disparate Member States that have different historical national champions and compete to attract company investment. By contrast, a hard Brexit, with no follow-on trade agreement with the EU providing some form of Single Market access, would likely make it more difficult for many UK companies to compete in the EU, but would not limit the ability of the UK government to grant subsidies to companies, within the limits of WTO rules. A prominent working group on Brexit and its consequences for UK competition law has recently noted:

[D]epending on the trade relationship with the EU and, indeed, trade relationships with other third countries, it is possible (even likely) that the UK would be required to accept (and might welcome) some limitations on giving State Aid to UK businesses. In the longer term, one issue that could be considered is whether, assuming that the general stance of policy remains anti-subsidy, it would be appropriate for the UK to create an "internal" discipline on subsidy policy[.]1

Whether that is true or not, the exact shape and impact of any future UK internal discipline on subsidies remains to be seen, just as Brexit raises unanswered questions in a host of areas to which solutions will have to be worked out both in the domestic UK and the EU-UK political dialogues. The examples of possible solutions reviewed here may provide inputs for these discussions.

Key Points

  • Once the UK leaves the EU, it will no longer be subject to comprehensive EU controls on State aid. Without a replacement framework, EU companies will not be able to complain in the UK about aid granted to their UK competitors. However, British companies will continue to be able to complain under EU State aid rules about State aid provided to their competitors in the EU.
  • Regardless of what the EU and UK agree to bilaterally, both would remain bound by their obligations under the WTO, which has its own set of subsidy rules contained in the Agreement on Subsidies and Countervailing Measures. WTO subsidy rules are similar in principle to EU State aid rules in many respects. However, they differ markedly in terms of legal process (no ex ante approval required and a different dispute settlement system), the requirement for private parties to reimburse subsidies that have been found to be illegal and their scope (WTO subsidy rules apply to "goods" only, not to subsidies for "services").
  • Beyond WTO rules, the EU will continue to be able to rely on its own anti-subsidy and anti-dumping procedures. Pursuant to WTO rules, they allow the EU to impose import duties on goods (but not services) from foreign countries that are found to have benefited from illegal subsidization or that are dumped, i.e., sold below fair market value (usually defined as the price charged on the home market or the cost of production), whether or not such dumping is the result of home market government subsidies. The UK, for its part, does not currently have such an anti-subsidy or anti-dumping policy in place but, under WTO rules, would be allowed to implement such policies as well.
  • There is precedent in (recent) EU free trade agreements as to how the EU and UK could go about creating some sort of bilateral agreement on the application of State aid rules. Whether they would agree to such a framework and what it would look like will of course depend on domestic UK political considerations, both sides' objectives and the course of the negotiations as a whole. The UK might well consider offering State aid discipline in certain areas in exchange for enhanced market access, particularly because the UK has historically had an anti-subsidy policy stance.
  • Differing views have recently been expressed within the UK on the degree to which it will actually wish to impose self-discipline post-Brexit on policy choices regarding subsidies. On the one hand, Chancellor of the Exchequer Philip Hammond has suggested that the UK would act independently of EU "constraints" post-Brexit and set up a regime that would allow it to "intervene appropriately."2 On the other hand, Joseph Johnson, the minister responsible for research and innovation, has noted that whether or not the UK ultimately would accept some form of EU State aid control, "[t]here will continue to be regimes governing government subsidies of one form or other to business in whatever scenario we might find ourselves in," adding that "[a]s a general point of principle, government wants to create a framework in which businesses can compete on a level playing field."3 Speculation about the support that Nissan was recently promised by Prime Minister Theresa May to continue to invest in its plant in Sunderland highlights the political sensitivity of the question. As noted, both domestic political considerations and the need for trade-offs as required to secure the best possible Brexit deal for the UK are likely to determine the outcome.

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Footnotes

1 Brexit Competition Law Working Group (BCLWG), Issues Paper, October 2016, point 4.2. The BCLWG is composed of prominent former UK competition regulators and academics, chaired by Sir John Vickers.

2 Treasury Committee of the House of Commons, Oral Evidence: The Work of the Chancellor of the Exchequer, HC 777, October 19, 2016, Answer to Question 83, available at http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/the-work-of-the-chancellor-of-the-exchequer/oral/41671.html.

3 The Select Committee on Science and Technology of the House of Lords, Inquiry on EU Membership and UK Science Follow-up, Evidence Session No. 5, October 25, 2016, Answer to Question 53, available at http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/science-and-technology-committee-lords/eu-membership-and-uk-science-followup/oral/42262.html.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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