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State Aid: What we now know

18 January 2017

Jurisdictions: United Kingdom
Services: International Trade and Investment

By Falk Schoening, Lourdes Catrain and Christopher Lock

Yesterday, the UK Prime Minister, Theresa May, set out the UK Government's long-awaited position on what the UK out of the EU should look like. The announcement of what is generally thought of as a "hard Brexit" negotiating position was combined with a stern reminder that the UK outside the EU will have the freedom to set "competitive tax rates", policies to attract and support global business and investment, as well as "changing the basis of Britain's economic model". This indicates how the UK Government may attempt to create leverage in the negotiations with the EU in order to maintain its competitiveness if the EU closes access for the UK to the Single Market.

In taking the UK out of the EU, the UK Government will have more freedom to provide public financial support to industries to keep them globally competitive. The transition from being an EU member, including stepping outside the EU's common commercial policy, to an economy outside the Single Market will also change the regulatory environment for subsidies controls.

The role of EU State Aid rules in the UK between triggering Article 50 and exiting the EU

The UK is currently subject to EU State aid rules. These rules hold that aid given to an undertaking that is granted by a state body and through state resources, which gives that undertaking a selective economic or financial advantage is illegal, insofar as it distorts or threatens to distort competition and affect trade between Member States. Most crucial from a UK political perspective: until Brexit occurs, UK support to companies can require notification and approval by the European Commission.

Even if State aid is not implemented immediately, it can still be caught under the EU provisions even if an announcement is made that aid will be granted after Brexit. For example, according to EU case-law aid that comes in the form of guarantees, regardless of whether such guarantees end-up materialising or not, will be caught under State Aid rules so long as they establish a sufficiently direct link between the advantage given to the beneficiary and a reduction of the State budget or a sufficiently concrete economic risk of burdens on that budget (see Bouygues SA, Bouygues Télécom SA v Commission) .

Therefore, despite the referendum, the UK does not possess a blank slate on which to entertain future aid to companies for the post-Brexit period. Such aid, even if implemented post-Brexit can still be deemed to be an advantage that entails a sufficiently concrete economic risk and could thus warrant Commission intervention. The Commission may even use its discretion to investigate such cases as a political tool, depending on the development of the Brexit negotiations with the UK.

State subsidies post-Brexit

The Prime Minister made it clear that the UK Government's aim is that the final EU-UK trading relationship will be a free trade agreement, with a phased approach to reaching that conclusion.  There is some scope for the retention of EU state aid principles in the UK, as the Prime Minister stated that "the same rules and laws will apply on the day after Brexit as they did before". However, State aid does not typically feature in EU trade agreements meaning that there is the possibility that the UK retains no EU State aid rules, instead falling back on the WTO rules on state subsidies. 

Outside the EU customs union, the UK would find itself individually bound by the WTO subsidy rules, rather than EU State aid rules which may, at first, give the UK more leeway to implement domestically-oriented economic strategies. In particular, WTO subsidy restrictions do not cover subsidies to services sectors, though such subsidies may fall under WTO national treatment rules requiring states to treat foreign and domestic industry equally.

Where the UK confers a financial contribution to specific manufacturing industries, WTO members can resort to either the WTO dispute settlement mechanism or to the national/EU rules on international subsidies to protect their market. To argue that a UK measure is illegal under EU/WTO law, the EU would have to prove that prohibited or actionable subsidies are taking place within the UK, and that this is causing material injury to a specific EU industry. Where this is found to be the case, the UK will be required under EU/WTO law to remove the subsidy and/or to pay additional duties on products benefiting from that subsidy when imported into the EU.

 In line with Ms. May's pledge to end the European Court of Justice's rule over Britain, the WTO rules are subject to the Dispute Settlement Body that review disputes between WTO members.  The UK would be bound by rulings of the WTO Dispute Settlement Body. 

With the UK no longer part of the EU trading bloc, it will be more vulnerable to direct economic action from other economic powers for example, US, China, Japan that may launch unilateral investigations into UK-only trade (and vice versa).

Yesterday's announcement might, in principle, provide the UK with more freedom to support the British industry following Brexit. Potential beneficiaries should nevertheless ensure that they don’t jump the gun in any discussions with the UK government. As long as the UK still is a member of the EU State aid rules apply and the Commission may use their State aid rulebook as a tool in negotiations with the UK.