Brexit: balanced and fairer trade

31/07/2020

The plot thickens, turning an arcane point of detail into what could turn out to be the game-changer … or wrecker for the entire "future relationship" deal.

As we left it yesterday, we had what tonycl thought could be a "quite unexceptionable" statement from Commissioner Phil Hogan about state aid provisions. This is the one where the EU wants the UK to set out in detail its state aid regime.

But, if that, from one perspective, is "unexceptional", the Downing Street mob disagree. And, yesterday, we had David Collins, professor of international law at City University, who comes into bat for them in today's Telegraph.

Collins's view is that the nature of our post-Brexit state aid regime is none of Brussels' business. It has never been clear, he writes, why the EU insists on tying the UK to its state aid regime as a condition for a conventional Free Trade Agreement (FTA).

His argument, on this, is that the EU should be satisfied by the existing international regime to control distortions resulting from government support for the private sector. The relevant international rules, he says, are the WTO's Agreement on Subsidies and Countervailing Measures (SCM).

The EU state aid rules, he says, are appropriate for governments which are members of the EU's Single Market and for which unfair state assistance could be harmful to competition within that market. But once the UK left the EU, it became a foreign country and therefore outside of the EU’s Single Market.

Therefore, he concludes that international rules should be able to deal with any trade-distorting subsidies which the UK may seek to use to the detriment of EU companies or indeed those from anywhere else. The UK is bound by the SCM as a member of the WTO and will remain so after 31 December 2020 irrespective of a whether an FTA with the EU is signed.

He asserts that, unlike the EU's stringent state aid regime, the WTO's SCM prohibits various forms of governmental support to private entities which affect international trade. Those subsidies which do not have adverse trade effects are allowed. If governmental assistance to a private company within the UK ends up creating a distortion in the UK's domestic market, that’s its own problem.

That leaves Collins to make the point that, provided that there are no external effects (i.e. trade effects), why should the EU care how the UK's internal market functions? This, he says, is why Dominic Cummings' plan for a light touch subsidies regime for the UK, governed by an independent regulator without full enforcement powers, shouldn't be resisted by the EU. It is really none of their business.

However, Collins does concede that there is a strong argument to be made that the SCM in its current form is deficient. In fact, he says, a Joint Statement from the Trade Ministers of Japan, the US, and the EU made in January 2020 outlined ways in which WTO rules on subsidies could be strengthened.

It suggested that the range of prohibited subsidies under the SCM needs to be expanded to include things like unlimited guarantees and certain direct forgiveness of debt. The proposal also indicated that certain types of subsidies have such harmful effects that they warrant a reversal of the burden of proof so that the subsidizing country must demonstrate that there are no serious negative trade effects, rather than the injured country showing that there are.

The EU, US and Japan also complained that the SCM does not provide sufficient incentives for WTO Members to notify their subsidies, which may explain why the notification record for subsidies under the WTO regime has been poor. Concern was also expressed that the way to calculate the extent of subsidization is muddled, making appropriate anti-subsidy duties difficult to calibrate.

Lastly, Collins says, the definition of "public body" under the SCM was also thought to be somewhat vague, especially in light of state-controlled economies like China, necessitating further clarification.

On this basis, he argues that, rather than attempt to impose its own domestic state aid rules on the UK after it has left, it makes more sense for the UK and the EU to agree on a subsidies chapter in their FTA which reflects these concerns.

Indeed, he says, the UK-EU FTA represents an excellent opportunity for the UK and the EU to improve upon the multilateral trading system. This is one of the reasons that countries enter into FTAs in the first place, rather than trade on WTO terms. The EU and Japan included some of the improved subsidies features in the relevant chapter of their economic partnership agreement (the JEPA) last year.

Importantly, though, Collins argues, the EU did not force its state aid rules on Japan and there is no role for the European Court of Justice in enforcing these commitments. The UK's Draft EU FTA contains a subsidy chapter with some provisions on enhanced notification, but unfortunately little else.

Subsidies are an area where the UK should be prepared to concede more, perhaps along the lines of the reforms suggested by the EU, the US and Japan.

Additional material could be included, perhaps even commitments to restrict distortive investment incentives. As the WTO is a trade body, there are no rules on investment incentives in the SCM, nor under any other facet of international law. Some might argue that a stronger international regime for investment incentives is overdue.

Thus, contrary to the Hogan line, instead of lamenting state aid as a divisive issue which could bring a UK-EU FTA crashing down, subsidies should be viewed as an opportunity for the UK and the EU to cooperate.

Collins thinks that an enhanced subsidies chapter in the UK-EU FTA could even help set the WTO agenda for resolving some of the identified weaknesses of the SCM. It is not unrealistic to suggest that subsidies are an aspect of trade policy where the UK and the EU can join forces to effect positive change, demonstrating both unity and initiative at the global level.

The above amounts to virtually the full text of the Telegraph piece – which is pretty dense - and it certainly does present a view different to that which we are getting from Hogan. However, if we can take that as a full representation of the argument, it appears that Collins has not given us an entirely full picture.

One of the crucial issues is the reference to the Japanese trade agreement, settled last year, where some improved subsidies features have been included. But what Collins doesn't say here is that between the EU and Japan, SCM is unfinished business.

He refers to the Joint Statement made in January 2020, but this does much more than simply outline ways in which WTO rules on subsidies could be strengthened. The statement on 14 January that the three parties issued is setting out new rules which they wish to see adopted. These go far beyond the EU-Japan partnership agreement and, of course, also include the US.

What is probably highly relevant to the UK issue is that the parties agreed that for particularly harmful types of subsidies, such as excessively large subsidies, the burden of proof should be reversed: the subsidising WTO member must demonstrate that there are no serious negative trade or capacity effects and that there is effective transparency about the subsidy in question.

There are other tweaks, but the use of the word "transparency" is all important. The EU wants its trading partners to implement transparent state aid schemes, which is why Dominic Cummings' plan for a light touch subsidies regime for the UK doesn't cut it. For it to be "transparent", there must be certainty as to application, which means there must be a predictable, rules-based scheme.

Last year, the European Parliament looked at SCM and issued its own report, concluding that the EU approach is "fair and balanced", more so than the existing WTO scheme. Clearly, Japan and the US agree.

The parties were to take this to the 12th WTO Ministerial Conference in June 2020 in Nur-Sultan, but this was postponed because of Covid-19. Not a great deal was expected of the conference, but it does mean that SCM has been left hanging, for the moment.

As with so many other things, though, the EU will not want to harm the progress it has already made, by entering into arrangements that could conflict with agreements already made, especially when they are work in progress. And, it seems, that is what Collins (and Cummings) wants it to do.

Maybe Hogan does have a point, but it does seem bizarre that, with only months to go before the whole EU-UK negotiation shuts down, we are arguing about such arcane details, which are still nowhere near being resolved. Usually, such things do not end well.

Also published on Turbulent Times.