Op-Ed: “The UK is not bound by EU State aid rules: Subsidies in the Trade and Cooperation Agreement between the EU and the UK” by Phedon Nicolaides
After the exit of the United Kingdom (UK) from the European Union (EU) on 31 January 2020, EU rules continued to apply to trade between the UK and the EU 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 come into force after 1 January 2021. Rather unusually, the new rules apply “provisionally” as of 1 January 2021 [Article FINPROV.11(2) of Part Seven of the Agreement]. The Agreement was signed on Wednesday, 30 December 2020, by the UK Prime Minister, Boris Johnson, and the President of the European Commission, Ursula von der Leyen and published in the EU Official Journal on 31 December 2020 (1).
The purpose of this article is to review the provisions on subsidies in the Trade and Cooperation Agreement between the EU and the UK. It argues that the provisions on subsidies are weak.
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 by EU state aid rules whose ultimate interpretation is the prerogative of the Court of Justice of the EU. Therefore, the question that naturally arises is whether the UK has achieved its objective. As explained in the next section, the answer is likely to be in the affirmative, but with some qualifications.
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 an Agreement on the Safe and Peaceful Uses of Nuclear Energy, an Agreement on Exchanging and Protecting Classified Information and 15 Joint Declarations.
The rules concerning 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 Arrangements”.
The framework in which the rules on subsidies are placed can be visualised as follows:
(1) Trade and Cooperation Agreement
(1.1) Part Two of the Agreement: Trade, Transport, Fisheries and Other Arrangements.
(1.1.A) Heading One of Part Two: Trade.
(1.1.A.i) Title XI of Heading One: Level Playing Field for Fair and Open Competition and Sustainable Development.
(1.1.A.i.a) Chapter three of Title XI: Subsidy control: Articles 3.1 – 3.13.
In addition, two joint declarations refer to subsidies: Joint Declaration on Monetary Policy and Subsidy Control and Joint Declaration on Subsidy Control Policies.
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, as will be seen in the following sections, certain aspects of subsidies fall outside the scope of the standard dispute settlement procedure.
This article is structured as follows. Section 2 below presents the main features of the rules on subsidies and identifies issues that may cause disagreement between the two Parties. The main part of the article is in section 3 which analyses in detail the text of the Agreement and comments on those aspects that may become problematic in the future. Section 4 refers briefly to the two Joint Declarations concerning subsidies and section 5 summarises the main findings of the article.
- An overview of the provisions of the Agreement on subsidies and main findings
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. Chapter three, Title XI, of Part two of the Agreement, applies to subsidies, not state aid. Indeed, 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” but 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:
- It defines the concept of subsidy and the principles by which subsidies are to be assessed.
- It identifies subsidies which are prohibited, subsidies which are subject to conditions and subsidies which are not covered by Chapter three.
- It establishes procedures for transparency in the granting of subsidies, consultations on subsidy control and dispute settlement.
- It requires the establishment of independent authorities in subsidy-control regimes and defines the role of national courts.
- It creates obligations for recovery of subsidies and rights for remedial measures [i.e. retaliatory actions].
In another significant departure from one of the fundamental features of the EU system of state aid control, the Agreement does not appear to require notification of subsidy measures to a competent authority before their implementation. It will be up to the UK to decide whether to establish a system of prior notification of subsidies.
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, Article 3.4 allows subsidies that pursue public policy objectives, 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. In the EU, certain kinds of aid are prohibited regardless of their effect on trade [e.g. aid that falls outside the exemptions in the Treaty on the Functioning of the EU].
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 what may be called “de minimis” subsidies. 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.
The Agreement imposes a symmetrical obligation on the two Parties to ensure that their subsidies are transparent. The rule on “transparency” of subsidies that is laid down in Article 3.7, Title XI, of the Agreement has no minimum threshold. By contrast, Article 9 of the General Block Exemption Regulation (651/2014) requires Member States to publish information on all individual awards of aid exceeding EUR 500,000. Moreover, the publication obligation of EU Member States is currently confined to aid granted on the basis of the GBER, while the transparency obligation in the Agreement applies to all subsidies. The EU may have to expand the coverage of its own publication 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).
To assist the reader, the provisions on subsidies [Chapter three, Title XI, of the Agreement] can be summarised as follows:
Scope: Subsidies are public resources which confer a selective advantage that affects trade.
Principle: Subsidies are not granted where they have a “material” effect on trade or investment.
- Compensation for natural disasters & exceptional occurrences.
- Subsidies of social character.
- Temporary subsidies for economic emergencies.
- Subsidies below SDR 325,000 [~ EUR 383,500].
- Subsidies to the audio-visual sector.
Specific rules concerning subsidies for:
- Compensation for services of public economic interest.
- Rescue and restructuring of companies.
- Banks, credit institutions and insurance companies.
- Large cross-border projects.
- Energy and the environment.
- Regional airports and air carriers for new routes.
Prohibited subsidies [if the effect on trade is “material”]:
- Unlimited state guarantees.
- Export subsidies [but not export credit].
- Subsidies stipulating the use of domestic products.
- Applicable if subsidies cause a substantial negative effect.
- Inapplicable to temporary subsidies for economic emergencies.
- Individual subsidies and recovery of subsidies fall outside the scope of Arbitration Tribunals.
As will be seen in section 3, the rules on specific sectors and other specific rules are very general, limited to a few paragraphs, and no more restrictive than the corresponding ones in the EU. The complexity of the Commission guidelines on such topics as the environment, energy, banking and restructuring of companies, suggests that the general principles lay down in the Agreement give to the UK ample room for maneuver.
Therefore, it is safe to conclude that the Agreement binds the UK only in so far as subsidies that have a material effect on trade or investment – which in itself may be a contentious issue – must be necessary and proportional. Even otherwise prohibited subsidies escape the prohibition if their effect is not material. And if the EU believes that UK subsidies harm its interests, it may not be easy for it to prove that they “cause” it a “significant harm”.
- The rules on subsidies: Review and specific comments
This section reviews in more detail the provisions of Chapter three on subsidies. My comments and assessment are in italics.
Article 3.1: Definitions
It reproduces, using slightly different words, the concepts of undertaking and state aid as they are defined in the EU case law and paraphrases the standard three-stage test expounded by the Court of Justice for determining the selectivity of tax measures. As mentioned earlier, an undertaking here is denoted as “economic actor” and state aid as “subsidy”.
However, the concept of subsidy does not contain the criterion of distortion of competition as in Article 107(1) TFEU. It is sufficient that trade between the Parties is affected. This makes sense because, at least in theory, a subsidy that can affect trade without distorting competition may still cause harm to consumers in a country, for example, whose firms divert sales to the UK to benefit from subsidies.
Article 3.2: Scope and exceptions
“1. Article 3.4 [Principles], 3.5 [Prohibited subsidies and subsidies subject to conditions] and Article 3.12 [Remedial measures] do not apply to subsidies granted to compensate the damage caused by natural disasters or other exceptional non-economic occurrences.”
This is similar to Article 107(2)(b) TFEU with the additional specification that the exceptional occurrence must be non-economic in nature.
“2. Nothing in this Chapter prevents the Parties from granting subsidies of a social character that are targeted at final consumers.”
This is similar to Article 107(2)(a) TFEU, except that it does not require non-discriminatory treatment of the products concerned.
“3. Subsidies that are granted on a temporary basis to respond to a national or global economic emergency shall be targeted, proportionate and effective in order to remedy that emergency. Articles 3.5 [Prohibited subsidies and subsidies subject to conditions] and 3.12 [Remedial measures] do not apply to such subsidies.”
This appears to reflect Article 107(3)(b) TFEU, although state aid granted on that legal basis is subject to assessment by the Commission.
This exception is in the interests of the EU, as state aid granted to remedy the effects of the financial crisis that broke out in 2008 has exceeded EUR 6 trillion and the state aid to combat the current pandemic has already exceeded EUR 3 trillion.
It is not clear what “temporary” and “effective” may mean in this context.
“4. This Chapter does not apply to subsidies where the total amount granted to a single economic actor is below 325,000 Special Drawing Rights over any period of three fiscal years. The Partnership Council may amend that threshold.”
This essentially sets a ceiling for de minimis aid expressed in SDRs rather than euros or pound sterling.
However, according to the IMF, 1 SDR is about 1.18 euro (2). This means that the de minimis amount for the purposes of this Agreement is about EUR 383,500!
Since the current de minimis Regulation [Regulation 1407/2013] is binding in the EU, the Agreement is more lenient on the UK, unless the European Commission intends to raise the de minimis ceiling.
“5. This Chapter does not apply to subsidies that are subject to the provisions of Part IV or Annex 2 of the Agreement on Agriculture and subsidies related to trade in fish and fish products.”
Agricultural subsidies granted in the context of the EU’s common agricultural policy also fall out of the scope of Article 107(1) TFEU [see Article 2111 of Regulation 1308/2013 on the Common Organisation of Agricultural Markets].
“6. This Chapter does not apply to subsidies related to the audio-visual sector.”
Article 107(3)(d) allows for subsidies under certain conditions to the audio-visual sector but does not exclude them from the scope of Article 107(1) TFEU.
“7. Article 3.9 [Independent authority or body and cooperation] does not apply to subsidies financed by resources of the Parties at supranational level.”
This excludes subsidies which are managed by institutions which, presumably, are not under the control of the Parties. This is also the current rule in the EU. Resources managed directly by the Commission, the EIB/EIF or EU agencies [e.g. the European Institute of Innovation and Technology] do not count as state resources in the meaning of Article 107(1) TFEU.
“8. For the purposes of subsidies to air carriers, for any reference to “effect on trade or investment between the Parties” in this Chapter, there shall be substituted a reference to “effect on competition between air carriers of the Parties in the provision of air transport services”, including those air transport services not covered under Title I [Air transport] of Heading 2 [Aviation].”
This clarification is necessary as trade is almost always affected by subsidies in the air transport sector. What matters is whether airports, for example, discriminate between airlines.
Article 3.3: Services of public economic interest
“1. Subsidies granted to economic actors assigned with particular tasks in the public interest, including public service obligations, are subject to Article 3.4 [Principles] insofar as the application of the principles set out in that Article does not obstruct the performance in law or fact of the particular task assigned to the economic actor concerned. The task shall be assigned in advance in a transparent manner.”
This reflects the provisions of Article 106(2) TFEU with the exception of affectation of trade to an extent that would be contrary to the common interest. However, the following paragraph addresses this omission by requiring that compensation is limited to the net extra costs and that cross-subsidisation is prohibited.
“2. The Parties shall ensure that the amount of compensation granted to an economic actor that is assigned with a task in the public interest is limited to what is necessary to cover all or part of the costs incurred in the discharge of that task, taking into account the relevant receipts and a reasonable profit for discharging that task. The Parties shall ensure that the compensation granted is not used to cross-subsidise activities falling outside the scope of the assigned task. Compensation below 15 million Special Drawing Rights per task shall not be subject to the obligations under Article 3.7 [Transparency]. The Partnership Council may amend this threshold.”
It reflects the principles in the 2012 SGEI Commission Decision [Decision 2012/21].
However, Article 2 of the Commission Decision exempts from notification compensation not exceeding EUR 15 million. The amount of SDR 15 million corresponds to EUR 17.65 million.
Again, the ceiling defined by the Agreement is more generous to the UK.
I hasten to add that the notification ceiling is not the same as the transparency ceiling. Bearing this qualification in mind, there is another difference between paragraph 2 above and the wording of Article 2 of the Commission Decision. The ceiling here is per task. The ceiling in the Commission Decision is per annum. Therefore, a provider entrusted with multiple tasks may receive total compensation exceeding SDR 15 million.
“3. This Chapter does not apply where the total compensation to an economic actor providing tasks in the public interest is below 750,000 Special Drawing Rights over any period of three fiscal years. The Partnership Council may amend this threshold.”
This reflects the principles of Regulation on SGEI de minimis aid [Regulation 360/2012].
However, the ceiling in the Regulation is EUR 500,000, while the amount of SDR 750,000 is equal to about EUR 885,000.
Article 3.4: Principles
“1. With a view to ensuring that subsidies are not granted where they have or could have a material effect on trade or investment between the Parties, each Party shall have in place and maintain an effective system of subsidy control that ensures that the granting of a subsidy respects the following principles:
- a) subsidies pursue a specific public policy objective to remedy an identified market failure or to address an equity rationale such as social difficulties or distributional concerns (“the objective”);
- b) subsidies are proportionate and limited to what is necessary to achieve the objective;
- c) subsidies are designed to bring about a change of economic behaviour of the beneficiary that is conducive to achieving the objective and that would not be achieved in the absence of subsidies being provided;
- d) subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy;
- e) subsidies are an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means;
- f) subsidies’ positive contributions to achieving the objective outweigh any negative effects, in particular the negative effects on trade or investment between the Parties.”
Article 3.4(1) establishes the principle that subsidies may not be granted if they have a “material” effect on bilateral trade or investment. While Article 3.1 defines subsidies as public funding that merely has an “effect” on trade or investment, Article 3.4 bans subsidies if their effect is “material”. Therefore, it exempts subsidies with no material effect. This is different from the EU system which, with the exception of de minimis aid, it exempts subsidies broadly according to their aims and need for state intervention, not according to their impact on trade.
Furthermore, without stating so, Article 3.4 allows subsidies that comply with what is in essence the Commission’s common assessment principles.
However, it is not clear what “material effect” may mean here.
What is also not clear is how the relevant authorities in each Party will ensure that the positive effects of subsidies outweigh the negative effects, especially if the negative effects primarily impact the other Party.
More importantly, given that the Commission has never carried out any quantification of the positive and negative effects of state aid, the balancing of positive and negative effects of subsidies will be unavoidably influenced by a certain degree of subjective analysis that will be vulnerable to criticism from the other Party. In this context, subjectivity does not matter very much if it is the outcome of consistent and impartial analysis by an authority such as the Commission that seeks to promote the common interest. But now that the UK is no longer a member of the EU, the common interest of the two Parties is a nebulous concept.
“2. Without prejudice to paragraph 1, each Party shall apply the conditions set out in Article 3.5 [Prohibited subsidies and subsidies subject to conditions], where relevant, if the subsidies concerned have or could have a material effect on trade or investment between the Parties.”
For public funding to be classified as a subsidy, just as in the case of state aid, it must have an effect on trade. Paragraph 2 excludes prohibited subsidies from the obligation not to be granted if they have no “material” effect on trade or investment. This is very different from the EU system in which “bad” state aid, such as operating aid or unnecessary aid, is not allowed regardless of the magnitude of its effect on cross-border trade.
At any rate, it is not clear what “material effect” may mean here. Back in 2004, the Commission tried to get Member States to agree on a common understanding of “lesser” amounts of aid and “limited effects on trade”. (3) The Commission’s initiative went nowhere, as it proved impossible to arrive at robust definitions. The concept of “material effect” may lead to the same conceptual disagreements in the future.
“3. It is for each Party to determine how its obligations under paragraphs 1 and 2 are implemented in the design of its subsidy control system in its own domestic law, provided that each Party shall ensure that the obligations in paragraphs 1 and 2 are implemented in its law in such a manner that the legality of an individual subsidy will be determined by the principles.”
The subsidy control system in the EU is well-known.
The subsidy control system in the UK is not yet established.
Article 3.5 Prohibited subsidies and subsidies subject to conditions
“1. The categories of the subsidies referred to in Article 3.4(2) [Principles] and the conditions to be applied to them are as follows. The Partnership Council may update these provisions as necessary to ensure the operation of this Article over time.”
Unlimited state guarantees
“2. Subsidies in the form of a guarantee of debts or liabilities of an economic actor without any limitation as to the amount of those debts and liabilities or the duration of that guarantee shall be prohibited.”
This is broadly the current rule in the EU. Unlimited guarantees are not allowed.
Rescue and restructuring
“3. Subsidies for restructuring an ailing or insolvent economic actor without the economic actor having prepared a credible restructuring plan shall be prohibited. The restructuring plan shall be based on realistic assumptions with a view to ensuring the return to long-term viability of the ailing or insolvent economic actor within a reasonable time period. … For the purposes of this paragraph, an ailing or insolvent economic actor is one that would almost certainly go out of business in the short to medium term without the subsidy.”
This reflects the principles of the Rescue & Restructuring Guidelines.
However, the term “ailing” economic actor does not appear in the Guidelines. Point 20 of the Guidelines explains that an undertaking “in difficulty” would almost certainly go out of business without aid but because this definition is too vague, it goes on to define more precise conditions when undertakings are considered to be in “difficulty”. See also Article 2(18) of the GBER.
“4. Other than in exceptional circumstances, subsidies for the rescue and restructuring of insolvent or ailing economic actors should only be allowed if they contribute to an objective of public interest by avoiding social hardship or preventing a severe market failure, in particular with regard to job losses or disruption of an important service that is difficult to replicate. Except in the case of unforeseeable circumstances not caused by the beneficiary, they should not be granted more than once in any five year period.
This also reflects the principles of the Rescue & Restructuring Guidelines.
“5. Paragraphs 3 and 4 do not apply to subsidies to ailing or insolvent banks, credit institutions and insurance companies.”
Banks, credit institutions and insurance companies
“6. Without prejudice to Article SERVIN 5.39 [Prudential carve-out], subsidies to restructure banks, credit institutions and insurance companies may only be granted on the basis of a credible restructuring plan that restores long-term viability. If a return to long-term viability cannot be credibly demonstrated, any subsidy to banks, credit institutions and insurance companies shall be limited to what is needed to ensure their orderly liquidation and exit from the market while minimising the amount of the subsidy and its negative effect on trade or investment between the Parties.”
This is broadly the current rule in the EU. Banks in trouble are either resolved or wound-up.
However, banks which are in principle solvent are also allowed to receive state aid under certain conditions for the issuing of new debt or shares.
“7. It shall be ensured that the granting authority is properly remunerated for the restructuring subsidy and that the beneficiary, its shareholders, its creditors or the business group to which the beneficiary belongs, contribute significantly to the restructuring or liquidation costs from their own resources. Subsidies to support liquidity provisions shall be temporary, shall not be used to absorb losses and shall not become capital support. Proper remuneration shall be paid to the granting authority for the subsidies granted to support liquidity provisions.”
The Commission 2013 Banking Communication requires that the contribution from shareholders and creditors in the form of “burden-sharing” absorbs losses first before any state aid is granted. The Agreement here stipulates only that the contribution is “significant”. It is not clear what “significant” may mean, but since the UK has already transposed in its national law the Banking Recovery and Resolution Directive [Directive 2014/59] it is unlikely that the UK banking regulator will allow restructuring subsidies without any bail-in of shareholders and creditors to absorb the maximum amount of losses.
“8. Subsidies that are contingent in law or in fact, whether solely or as one of several other conditions, upon export performance relating to goods or services, shall be prohibited, except in relation to:
(a) short-term credit insurance for non-marketable risks; or
(b) export credits and export credit guarantee or insurance programmes that are permissible in accordance with the SCM Agreement, read with any adjustments necessary for context.”
This is the current situation in the EU.
Subsidies contingent upon the use of domestic content
“12. Without prejudice to Article SERVIN 2.6 [Performance requirements] and Article SERVIN 2.7 [Non-conforming measures and exceptions], subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods or services shall be prohibited.”
This is the current rule in the EU.
Large cross border or international cooperation projects
“13. Subsidies may be granted in the context of large cross border or international cooperation projects, such as those for transport, energy, the environment, research and development, and first deployment projects to incentivise the emergence and deployment of new technologies (excluding manufacturing). The benefits of such cross border or international cooperation projects must not be limited to the economic actors or to the sector or the States participating, but must have wider benefit and relevance through spill over effects that do not exclusively accrue to the State that grants the subsidy, the relevant sector and beneficiary.”
This reflects the first part of Article 107(3)(b) TFEU and the Commission’s Guidelines on Important Projects of Common European Interest.
However, in none of the very few Commission decisions on IPCEI has there been a quantitative threshold of effects that “do not exclusively accrue” to the aid-granting State. The subjectivity in the assessment of what does not “exclusively accrue” can be a source of dispute, but the dearth of such projects is unlikely to give rise to actual disputes.
Energy and environment
“14. The Parties recognise the importance of a secure, affordable and sustainable energy system and environmental sustainability, notably in relation to the fight against climate change which represent an existential threat to humanity. Therefore, without prejudice to Article 3.4 [Principles], the subsidies in relation to energy and environment shall be aimed at, and incentivise the beneficiary in, delivering a secure, affordable and sustainable energy system and a well-functioning and competitive energy market or increasing the level of environmental protection compared to the level that would be achieved in absence of the subsidy. Such subsidies shall not relieve the beneficiary from liabilities arising from its responsibilities as a polluter under the law of the relevant Party.”
This corresponds to the very basic principles in the Commission’s Guidelines on Environmental and Energy Aid.
However, the complexity of the current rules is hardly captured by paragraph 14 above.
Subsidies to air carriers for the operation of routes
“15. Subsidies shall not be granted to an air carrier for the operation of routes except:
(a) where there is a public service obligation, in accordance with Article 3.3 [Services of public economic interest];
(b) in special cases where this funding provides benefits for society at large; or
(c) as start-up subsidies for opening new routes to regional airports providing that it increases the mobility of citizens and stimulates regional development.”
This reflects the very basic principles of the current rules in the EU. Case (a) corresponds to aid on the basis of Article 106(2) TFEU, case (b) appears to correspond to Article 107(2)(a) TFEU [aid having a “social character”] and case (c) corresponds to Article 107(3)(c) as it is applied by the Aviation Guidelines.
Article 3.6: Use of subsidies
“Each Party shall ensure that economic actors use subsidies only for the specific purpose for which they are granted.”
This is also the rule in the EU, which seeks to prevent misuse of state aid.
Article 3.7: Transparency
“1. With respect to any subsidy granted or maintained within its territory, each Party shall within six months from the granting of the subsidy make publicly available, on an official website or a public database, the following information:
- (a) the legal basis and policy objective or purpose of the subsidy;
- (b) the name of the recipient of the subsidy when available;
- (c) the date of the grant of the subsidy, the duration of the subsidy and any other time limits attached to the subsidy; and
- (d) the amount of the subsidy or the amount budgeted for the subsidy.”
This corresponds to the current requirement in the EU for publication of all state aid awards granted on the basis of the GBER exceeding EUR 500,000 [see Article 9 of the GBER].
It is rather surprising that no minimum threshold is set in paragraph 1 above.
Since the Agreement is symmetrical, the question that arises is whether Article 3.7 implies that the EU will remove its publication threshold and expand the publication obligation to aid granted outside the GBER.
“2. … [concerns subsidies in the form of tax measures].
3. In addition to the obligation set out in paragraph 1, the Parties shall make subsidy information available in accordance with paragraphs 4 or 5 below.
4. For the Union, compliance with paragraph 3 means that with respect to any subsidy granted or maintained within its territory, within six months from the grant of the subsidy, information is made publicly available, on an official website or a public database, that allows interested parties to assess the compliance with the principles set out in Article 3.4 [Principles].”
As mentioned earlier, Article 9 of the GBER only requires publication of individual awards that exceed EUR 500,000.
Will the EU remove that threshold and expand the publication obligation to all aid, also to that which is granted outside the scope of the GBER?
Perhaps for the EU side, it is considered sufficient that aid authorised by the Commission outside the GBER is eventually made public in Commission decisions. When such a decision concerns individual aid, then the publication of the decision will conform with Article 3.7(1) and 3.7(4). But when the decision concerns a scheme, its conformity will be doubtful.
This doubt is due to the fact that the Agreement refers to “subsidy” without clarifying whether a subsidy means individual award or a scheme.
“5. For the United Kingdom, compliance with paragraph 3 means that the United Kingdom shall ensure that:
(a) if an interested party communicates to the granting authority that it may apply for a review by a court or tribunal of (i) the grant of a subsidy by a granting authority or (ii) any relevant decision by the granting authority or the independent body or authority;
(b) then, within 28 days of the request being made in writing, the granting authority, independent body or authority will provide that interested party with the information that allows the interested party to assess the application of the principles set out in Article 3.4 [Principles], subject to any proportionate restrictions which pursue a legitimate objective, such as commercial sensitivity, confidentiality or legal privilege.
The information referred to in point (b) of the first sub-paragraph shall be provided to the interested party for the purposes of enabling it to make an informed decision as to whether to make a claim or to understand and properly identify the issues in dispute in the proposed claim.”
There is no EU rule that obliges Member States to provide information to interested parties! Competitors may only complain to the Commission or initiate proceedings before national courts.
Therefore, here the Agreement goes beyond existing rules in the EU, applies more strictly to the UK and confers to individuals more rights than they currently enjoy in the EU.
“6. For the purposes of this Article, Article 3.10 [Courts and tribunals] and Article 3.11 [Recovery], “interested party” means any natural or legal person, economic actor or association of economic actors whose interest might be affected by the granting of a subsidy, in particular the beneficiary, economic actors competing with the beneficiary or relevant trade associations.
7. … [concerns freedom of information].”
Article 3.8: Consultations on subsidy control
[This Article lays down a procedure for request of information and consultation within the “Trade Specialised Committee on the Level Playing Field for Open and Fair Competition and Sustainable Development”.]
The Trade Specialised Committee on the Level Playing Field for Open and Fair Competition and Sustainable Development is established by Article INST.2(1)(j), Title III, Part One on Common and Institutional Provisions. The Committee comes under the supervision of the Partnership Council which is the highest body established by the Agreement.
Article 3.9: Independent authority or body and cooperation
“1. Each Party shall establish or maintain an operationally independent authority or body with an appropriate role in its subsidy control regime. That independent authority or body shall have the necessary guarantees of independence in exercising its operational functions and shall act impartially.
2. … [encourages cooperation between competent authorities of the two Parties].”
The Agreement essentially leaves it to each Party to design its system of subsidy control and determine “an appropriate role” for its independent authority.
The requirement for an “appropriate role” is quite vague.
Neither Article 3.9, nor Article 3.4 explicitly require prior notification of subsidy measures to this independent authority before their implementation. The EU’s 60-year experience indicates that the obligation of prior authorisation is the cornerstone of an effective subsidy control regime.
Perhaps the requirement for transparency and the right of access to information by interested parties may counter-balance the absence of an explicit obligation for prior notification. This depends, of course, on the practical arrangements that the UK will put in place to give effect to that right.
The UK has already established a state aid unit within the independent Competition and Markets Authority.
In early 2019, the UK government submitted to Parliament draft legislation [“The State Aid (EU Exit) Regulations 2019″] that basically copied all EU rules and conferred to the CMA powers similar to those of the Commission (4). These Regulations do not seem to have been adopted as a UK statutory instrument. A search of the website of the CMA on 30 December 2020 did not detect that any state aid procedures have been established.
Article 3.10: Courts and tribunals
“1. Each Party shall ensure, in accordance with its general and constitutional laws and procedures, that its courts or tribunals are competent to:
- a) review subsidy decisions taken by a granting authority or, where relevant, the independent authority or body for compliance with that Party’s law implementing Article 3.4 [Principles];
- b) review any other relevant decisions of the independent authority or body and any relevant failure to act;
- c) impose remedies that are effective in relation to points a) or b), including suspension, prohibition or requirement of action by the granting authority, the award of damages, and recovery of subsidy from its beneficiary if and to the extent they are available under the respective laws on the date of entry into force of this Agreement;
- d) hear claims from interested parties in respect of subsidies that are subject to this Chapter; where an interested party has standing to bring a claim in respect of a subsidy under that Party’s law.
2… [confers to each Party the right to intervene].
3.… [Parties are not obliged to create more rights than those required by the Agreement].”
This Article reflects the principles in EU case law on the roles of EU and national courts.
Article 3.11: Recovery
“1. Each Party shall have in place an effective mechanism of recovery in respect of subsidies in accordance with the following provisions, without prejudice to other remedies that exist in that Party’s law.
2. Each Party shall ensure that, provided that the interested party as defined in Article 3.7(6) [Transparency] has challenged a decision to grant a subsidy before a court or a tribunal within the specified time period, as defined in paragraph 3 of this Article, recovery may be ordered if a court or tribunal of a Party makes a finding of a material error of law, in that:
- (a) a measure constituting a subsidy was not treated by the grantor as a subsidy;
- (b) the grantor of a subsidy has failed to apply the principles set out in Article 3.4 [Principles], as implemented in that Party’s law, or applied them in a manner which falls below the standard of review applicable in that Party’s law; or
- (c) the grantor of a subsidy has, by deciding to grant that subsidy, acted outside the scope of its powers or misused those powers in relation to the principles set out in Article 3.4 [Principles], as implemented in that Party’s law.”
[Paragraphs 3 – 4 lay down certain time limits concerning the “specified time period” mentioned in paragraph 2.]
“5. For the purposes of this Article, recovery of a subsidy is not required where a subsidy is granted on the basis of an Act of the Parliament of the United Kingdom, of an act of the European Parliament and of the Council of the European Union, or of an act of the Council of the European Union.”
In the case of the EU, state aid granted by an act of the EU cannot be attributed to a decision of a Member State. Therefore it falls outside the scope of Article 107(1) TFEU.
It is hard to understand why or how a subsidy that is granted by an act of the UK Parliament would not be attributed to the UK.
Will this not provide a loophole for subsidies in the UK to escape from any future system of subsidy control?
[Paragraphs 6 – 7 provide for the Partnership Council to consider additional or alternative mechanisms for recovery].
Article 3.12: Remedial measures
This Article lays down a procedure for remedial [i.e. retaliatory] action when a Party believes that it is harmed by the subsidies of the other Party and for the establishment of an Arbitration Tribunal to resolve the dispute.
Article 3.12 provides for remedies which are inefficient means of restoring competition, lays down a cumbersome process and sets standards of proof that themselves can be the subject of dispute.
The remedies are inefficient because they counteract the effect of subsidies through additional trade barriers, without necessarily achieving the recovery of the subsidies. By contrast, in the EU, the purpose of recovery is to remove the advantage conferred by the aid and the distortion caused by it without creating additional distortions.
The process is cumbersome because of its many stages and deadlines.
With respect to the standards of proof, a Party has to demonstrate that four conditions are fulfilled: 1) a subsidy exists or has been granted, 2a) it “causes” or there is a 2b) “serious risk” that it will cause 3) a “significant” 4) negative effect. By contrast, In the EU, it is not necessary to prove causality between the granting of state aid and the negative effect of the aid. Moreover, the Commission’s compatibility assessment does not have to establish that there is a serious risk that any negative effect is significant. Admittedly, however, state aid is incompatible with the internal market when it affects trade to an extent that would be contrary to the common interest. But there is no requirement that the extent is “significant” for a finding of incompatibility.
Article 3.13: Dispute settlement
“1. Subject to paragraphs 2 and 3, Title I [Dispute settlement] of Part Six [Dispute settlement and horizontal provisions] applies to disputes between the Parties concerning the interpretation and application of this Chapter, except for Articles 3.9 [Independent authority or body and cooperation] and 3.10 [Courts and tribunals].
2. An arbitration tribunal shall have no jurisdiction regarding:
(a) an individual subsidy, including whether such a subsidy has respected the principles set out in paragraph 1 of Article 3.4 [Principles], other than with regard to the conditions set out in Article 3.5(2) [Unlimited state guarantees], (3) to (5) [Rescue and restructuring], (8) to (11) [Export subsidies] and (12) [Subsidies contingent upon the use of domestic content]; and
(b) whether the recovery remedy within the meaning of Article 3.11 [Recovery] has been correctly applied in any individual case.
3.… [concerns a procedural issue].”
The powers of arbitration tribunals are limited. Individual subsidies, recovery of subsidies and the decisions of the independent authorities and national courts are excluded from the their jurisdiction.
- Joint declarations
The Agreement is accompanied by 15 Joint Declarations, two of which refer to subsidies. The Joint Declaration on Monetary Policy and Subsidy Control clarifies that monetary policy operations [e.g. the granting of emergency liquidity assistance to solvent banks] do not constitute subsidies.
This is currently the rule in the EU.
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.
The text Declaration, which is short and general, reflects broadly current EU rules.
The UK has succeeded to de-couple itself from EU state aid rules. The provisions of the Agreement are rather reasonable and could have been adopted unilaterally by any country that wishes to impose some discipline on public subsidies. Nonetheless, the UK is free to define the precise rules on its subsidies. Whether such deviations from EU rules will actually produce any substantial benefits is an issue that needs to be empirically tested.
It is the nature of any international agreement to bind to a certain extent its parties. In this respect, the UK has not succeeded to shield its subsidies from external scrutiny. It will be subject to the decisions of Arbitration Tribunals which replace the Court of Justice to a certain degree, and will be exposed to remedial action by the EU.
It remains to be seen whether the decisions of future Arbitration Tribunals will be more favourable to the UK than the judgments of the Court of Justice and whether any benefits from the UK’s newly found freedom to define specific subsidy rules will outweigh the harm from potential remedial action by the EU.
(1) OJ L 444, 31 December 2020, pp. 14-1462. The text of the Agreement can be accessed here.
(2) See IMF’s website for SDR exchange rates.
(3) The text of the Commission’s proposals has been archived, but it can be accessed here.
(4) The text of the draft legislation can be accessed here.