The post-Brexit UK-EU trading relationship

Issues of competition policy and state aid

09.06.2020

With governments around the world focusing on the fallout from COVID-19, many commentators have suggested that the UK and the EU will be forced to extend their year-end deadline for reaching a post-Brexit trade deal. Yet despite the difficulties caused by the coronavirus crisis, the UK government has insisted that it will not request an extension to the transition period. On 16 April the UK’s chief negotiator, David Frost, said that extending “would simply prolong negotiations, create even more uncertainty, leave us liable to pay more to the EU in future, and keep us bound by evolving EU laws at a time when we need to control our own affairs”.

Just over a month later, on 19 May, the UK government published a series of draft agreements setting out how the future EU-UK relationship could be put into law at the end of the transition period. The documents include a draft Comprehensive Free Trade Agreement (CFTA) and side agreements covering areas such as aviation and energy. The positions taken in the draft agreements reflect those outlined in The Future Relationship with the EU: the UK’s Approach to Negotiations, which was published on 27 February.

The documents issued by the UK government should be read alongside their EU equivalents – the draft Agreement on the New Partnership with the UK and the EU’s negotiating directives. The latter emphasise that the future relationship should be underpinned by “robust commitments” to ensure a “level playing field” for open and fair competition. Specifically, any free trade agreement between the parties should, according to the EU, “uphold common high standards, and corresponding high standards over time with Union standards as a reference point, in the areas of state aid, competition, state-owned enterprises, social and employment standards, environmental standards, climate change, [and] relevant tax matters”. As the EU sees it, such an agreement should also “include for each of those areas adequate mechanisms to ensure effective implementation domestically, enforcement and dispute settlement, including appropriate remedies”.

Perhaps predictably, the UK government has said that it is not prepared to be bound by such stringent provisions. In this article we briefly consider its current position on two issues: competition policy and state aid.

Competition policy

The UK government states in The Future Relationship that a free trade agreement “should commit the parties to maintain effective competition laws, covering merger control, anticompetitive agreements and abuse of dominance, while maintaining the right to provide for public policy exemptions”.  In its view, this does not require legal or regulatory alignment – both the UK and the EU “should have the regulatory freedom to respond to new and emerging challenges in these areas”. At the same time, the government recognises the importance of cooperation to enhance effective competition law enforcement. Article 22.2(3) of the draft CFTA provides that “[the parties’] respective competition authorities shall endeavour to coordinate and cooperate in the enforcement of their respective competition law to fulfil the objectives of this Agreement”. Article 22.2(3) also states that the parties “may enter into a separate agreement on cooperation between their competition authorities, which may include conditions for the exchange and use of confidential information”. The EU has entered into specific competition cooperation agreements with other countries, notably the US (see here).

Significantly, however, the competition provisions in Article 22 are not subject to the CFTA’s wider dispute resolution provisions. In this respect the UK’s proposed approach is broadly in line with free trade agreements that the EU has recently entered into with Canada, Japan and South Korea, which exclude competition issues from wider dispute settlement mechanisms.

Given the above, it seems likely that the basic provisions of UK merger control and the Chapter I and II prohibitions will remain the same in the post-transition period. However, the extent to which EU and UK competition law start to diverge over time may depend significantly on the terms of any free trade agreement between the parties. If no agreement is reached, section 60A of the Competition Act 1998 is due to come into force in the UK. As we reported here, that provision obliges UK courts and competition regulators to ensure there is “no inconsistency” with pre-Brexit EU case law when interpreting UK competition law, unless it is appropriate in the light of specified circumstances to depart from such pre-Brexit EU case law[1].  Even if the parties do reach agreement, the door may be open for UK competition law to diverge from EU competition law, particularly in the longer term.

State aid

The UK government is currently proposing a state aid regime based on WTO rules. Referring to the term ‘subsidies’ rather than ‘state aid’, paragraph 64 of The Future Relationship states:

“The UK will have its own regime of subsidy control. The Agreement should include reciprocal commitments to transparency about the award of subsidies which go beyond the notification requirements set out in the WTO Agreement on Subsidies and Countervailing Measures. This should include an obligation on both parties to notify the other every two years on any subsidy granted within its territory, applying to goods or services, in line with EU-Japan EPA. The Agreement should also include the right to request consultations on any subsidy that might be considered to harm the interests of the parties.”

In addition, the government considers that the state aid provisions in Article 21 of the CFTA should not be subject to the agreement’s wider dispute resolution provisions. That would mean no enforcement regime other than through the WTO, which is experiencing its own difficulties after the US put a block on the appointment of new judges to the WTO appellate body last December.

The contrast between the UK and EU positions on state aid is stark. The EU’s negotiating directives envisage “the application of Union State aid rules to and in the United Kingdom”. If the EU has its way, an “independent and adequately resourced enforcement authority” would enforce the applicable rules in the UK, working in close cooperation with the Commission; and disputes about the application of state aid rules in the UK would be subject to dispute settlement. These proposals indicate that the EU views state aid as one of the most important parts of the “level playing field” of common rules and standards which it says the UK must abide by if it wants a trade deal with zero tariffs and zero quotas.

What next?

It remains to be seen how the respective positions of the UK and the EU will play out in the forthcoming negotiations – and how far the parties will be prepared to compromise in key areas. State aid appears to be a major battleground and, with the EU asking for continuing UK alignment with EU rules, reaching agreement in this area is likely to be particularly difficult. The UK’s chief negotiator was certainly uncompromising in the public letter he wrote to his EU counterpart, Michel Barnier, on 19 May:

“[…] your text would require the UK simply to accept EU state aid rules; would enable the EU, and only the EU, to put tariffs on trade with the UK if we breached those rules; and would require us to accept an enforcement mechanism which gives a specific role to the European Court of Justice. You must see that this is simply not a provision any democratic country could sign […]”

If the transition period expires without a comprehensive trade deal, the UK and the EU will be subject to non-preferential WTO rules.  UK exports to the EU would be subject to the EU’s high external tariffs, and vice-versa.  Given that the UK sends just under half of its exports to Europe, a no-trade-deal Brexit at the end of the year may well be more painful for the UK than for the EU, although that may not be a determining factor when weighed in the balance with all the other issues that affect these negotiations.

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[1] It’s possible that the UK government will make further changes to sections 60 and 60A of the Competition Act 1998, depending on the outcome of the trade negotiations with the EU.  In his written statement of 3 February, Prime Minister Boris Johnson declared that “any agreement must respect the sovereignty of both parties and the autonomy of our legal orders. It cannot therefore include any regulatory alignment, any jurisdiction for the CJEU over the UK’s laws, or any supranational control in any area […]”.

Pat Treacy

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Edwin Bond

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