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Brexit negotiations: the state aid problem

Overview

The public statements made by Brexit negotiators David Frost and Michel Barnier last week suggest that the latest round of Brexit negotiations has resulted in minimal progress on the key issues separating the UK and EU. 

The negotiations have also thrust the complex state aid rules into the limelight, as the so-called "level playing field" provisions have become a major sticking point, along with the scope of EU fishing rights in British waters. The EU is seeking agreement that the UK will not seek to distort competition post Brexit by subsidising British businesses or reducing regulatory standards in a manner considered unfair by the EU. The gulf between the two sides on this issue was laid bare in the contrasting approaches reflected in Barnier's statement:

On the level playing field, the UK still refuses to commit to maintaining high standards in a meaningful way. On State aid, despite the clear wording of the Political Declaration, we have made no progress at all. This is all the more worrying because we have no visibility on the UK's intention on its future domestic subsidy control regime.

and David Frost's version of events:

We have always been clear that our principles in these areas are not simple negotiating positions but expressions of the reality that we will be a fully independent country at the end of the transition period.

The fear on the EU side is that without a UK/EU Free Trade deal, and in the absence of any attempt by the British to replace the EU state aid regime with a domestic regime of similar heft and an independent, binding mechanism to settle EU/UK disputes regarding the same, the UK will be free to exploit the relative weakness of the WTO rules on state aid. The position is all the more complicated by the COVID crisis since most EU countries have taken advantage of a temporary framework introduced by the EU at the start of the crisis to allow Member States to provide financial support to domestic businesses during the lockdown. Such financial support measures would ordinarily have fallen foul of the EU state aid regime.  However, while this framework has temporarily relaxed State aid rules, the schemes approved under it have nonetheless had to comply with specific criteria which has complicated the distribution of financial support to certain businesses. From January 2021, (assuming no extension to the transition period), if it were minded to do so, the UK Government could have greater freedom to provide financial support (subsidies, tax breaks etc.) to domestic businesses as they recover from the COVID crisis, without the constraints of the EU state aid regime (or a similar domestic subsidy control regime).

For more detail on the state aid regimes in the EU and under WTO rules, and the implications of Brexit on the UK's ability to support British businesses, with or without a deal, see our longer briefing: State aid, COVID-19 and Brexit: level playing field or UK ploughing its own furrow?.

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