Brexit and WTO subsidy rules: understanding the impact

On 9 September 2020, the Secretary of State for the Department of Business Energy and Industrial Strategy (BEIS) announced that the UK would follow the World Trade Organisation (WTO) rules on subsidies, "replacing" the current system of EU State aid law.

Take-away

The WTO rules already apply to trade between the UK and certain countries outside the EU (eg Russia). The change proposed by the Secretary of State is that the WTO rules will now also apply to trade with the EU from 1 January 2020. This means that in their bilateral relationship, EU and UK subsidies in relation to services will no longer be regulated at all, and that any challenges for subsidies in relation to goods will only be challengeable through the WTO mechanisms by the European Commission or the UK government.

Additionally, and as a consequence of the UK jettisoning the EU rules, the UK will need to adopt its own internal facing rules (ie for intra-UK trade), as it currently relies on the EU rules to regulate intra-UK trade. The UK government has stated that it will consult on what those rules will be in 2021; meaning that these rules will not be in place before the end of the transition period. The effect will be that subsidies within the UK will be unregulated for at least a short period of time. These rules will rely on the new legal regime currently being set-up by the government via the UK Internal Market Bill.

Background

The WTO rules on subsidies are contained in the Agreement on Subsidies and Countervailing Measures (the SCM Agreement). There are other associated agreements such as the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (the Anti-Dumping Agreement) and the Agreement on Safeguards. All these agreements are annexed to the Agreement Establishing the WTO (the WTO Agreement), and the UK, by virtue of being a member of the WTO (and a signatory of the WTO Agreement), is a party to the SCM Agreement, the Anti-Dumping Agreement and the Agreement on Safeguards.

There was therefore never any doubt that the UK would follow and adopt the WTO rules on subsidies; it is obligated to do so as part of its WTO membership. However, like most other WTO principles, the rules on subsidies can be overridden by mutual agreement of the members on a case by case basis. For example, although a country's tariff for a specific good is set in its schedule of commitments (a separate, country-specific set of obligations applicable for each WTO member with regards to all other WTO members), it can agree different tariffs with different WTO members via free trade agreements. The same is true with the WTO subsidy rules. The EU rules on State aid are such an agreement, which allows rules on subsidies to apply between EU Member States which are different from the rules in the SCM Agreement. The EU rules are contained in the Treaty on the Functioning of the European Union (TFEU), in particular at Articles 107 to 109.

The differences between the EU and WTO rules are several, but the key ones are as follows:

• The EU rules apply to both goods and services, whereas the SCM Agreement applies only to goods.¹

• The EU rules have a dedicated enforcer (the European Commission), whereas the SCM Agreement needs to be enforced by WTO members themselves.

• Disputes resulting from a breach of EU rules can be brought directly (ie by affected individuals and companies) and resolved definitively (including obliging to repay unlawful subsidies) through both domestic courts and the EU courts. In contrast, the SCM rules are subject to the WTO rules on dispute (commonly referred to as the DSU). These require that only governments of WTO members can take up complaints (ie not individuals or entities affected by the subsidy). Additionally, there is no remedy which can be obtained through the DSU (at most, a country affected by an unlawful subsidy will be allowed to retaliate by setting up its own "countervailing measure"). The DSU is also a highly politicised process, and there is consequently reduced legal certainty.²

Importantly, the EU rules and the WTO rules are not entirely mutually exclusive. The EU rules are internal facing (ie they apply only to transactions by internal market participants - ie the EU Member States). In contrast the WTO rules are external facing (ie they apply to all extra market transactions). This means that when Germany and France trade together (ie intra-EU trade) they are subject to the EU rules, but when Germany trades with Russia (ie extra-EU trade) the WTO rules will apply. This division is deeply entrenched in EU policy: intra-EU trade relates to the internal market policy. Under the Treaty on the European Union (TEU), EU member states have devolved nearly all decision-making powers for internal market policy matters to the EU institutions (eg the European Commission). This has also an impact on the EU's external trade policy where the policy for establishing countervailing measures (and also safeguarding and anti-dumping measures) is defined at the EU level.³

The change proposed by the Secretary of State is that the WTO rules will now also apply to trade with the EU from 1 January 2020. This means that in their bilateral relationship, EU and UK subsidies in relation to services will no longer be regulated at all⁴, and that any challenges for subsidies in relation to goods will only be challengeable through the WTO mechanisms by the EU Commission or the UK government.

As the UK currently relies on the EU rules to regulate intra-UK trade (because the UK is, until the end of the transition period, still part of the EU internal market), the UK's refusal to continue to apply the EU rules will require it to adopt its own internal facing rules (ie for intra-UK trade). The UK government has stated that it will consult on what those rules will be in 2021; meaning that these rules will not be in place before the end of the transition period. The effect will be that subsidies within the UK will be unregulated for at least a short period of time. These rules will rely on the new legal regime currently being set-up by the government via the UK Internal Market Bill.

One of the difficulties creates by the UK Internal Market Bill is that it creates a unified single market in the UK, including Northern Ireland. This is in opposition to certain terms of the Withdrawal Agreement which the UK agreed with the EU in January 2020, and in particular the Northern Ireland Protocol which requires Northern Ireland to remain subject to certain EU internal market rules, including the State aid rules. It is not yet clear how the UK government will navigate this, as it raises questions both in terms of compliance with international law obligations, but also domestic constitutional issues relating to devolution.

¹ The WTO rules on services (GATS) do include a reference to rules on subsidies for services, but this was expressly left open for further negotiations (which were never completed).

² Additionally, the DSU is currently unable to hear appeals from its own first instance body, at its Appellate Body is not quorate, due to the terms of two member expiring and the US refusing to allow for new appointments.

³ Note, however, that the EU is currently consulting on a new set of rules to bring extra-EU trade in line with the EU rules currently applicable for intra-EU trade (see White Paper on levelling the playing field as regards foreign subsidies published by the European Commission on 17 June 2020).

⁴ See, however, the proposal mentioned in the previous footnote which, when adopted in its current form, may have an impact on the bilateral relationship between the EU and the UK.