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Stephen Booth is Head of the Britain in the World Project at Policy Exchange.

At this delicate stage, predictions of whether the Brexit negotiations will conclude with a trade agreement or not are bound to be no more than guesswork. With only four months until the end of the Brexit transition period, the chances of a UK-EU trade deal being ready for January 1, 2021 are in fifty-fifty territory.

The EU’s “parallelism” policy – blocking progress in one area as long as there isn’t progress elsewhere – means that Michel Barnier is refusing to discuss British proposals on fishing until the UK moves on other issues, including the most difficult of them all: the EU’s desire to establish a “level playing field” for state aid. It could be argued that Brussels’ insistence on solving the difficult issues first prevents rather than permits progress.

Ultimately, fishing is not likely to be the deal-breaker. The eight EU member states with significant fishing fleets will completely lose access to UK waters if there is no deal at all, so cutting a deal is clearly better than the default, even if it falls well short of the desire for “relative stability” for existing EU quotas.

At the start of the summer there were reasons for optimism about a deal. The EU had signalled a willingness to water down its most ambitious demands on fishing and state aid and the UK had acknowledged the EU’s concerns about the overall structure of the agreement.

However, the mood appears to have turned and the last negotiating round yielded very little, according to the readouts from both sides. This week Jean-Yves Le Drian, the French Foreign Minister, cited the “intransigent and frankly unrealistic attitude” of the UK for the lack of progress. Barnier yesterday gave a speech outlining the continued areas of disagreement. Equally, recent media reports suggest the UK is preparing the ground to walk away from the talks if the stalemate continues much longer.

State aid is the major stumbling block. The impasse would appear to be a bigger problem in theory than in practice. UK orthodoxy has seen past governments refrain from major interventions in the economy. According to the European Commission’s “State aid Scoreboard”, the UK spent state aid equivalent to 0.34 per cent of GDP in 2018, compared to an EU average of 0.76 per cent. Meanwhile, France spent 0.79 per cent, slightly above the EU average, and Germany spent a much larger per cent.

The perception in Brussels is that this UK Government is different. David McAllister, the German MEP who chairs the European Parliament’s Brexit committee and who is close to Angela Merkel, has said the “UK’s interest in subsidising sectors”, such as steel and cars, would have “direct consequences for EU industries and jobs if these goods have ‘duty-free, quota-free’ access to the single market”.

This precise fear of the UK turning to a historically continental strategy of promoting “national champions” may be wide of the mark. Nevertheless, it is clear that some members of this Government view industrial policy and strategic investment as important levers at its disposal.

In this area, the devil will be in the detail. In the post-Covid world, it is difficult to predict what will be required of the state and nimbleness may be critical. Therefore, it is understandable that the UK would not want to find itself bound permanently by treaty into the EU state-aid regime, much of which is “temporarily” suspended in any case due to the pressures of the crisis on national and regional governments.

Little headway appears likely until the UK sets out its blueprint for domestic state subsidy control, which is expected to be later this month. At a minimum, the UK will need to comply with WTO rules, but these fall far short of the requirements of the current EU regime.

WTO rules only apply to goods, while the EU rules apply to both goods and services. The EU rules are prescriptive in what and what is not permitted, whereas, in practice, WTO rules set a high threshold because complainant countries must demonstrate that disputed aid is harmful in its effect.

The EU appears to have walked back from its initial position – clearly unacceptable to the Government – that the UK should continue to be bound by EU state aid rules into the future, with the European Court of Justice (ECJ) having the final say in respect of enforcement. In contrast, the EU’s agreement with Canada simply uses the WTO model as a basis and expands it to services, but there are limited options for enforcement.

A possible compromise would be for the UK to implement domestic legislation, adopting some aspects of the status quo, enforced by an independent UK authority and subject to review by Parliament and the UK courts (not the ECJ). Subject to dispute settlement, set out in the UK-EU trade agreement, the EU (and the UK) would retain the right to adopt countermeasures, such as tariffs, against any state aid deemed to be trade-distorting.

Whether this would be acceptable to the EU remains to be seen. The essential objective from the UK’s perspective is to depart from the EU’s desire to micromanage the UK’s subsidy policy by treaty. However, the UK would need to accept the principle that the EU could deal with the consequences of UK subsidies with countermeasures such as retaliatory tariffs.

A bust up in September or October does not necessarily preclude a deal at the last minute. Weighed against these important, yet technocratic considerations, is the prospect of no agreement at all.

A trade agreement, with no tariffs on UK-EU trade and regulatory cooperation, would better enable the UK to implement the Northern Ireland Protocol in the light-touch way the Government has outlined.

Any disruption attributed to a no deal exit, however transient, would give Keir Starmer ammunition in his continued attack on Government competence. Against this, the Government is in a much stronger position than it was in the autumn of 2019 when renegotiating the Withdrawal Agreement.

Failure would have economic and geopolitical consequences for the EU too. The UK may only be Germany’s seventh largest trade partner, but it ranks second in contributing to Germany’s trade surplus.

It is notable that Tom Tugendhat MP has on this site recently called for the UK to break with EU policy on Iran to adopt an approach closer to the United States. In the event of a breakdown in the trade relationship, Brussels should not be surprised to encounter a more muscularly independent UK in other fields.

We are now approaching the end game. The technical negotiations have probably achieved as much as they can at this stage. It will soon be up to the politicians on both sides of the table to make the big call about whether to make the deal or not.

196 comments for: Stephen Booth: With four months left to get a Brexit deal, state aid is the major stumbling block for the UK and EU.

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