Brexit: is a deal still doable? State aid and the Internal Market Bill

The UK Government's decision to introduce legislation which would effectively override some aspects of the Brexit Withdrawal Agreement has gone down badly with the EU. Does this mean that businesses need to prepare for no deal at the end of the transition? Or is a deal still doable?

Impact on your Brexit preparations

Although the latest developments may well increase the risk of no deal, that risk was in our view already significant – which is partly why we have argued that businesses should prepare for a no deal outcome. Furthermore, for a lot of businesses, many of the practical difficulties associated with the end of the Brexit transition period will be the same whether or not there is deal, so it is no longer the case that businesses are being expected to prepare for two radically different outcomes. Consequently, our advice remains that businesses should continue to prepare for no deal, whilst hoping that one emerges (and being realistic about the likely limitations of any such deal).

What to do

For more information on how to prepare, see our short guide on key issues to consider. You can also register for our webinar "Are you ready for Brexit" at 4 pm on Thursday 24 September, featuring international trade commentator Dmitry Grozoubinski. The webinar will cover what businesses involved in the provision or receipt of goods and non-financial services should be doing to prepare ahead of 1 January 2021 – whether or not there is a deal. Topics to be covered include business travel and immigration, import and export of goods, product and services regulation, data protection, tax matters and commercial contracts

Is a deal still doable? State aid as a 'case study'

A deal is still doable if there is the political will to make compromises. By way of an example, a key area of disagreement between the parties is the EU's demand for a level playing field on state aid (for more detail on state aid, click here for our recent Q&A). On the face of it, the parties' opening positions here are irreconcilable, with the EU insisting that the UK should continue to adhere to EU state aid rules and the UK insisting that it should not be required to go any further than the relatively level playing field conditions in free trade agreements with countries such as Canada. The EU's response to this last point is that the UK is much closer geographically than Canada and is being offered a better deal, at least in terms of tariffs on goods, and therefore stronger provisions are appropriate.

More recently, however, the EU is reported to have indicated a willingness to revisit its position, provided the UK supplied detail on how it proposed to replace the EU state aid regime to which it is currently subject with its own domestic regime. The UK Government has now made an announcement in which it committed itself to following WTO rules on state aid and to hold a consultation on a domestic subsidy control regime, although it provided no detail on the latter. From the EU's perspective, this is unlikely to be sufficient to allay its concerns about the UK having a comparatively free hand to subsidise businesses after Brexit, whilst the EU continues to be constrained by its own internal state aid rules.

HOW MIGHT A COMPROMISE BE REACHED ON STATE AID?

The EU will want to see that UK proposals for a domestic subsidy regime includes services as well as goods because WTO rules only cover the latter. It will also want to satisfy itself that the regime will act as a meaningful constraint on government – which probably entails an independent regulator together with the ability for businesses which believe they have been harmed by unfair subsidies to take court action (the WTO framework, by contrast, is not "policed" by an independent regulator and offers no ability for enforcement by private businesses – disputes may only be raised at state to state level). However, if it is correct that the EU is no longer wedded to the idea that the UK must follow EU state aid rules, then a compromise is clearly possible on this issue if the UK is prepared to put forward a reasonably robust state aid regime of its own design. Given the UK's historic support for state aid rules as an EU member state and its recent statement that it does not intend to return to a "1970s approach of picking winners and bailing out unsustainable companies with taxpayers’ money ", one would expect the UK to feel able to make stronger commitments in this area than it has done to date. UPDATE 22.9.2020: A group of leading state aid lawyers has written to the Prime Minister underlining their belief that a compromise of this nature is possible and offering to assist the Government in preparing a robust set of proposals to put to the EU in the context of the negotiations.

Obviously state aid is not the only unresolved matter in the Brexit negotiations – but it illustrates how a compromise could be reached on a complex and controversial issue, despite the apparently irreconcilable opening positions of the parties.

Where does the Internal Market Bill come in?

The relevance of the Internal Market Bill to this debate is that (among other things) the draft legislation purports to override a commitment which the UK made in the Withdrawal Agreement to continue to adhere to EU state aid rules in relation to any matters affecting Northern Ireland (which would be likely to include any UK-wide subsidy measures). This commitment rather undermined the UK's negotiating position with regard to state aid, since the EU could point out that the UK had already signed up to EU rules in the Northern Ireland Protocol to the Withdrawal Agreement. So it may well be that the Bill - in combination with the refusal to commit to a robust domestic subsidy regime - is essentially an attempt to increase the UK's negotiating leverage by signalling that it may not uphold that commitment in the event of no deal, playing on the EU's concern about the UK being relatively unconstrained by subsidy rules.

An alternative interpretation of these developments is that they are part of an attempt to provoke the EU into withdrawing from the negotiations, at which point the UK Government would argue that the EU was primarily to blame for the breakdown (and for the consequences of no deal). If this was the idea, the EU has not so far taken the bait, although it has set a deadline of the end of the month for the legislation to be withdrawn, failing which it will consider taking action against the UK under the Withdrawal Agreement (click here).

HOW SIGNIFICANT IS THE EU'S END OF SEPTEMBER DEADLINE?

It does not necessarily follow that the negotiations on the future trading relationship will collapse unless the offending provisions of the Internal Market Bill are withdrawn by the EU's deadline of end of September. Firstly, the EU's threat of further action was issued in the context of talks in the Joint Committee on the implementation of the Northern Ireland Protocol, which are distinct from the talks on the future UK-EU relationship. Secondly, the offending provisions of the Internal Market Bill have already raised concerns amongst Conservative MPs and are widely expected to encounter opposition in the House of Lords; these developments could encourage the EU to take the view that it was premature to call off the talks based on legislation that the UK Government may not be able to get through Parliament in the foreseeable future. However, if the EU perceives that the UK is not engaging constructively on unresolved issues such as state aid and is not prepared to take the EU's concerns seriously, then a collapse in the negotiations could well be on the cards.

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