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

3 Sep

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.

Jonathan Djanogly: Parliament should be able to scrutinise new trade deals properly. But the current arrangements are simply unfit for purpose.

29 Jun

Jonathan Djanogly is a former Minister, and is MP for Huntingdon.

Did we come through the Brexit process only for the UK Parliament to have less scrutiny over new free trade agreements than we had during our membership of the European Union?

This is the question that Parliament is going to have to address through the Trade Bill, currently making its way to report stage in the House of Commons.

In fact, it seems to be surprising most people that, seemingly contrary to what was proposed in the Queen’s Speech, the Trade Bill does not actually address future trade agreements at all.

Rather, it provides a low scrutiny mechanism, using Statutory Instruments (SIs), for existing EU free trade agreements (FTAs) to be ‘rolled over’ to the U.K. However, given that we have left the EU, it can be questioned as to whether any EU deals with such third countries should now be dealt with as new trade agreements.

For instance, the U.K /Japan proposed FTA is now being treated as a new agreement, and will not replicate the FTA that the EU agreed with it. Likewise, countries such as Canada seem to be waiting to see what the EU agrees with the UK, before agreeing their own new deals with the UK.

In effect, it is arguable that the Bill, which was perfectly rational when its second reading was initially heard in January 2018, may now simply have missed the boat, in terms of the future relevancy of EU trade deals that we have thus far failed to adopt.

It is also somewhat annoying, to those of us that have been following the generation of this bill for the last three or more years, that most of the sensible amendments offered by the then Secretary of State, Liam Fox, have not been re-incorporated into the current bill now before the House.

Agreement that the SI regime should only last for three years rather than five, and that the Government should have to produce reports for Parliament to explain their proposals at least 10 days before the SIs are heard, are surely not contentious. Accordingly, I have re-tabled the last Government’s own amendments for debate.

There then arises the question as to how we are going to deal with future FTAs with countries and organisations, such as the US, China and the EU. On this the Bill is quiet, despite Fox agreeing to consult on a new scrutiny process in 2018.

For the last 40 odd years, the EU has been negotiating our trade deals. As part of the EU scrutiny process, a vote needs to be taken by the EU Parliament on the draft FTA prior to its signature.

Most other countries have similar approval arrangements. In fact, some go further and allow the legislators to get involved in the provisions of the deal. So, for instance, the U.S. Senate can amend draft trade agreements.

In practice, a parliament holding the threat of a veto means that it is very rarely used. This is because the executive will have good reason to look for consensus on its negotiating mandate, as well as carrying legislators along during negotiations through regular disclosure and discussion.

A wise executive would naturally wish to avoid an unnecessary parliamentary bust up just before signing an FTA. Of course, this is where it all went wrong with the TTIP negotiations between the US – EU. Here, both the US Congress and the EU Parliament were disclosing information to their respective elected representatives, that was not being provided to UK parliamentarians.

As a result, and with the inevitable leaks, the whole debate surrounding thousands of lines of deal negotiations got reduced to accusations of selling the NHS and Brits being forced to eat American chlorinated chicken. One might have thought that the UK government had learnt its lesson from the TTIP experience.

The point to be addressed in the Trade Bill is not whether individual issues, such as food standards, environmental regulations, public services or digital services provision or consultation with the devolved authorities are good or bad things in themselves.

Rather, it is the need for the Bill to provide a statutory framework that requires government to take early stage consultation and ongoing soundings through the course of FTA negotiations. This is in order that business and citizens feel they are being listened to with similar rights to their counterparts in the country with whom we are negotiating. Then, before signing, MPs should get to vote on the deal, as will be the case with the counter-party.

In effect, I would argue that current UK practice on scrutinising trade deals is neither democratic nor practically fit for purpose. Moreover, I would go further to point out that our poor scrutiny process is going to be undermined, in any event, by other countries’ more modern scrutiny practices.

The Government suggest that the Constitutional Reform and Governance Act (CRAG) process, allowing a short delay mechanism before ratification (ie after the signing) of FTAs, is adequate. This is the same CRAG process that was implemented by Labour in 2010 at a time when the U.K. benefited from the EU Parliament veto. By the way it’s also the same process that was described in 2019 by the Lords Constitution Committee as ‘anachronistic and inadequate’.

Secondly, the Government suggests that the Trade Select Committee could be utilised to provide scrutiny for proposed new FTAs. Let us here, firstly, assume that the Trade department and therefore its committee is going to survive a rumoured merger with the Foreign Office. Even so, and despite negotiations with the US and now Japan having already started, no such arrangements with the trade committee have yet been agreed. We know this from an on the record June letter sent from the chair of the committee to Truss.

Of course, the Trade Committee will not have jurisdiction to look at the proposed EU FTA and, following the post- Brexit demise of Bill Cash’s European Standing Committee B, it has not yet been made clear who or how any proposed EU deal will be scrutinised.

I am not suggesting that MPs should be able to impede Government negotiations on FTA’s, and nor am I saying that MPs should be able to amend draft FTAs. However, we need legislation that provides for Parliament to approve FTAs, on a yes or no basis, before they are signed. I have tabled an amendment to the Trade Bill to that effect, and I look forward to the debate.