Will the UK be free to subsidise business after Brexit?

Published on
2 min read

Earlier this month, the World Trade Organisation ruled that the USA may impose up to almost USD 7.5 billion of “countermeasures” against trade with the European Union. This is the latest stage of a long running dispute between the USA and the EU over alleged subsidies made to Boeing and Airbus respectively.

Within the EU, subsidies from governments or any other public bodies to businesses are generally prohibited by the State Aid rules, which are enforced strictly by the European Commission.  In the event of a no-deal Brexit, the expectation is that the UK would adopt the State Aid rules on a UK-wide basis and that they would be enforced by the Competitions and Markets Authority.   

However, the recent WTO decision in the Airbus case reminds us that outside of the EU there exist WTO rules governing the use of taxpayers’ money to support businesses, which will still apply regardless of Brexit.  The UK is party to the WTO Agreement on Subsidies and Countervailing Measures (SCM). Under the SCM, some subsidies are prohibited outright while the rest are ‘actionable’ – meaning that the subsidy is allowed, but other countries can take certain actions if the subsidy harms them. For example, affected countries can protect their industries by taxing imports of the subsidised good – this is known as imposing a ‘countervailing duty’, and this is what the USA is now permitted to do under the latest decision in the Airbus case.   

Although the definition of a ‘subsidy’ under the SCM is broadly similar to the EU’s State Aid rules, the EU rules are a lot more stringent than the SCM.  The key differences between them are:

  • The default position in the SCM is that subsidies are generally allowed, while EU rules consider subsidies to be generally illegal.
  • SCM applies only to goods, but EU rules include services too.
  • EU rules are applied prospectively (ie legality must be proved before awarding any support), while WTO rules are only reactive, and are only triggered if a member country lodges a complaint.
  • WTO rules rely on state-to-state enforcement while under EU rules there are remedies available to businesses and individuals.

Under EU rules, a business has to repay illegal State Aid. There is no such mechanism to remove anti-competitive effects under the WTO rules.  Instead, affected countries are allowed to take countervailing measures.   

Points to note

While the UK may have more flexibility outside of the EU system it will not be free of all constraints on subsidies to business. So contrary to the hopes of some, it is unlikely that Brexit, of any sort, will result in substantially greater support of UK businesses by the UK Government. 

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