The UK needs a balance of certainty and creativity in state aid rules

Welcome back. Do you work in an industry that has been affected by the UK’s departure from the EU single market and customs union? If so, how is the change hurting — or even benefiting — you and your business? Please keep your feedback coming to brexitbrief@ft.com.

The reality of Brexit — as we’re seeing this week with the dangerous ruckus over implementation of the Northern Ireland Protocol — is that it was always going to be an ongoing process, not an event. 

But that does not mean, at least from an EU perspective, that the Trade and Co-operation Agreement signed last Christmas Eve is an endlessly fungible document.

The first month of this post-divorce world has been characterised by some uncertain probing from affected industries wondering whether there is space for greater “pragmatism” on the EU side, particularly on rules governing food and drink exports.

Part of the problem is that Prime Minister Boris Johnson’s government has been inconsistent and evasive about a deal that it trumpets one minute, but then denies the reality of the next. This leads to some understandable confusion when Canada-style rules are applied to the UK.

For example, since Canadians do not send fresh products such as cockles, mussels, clams, scallops and oysters to the EU, they are not inconvenienced by the bloc’s rules that require these products to be “depurated” (cleaned) before export — something that kills their shelf life.

The UK shellfish industry does — or did — send thousands of tonnes of these products to the EU (where prices are higher and appetites are larger) but this week were told that EU trade rules could not be fixed to accommodate them. 

This is not, according to the industry’s trade association, what Defra, the agriculture ministry, had led them to believe would happen, hence the disappointment in the press.

There will be more of these examples and — if the EU approach so far is any guide — more disappointments as wished-for “easements” from EU trading rules (for example on UK exporting chilled meat products) do not materialise. 

Indeed, EU officials are keen to lower expectations and the appointment of David Frost as Mr Johnson’s Brexit representative does not augur too well for those who hope that the TCA’s various management committees will become forums in which “fixes” can be found.

Lord Frost was key to the decision to prioritise sovereignty over market access while negotiating the deal, and there is minimal expectation in Whitehall that he will do much to prevent a gradual freezing over of relations with Brussels. There are tricky times ahead, I suspect, and not just when it comes to Northern Ireland.

Which brings us back to the home front. If the British government does not have a say over whether the EU will take British bangers and bivalve molluscs, it has taken back control of key areas of domestic policy, including subsidy controls — or state aid, in EU parlance.

This week the government launched a consultation over what form the UK’s subsidy regime should take.

As ministers have long argued, Brexit means that now the UK is outside the bloc, it does not need to duplicate an EU regime designed to ensure free and fair competition between 27 sovereign countries, all of which have control over their tax policy.

The result is a state aid system that can be very cumbersome, often taking months to make decisions on whether a grant is acceptable — to the longstanding frustration of British ministers, and not just pro-Brexit ones.

Now that it is flying solo, the UK can create a nimbler regime. Some possible features are outlined here by James Webber, a partner at law firm Shearman & Sterling with a strong intuition of Brexity thinking.

The most obvious change is that the “independent authority” that the UK agreed to set up as part of the TCA does not have to be an EU-style approvals body. Indeed, the consultation, while being pretty open-ended, seems clear that it should, at most, have an advisory role.

The government’s hope is that this flexibility will turbocharge its levelling up agenda and public-private innovation, but time will tell whether, if in practice, that is really the case.

As Alexander Rose, an EU competition expert at law firm DWF, has pointed out, creating too much uncertainty by leaving the courts to decide on disputes over subsidies is actually a recipe for caution and inertia.

Indeed, the current situation left behind by the TCA — which sets out principles of subsidy alongside the Northern Ireland Protocol which also cuts across subsidy policy — is already proving burdensome and confusing to regional authorities, he says.

One solution to reducing that burden is to identify “safe harbours” where subsidies are allowed unchallenged in defined areas — for example, to meet social and environmental policy goals. 

This would be a version of the EU’s “block exemptions” but under a UK regime that does not require prior approvals, it could be more flexibly applied, so that if a subsidy did not fit squarely in a particular safe harbour, it could still go ahead on the balance of risk.

Ultimately, as George Peretz QC explains, there is a spectrum of possibility between the EU’s rigid, formalistic system — that requires pre-notification — and an “open sea” system, where the only check is the possibility of a court challenge.

Instinctively, the government wants to be closer to the open sea end of the scale, but as Mr Peretz observes, that approach “terrifies” those taking decisions in grey areas where value judgments are required on the merits and impacts of a subsidy.

“Beneficiaries and lenders want certainty, they might be reluctant to commit money if there is a risk of state funding getting withdrawn — so the risk is that people end up taking very cautious views, ‘sticking close to nurse’ because they are terrified of taking a decision,” he explains.

Achieving the right balance of certainty and creativity will be important in implementing the government’s levelling up agenda, possibly creating a less rigid system of regional development than that imposed from Brussels.

Brexit in numbers

There has been a lot of speculation about the volumes of trade going over the Channel since January 1, but the Port of Dover has shared its final numbers for freight vehicles in January with Brexit Briefing.

The numbers show traffic steadily returning to seasonally normal levels, with the final week in January only 13 per cent below the figure for 2020. If you take into account the bulge caused by record levels of traffic during the stockpiling frenzy in December, then, in aggregate, things are now in spitting distance of normality.

But these headline figures conceal a few known unknowns — principally the level of trucks running back to the EU empty in order to avoid frictions at the border. Pre-Brexit, about a third ran empty; now French officials estimate it to be 50 per cent — groups such as the Road Haulage Association say evidence from their members puts it closer to 65 per cent.

The other issue the data do not address is the number of vehicles that are able to board freely in Dover — and traffic is running smoothly so far through the port — but are then stopped in Calais and found to have incorrect paperwork.

My colleagues in Paris asked for details from regional officials in Calais, who said that while only a small fraction of lorries were carrying food consignments, only one in 10 of those had fully correct paperwork — so 90 per cent carried errors, however small. 

As the fishing and meat-exporting industries are discovering, this paperwork is deeply complex and even when they get the hang of it, raises questions about the viability of shipping high-value products with short shelf lives, and certainly not in small, grouped loads that involve multiple businesses.

Indeed, the IHS Markit/Cips purchasing managers’ index indicated that manufacturing was “close to stalling” this week, which tallies with the broader underlying assessment of an old customs broker hand of my acquaintance: “It’s the new normal. Less goods, moving more slowly, and costing more.”