Thread by @pmdfoster

So. July is crunch month for #Brexit talks - need to make political moves on big stuff. The issue of State Aid is key. With help of legal eagles I've tried to unpick issue here - and pick over solutions. Complex but interesting. Stay with me. 1/Thread

ft.com/content/560e9b…

So first, why is this such problem?

Well, because it goes to the very heart of the 'level playing field' issue.

It cuts hard across UK desires to be 'sovereign equals' with EU after #Brexit trade deal takes effect.

But the EU are determined to guard against UK free-riding/2

First, let's look at opening positions. Then possible solutions.

Here are the EU and UK positions side by side, taken from EU mandate/UK Future Relationship document. /3

assets.publishing.service.gov.uk/government/upl…

consilium.europa.eu/media/42736/st…

The EU wants the "application" of EU State Aid rules in the UK on an "ongoing" basis.

This, it argues, is because of the "size and proximity" of the UK. Otherwise UK will be free to unfairly subsidise while getting 'zero tariff, zero quota' access to EU single market./4

But as @DavidGHFrost made clear in thread last week this is an "unrealistic" position, and EU will have to shift if it wants a deal. No way the UK can allow EU's top court to effectively have say over levers of UK economy/5

https://twitter.com/DavidGHFrost/status/1276158483445035010?s=20

@DavidGHFrost Before we move to UK position an important tangent. The Northern Ireland Protocol *already* leaves ECJ a say over aspects of UK subsidy policy as it effects goods sector in NI. This is a big potential future tangle.

@GeorgePeretzQC explains it here. /6

prospectmagazine.co.uk/economics-and-…

@DavidGHFrost @GeorgePeretzQC So what about UK position? It wants something it says is modelled on EU-Japan deal. A discrete UK regime, based on WTO concepts with notifications to the other side every two years, and "consultations" on potentially harmful subsidies. But the EU says "no way". /7

@DavidGHFrost @GeorgePeretzQC As one official on the EU side articulates it to me: “This approach — ‘we’ll notify you every two years on what we’ve done and if you want to punish us, then punish us’ — that’s never going to fly.”

Why? Because it doesn't give reassurance commensurate with UK access demands./8

@DavidGHFrost @GeorgePeretzQC So. Now the tricky part.

What might be the compromise that would

a) allow the UK to retain judicial sovereignty

And

b) reassure the EU on the point of UK free-riding on the single market.

So here, best to ask a lawyer or three! /9

@DavidGHFrost @GeorgePeretzQC You'll get lots more detail from following @GeorgePeretzQC Alexander Rose @StateAidLaw and keep eye on James Webber, anti trust partner @ShearmanLaw but the basis of a 'fix' would seem to lie in having two parallel, but discrete regimes. /10

@DavidGHFrost @GeorgePeretzQC @StateAidLaw @ShearmanLaw These two regimes would need an independent regulator - let's presume DG Competition for the EU and the CMA for the UK.

There would also need to be, set out in the FTA, what one EU official called a "joint philosophy". Some ground rules./11

@DavidGHFrost @GeorgePeretzQC @StateAidLaw @ShearmanLaw James Webber describes a plan based on measuring how a subsidy actually distort trade between the EU and UK.

So you agree to rule out some areas (so aid below 75m euros, say) and accept obvious "manifest negative effects", like subsidising to steel jobs. /12

@DavidGHFrost @GeorgePeretzQC @StateAidLaw @ShearmanLaw Steal! :) The tricky part is what happens in the middle. But you would need evidenced-based analysis of distortion, of the kind already made during merger evaluations. Tricky, but not impossible. Alongside an independent dispute resolution system. /13

@DavidGHFrost @GeorgePeretzQC @StateAidLaw @ShearmanLaw Logically, the DRM could not be binding on either party, or it would risk cutting across either sides top courts. And that can't happen. So as a last resort, you have proportionate tariff-retaliation.

It all sounds logical, so what's the problem? /14

@DavidGHFrost @GeorgePeretzQC @StateAidLaw @ShearmanLaw On the UK side, committing to a "joint philosophy" in the FTA may be more than Brexiters can stomach. Tho it is not really clear why. Word is that Cummings & co want minimalist regime...but they've not articulated why. Other than vague dislike of the "administrative state"/15

@DavidGHFrost @GeorgePeretzQC @StateAidLaw @ShearmanLaw In the election @BorisJohnson said UK would have a regime that made it "faster and easier" to bail out companies; but was quickly attacked by IEA and others. A consultation with industry was promised. Hasn't happened. And there's no legislation yet, either. /16

@DavidGHFrost @GeorgePeretzQC @StateAidLaw @ShearmanLaw @BorisJohnson Which begs question a) what is the UK regime for b) would it be precluded by doing a deal with EU. There is talk of 'freeports' and 'pump-priming' a Green new deal....but not clear that couldn't happen inside the deal described above. /17

@DavidGHFrost @GeorgePeretzQC @StateAidLaw @ShearmanLaw @BorisJohnson As Ulrich Soltész from #GleissLutz tells me, given relative track record of UK subsidy vis-a-vis France and Germany, he bets that in the real world of EU-UK trade post Brexit the dispute resolution panel wouldn't actually be very busy. /18

@DavidGHFrost @GeorgePeretzQC @StateAidLaw @ShearmanLaw @BorisJohnson On the EU side, Mr Webber warns that a trade distortion-based approach will be resisted by the Commission which uses the State Aid regime as a wider lever of power (on tax policy for example) and won't like an approach that could undermine the existing regime by example /19

@DavidGHFrost @GeorgePeretzQC @StateAidLaw @ShearmanLaw @BorisJohnson If you want to be optimistic about a deal, you might note that @BorisJohnson often focusses on "No ECJ" as a test of his deal? That is probably achievable in the end. So if the beef isn't ultimately on substance of subsidy powers, then he can claim 'freeeeedom' and a win /10

@DavidGHFrost @GeorgePeretzQC @StateAidLaw @ShearmanLaw @BorisJohnson It is also notable that the government, while talking tough - officially wont rule out having no State Aid regulator at all, citing Canada as a precedent - concedes that its policy is being developed "in tandem" with EU negotiations.

See this letter. /21 committees.parliament.uk/publications/1…

@DavidGHFrost @GeorgePeretzQC @StateAidLaw @ShearmanLaw @BorisJohnson Some say that Cummings and Co are planning a great top-down subsidy blitz...but it is odd that, if that's the case, and they're prepared to go to the 'no deal' wall over this, they've done nothing at all to sell or articulate that vision. /22

@DavidGHFrost @GeorgePeretzQC @StateAidLaw @ShearmanLaw @BorisJohnson Because as @GeorgePeretzQC explains, there will have to be some UK policy to avoid falling back onto the default of EU law via the Withdrawal Act, and it looks like it will be brought in as part of EU-UK deal implementation legislation, which means an almighty rush/23

@DavidGHFrost @GeorgePeretzQC @StateAidLaw @ShearmanLaw @BorisJohnson Noting both @MichelBarnier's recent remarks hinting at flexibility - and @DavidGHFrost tweet saying he had "noted carefully" the EU overture - its clear deal time approaches.

Both sides say they are "ready to tango". How far that survives contact with reality, we'll see. ENDS