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This Is How State Aid Became The Major Stumbling Block To A Deal With The EU

Lord Forst and Michel Barnier are due to hold crunch Brexit talks this week (PA)

6 min read

As the deadline to sign a Brexit free trade deal ticks creeps ominously closer, the issue of state aid has emerged as the biggest obstacle to an agreement, with the UK insisting on rejecting the EU’s rules.

At a basic level, state aid is about economic protectionism: countries giving their own firms an economic boost ahead of foreign companies. 

But as with so much of Brexit the row is not really about what it purports to be – it’s about something deeper, more totemic.

To Brexiteers it is about removing the EU’s hand from the UK’s decision-making entirely, while the EU say it is about maintaining a “level playing field”.

It's a state of affairs leading Brexiteer David Jones says is “incompatible with British independence”. 

He is backing the government in trying to “regularise its legal position”.

The Tory MP and deputy chair of the ERG told PoliticsHome: “I don't know of any free trade agreement ever, under the terms of which one party has got that level of influence over the actions of another party."

Remainers, needless to say, think the row is unnecessary. Former attorney general Dominic Grieve said: “On the face of it, this country has never been in favour of state aid.

“It has been seen as a form of manipulation of the markets and if carried out badly, could lead to legal challenges domestically on the basis of unfairness, if one company were favoured over another.

“But this government appears to have decided it’s a dealbreaker.”

The EU has long insisted a comprehensive trade deal with the UK hinges on keeping the so-called “level playing field”, which they say includes making sure state aid is not used to give British firms an economic advantage.

But the UK has in fact been loathe to use such schemes over the decades, especially compared with its continental neighbours. State aid spending makes up just 0.34% of Britain’s GDP, and that figure is unlikely to change that in the coming months, even as industries struggle to cope with the impact of coronavirus. 

However, the government is said to want the ability to use subsidies to help improve the country’s technology sector. 

As both James Forsyth in The Times and ITV’s Robert Peston have reported, Number 10 wants to help build up the industries of the future and become less reliant on either the United States or China, both of whom happily boost their own tech firms.

The UK is yet to publish a proposed subsidy regime for its own industries post-Brexit, criticising Brussels for insisting on seeing it before moving on to the next stage of the talks, leading to this summer’s impasse.

It has now become the most important issue on the table in the crunch talks between Lord Frost and Michel Barnier this week after its impact in Northern Ireland has become clearer.

In the existing protocol in the Withdrawal Agreement, Northern Ireland is a de facto member of the single market, and therefore subject to EU state aid law. 

And the European Commission said its interpretation of that would cover the UK subsidising a company in mainland Britain which has interests in Northern Ireland.

Mr Jones finds this unacceptable: “If anyone had suggested to them that they would try to impose EU state aid policy on Canada or Japan or whoever, they would have said 'no we don't do that' - but they're trying to do it in the case of the UK.”

In response to the issue Downing Street is set to publish a new Internal Markets Bill in the coming days, allowing UK ministers to take charge of customs issues on the Irish border, and also diluting Northern Ireland’s obligations to EU state aid rules.

That has been met with anger by Brussels, who claim doing so threatens the legitimacy of the Withdrawal Agreement and peace in Northern Ireland.

Mr Jones accused the EU of refusing to act in good faith by “refusing to talk about anything other than their red lines" of level playing field and fisheries.

“I think it's more than arguable that they've acted in bad faith and in breach of the Withdrawal Agreement, so it's a wee bit rich if they're now squawking about it because that's something they should have been doing for the last nine months, but they haven’t,” he added.

The UK has tried to dampen down the row, an official insisting they are only making “minor clarifications in extremely specific areas” to the existing deal and fixing some legal loopholes, but it is clear behind the scenes that this is now the biggest issue in the negotiations.

And Number 10 appears willing to walk away from the whole thing if it cannot be agreed, not wishing to cave in to Brussels’ leading demand almost on principle.

Mr Grieve said the EU is not going to back down on state aid, and the impasse will threaten the future of the union.

“The truth may well be that the government wants the freedom to do state aid, but in practice it is most unlikely it would ever be carried out.

“But from an EU point of view, this sort of assurance – ‘we have the power to do this on paper, but we probably won’t’ - does not suit them when they are operating a strictly rules-based system.”

He added: “It was the same with fisheries – to join the EU in 1974, we to an extent sacrificed our fisheries and I think it’s an inescapable conclusion that they were deemed not economically important.

“We decided, as a matter of state policy, that opening up our seas to EU control was acceptable, and it’s become totally talismanic as an issue.

“Economically, except of course for the fisheries communities, it’s an absolute drop in the ocean. It’s actually probably the only thing in which leaving the EU is advantageous to UK – we will regain complete control of our economic seas.

“But the idea that that should end up being the stumbling block on a deal that might be worth billions is an extraordinary reflection of the way in which emotion has come to be much more important than economic sense in forging our future international relationships.

“I think the EU may well back down on fisheries. I fail to see how it can on the state aid issue, when it would so clearly go against its international rules and regulations.

“For me, there was a slight inevitability about all of this and behind it all is the question of whether the union in the UK survives at all.

"This has huge implications for Northern Ireland, and I fail to see how it helps keeps Scotland in the union, although obviously that is a separate - but linked - issue.”

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