State Aid, the Single Market and the World Trade Organisation

 

Political arguments in Britain during the last couple of years have focused heavily on the likely effects of Brexit on trade in goods and services. This has made for a rather dull public debate because, in truth, after decades of trade liberalisation across the world, the probable changes in the international trading position of Britain would hardly be the most significant outcome of Brexit. Other policy issues are more important, including the implications of the Single Market for industrial policy and State Aid. These could indeed have strongly beneficial outcomes for workers and the poor.

 

Remarkably, some on the Left have attempted to portray Brexit in a negative light even in these respects. Characteristic have been the arguments of Open Britain in defence of the Single Market.[1] According to Open Britain, a Left government could pursue the innovative industrial policies that Britain needs, while remaining in the Single Market. Core analytical support for this view was provided Tarrant and Biondi in a widely read contribution claiming that EU State Aid laws draw on the “social market economy” of Germany and would not prevent Britain from expanding State Aid.[2]

 

These are not persuasive arguments. The Single Market certainly allows for the advance of State Aid but couches it in terms of market compatibility, which would prove a serious impediment to radical policies pursued by the Labour Party. Brexit would offer to a Left government considerable additional scope to deploy State Aid in support industrial policy. Indeed, the rules of the World Trade Organisation (WTO) with regard to State Aid are generally more conducive to Left policy.

 

Comparing State Aid regimes

 

Few on the Left would disagree that a radical government in the UK ought to engage in far-reaching and bold industrial policy. Industrial intervention would be vital to overcoming the deleterious legacy of decades of neoliberalism, and to rebalancing the economy in the interests of workers and the poor. It would be necessary to undertake a programme of public investment and to adopt measures to boost productivity especially in deindustrialised regions, including Northern England, Wales and Scotland. It would also be necessary to lessen the overweening presence of the City of London in the British economy.

 

The EU certainly allows for industrial policy.[3] However, the tenor of EU industrial policy is to be consistent with the Single Market and thus to support competition, or simply to fix putative “market failure”. It covers a very wide range of topics including cybersecurity, intellectual property rights, regulating personal data, alternative fuels, a skills agenda, and so on. The objective is to establish a competitive environment that prevents member states from supporting enterprises that are deemed unsuccessful and wasteful of resources.

 

This is a very different industrial policy to that which was deployed in Europe in the immediate post-war decades or in more recent years in East Asia with considerable success, the aim of which was to restrain the market and direct private capital, including by promoting “national champions”. In contrast, current EU industrial policy operates within a neoliberal framework that avoids deploying state power against the market and private capital. For this reason it lacks both the effectiveness and the range that would be required for a Left policy in the UK.

 

This point can be simply demonstrated with regard to State Aid, which is a vital component of industrial strategy. Note first that Britain spends far less than other EU countries on State Aid (roughly half of French and a quarter of German expenditure as proportion of GDP). The dominant neoliberal thinking of the last four decades in the UK accounts for much of the current feebleness of State Aid. A Left government would need to increase the proportion substantially with the aim of rebalancing the economy. But what is the most propitious framework of State Aid rules?

 

Brexit does not imply that Britain would acquire full freedom to conduct its own State Aid policies. The global spread of neoliberalism during the last four decades has meant that the rules of international trade under the World Trade Organisation now also include State Aid. The members of the EU are already subject to WTO rules, and after leaving the Single Market Britain would have to continue applying these. But there is no doubt that EU State Aid rules are much more restrictive than WTO rules, which operate at a far less detailed level and with fewer sanctions.[4] Exiting the Single Market and remaining within the rules of the WTO would actually open up fresh policy space for a Left government.

 

To be more specific, the rules of the WTO on State Aid relate to subsidies (strictly financial support) which are intended either to boost exports or to reduce imports. The WTO is not concerned with subsidies directed to the domestic economy that do not affect international trade. Under WTO rules it is possible to have regional subsidies that apply to all enterprises in a region. Moreover, the WTO does not have a central mechanism to monitor and enforce its State Aid provisions, which are in any case milder. It has a Disputes Settlements Mechanism to which cases can be brought by other WTO member states, but there is no mechanism to enforce breaches of the subsidies rules. Instead the WTO lists prohibited subsidies as well as actionable subsidies, which allow complaining countries to impose countervailing duties after settlement.

 

In sharp contrast, the rules of the EU on State Aid focus not only on subsidies but on any intervention aimed at domestic industry as long as it could be interpreted as a “distortion” of competition. EU rules generally allow a national government to set the framework of State Aid, but prevent it from setting the direction of an industry, a sector, or the economy as a whole. It is nonetheless possible to have some regional interventions despite the general restriction on subsidies, under the so-called de minimis rule. This basically amounts to allowing assistance worth less than 200,000 euros per enterprise over three years – a very small sum in the British context. The EU also allows for some “block exemptions” applying to Small and Medium Enterprises, Research and Development, Regional Aid, Renewable Energy, and so on.[5] These exemptions are generally small in size and they are explicitly required not to affect export-related activities. The decision on what activities are exempted is ultimately taken by the EU, not the national government.

 

EU rules are actively monitored and aggressively enforced through penalties that involve financial recovery of any putative intervention. The ECJ has consistently facilitated this practice. Precisely because the EU operates in this way it happens that cases are brought to the attention of the Commission and the ECJ by domestic competitors who have a narrow interest in stopping particular forms of State Aid. National policy is thus also hampered from within by self-interested private parties that seek the support of the EU. It is very likely that a Labour government attempting to expand State Aid within the EU framework would rapidly come up against this problem.

 

Any radical industrial policy adopted by a Left government would face significant difficulties within the EU State Aid framework. There are likely to be challenges on regional aid, on support for local banks, and even on setting up a National Investment Bank. There are also likely to be challenges on State Aid intended to restructure the economy in sectorial terms. Finally, there are likely to be challenges on introducing public ownership, if publicly owned firms received support that aimed to replace private provision and pursue wider policy goals. The WTO framework is more permissive in all these respects.

 

Public procurement, nationalisation and State Aid

 

It is also important to note – though falling only partially under State Aid – that it would be hard for a Left government to use public procurement as a tool of industrial policy within the EU. Public procurement could be a part of industrial policy strategically deployed by the Labour Party to ensure that government suppliers and public contractors complied with legislation on workers’ rights as well as safeguarding the maintenance of pay ratios among workers. Not least, public contractors could be required to comply with rules on broader social responsibility. Such strategic aims, however, would be hardly compatible with EU directives on public procurement which operate broadly within a framework of ensuring competition and equitable treatment of suppliers.[6] It is true that the EU recognises the ability of procurement to deliver “social value”, including employment opportunities, social and labour rights, social inclusion, ethical trade issues, corporate social responsibility and promoting SMEs.[7] But the “social value” is directly and narrowly associated with each public procurement contract, and would not allow for flexible deployment of the strategy. This would make it practically impossible for the Labour Party to use public procurement to achieve its aims within the EU.[8]

 

The contrast with WTO rules is again sharp. If the UK left the Single Market it would need to re-join the Government Procurement Agreement (GPA) as an independent member and follow its anti-discrimination rules. These would not prevent the government from making demands on contractors that went beyond the narrow remit of the contracts themselves (and their presumed “social value”). In addition, the WTO rules do not apply to contracts that fall below each country’s self-determined coverage thresholds; they also do not cover private utilities and have limited applicability to defence procurement and concessions.[9]

 

A Left government could seek to use below-threshold contracts as well as targeting the areas with limited or no applicability of WTO rules to support local jobs and businesses. Moreover, it would have the opportunity to renegotiate the terms of re-joining the GPA, including the coverage thresholds and introducing special conditions for Small and Medium Enterprises, as the WTO has done with other countries. Several options would be open to the UK with regard to public sector bodies and housing associations.[10] The deal negotiated with EU on exit would have a significant impact on these options.

 

Finally, the EU State Aid rules have implications for the nationalisation and renationalisation of selected public utilities. There are nationalised industries in the EU, and EU rules allow for nationalisation to occur, but a nationalised company must behave as a conventional firm and cannot pursue broader social policy aims. The rule of market competition, the so-called “market operator principle”, is paramount for the EU.[11] Exceptions could be made but they would require proving that no competition existed in the instances concerned, something that would be practically impossible in the UK. For a Left government that intended to bring public utilities and other privatised industries back into public ownership to strengthen investment, improve services and meet social aims these State Aid rules would prove major obstacles, especially in view of the entrenched neoliberal outlook of EU institutions and their probable hostile reactions.[12]

 

The Left should grasp the opportunity of quitting the Single Market

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The view that the EU Single Market in 2018 is rooted in the tradition of the “social market economy”, which includes protection for labour and regulation for private capital, is at least thirty years out of date. For one thing, the putative “social market economy” of Germany is actually a neoliberal world with a deeply segmented labour market in which precarious labour and income inequality have soared. For another, the Single Market is a highly restrictive neoliberal environment that induces austerity and limits the scope for radical industrial policy. The Single Market rests on the Four Freedoms of the EU, that is, the freedom to move goods, services, capital, and labour. These were restated as individual freedoms in the Treaty of Maastricht of 1992, thus opening space for the European Court of Justice to intervene systematically in economic policy. During this period the ECJ has systematically promoted neoliberalism by favouring capital against labour.

 

Exiting the Single Market would offer several degrees of freedom to a Left government committed to social and economic reform. The machinery of the EU understands full well the danger posed by a radical Labour government in this respect. As senior sources from the EU confirmed to the Times of London on 7 May, it is the possibility that a Corbyn-led Labour government might move in exactly this direction that most frightens the EU about Brexit.[13]

 

The referendum of 2016 placed the UK outside the EU through a democratic decision supported primarily by the workers and the poor of Britain. There is no evidence that these social strata have changed their outlook during the ensuing period. They remain broadly in favour of Leave, but need information, arguments and, above all, political leadership from the Left, which used to be their historic voice. Unfortunately, the Left has found it hard to come to terms with the realities and implications of the referendum decision. Its role in the ensuing public debate has been quite weak, not least because the Remain side has exerted considerable influence within the Labour Party.

 

It is astonishing that strong voices continue to be heard among the Left arguing in favour of the Single Market. This fact alone reflects deep confusion with regard to the EU. A Left government that accepted the framework of the Single Market would find it practically impossible to oppose neoliberalism by deploying State Aid. Conversely, a Left government that aimed to rebalance both economy and society in the interests of workers and the poor through industrial policy would gain considerable policy space by exiting the Single Market. Brexit has created path-breaking opportunities to oppose neoliberalism, but they must be grasped by the Left, if they are to bring results.

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References

[1] See particularly Catherine West et al., “Busting the Lexit Myths”, Open Britain/ Labour Campaign for the Single Market, January 2018.

[2] See Andy Tarrant and Andrea Bondi, “EU State Aid Laws and British assumptions: a reality check”, mimeo, eventually published as “EU law is no barrier to Labour’s economic programme”, Renewal, 22 September 2017.

[3] See, for instance, State of the Union 2017 – Industrial Policy Strategy: Investing in a smart, innovative and sustainable industry,18 September 2017.

[4] See Federico Mor, "EU State Aid rules and WTO Subsidies Agreement", Briefing Paper 06775, House of Commons Library, 9 June 2017

[5] See Claus-Dieter Ehlermann and Martin Goyette, "The Interface between EU State Aid Control and the WTO Disciplines on Subsidies", European State Aid Law Quarterly 5(4) (2006), p.74.

[6] See European Commission, “Public Procurement Strategy”, 3 June 2018.

[7] See European Commission, “Buying Social: A Guide to Taking Account of Social Considerations in Public Procurement”, October 2010.

[8] See Peter Smith, “Corbyn and Labour: using public procurement to achieve policy goals”, Public Spend Forum Europe, 20 April 2017.

[9] Cf. WTO, "Overview of the Agreement on Government Procurement", 3 April 2017, and European Commission, "Green Paper on the modernisation of EU public procurement policy: Towards a more efficient European Procurement Market", 27 January 2011.

[10] See Sue Arrowsmith, "Consequences of Brexit in the Area of Public Procurement", Study for the IMCO Committee, European Parliament, April 2017, and Simon Randall, "Public Procurement After the UK's EU Departure", Society of Conservative Lawyers, July 2017.

[11]  “The purpose of the MEO test is to assess whether the State has granted an advantage to an undertaking by not acting like a market economy operator with regard to a certain transaction. In that respect, it is not relevant whether the intervention constitutes a rational means for the public bodies to pursue public policy (for example employment) considerations… The decisive element is whether the public bodies acted as a market economy operator would have done in a similar situation. If this is not the case, the beneficiary undertaking has received an economic advantage which it would not have obtained under normal market conditions, placing it in a more favourable position compared to that of its competitors.” EU Commission, “Commission Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union”, Notice 2016/C 262/01, p.18.

[12] See guidance quoted above

[13] See "Fear of Jeremy Corbyn-led government prompts tough EU line on Brexit", The Times, 7 May 2018.

[14] See Harold D. Clarke, Matthew Goodwin and Paul Whiteley Brexit: Why Britain Voted to Leave the European Union (Cambridge University Press: Cambridge, 2016).

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About the author/s

 

Costas Lapavitsas is Professor of Economics at the School of Oriental and African Studies, University of London, and a former member of the Greek parliament. A revised version of this article appears in Jacobin magazine.

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