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The rules of state
20 Jun, 2017

As I write this piece, negotiations between the UK and EU on the former’s proposed departure are two days into a 720 day cycle.

So far, even in this short time span, we have seen the Engineering Employers Federation (EEF) and the Society of Motor Manufacturers and Traders (SMMT) strongly argue for Single Market Access, while the VDMA, the powerful association of German manufacturing industries, has warned there should be “no unilateral concessions” in favour of the UK. Thilo Brodtmann, VDMA executive director, called for Brexit negotiations to be held swiftly, saying, “We must not run the risk of having no agreement in place two years from now,” when talks come to a close. But he said preserving the single market among the remaining 27 EU member states was more important to VDMA member companies than keeping access to the UK market, a position which contradicts a commonly expressed Brexit position that “they need us more than we need them”.

Recently, the UK Industrial Strategy Green Paper has also been published, designed to provide the foundations on which it is intended that the UK’s future industrial success will be built. A coherent industrial strategy makes perfect sense, and all nations – and trading blocs – should have one.

Regrettably, we cannot get away from what Briefing Paper Number 07682 readily acknowledges, that our future industrial strategy is inextricably linked to Brexit. “In common with many areas of Government policy, industrial strategy could be radically altered by the UK’s decision to leave the EU,” it states. “Aspects of industrial strategy that could see significant risks and opportunities from Brexit include state aid rules, trade, investment, and research.”

The Government’s green paper states that the Government will welcome an agreement to continue to collaborate with European partners on major science and research and technology initiatives. It adds that procurement policy will no longer be constrained by EU law. EU State Aid Rules do indeed strictly prohibit most instances of financial support from Government to failing or threatened industries. But in practice, what would leaving the EU really mean?

The UK will be a member of the EU until negotiations have been finalised. Until the UK’s formal exit, State Aid rules will still apply, and one assumes throughout any transitional period.

Beyond that, the extent to which State Aid rules will apply will depend on the nature of the relationship with the EU that is negotiated. If the UK were to became a member of an outer shell, like Norway, Switzerland, Iceland or the Ukraine, then State Aid rules would still apply since they are broadly replicated in the relevant agreements. If the UK negotiated an unique trade deal with the EU, then the likelihood is that some form of State Aid rules would still apply since the EU would probably require some form of state aid control – and vice versa.

But even if the UK were to leave without entering into any formal relationship with the EU, then theoretically, no form of State Aid controls would apply to the UK Government, and it would be free to provide any assistance to industries. However, the paper says, “various factors” mean that the UK Government would be unlikely to begin subsidising failing industries – not least that in recent history, the UK has been averse to providing direct financial support to failing industries. And even as a member of the World Trade Organisation (WTO), the UK is bound by the WTO Agreement on Subsidies and Countervailing Measures, which restricts the use of subsides, although less stringently than the EU State Aid rules.

It is hard to see what constraints we are working so hard to free ourselves from. Perhaps a more relevant question is why it taken Brexit to bring the need for an industrial strategy to the fore. It should be a core KPI of any successful economy and it is long overdue.

Andy Pye