Beyond Brexit: trade in goods Contents

Chapter 2: Level playing field

The TCA’s provisions

24.The level playing field was among the most contentious issues in the TCA negotiations. As the EU Internal Market Sub-Committee noted, the term is “used variously to cover any provision, in bilateral or multilateral agreements, that serves to limit regulatory competition between trading partners in areas such as labour and environmental protection”.26

25.Title XI of Part Two of the TCA, the “Level Playing Field for Open and Fair Competition and Sustainable Development”, seeks to deliver mutual benefits by “preventing distortions of trade or investment”, while stating that its purpose “is not to harmonise the standards of the Parties”.27 It includes provisions on subsidy control, labour and social standards, environment and climate, competition policy and taxation. Its environment and climate provisions are examined in the report by the EU Environment Sub-Committee;28 this chapter focuses on subsidy control and labour and social standards.

26.In broad terms, the TCA’s level playing field provisions appear to represent a success for the UK negotiating team, setting out general principles rather than adherence to specific EU laws. The Government’s summary says: “The system that has been agreed upon does not compromise the UK’s sovereignty in any area, does not involve the European Court of Justice in any way, and is reciprocal.”29 The Local Enterprise Partnership (LEP) Network welcomed the TCA’s level playing field provisions and said that, while businesses may find some of the controls “irksome and, in some cases, costly to adhere to”, they at least “know where they stand”.30

Subsidy control

27.Subsidies are direct or indirect financial contributions from the state—such as grants, loans, loan guarantees or tax breaks—granted to certain companies, usually to promote a social good or address a market failure. To minimise the risk of subsidies wasting public money or giving recipients an unfair advantage over their competitors, particularly those in other jurisdictions, a subsidy control regime regulates the granting of subsidies. Before 1 January, the Government’s freedom to grant subsidies was limited by the EU’s ‘State aid’ rules.31

28.The principles agreed by the Parties are intended to ensure that “subsidies are not granted where they have or could have a material effect on trade or investment between the Parties” (though there are exemptions). The Parties each commit to “establish or maintain an operationally independent authority or body with an appropriate role in its subsidy control regime”.32

29.Christophe Bondy, Partner at Steptoe & Johnson LLP, described the TCA’s subsidy framework as “much more elaborate than one would typically find in the context of a free trade agreement”, which he said is “reflective of the EU’s concern about the potential direction of travel by the UK”.33

30.Nevertheless, Allie Renison, Head of EU and Trade Policy at the Institute of Directors, said the provisions gave the Government “a huge amount of flexibility” to pursue its objectives and no excuse to “hide behind State aid rules not to do something”.34 These areas of greater flexibility, she said, include an end to the requirement to pre-notify the EU of subsidies, and an increase in the de minimis level, below which subsidies may be granted, to 325,000 Special Drawing Rights (approximately £338,000) over three years.35 Paymaster General Penny Mordaunt agreed that the new framework “gives us more flexibility” to “focus on supporting those businesses with the innovation that we want to see and to focus on supporting our wider objectives”.36

31.However, witnesses also told us that the Government had yet to use this new freedom. Jo Lappin, representing the LEP Network, and Allie Renison both described the UK as in an “interregnum”37 on subsidy controls—out of the EU regime but without its own yet in place. We were told that the Government appears to be “defaulting back to the EU’s regime just for purposes of ease” until the UK’s own subsidy regime is established.38

32.Allie Renison stressed the importance of “consulting on industry views, and having the mechanism to be transparent, before we have the regime set up”.39 Two days later, on 3 February 2021, the Department for Business, Energy and Industrial Strategy (BEIS) published a consultation on a UK subsidy control regime to provide “more flexible and tailored financial support to businesses”.40

Possible subsidy priorities

33.We were told that the UK’s new subsidy control regime should be “a long-term framework that is not subject to excessive tinkering. We should have simple subsidy rates that align with programme activity and geographies.”41

34.The Paymaster General told us the Government’s key aims in future subsidy programmes were “the economic regeneration of the whole of the UK, the four nations; the strategic interventions that will work there; and promoting our competitive edge”, along with a focus on “job creation, promoting innovation and protection for workers and the environment”.42

35.Several witnesses suggested an additional priority for the Government: to “use State aid to support improvement in knowledge and understanding of how cross-border trade works”,43 and to enhance companies’ understanding of the new requirements brought about by the end of the transition period. Chapter 6 outlines the importance of customs intermediaries in providing specialist advice, and the difficulties that many businesses face in accessing their services. Support for businesses in the form of “either a voucher-type system or tax relief”,44 as Allie Renison suggested, would be extremely beneficial. In response to such calls, the Government on 11 February announced a £20 million SME Brexit Support Fund, which we consider in more detail in Chapter 9.

36.Allie Renison urged the Government to drop the “undertakings in difficulty” rule, inherited from the EU rulebook, under which some firms already in financial difficulty before the COVID-19 pandemic are denied access to pandemic support measures such as the Coronavirus Business Interruption Loan Scheme and the Coronavirus Large Business Interruption Loan Scheme.

37.Jo Lappin said that increasing the de minimis level, below which subsidies may be granted, to £500,000 would be “more reasonable” to help businesses recover from the pandemic.45

38.Following the closure of its consultation on 31 March, the Government should move swiftly to introduce a transparent subsidy control regime. While the nature of this regime should be driven by the consultation responses, we recommend support to help smaller firms navigate the new requirements for cross-border trade as one initial area of focus for UK subsidy control policy. In this regard, the new £20 million SME Brexit Support Fund is a welcome step in the right direction, but we are concerned that the funding provided will be insufficient to meet its objectives.

Labour and social standards

39.The TCA contains a mutual non-regression commitment which states: “A Party shall not weaken or reduce, in a manner affecting trade or investment between the Parties, its labour and social levels of protection below the levels in place at the end of the transition period, including by failing to effectively enforce its law and standards.”46 Each Party is to enforce this by monitoring working conditions and providing legal avenues for disputes. If one Party perceives the other as gaining an unfair competitive advantage through changes to its labour and social standards, it can instigate dispute resolution proceedings that may lead to the imposition of countermeasures or the suspension of some TCA obligations.

40.The Government’s summary of the TCA says the UK “has embedded into this Agreement our manifesto commitment to high labour … standards without giving the EU any say over our rules”.47 By contrast, legal expert David Thorneloe said that in the longer term the non-regression commitment “changes the rules of the game for UK Government policy-making … We have regulatory independence, but it is independence with consequences attached. What that means for businesses is ultimately uncertainty.”48

41.This uncertainty was illustrated in late January when new Business Secretary Kwasi Kwarteng cancelled a planned BEIS consultation on changes to employment rights, just days after saying it would go ahead.49 Allie Renison told us businesses are confused about “where that desire is coming from” and are looking for “a period of stability and calm”. Their biggest concern, she said, is that the Government would do “too much in a non-transparent manner”, potentially triggering the dispute procedures and attracting retaliatory tariffs. She made “a plea to the Government to make sure that there are transparent mechanisms for how they approach regulatory change going forward and that we get back to doing impact assessments and consultations”.50

42.We welcome the Government’s stated commitment to high labour and social standards and urge it to approach any changes to these standards with caution. When it identifies a need to amend the current standards, it should proceed with transparency and only after consultation, taking into account the potential impact on UK-EU trade in goods.

Disputes

43.If one Party to the TCA suspects the other of breaching subsidy controls, the new Trade Specialised Committee on the Level Playing Field for Open and Fair Competition and Sustainable Development will seek a mutually satisfactory resolution. Unilateral “remedial measures” can be taken if the dispute is not solved, and if these are later found to be unnecessary or disproportionate, an arbitration panel can determine the suspension of some parts of the TCA.51

44.The TCA also contains a rebalancing mechanism whereby the Parties acknowledge that significant divergence, even if not breaking the rules set out in the TCA, “can be capable of impacting trade or investment between the Parties in a manner that changes the circumstances that have formed the basis for the conclusion of this Agreement”. If trade is affected, either Party may take “necessary and proportionate” rebalancing measures, such as temporary tariffs. Unless an expert arbitration panel finds that there has been a breach of the level playing field, the Party subject to tariffs can respond with countermeasures.52

45.If disputes are not resolved, from 2025 the Parties can request a review of the TCA’s entire trade pillar. As a result of this review, the trade elements—or indeed any part—of the TCA can be terminated.53

How much will dispute resolution measures be used?

46.In the long term, therefore, either Party could seek to invoke the rebalancing mechanism, or threaten to do so, if it deemed the other Party’s measures to be less effective than its own. This so-called ‘ratchet effect’ may incentivise either Party to follow suit if the other raised standards in any of the areas in question. A European Commission Q&A states that the rebalancing mechanism “might be relevant, for example in a situation where one Party would significantly increase its levels of protection related to labour or social standards, the environment or climate above the levels of the other Party”, or has “a system of subsidy control that would systemically fail to prevent the adoption of trade distorting subsidies”.54

47.Penny Mordaunt told us that the bar for retaliatory measures and the rebalancing mechanism was “extremely high”, and that their use “would be a rare occurrence”.55 Professor Catherine Barnard, Professor of European Union and Labour Law at the University of Cambridge, told the EU Select Committee on 2 February that dispute resolution mechanisms in free trade agreements are generally “not often invoked” and rarely lead to “the excitement of retaliation and cross-retaliation”.56

48.Ultimately, however, it is unclear to what extent and in which circumstances either Party will seek to use the TCA’s dispute resolution levers. Allie Renison said the criteria for a dispute is the “biggest question mark”.57 The extent to which either Party invokes these safeguards “will depend on economic interest case by case” and we were told that “arguably the UK has more to lose on a high-level basis by not complying”.58

49.Notwithstanding its confidence that the TCA’s complex dispute resolution measures will be used infrequently, we recommend that the Government work with the EU to clarify publicly the precise circumstances in which either Party is likely to invoke them.


26 Letter from Baroness Donaghy, Chair of the EU Internal Market Sub-Committee, to Paul Scully MP, Minister for Small Business, Consumers and Labour Markets, 3 April 2020: https://committees.parliament.uk/publications/574/documents/2319/default/

28 European Union Select Committee, Beyond Brexit: food, environment, energy and health (22nd Report, Session 2019–21, HL Paper 247)

30 Supplementary written evidence from the Local Enterprise Partnership Network (FUU0021)

31 The EU refers to subsidies as “State aid”, but there appears to be little practical difference between the two terms.

33 Q 9 (Christophe Bondy)

34 Q 29 (Allie Renison)

35 Q 27 (Allie Renison)

36 Q 60 (Penny Mordaunt MP)

37 Q 27 (Jo Lappin)

38 Q 27 (Allie Renison)

39 Q 29 (Allie Renison)

40 Department for Business, Energy & Industrial Strategy, ‘Business Secretary sets out new subsidies system that works for the UK’ (3 February 2021): https://www.gov.uk/government/news/business-secretary-sets-out-new-subsidies-system-that-works-for-the-uk [accessed 3 March 2021]

41 Q 28 (Jo Lappin)

42 Q 59 (Penny Mordaunt MP)

43 Q 29 (Liam Smyth)

44 Q 25 (Allie Renison)

45 Q 28 (Jo Lappin)

48 Q 8 (David Thorneloe)

49 ‘Review of UK workers’ rights post-Brexit is axed in sudden U-turn’, The Guardian (27 January 2021) https://www.theguardian.com/politics/2021/jan/27/review-of-uk-workers-rights-post-brexit-is-axed-in-sudden-u-turn [accessed 3 March 2021]

50 Q 30 (Allie Renison)

54 European Commission, ‘Questions & Answers: EU-UK Trade and Cooperation Agreement’ (24 December 2020): https://ec.europa.eu/commission/presscorner/detail/en/qanda_20_2532 [accessed 3 March 2021]

55 Q 59 (Penny Mordaunt MP)

56 Oral evidence taken on 2 February 2021 (Session 2019–21), Q 8 (Prof Catherine Barnard)

57 Q 27 (Allie Renison)

58 Q 5 (David Thorneloe)




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