20 December 2019

The policy of the newly elected UK Government is to obtain, as soon as possible, the Westminster Parliament’s approval of the revised Withdrawal Agreement that was negotiated with the EU in October 2019. Given the new Government’s majority of 80, it seems inevitable that it will be able to do so.

The UK will thus leave the EU on 31 January 2020, and there will then be a transitional period until 31 December 2020, during which EU law will continue to apply, to allow time to negotiate the future relationship.

The background

Two of the areas in which EU law has had a particular impact on economic life in the UK are state aid and free movement of goods. State aid is shorthand for a set of rules which prohibit Member States from distorting competition by granting aid to specific businesses. Free movement of goods is one of the four freedoms of the European Single Market, achieved by the EU’s customs union and the prohibition of discrimination against imports from other Member States. Currently, the European Commission polices these matters.

The level playing field

The direction of travel of former Prime Minister Theresa May’s original Withdrawal Agreement was towards close alignment between the UK and the EU in these areas. Under the Northern Ireland Protocol (the so-called Backstop), in the absence of a future relationship agreement, the UK would have been legally committed to non-regression on a number of areas including state aid and competition, in order to maintain a level playing field with the EU, and the UK would have remained in the EU’s customs union.

The accompanying Political Declaration recorded an intention to build upon these level playing field arrangements in the future relationship, and to forge a trading relationship that was “as close as possible”. However, following Prime Minister Johnson’s October 2019 Agreement, the level playing field is now mentioned only in the revised, and non-binding, Political Declaration, re-framed as an aspiration to make “robust commitments” to prevent distortions of trade and unfair competitive advantages. There is no longer any mention of the future trading relationship being as close as possible. Legally, greater divergence in these areas is now a possibility.

Greater divergence

There have been signs recently that the Government will try to make use of this increased scope for divergence. On 29 November, during the General Election campaign, Mr Johnson announced that exiting the EU would give his Government the freedom to provide prompt state aid “within days” to struggling British industries, and to instruct the public sector to start “Buying British”.

Striking a balance

That said, whilst these policies may now be more legally feasible, they are potentially anathema to the EU. They may well be unable to survive contact with the political reality of negotiating a new free trade agreement.

It is likely that the EU will try to link the degree of the UK’s access to its Single Market to the levelness of the regulatory playing field on state aid, and it will be interesting to see where Mr Johnson sees the balance between free trade with the EU and protectionism lying.

At the time of writing, the detail of the proposed shake up of these rules is yet to be published. We at BTO will be keeping a close eye on developments in these areas and Brexit generally, and helping our clients navigate the unpredictable waters ahead.

Contact: Will Cole, Partner T: 0131 222 2939 E: wco@bto.co.uk