January 1, 2021 will be momentous for many reasons. For one, 2020 will finally be over. And, according to business secretary Alok Sharma, it will also mean a significant change for British businesses as the country slips out of the European Union, and with it the EU’s state aid rules.
State aid is the practice of investing public resources to boost certain companies – potentially giving them an advantage against others in the market. In theory, under EU rules, propping up or promoting a country’s businesses to the detriment of others isn’t allowed, and it is monitored under a subsidy control regime. In practice, the EU permits some exceptions to the rule. But the general idea behind the EU’s state aid regime is to ensure that an open and competitive market can flourish across all 28 member states.
Yet those 28 will become 27 by 2021, as Brexit takes place – with or without a new trade deal. The UK’s desire to use state aid has become one of the key sticking points in its trade negotiations with the EU: Britain seeks an economic boost to counteract the damage of leaving the trading bloc while the EU wants to keep competition as fair as possible. But it’s not just about state aid in general that the government is lobbying so keenly: prime minister Boris Johnson and his key adviser, Dominic Cummings, hope that removing state aid rules will allow them to bolster businesses in the UK’s technology sector.
Reports from Business Insider indicate Cummings wants to create a “British Google” to compete with Silicon Valley. “It’s difficult not to centre the ideology of Dominic Cummings in this,” explains Max Beverton-Palmer of the Tony Blair Institute, a non-profit set up by the former prime minister. “Given he’s written so much about it, that feels like it’s the justification.”
“The question is what form of subsidy control regime could the UK have at the start of next year,” says professor Suzanne Rab, barrister at Serle Court Chambers. “The default position is that the UK, and the extent to which it is bound by any new rules on level playing field or state aid, would have fallen away at the end of the year,” she explains. That was all subject to provisions in other documents, including the withdrawal agreement and political declaration agreed with the EU in October 2019. “If all that was unchanged, there was always going to be some sort of a subsidy control-type regime at the end of it, regardless of a trade deal or a no trade deal,” says Rab.
Sharma confirmed on September 9 that when it comes to state aid, the UK plans to adopt the World Trade Organisation’s (WTO) rules on state subsidies. “We do not want a return to the 1970s approach of picking winners and bailing out unsustainable companies with taxpayers’ money,” he said.
However, the WTO’s state aid rules are different from the EU’s, if anything because they cover different things. “It covers just goods, unlike the EU state aid rules which cover goods and services,” says Rab. WTO rules are also believed by those advocating for a no-deal Brexit and stepping away from EU rules to allow more room for manoeuvre for the UK to support its own industries.
Cummings’s plan is redolent of the history of Darpa, the USA’s defence research and development agency responsible, among other things, for the invention of the internet and GPS. Darpa was established in 1958 as a state-sponsored institution, and it has thrived as a result of that support. Many successful companies have been spun out of Darpa. Cummings has already obtained his version of Darpa – after a fashion.
Yet it’s not clear whether his new goal would really require the UK to leave the EU without any kind of trade deal – which may include incorporating Europe’s state aid rules. “It’s a nice grand narrative, but it doesn’t necessarily stack up – as to what the limitations of state aid would actually be,” says Beverton-Palmer.
The idea that a no-deal Brexit is required to promote the tech sector is a false narrative that has percolated through to the tech industry itself. “There has been quite a lot of talk about how actually a lot of these perceived restrictions around state aid are down to the interpretation of the UK government, rather than EU legislation,” says Katie Gallagher, of the UK Tech Cluster Group, and managing director of Manchester Digital, a trade body.
The UK is already comfortably within state aid spending limits, investing 0.5 per cent of its GDP in state aid instruments, compared to Germany, which puts between 1.4 per cent of its GDP into supporting companies through allowable financial instruments. France regularly invests double the percentage as the UK in supporting its own companies.
Some argue that what Cummings and the government want to do isn’t expressly prohibited anyway under EU state aid rules. “The current regime doesn’t actually stop you from doing this,” says Alex Stojanovic, a Brexit researcher at the Institute of Government research centre. “What it does is shape how those subsidies are provided. Rather than unlimited forever subsidies – like state backing to a failing company – you have to do a specific amount over a specific amount of time to make subsidies less wasteful.”
There are also exemptions for certain areas already within EU state aid rules that could be used to allow the kinds of investments the UK government seems to want to do to promote the tech sector. “You can have subsidisation of skills like research, which are absolutely allowable under competition law,” says Andrea Andreoni, associate professor of industrial economics at University College London.
But the big question is whether any idea of state-supported companies achieving their potential can work in the UK. There’s no guarantee that a UK unshackled from EU state aid rules would necessarily become apter to create tech champions of the type Dominic Cummings seems to yearn for. “If you look at data-driven platforms and technologies, Europe is as a whole – including the UK – far behind both the US and China, and the scale of investment in these countries is a completely different magnitude,” says Andreoni. “The point is, the extent to which you can operate more freely and in a more effective way outside the European Union is quite questionable.”
The model Cummings appears to want to borrow is absorbing the cost of investment for certain technologies to promote the UK as a leading light in the sector, much in the same way that the Japanese government allowed its semiconductor manufacturers to sell their products into the global market for less than the cost of producing them throughout the 1980s. State support proved a boon for Japan, with its companies dominating the semiconductor industry. When it reworked state support, it sunk down the rankings.
China, a communist state, is also significantly different from the UK. “China does it, but it also does it in a very different way,” says Beverton-Palmer. “The benefit the US and China have is the scale of their market, which we don’t have in the UK.” There are also other challenges for any company benefiting from state aid. “It’s pretty clear that in the startup sector, the big wins are already ticked off.” Instead of trying to make the next Google, he reckons the UK should instead look at sectors that are highly regulated but under-explored, like biotechnology.
Even then, says Andreoni, the secret isn’t necessarily subsidising the tech sector alone. “Subsidies can give you the easy, quick solution of attracting investment, but not necessarily result in long-term transformation in terms of technology,” he explains. The US, for instance, gives away $95 billion in subsidies – but without increasing spending on supporting infrastructure, too, the risk is that those subsidy-backed firms end up taking more than they give from the areas they are based.
“If the idea is to get some of the US experience, you need a package of investment alongside policies,” Andreoni says. “Subsidies are just one relatively small part of that package.”
This article was originally published by WIRED UK