Three key things you need to know about the United Kingdom Internal Market Bill

On 9 September 2020, I was interviewed by CNBC on the United Kingdom Internal Market Bill published that day. I covered three key points you need to know about the Bill in the interview, which I've expanded on below.

Free movement of goods and services between the UK nations and mutual recognition

Currently, there are no obstacles to the movement of goods between England, Scotland, Wales and Northern Ireland. This is because standards such as labelling, food safety, and technical specifications are mostly set by EU legislation and apply to the whole of the UK, to allow the free movement of goods within the European single market.

The UK left the EU on 31 January 2020 but it's still subject to EU rules during the transition period, which ends on 31 December 2020. At the end of the transition period, EU rules will no longer apply and the power to legislate in those areas will return to the either the UK government or to the devolved administrations (if it's their area of competence).

The UK government has been concerned for some time that the various nations could adopt different standards and block goods of a different standard coming from another region. Therefore, the UK Internal Market Bill states that goods sold in one region should be recognised as sellable in all the others.

The devolved administrations have been very critical of the Bill. Their concern is that more powers should return to them and they disagree with the recognition of different standards.

For example, what if Scotland wants to protect its citizens and would like to have a higher standard of food safety? According to the Bill, it would still have to accept lower quality food goods produced elsewhere in the UK for sale.

You can expect strong opposition from the devolved administrations and there are already talks about possible legal challenges.

State aid

The Bill mentions the possibility to grant subsidies, but it only states that "a Minister of the Crown may provide financial assistance, out of money provided by Parliament". The Bill is silent on aid by devolved administrations. Does this mean that they cannot provide any aid, or only in certain, exceptional circumstances, or only below a certain threshold? We'll have to wait and see.

Regardless, it's obvious that the UK government is concerned by subsidies granted by one devolved administration that could distort competition within the UK’s internal market. Policing this is a role that the EU State Aid rules currently fulfil for the European Single Market.

If EU Country A were to give uncontrolled aid to an ailing company, it would distort competition in the EU, as it would disadvantage other companies in other countries in that sector that didn't receive aid – which is when the European Commission in Brussels would step in to approve or prohibit the granting of aid.

But in an unexpected twist, on the same day the Bill was published, Business Secretary Alok Sharma, announced that from 1 January 2021, the UK would follow subsidy rules set up by the World Trade Organisation. What's surprising about this is that the WTO rules only apply to trade between countries and were created to avoid distortion of international trade – such as US companies given grants if they export to Europe – and have nothing to do with the protection of a national single market.

For example, WTO rules capture subsidies that require the recipient to meet certain export targets, or to use domestic goods instead of imported goods. And interestingly, those subsidies are legal under the national law of the state granting the aid but are illegal at an international level if they distort international trade. They can be challenged through a WTO settlement procedure.

The WTO rules have little to do with national trade, so how the UK will apply those rules on 1 January 2021 leaves me a bit perplexed. Maybe the UK government plans to apply them to trade with the EU? Yes, but that leaves a big gap for intra-UK trade. The government has promised that it will publish guidance on the application of these rules later this year and will start on a public consultation for a UK’s new subsidy regime soon; this should be completed in 2021. The time frame is another obstacle to concluding a deal with the EU, as the EU has been requesting an appropriate state aid regime in the UK before the end of this year for a long time now.

What about Northern Ireland?

Things get even more interesting if we look at the issues concerning Northern Ireland. Article 10 of the Northern Ireland Protocol – part of the Withdrawal agreement, an international treaty voluntarily signed by the British Prime Minister – states that EU state aid rules apply to the UK as long as the aid affects trade between Northern Ireland and the EU (and you should read that as mainly the Republic of Ireland).

I've argued for some time that this would capture any subsidy (above a threshold to be agreed between the UK and the EU) which is granted in Great Britain and involves companies active in Northern Ireland, and where trade between Northern Ireland and the EU is affected.

What that means is that state aid by the UK government that fulfils these criteria – even if given to a British company – would have to be notified and approved by the EU Commission. This would be the case where a company in Great Britain that gets subsidies from the UK government has plants in Northern Ireland whose products are exported to the EU. Art 10 is quite clear on this point.

Those in favour of Brexit see Art 10 as continued application of EU state aid rules in the UK. In that context, this Bill is an effort to change the application of Art. 10. But, as many have said (even in Parliament), the Bill is clearly a breach of international obligations, because it allows the UK government to disapply Art. 10 and adopt its own interpretation.

The Bill also explicitly excludes from Art. 10 aid which is given to individuals outside Northern Ireland (but who might be trading in Northern Ireland and exporting to the EU). 

Ultimately, there are two things to consider here:

• either the UK government knew what it was signing at the time and now, in bad faith, intentionally wants to break its word (in the futile hope that the EU will blink and essentially be blackmailed into offering a deal – ie "We'll only adhere to our international obligations if you give us a deal"), or
• the UK government didn't know what it was signing up to (in which case, you could say that its ministers are incompetent, as the wording of Art 10 is abundantly clear).

A recipe for disaster?

All told, the mix of EU state rules and WTO rules combined with the undisclosed UK state aid regime indicate that the whole UK Internal Market Bill is a recipe for disaster. The UK has always prided itself on standing by its international obligation; the Bill calls this into question, and makes me wonder if it's yet another nail in the coffin of UK democracy.

Please get in touch if you'd like my views on the UK Internal Market Bill – including the three key points raised here – in greater detail.