Japan trade deal commits UK to stricter state aid curbs than in EU talks

Contrasting positions could undermine negotiating stance with Brussels

The UK’s new trade deal with Japan commits it to tougher restrictions on state aid than the ones it is currently offering the EU in the Brexit talks, potentially undermining its negotiating position with Brussels.

In the bilateral UK-Japan agreement announced in principle on Friday, London and Tokyo have agreed to replicate the restrictions on subsidies in the EU-Japan deal that went into effect last year. That agreement prohibits the governments from indefinitely guaranteeing the debts of struggling companies or providing an open-ended bailout without a clear restructuring plan in place.

By contrast, the UK has repeatedly told the EU that it must have total freedom over state aid after the end of the Brexit transition period with complete autonomy over future subsidy decisions, subject to WTO rules.

The so-called level-playing-field issues have become the main sticking point in the EU-UK negotiations, with London resisting Brussels’s demands for it to remain within the tough EU state aid regime.

Britain’s proposal to the EU would merely require each side to notify the other of subsidies rather than restricting them. Its offer replicates the EU’s commitments in earlier bilateral trade deals, such as the one with Canada that went into force in 2017.

A government spokesman said: “The UK offer to the EU is based on the arrangements agreed between Canada and the EU.

The idea that we’ve given too much away is rubbish as far as I’m concernedAlly of Liz Truss

 “The UK-Japan agreement contains similar commitments, including on transparency about subsidies awarded and consultations over any concerns about those subsidies which may affect the other party.”

However, the contradiction between the two positions has created consternation within the UK government.

A person familiar with internal Whitehall deliberations said that the UK’s chief Brexit negotiator David Frost had raised concerns that Liz Truss, international trade secretary, had given more away to Japan on level playing field issues than was being offered to Brussels.

One ally of Ms Truss said that the state aid elements of the Japan deal were “just a standard clause in any free trade agreement” rather than a more generous concession. “The idea that we’ve given too much away is rubbish as far as I’m concerned.”

Trade experts said it would be awkward for the UK to maintain contrasting positions in two sets of talks.

George Peretz, a barrister at the Monckton legal chambers in London, said: “The provisions on state aid in the EU-Japan FTA create some quite hard-edged commitments not to provide open-ended government support to companies.

“If the UK-Japan FTA replicates those provisions, the UK will need to legislate to ensure that British public bodies do not contravene them. That could well compromise the UK’s negotiating position with the EU, where it has not offered anything like that level of commitment.”

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But some lawyers also stressed that the subsidy rules in the Japan bilateral deal were still weak compared with the detailed and invasive EU state aid regime.

James Webber, a partner at the law firm Shearman & Sterling, said: “It’s a concession of sorts by the UK, but if this is where the negotiations end up, it will be much closer to the UK’s view of the world than the EU’s.”

A government spokesperson said: “In all our trade negotiations, including with the EU and with Japan, we consistently make proposals which provide for open and fair competition, on the basis of high standards, in a way which is appropriate to a modern free trade agreement between sovereign and autonomous equals.”