Boris Johnson Mustn’t Destroy What Can Be Saved From Brexit

(Bloomberg Opinion) -- The painstakingly negotiated Northern Ireland Protocol was the linchpin of the Brexit deal signed by Britain and the European Union last year. So Tuesday’s statement from a U.K. minister that his government is ready to break international law “in a very specific and limited way” in order to change that agreement will echo for a long time, and not just in Britain.

It resonates in the same way that White House counselor Kellyanne Conway’s casual assertion of “alternative facts” did back in 2017. It upends our notion of the existing order of things. In this instance, the way Boris Johnson’s administration regards the rule of law.

As of writing this, we’ve not seen the wording of the government’s proposed legislation to circumvent parts of the EU Withdrawal Agreement. But legislating to contravene the Brexit treaty’s terms, as Northern Ireland minister Brandon Lewis acknowledged the government intends to do, is no mere technicality.

Johnson dislikes the Protocol — which he signed up for, remember — because it means his government has to abide by EU state aid rules on trade between the bloc and Northern Ireland. In our hyper-connected world that could apply to almost anything. It could mean that support given to a Nissan plant in northern England is ruled out because cars produced there could cross into Ireland. The prime minister either only belatedly recognized what he sees as a trap door, or figured he could fix it later.

However the realization dawned, the issue of state aid is totemic because it sits at the intersection of Johnson’s plans for rebalancing the U.K. economy — which will involve investment in struggling industrial regions — and his rationale for leaving the EU in the first place. For Brexiters, applying state aid rules designed in Brussels defeats the purpose of leaving the bloc.

The problem has been percolating for a while. Last year, Johnson declared that Britain would adopt its own state aid regime. In February 2020, a free market think tank, Politeia, published a paper warning of the dangers in the Protocol and urging the government to take “quick legislative action” to end the obligation to notify the European Commission of state aid. Had the pandemic not descended, the argument might have broken out months ago.

Johnson’s championing of state aid is an odd hill for a Tory to fight on, even if it’s explained by the need to keep the party’s new voters in northern England on board. Mainstream Conservatives, such as former party leader and Foreign Secretary William Hague, are troubled by the change in philosophy. They don’t mind wresting free from Brussels rules but worry this is cover for a new era of French-style “dirigisme.” 

For decades, the U.K. protested when European governments doled out subsidies or other aid to industries. Conservatives were scathing about states mollycoddling industry and argued that the market was better at picking winners. Indeed, Britain was instrumental in shaping the EU’s state aid policy, and assisted its industry far less than Germany and France did theirs.

I’d still argue that it’s not in the U.K.’s interest to abandon that Tory orthodoxy in favor of unrestrained subsidies. Propping up failing sectors would damage Britain’s competitiveness. Still, there’s evidence to support the view from Downing Street that targeted and limited state inducements can support innovation, as has been the case in Singapore and Israel. It can also help ensure that skills and infrastructure are more evenly distributed across a country.

Johnson exaggerates the constraints imposed by the EU state aid rules. The regime is far from perfect — it can be arbitrary and it accords Brussels enormous powers. But most EU countries are adept at getting any assistance approved. Automatic approvals applied to nearly 95% of state aid last year. As the pandemic unfolded this year, the EU quickly signed off on a raft of government help to industry.

The quality of the EU regime is beside the point, however. Britain is no longer a member and — naturally enough — doesn’t want to be bound by the bloc. But the U.K. needs to articulate what rules it wants to apply, both to comply with its good faith promise to the EU to trade fairly, and to let British companies and industries know what will be allowed. A scattershot approach is likely to be wasteful and distort investment decisions, a danger that ought to concern the U.K. taxpayer as much as Brussels.

The EU is hardly blameless in this stand-off. The chief Brexit negotiator, Michel Barnier, demanded initially that the U.K. simply translate the current EU state aid regime into U.K. law and then keep it aligned with the EU over time. That was clearly a non-starter for the Brits and over the summer Barnier softened his position.

Brussels has also been shortsighted, and petty, in projecting a zero-sum view in which any U.K. success is somehow Europe’s loss. Sure, distortions to competition must be countered, but trade agreements happen because both sides usually win. A more productive, innovative Britain would be good for Europe too.

There’s no reason the U.K. shouldn’t be allowed to build its own set of state aid rules that establishes an equivalency with the EU and includes some kind of dispute settlement mechanism. Britain might even incorporate the EU’s “balancing” concept, where negative effects on competition are balanced against other goals such as regional development and reducing climate impact.

This dispute would be an unfortunate way for the U.K.-EU trade deal to die. If it really does lead Johnson to break a treaty obligation, the damage will be incalculable.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Therese Raphael is a columnist for Bloomberg Opinion. She was editorial page editor of the Wall Street Journal Europe.

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