EU-UK trade dispute 2022 WTO Trade Disputes: EU launches landmark WTO complaint against the UK for alleged discriminatory practices in the award of Offshore Wind Sector subsidies 21 APRIL 2022 HTTPS://DW FGROUP.COM /EN/NEW S-AND-INSIGHTS/INSIGHTS/20 22/4/EU-LAUNCHESLANDMARK-WTO-COMPLAINT-AGAINST-THE-UK The UK has been hit by a World Trade Organisation complaint submitted by the European Union, alleging local content requirements within the UK's Contracts for Difference scheme discriminated against EU goods and suppliers, thereby falling foul of Article III:4 of the GATT. The move represents the first formal EU-UK trade dispute following Brexit and the negotiation of the EU-UK Trade and Cooperation Agreement in December 2020. It also creates uncertainty around the delivery of the UK's flagship subsidy scheme promoting renewable energy generation. In this article, we look into the grounds for the complaint, the EU's strategy in bringing the claim and the possible consequences. What is the EU's WTO complaint against the UK about? The EU complaint [1] challenges the compliance of the Department for Business, Energy and Industrial Strategy ("BEIS") scheme, Contracts for Difference ("CfD scheme") with Article III:4 of the General Agreement on Tariffs and Trade 1994 ("GATT"). In particular, the EU claim alleges that eligibility rules around local content for energy subsidies in the CfD scheme breach WTO rules. The CfD scheme is a high profile UK Government policy. In the UK government’s own words, the CfD scheme is "the main mechanism for supporting low-carbon electricity generation, more than 80% of which comes from offshore wind farms". CfDs are a government-driven incentive for private investments in renewable energy projects, which require a high upfront investment and long-term financial commitment. The CfD scheme is designed to protect investors from volatility in wholesale electricity prices and thereby incentivise investment, which contributes to meeting the Net Zero target. CfDs have a social function, protecting consumers from high electricity prices, as well as a market function, incentivising competition of different types of renewable energy projects for the same CfD. Renewable energy actors in the UK that meet the eligibility requirements can apply for a CfD. Since December 2021, the eligibility rules have included a local UK content 1 requirement. Successful applicants enter into a private law contract with the Low Carbon Contracts Company (LCCC) [2], a Government-owned company. Under the CfDs, the developers of winning projects are paid a rate for the electricity they produce over a 15year period. The subsidy is the difference between the ‘strike price’ (a price for electricity reflecting the cost of investing in the renewable energy project) and the ‘reference price’ (the average market price for electricity in the GB market). The EU complaint is about the new UK local content requirement for eligibility for CfD in renewable energy projects, expected from UK applicants and beneficiaries of the scheme. Such a local content typically includes the supply of wind turbines (often the most significant cost input) as well as the installation service from the supplier. The EU believes this element – localisation of turbines supply in the UK - is discriminatory, placing EU suppliers of turbines and of related services at a disadvantage, and violating Article III:4 of the GATT. Article III.4 of the GATT prohibits governmental measures (laws, regulations and requirements) that result in treatment of imported goods in a manner that is less favourable than the treatment of comparable local goods. In its request for consultations, the EU lists over a dozen of UK laws, regulations, guidance and consultant papers relating to this point. What other approaches could the EU have taken? At this early stage of the WTO process, the EU chose not to complain about the consistency of the CfD scheme with WTO rules on subsidies in the Agreement on Subsidies and Countervailing Measures. This has surprised many observers, but one possible explanation for this apparent omission is that in 2014 the European Commission approved the Contracts for Difference scheme as lawful State aid [3]. Although the local content requirement was not present in the measure at that time, the EU is unlikely to want to call into question its own approval. Furthermore, EU member states such as France have created similar subsidy support schemes for wind farms, where local content is a best practice or a voluntary commitment, as opposed to a legal eligibility requirement [4]. How has the UK responded to the EU's WTO complaint? The UK has robustly responded to the EU complaint, stating that the scheme is fully compliant with WTO rules, and that it will defend the scheme vigorously. 2 The challenge has added further tension to the EU-UK relationship. Not only are other trade disputes likely to follow, but the UK will be carefully reviewing similar subsidy schemes for green energy projects and wind farms being introduced by EU Member States. Where such local content requirements are set out in such subsidy schemes then the UK is likely to consider initiating a WTO complaint for discriminatory practices against the EU. Does the EU WTO complaint damage investment in offshore wind energy? Both the UK and the EU pursue ambitious climate and green energy transition goals. To some extent, they compete against each other in reaching those goals. In the EU, countries like the Netherlands, France, Spain, Denmark and Belgium have invested in wind farms early on, and the availability for new plots and the issuance of permits for new projects in those countries has reached bottlenecks [5]. Social and environmental opposition to building onshore wind farms in the EU has been growing and has further stifled wind farm growth in the EU. In contrast the UK, particularly as an island nation, has so far been more successful in developing offshore wind farm capacity, and there are good growth prospects in the UK offshore wind sector. With strong market competition among wind turbine manufacturers generating a price squeeze for turbine manufacturing, local content in wind farm projects may protect local turbine manufacturing and local turbine prices. Furthermore, FT reports Renewable UK estimates that just 29 per cent of capital expenditure on offshore wind projects went into the UK economy, which rises to 48 per cent over the estimated 30-year life cycle of such projects, including maintenance. The current UK Government's goal is to increase that level of capital expenditure spent with UK-based suppliers to between 40 – 50% and 60% of lifetime spend, including maintenance [6]. How do WTO complaints unfold? WTO complaints initially follow a diplomatic route, but may move onto a legal footing if progress is not made. The diplomatic route is meant to try and exhaust all means for a mutually agreeable solution. The formal period of 60 days provides for the diplomatic "consultations", however this is not mandatory and can be extended by consent between the parties. 3 The WTO consultations, which begin after the complainant (the EU) and the respondent (the UK) exchange initial papers, are held in Geneva, but also often involve multiple rounds of written correspondence. This provides an opportunity for the parties to attempt to reach compromise. If the matter proceeds then third parties, (other WTO member countries) will have the opportunity to join the dispute and support either the EU or the UK in their positions and written interventions. There is a procedural possibility for third parties to request joining in earlier, during the initial consultations. However, in order to be allowed to join consultations, third parties need to demonstrate a substantial interest in the dispute, and the consulting parties must confirm that a substantial interest exists. This procedural test acts as a hurdle for third parties to intervene during consultations; therefore, third parties usually join a dispute during the early panel stages. Should the two sides not be able to find a common ground within 60 days or any further reasonable time allowed by them, the EU will proceed to making a formal request for the establishment of a panel. The panel is the team of arbitrators that will hear the legal WTO case. That is not the end of the diplomatic process – as the two sides will need to find an agreement on the choice of three candidate panel members, termed "composition of the panel", who must be knowledgeable of the subject-matter and as impartial as possible. Once the panel is composed and approved by both parties, the WTO Dispute Settlement Body will set the legal panel process in motion. The 9-month period for a panel's work is often exceeded in practice. During that time, the EU and the UK will exchange two sets of written submissions. Any third parties who have joined the dispute may also make written submissions. In the last stage, the panel will prepare a draft report, which the main parties can comment upon. Then the panel will publish the final report. What can be the consequences of a WTO Panel judgment? Should a WTO Panel find that the UK has violated Article III:4 of the GATT, the panel report would recommend the UK to remove such inconsistency from the CfD scheme. The UK would have a procedural opportunity to appeal the panel report with the Appellate Body. However, should the UK fail to appeal the report, the panel's ruling would become final and would be adopted by the Dispute Settlement Body. The UK would then face its binding effects and have a sovereign choice to make – to follow the panel's 4 recommendation and remove the legal local content requirement from the CfD scheme, or not remove it, and face possible EU retaliation. The EU has recently strengthened its unilateral instruments for retaliation, and those could involve, among other, a suspension of the Trade and Cooperation Agreement, and the preferential tariff treatment of goods and services coming with it. Should the UK appeal the panel report, the Appellate Body will be called to rehear the legal aspects of the dispute. However, at present, the Appellate Body is effectively paralysed since December 2019 due to a lack of quorum of its members and the unwillingness of the United States to appoint new members until a reform of the body is effected. Consequently, WTO appeals have been filed "into the void". However, the new EU retaliation tools could in theory be used against the UK in any event in order to circumvent any problems arising in this respect. Most commentators agree that any protracted WTO dispute between the UK and the EU would worsen an already complicated relationship following the UK's exit from the EU and the disagreements on the implementation of the Northern Ireland Protocol. Conclusion The decision to initiate a WTO dispute is normally preceded by months of informal exchanges between representatives of each country. Therefore, this is probably not the first post-Brexit trade dispute, but rather the first to become a formal WTO complaint. There will always be a political angle in bringing a formal complaint. UK politicians will portray this as the EU attempting to impinge on the UK's sovereignty following Brexit. The EU will want to portray this as standing up for the rights of EU suppliers wishing to participate in the supply of renewable energy equipment. This political position is further complicated by several EU Member States setting up similar initiatives which contain conditions designed to encourage local content. Bringing an action under the WTO dispute settlement route is risky. The ultimate arbitrator is the panel, whose decisions can be difficult to predict. Both the EU and UK will therefore be taking stock of their positions and considering whether to look for a diplomatic compromise rather than proceeding to a published panel report. The geopolitical angle cannot be ignored either. Part of the purpose of the CfD programme is to safeguard the UK's energy supply. Reducing reliance on energy supplied by third parties has become a high profile security matter in light of the war 5 between Russia and the Ukraine. We therefore anticipate that one of the UK's arguments will be that the local content requirement is capable of being justified on this basis. It remains to be seen whether the EU and UK can reach a compromise on the CfD eligibility requirements or whether the dispute will proceed to a panel report. Whatever the final outcome, it will shed more light on the scope of Article III:4 of the GATT in the current circumstances, and whether its underlying principle of non-discrimination is relevant in the context of foreign investment security screening, or control over foreign subsidies. These are serious policy questions, which are not purely legal at a time when both the EU and UK is calling for reform of the WTO rules in order to make these more effective. References: 1. The WTO case is formally registered as DS612: United Kingdom — Measures Relating to the Allocation of Contracts for Difference in Low Carbon Energy Generation (short title UK — CfD (EU)) 2. https://www.lowcarboncontracts.uk/ 3. https://ec.europa.eu/commission/presscorner/detail/en/IP_14_866 4. "The [French Government's] sector deal aims to use 50% of local content in projects by 2035 based on good practice and voluntary commitments. Local manufacturing naturally develops in markets with significant market demand set by the Government." See France commits to 40 GW offshore wind by 2050, 31 March 2022, https://windeurope.org/newsroom/news/france-commits-to-40-gwoffshore-wind-by-2050/ 5. "The lack of permitted projects is in many countries leading to a situation where the developers are bidding the lowest possible price into the auctions and it's very difficult to build turbines at those prices," WindEurope's chief executive Giles Dickson told Reuters", see https://www.reuters.com/markets/commodities/european-wind-power-lobbydemands-more-permits-ease-bottlenecks-2022-02-24/ 6. FT, Why UK pledge to become ‘Saudi Arabia’ of wind power rings hollow, UK Business and Economy, 8 January 2022. 6