Industry (Subsidies) (Hansard, 12 April 1989)

§ Mr. Jerry Hayes (Harlow)
The debate tonight concerns unfair competition in the European Community and direct subsidising, which are against article 92 of the treaty of Rome and which deliberately and unfairly undercut jobs and industry in this country. Before going into the general, I want to go into the particular. I am speaking about a company in my constituency, Cossor Electronics, which has been there for a long time. It has a large, dedicated and professional work force who have worked hard to make the company the world leader, not only in electronic components, but especially in air traffic control. As it is the world leader, no one could have been more horrified than myself and my constituents to hear that in the past few weeks it has lost contracts in air traffic control to the value of £80 million, not through lack of keenness, competition or misunderstanding the market, but simply because of unfair competition from abroad.
That has happened in Australia, Thailand, Turkey and central America, and it could happen in other countries. The facts are simple. Two European member states— France and Italy— have been directly and illegally subsidising unfair competition, so much so that on the air traffic control contract that was awarded to the French and the Italians a few days ago in Australia they were able to offer their products at 40 per cent. below their own catalogue prices.
After dealing with the particular, I shall turn to the general. In the run-up to 1992, state aids could be used as an alternative to tariff barriers and other forms of protection. Uncontrolled state aids could be a threat to the unity of the Common Market and to the system of free competition. There is a danger that the combined effect of independently applied national policies would lead to incoherent, contradictory results at Community level. Only further Community control can ensure that any benefits obtained from state aid outweigh the resulting distortions in competition.
An interesting report was issued by the Commission only a few weeks ago. It is a survey of state aids and says that the total annual volume of state aid in 1986 amounted to about £65 billion, which represents 3 per cent. of gross domestic product, or £517 per employed person. The amounts are so high that not only are the effects on competition pronounced, but their macroeconomic impact cannot be ignored. Aids exceed direct taxes on companies, and constitute an important factor in budget deficits in certain member states.
It is worth looking at those countries which are abusing the system. I am delighted that my hon. Friend the Member for Ilford, South (Mr. Thorne) is present. He has been working hard on behalf of his constituent company, Plessey, against unfair practices, as has my hon. Friend the Member for Isle of Wight (Mr. Field), who cannot be present this evening but who supportss what my hon. Friend the Member for Ilford, South and I say.
We must look at the main villains. Italy gives about five times as much as France and Germany. Of the small member states, Greece and Ireland give a significant volume of aid. In 1986, the United Kingdom gave £1.9 billion in aid, France gave £3.6 billion, Germany gave £4.9 1034 billion, and Italy gave £16 billion. In other words. Italy is now giving nearly nine times as much as the United Kingdom. Those results alone must show that a review of policy is essential.
In most member states, grants and straight lax reductions were the most common form of intervention. We must take into account that France and, to a lesser extent, Italy have been using more opaque forms of aid, namely equity participation, guarantees and soft loans. But we are talking about £65 billion of Community money being spent on feather-bedding industries. Of course one must understand that, to a certain extent, strategic industries and industries in difficulty— for example, coal, steel and railways— must be protected. But if one forgets those industries, over £30 billion of member states' money is being deliberately and illegally spent on unfairly feather-bedding industries and undercutting competition.
Just as the United Kingdom has been remarkable for its modesty in state aid, Italy has been remarkable for the extent of the aid that it has given. It has the most expensive regional policy for the less prosperous peripheral regions — one cannot complain about that— and it also has the largest interventionist industrial policy aids and the largest aids granted through public holding companies. In addition, apart from France, it has the largest aids for exports and, apart from Germany, the largest aids for research and development.
Yesterday, I flew to Brussels and had the opportunity of speaking to Sir Leon Brittan, the Commissioner with responsibility for competition policy, financial institutions. I am delighted to say that he gave a significant undertaking. He said that he intends to use much more actively the Commission's powers under article 93.1 to review the important existing aids which, by their nature and volume, adversely affect competition and intra-Community trade. Perhaps most important of all, although the Commission takes a strict line against aids for exports to other member states, no action has ever been taken on aids to exports to Third world countries. There is no doubt that such aids can distort competition inside the Community. The sheer volume of the aids and the large differences between member states make it essential to consider the position afresh.
The feather-bedding of nationalised industries must stop. There can be no room for policies that have the effect — even if it is not always the intention—of discriminating against the private sector. The private sector must be allowed to compete on equal terms. It must be the market, and not state aid, that is allowed to rationalise the industrial structure and determine the number of firms that should be allowed to compete

§ Mr. Neil Thorne (Ilford, South)
Is my hon. Friend aware that the bid by GEC—Siemens for Plessey will be particularly affected by the fact that, because the German telecommunications industry is heavily subsidised, the real cost of producing equipment in Germany is considerably higher than it is here? Consequently that company will not be able to compete internationally. In those circumstances, unemployment will be created because Japan and other countries would be able to undermine our industry

§ Mr. Hayes
My hon. Friend makes his point very well indeed. This is the difficulty. More than £30 billion of Community money, member states' money, is being spent on feather-bedding state industries, at the expense of fair 1035 competition. Let us have a free market, let us have a situation in which we can compete, but let us compete on equal terms. Let us have a level playing field. At present the playing field is not level; it is slanted against the companies in my hon. Friend's constituency and in my constituency.
Let us make no mistake it is not only firms and jobs in Ilford, South and in Harlow that will be at risk; firms and jobs in every constituency will be at risk unless the Commission acts quickly, and unless—and this is where I bring my hon. Friend the Minister in— the Department of Trade and Industry makes it absolutely clear that it will not put up with unfair competition. My hon. Friend will have to say, "Let's have the evidence", but he knows as well as I do that this is going on. If this is what the French and the Italians are doing to British industry now, what on earth will happen to jobs in our constituencies, to the people who have been working hard to make this country competitive and a great exporter again, after 1992 unless the Government and the Commission act quickly?

§ The Parliamentary Under-Secretary of State for Trade and Industry (Mr. Robert Atkins)
I congratulate my hon. Friend the Member for Harlow (Mr. Hayes) on raising this topic. We have come to expect him to show, on any occasion, that he is happy to draw attention to the interests of his constituents. The case that he made tonight, and has made on other occasions, is one that we view with considerable concern. Obviously, I am impressed that my hon. Friend the Member for Ilford, South (Mr. Thorne) is in the House. His presence adds weight to the case that my hon. Friend the Member for Harlow makes.
It is worth dealing specifically with the case of Cossor, which I know is dear to my hon. Friend's heart, and which he raised with Sir Leon Brittan yesterday. My experience of the aerospace industry, both with my hon. Friends on the Back Benches and now as a Minister, leads me to believe that there is quite a lot going on about which we might be concerned. However, my hon. Friend, as a lawyer, will understand better than most that demonstrating proof is very different from having suspicions. We have to consider how best to go about doing just that.
I am aware that Cossor Electronics, which is a fine company— as is Plessey, which is in the constituency of my hon. Friend the Member for Ilford, South— and the United Kingdom ground radar industry generally, is meeting strong competition from other European suppliers and overseas markets. The consequences of a continuing loss of business in this market are of great concern. My hon. Friend the Member for Harlow rightly stressed that his constituency and others will be affected if the loss continues.
As my hon. Friend the Member for Harlow is aware, my Department stands ready to intervene on the company's behalf, with the appropriate authorities, providing that real evidence can be presented on the origin and destination of the alleged subsidies. It is regrettable that at present we have seen no hard evidence, although we may have some suspicions. I am alive to those suspicions becoming hard evidence. If my hon. Friend can give me more information, or if company representatives can do 1036 so, I shall be more than happy to act and to encourage the Department to pursue the matter with the Commission. I await that information.
My hon. Friend the Member for Harlow touched on the general principle of state aids, and I shall dwell on it in a more general sense as I believe that the House will value my doing so. One of the Government's basic aims is to encourage and secure an environment in which business can operate freely on the basis of fair competition in an open market. In the European Community too, competition policy has been seen as crucial to securing the Community's basic aims.
With the coming of the single European market, state aids and other elements of competition policy become even more important. Once the single market is established, state aids will be virtually the only remaining instrument of protection available to member states against competition within the Community. Firm and even-handed enforcement of the state aid rules is therefore a vital factor in the creation and maintenance of a genuinely single market. It is essential that barriers to trade within the Community are not replaced with illegal or unjustified subsidies which serve only to protect uncompetitive industry. Indeed, industry in the Community will not win in world markets through that sort of protection.
My hon. Friend the Member for Harlow referred to feather-bedding, and his point was well taken. Efficient companies, which should benefit from the single market, would be prevented fully from using the advantages that they have gained through their efficiency. They may be deterred from exploiting their advantage if they believe that this may provoke distortions of competition in other member states. As a member of the international trading community, the EC cannot only look inwards. It must uphold and respect the rules imposed under other international agreements. It is therefore especially important for the Community, as well as for the United Kingdom, that the state aid regime is enforced rigorously and even-handedly. I should make it clear exactly what that regime is.
The rules are laid down in the treaty of Rome. They concern any aid granted by member states or through state resources which distorts, or threatens to distort, competition by favouring certain undertakings or the production of certain goods. The treaty does not identify what counts as an aid. It can be any form of subsidy, any relief from financial burdens such as taxation or social security benefits or interest on loans, or any other measures with similar effect. All aids are considered to be incompatible with the Common Market in so far as they affect trade between member states, unless they can be justified by providing some compensating Community benefit.
The treaty of Rome lays down those general rules. It also gives the Commission power to enforce them and lays down the procedure for so doing. Member states must notify to the Commission all plans to grant aid or to change their arrangements for granting it. This applies to schemes for granting aid and, sometimes, to individual projects. The Commission is then responsible for scrutinising the proposal to determine whether it is compatible with the Common Market. If it cannot agree following this examination, it can open a formal investigation procedure and consult all member states 1037 about the proposal. The Commission may then agree the proposal, amend it or impose conditions, or reject it entirely.
Member states may not pay aid until their proposal has been agreed by the Commission. If a member state pays an illegal aid, the Commission can order the aid to be repaid — that means clawing it back from the recipients— and it can take member states to the European Court of Justice to have its decisions supported.
The Commission can also investigate aids which are being paid by member states under schemes already in force, either on its own initiative or as a result of a complaint. I anticipate such a complaint from my hon. Friends in due course. If the aid is found not to be compatible with the Common Market, the Commission can order the scheme to be changed or stopped or, in extreme cases, the aid reclaimed.
All that underlines the fact that clear rules exist in the Community to secure fair competition and to ensure that subsidies do not distort trade. The key point is to have the rules enforced by the Commission in a rigorous and even-handed manner. My hon. Friend emphasised that strongly. The Commission has been tightening up markedly over the past few years, and it intends to continue doing so.
My hon. Friend drew attention to the visit and to the comments of our erstwhile colleague, Sir Leon Brittan. He said only a few weeks ago that firm control can ensure that the benefits derived from state aids will outweigh any distortions of competition. He pointed to recent work by the Commission to identify the full extent of aids granted by the different member states. My hon. Friends will be pleased to know that the United Kingdom came out of the analysis relatively well.
Since the early 1980s, the level of United Kingdom subsidies has been on a firm downward trend, while that in other major member states has been upwards, in some cases markedly so. My hon. Friend referred to some of those countries. The Commission believes that little of the aid has been accompanied by positive benefits, that it has simply served to cancel out similar aids in other member states. The Commission therefore intends to review all existing aid schemes, as well as new schemes for which the Commission's approval is being sought. Without a firm and comprehensive policy of this kind, Sir Leon saw little possibility of completing the single market, and he committed himself to allowing undistorted competition to play its rightful role. The Commission's analysis is not yet complete, but Sir Leon has said that it is already clear to him that urgent action is needed, and clear also where changes have to be made.
My hon. Friend made several references to cases and countries that he knows of, and to the figures involved. Sir Leon is addressing the matter in the terms that my hon. Friend has talked about. I trust that in due course, although it may take longer than my hon. Friend and I wish, we will be able to resolve the problem. I can assure the House and my hon. Friends that the Commission will have the Government's full support in its work. The creation of the single market requires no less if we are to secure its benefits.
1038 The position of individual British companies must also be considered when they run up against unfair competition from elsewhere in the Community. It is worth distinguishing here between subsidies which are illegal—that is, those that have not been notified to the European Commission or are not covered by an approved scheme — and subsidies that have been notified and approved by the Commission. In the case of illegal subsidies, the Government will do their utmost to pursue with the Commission the cases of British firms which have suffered because of illegal subsidies granted to their competitors.
My officials are always ready to discuss with firms what it takes to mount a persuasive case. The main requirement is to obtain hard evidence that the European competitor has received a subsidy and that the subsidy is likely to fall outside schemes which have been approved by the Commission. This is an area in which the Commission is particularly concerned, and I have every confidence that it will follow up complaints to the best of its ability. It has at its disposal the range of sanctions to which I referred earlier.
In the case of legal subsidies, the scope for immediate action is more limited, but where subsidies can be shown to put British firms at a disadvantage, we may be able to persuade the Commission that wider Community principles are at stake. As Sir Leon Brittan said, the Commission is concerned about the high level of subsidies which it has itself approved over the years and it intends to review these comprehensively. The Government would certainly urge the Commission to give priority to those which clearly disadvantage British companies as well as distorting trade within the Community more generally.
To sum up, the Government believe that rigorous and even-handed enforcement of the state aid rules is crucial to securing free and fair competition within the European Community. That in turn is vital for creating and maintaining a genuinely single market in Europe. We shall do our utmost to ensure that British firms have the opportunity to share in the benefits which an open market can bring.
Both of my hon. Friends the Members for Harlow and for Ilford, South, who have addressed the House cogently and articulately on the problem, are to be congratulated on the concern that they have shown for their constituents. They have my assurance that I and other Ministers in the Department of Trade and Industry will do all we can to ensure that British companies get a fair crack of the whip on an even playing field or, indeed, according to any other analogy that can be drawn.
I am grateful that my hon. Friend the Member for Harlow has seen fit to draw this matter to the House's attention. If he or a company in his constituency or that of my hon. Friend the Member for Ilford, South can find the hard evidence, I assure them that we shall wage war to the highest possible level to ensure that all is fair in that difficult area.