In theory, the system of free trade driving the world economy is supposed to provide a level playing field for all. In practice, countries have long complained that rivals unfairly dish out aid in the form of state-backed subsidies to boost favored companies -- often as they do the same. Now that the pandemic has forced governments to mount huge rescue efforts for their economies, the fragile set of rules that aim to keep state support in check is under threat. State aid has also become a sticking point in the U.K.’s protracted talks on shaping its future relationship with the European Union.

1. What’s state aid?

It’s when governments hand out support to key manufacturers or industries, which typically takes the form of cheap loans, tax breaks, contracts or direct subsidies. The idea is to give homegrown corporations an edge over outside competitors to create jobs, drive exports and fuel economic growth. Sometimes the state acquires partial ownership. Though aid can be modest, it attracts attention when it lasts for decades or drives the deliberate creation of dominant firms celebrated as “national champions.”

2. What’s it got to do with Brexit?

The issue is how far Britain needs to guarantee a “level playing field” ensuring fair competition between businesses, which the EU had made a condition of any potential trade deal that would come in after 2020. In July the EU’s chief negotiator Michel Barnier indicated the bloc was willing to compromise on its insistence that it retains control over the U.K.’s state aid policy. The EU had initially demanded that the U.K. stick to the bloc’s state aid rules, even if they changed over time. On July 23, Barnier only said: “We need consistency, or some kind of equivalence” and the two sides are discussing a system that would see the U.K. making its own state-aid decisions but with independent oversight.

3. How has the virus made this more complex?

The U.K. in July made financial assistance available to a wider range of businesses hit by Covid-19. The 27-nation EU has also been under pressure to better protect its local industries and repatriate supply chains after the global pandemic caused the steepest recession in almost a century. In June EU Competition Commissioner Margrethe Vestager unveiled plans to protect local industries from the potential threat of takeovers and unfair competition by companies bankrolled by foreign states.

4. What’s wrong with a little help?

It’s a question of fairness, and about who gets to pick winners. There’s also concern that governments may be supporting unviable “zombie” companies, choking innovation and wasting money. Before the pandemic, Italy’s repeated bank rescues raised hackles, while the U.S. and Europe have feuded for decades over support for rival planemakers Boeing Co. and Airbus SE. Under President Donald Trump, the U.S. sparked a trade war partly over accusations that China’s subsidies created unfair competition for American firms. State support can fuel battles between places vying for jobs and investment; Ireland and Luxembourg became targets of EU regulators for the low tax rates they charged Apple Inc. and Amazon.com Inc. respectively.

5. Is state aid on the rise?

The pandemic may be sweeping aside any pretense of restraint. For years, European leaders struggling with rising populism and competition from big Chinese firms wanted more leeway to act. Then the virus crisis drove governments and central banks to unleash waves of state assistance. While much of it preserved jobs and businesses economy-wide, other efforts were more targeted. The EU quickly relaxed curbs on cash injections and other support. Airlines around the world were rescued with offers of multi-billion dollar loans and job support packages. France provided funds to carmaker Renault SA and the aerospace industry, while Fiat Chrysler Automobiles NV secured a loan to support its operations in Italy. The U.K. and Canada also pledged to step in. Germany put aside frugal traditions and unleashed a strategy to help key industries and promote local suppliers. Its $10 billion bailout of Deutsche Lufthansa AG will result in the government owning a 20% stake.

6. Who’s complaining?

One regular voice of outrage is the chief executive officer of budget airline Ryanair Holdings Plc, Michael O’Leary, who says state assistance for his rivals amounts to governments “selectively gifting billions of euros to their inefficient flag carriers.” Deep-pocketed Germany is showering firms with aid that debt-ridden Italy can’t match, prompting calls for more fairness. To ensure weakened companies don’t become easy prey, the EU is rewriting competition rules to restrict takeovers by foreign entities that may be receiving state aid. China’s HNA Group Co., which shot to prominence by spending more than $40 billion on acquisitions across six continents starting in 2016, has become one of the biggest corporate casualties of the pandemic. China began assuming control of the debt-laden firm in March.

7. Who keeps score?

Institutions such as the World Trade Organization try to keep the peace by adjudicating state-aid spats. But there’s plenty of scope for discord. Member states created a system for handling subsidies but left plenty of wiggle room for the nations to provide support. Since the U.S. paralyzed the WTO’s appellate body in 2019, defendants can veto rulings by appealing them into a legal void. Meanwhile the U.S., Japan and the EU have been trying to work together to forge new subsidy rules for China. Policing state aid is also a cornerstone of the EU, which regulates Europe’s vast free trade area known as the common market, home to almost 450 million consumers.

8. Does state aid work?

Yes -- or there wouldn’t be fights about it. Helping companies and creating jobs serves a political purpose; whether there’s an economic benefit to aiding coal, steel or autos is harder to say. But there’s a broad perception that having companies that can compete globally has powered exports in the U.S., South Korea, Japan and China. Bailouts of banks and big companies during the 2008 crisis rescued the global financial system and most loans were repaid, though they also created resentment about the use of taxpayer funds.

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