28 January 2020
With Brexit now a reality, attention has turned onto the negotiations for the future EU/UK trade relationship. As the UK will leave both the single market and the customs union, the UK will no longer be bound by EU rules on its economy.
This allows the UK to diverge from EU rules, but it also means that it will be harder to sell goods and services into the EU market. EU standards are generally strict, often in ways that restrict trade, yet because the EU market is so big, it is often able to force concessions from other countries to follow their standards in exchange for access to the world’s biggest market.
As a result, the most important part of the upcoming negotiations, and the most challenging, will be the part on standards. The EU would like the UK to keep EU standards, for the whole UK economy, and it wants to spread those standards around the world. It is prepared to leverage access to the EU market in order to achieve that goal.
In that context, many assume that the UK has already agreed to maintain EU standards because of the level playing field provisions that are included in the Political Declaration, and therefore the UK room for manoeuvre in the negotiations is small.
This is not the case. The level playing field provisions relate to the environment behind which a product was made. Specifically they relate to the state aid, environmental and social conditions around which a product or service is developed. For example, they commit the government to not giving a British car producer a subsidy to produce cars which can then be sold into Europe at a discounted rate, to not lower environmental standards so that a polluting product produced in the UK can get an advantage over European products which don’t pollute and to not lower labour standards to such a level that the UK can use that cheap labour to undercut European production.
The UK is unlikely to do much of this in any case. Subsidising industrial champions is generally out of fashion in the UK. Britain is often ahead of Europe in environmental protection and there is little appetite to reduce working rights or holiday entitlements, which are in some areas more generous that the EU and have developed over a century of political debate within the UK.
The British government therefore didn’t give up a huge amount when it agreed to these. In theory it should make it easier for the EU to be more generous on tariff reductions as tariffs are often imposed against countries using these methods to give their companies an unfair advantage.
These provisions do not stop the UK diverging from EU rules in other areas, such as product standards, either in order to make the UK more competitive or because of the way a particular issue develops politically in the UK.
For goods sold in the UK, the UK is free to change costly regulations or those that are overly bureaucratic if it wishes. However goods sold to the EU will still need to meet the EU standards.
This divergence has already started. The UK government announced last week that it would not implement the EU copyright directive. This was a poorly designed law that is widely expected to greatly limit digital innovation. By not applying it the UK will make itself more competitive globally. It will create barriers with the EU, but as the big US tech firms have shown, the lack of a specific trade access on digital services doesn’t necessarily mean that you don’t have access to the European market.
There are many other examples of EU rules that either don’t work or have crudely attempted to address an issue or perceived problem. The EU may have chosen one political path to address that issue but that doesn’t mean that the UK has to or should follow exactly the same rules. especially if it can meet the same goals in a more competitive way.
The UK is likely to legislate with the same intended outcome as the EU, i.e. to ensure food is safe to consume, or that cars are safe and don’t pollute the atmosphere. The exact rules may be different but the intended outcome will often be similar.
The decision making process in the EU is complex. The laws it produces can be bureaucratic and often undermine Europe’s competitiveness. They also can’t be changed easily or quickly if problems emerge. The UK system is quicker, with less people involved in drafting a law, and can potentially meet similar aims with less potential impact on competitiveness.
This competitive divergence can even be managed in trade agreements. The EU has agreements in place with a number of countries where they can certify that goods produced in those countries meet the same aims and outcomes as the EU rules, even if the actual rules are different. Product testing centres can test for EU standards in that country before the good is exported to the EU.
The level playing field provisions agreed in the Political Declaration will not stop the UK from diverging from EU rules in areas it can be more competitive. The EU reaction to this wish to diverge will define the level of access that UK companies subsequently have to the EU market. Possibilities exist to mitigate the trade friction, if both sides wish to use them.
However this regulatory competition has the potential to be positive for both sides. Brussels has had no serious regulatory competition in Europe for decades, and as a result, has increasingly produced inefficient and anti competitive legislation. The arrival of another rule setting authority in its near orbit may encourage it to sharpen its approach. If the UK gets its approach right, and becomes competitive without reducing its standards, we may even see the two entities competing to ensure their regulations allow businesses to be more competitive. Such an outcome would be beneficial for all.
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