Regulatory Alignment – Brexit Time

With barely two weeks to go to a crunch European summit, the UK Prime Minister Boris Johnson has made his pitch for a revised Irish ‘backstop’ and a new Political Declaration on the future relationship between the EU and the UK. Not surprisingly given that what has been released deals solely with the backstop, the question that journalists have focused upon is whether the idea of an all-Ireland regulatory zone and customs controls away from the North-South border can get a green light from the EU and from the MPs who will need to back the deal.

Under the pressure of time, political and media attention cannot help but be consumed with the here and now. Yet what is fundamentally at stake in all of this is not just what it takes to “Get Brexit Done” but where the UK and the EU are heading in terms of their future relationship. As Jill Rutter has tweeted, what is really significant about Boris Johnson’s letter to departing European Commission President Jean-Claude Juncker is that the softer form of Brexit envisaged by Theresa May – and rejected not just by her own MPs but also Opposition parties – is not what the Johnson Government wants. The shape of Brexit has altered and altered radically from a year ago.

On this blog last year, I suggested that what might be important about the planned backstop was that it was less a safety net and more of a trampoline towards a particular kind of future EU-UK relationship. Indeed, the terms of the Political Declaration implied that a future relationship would build upon a backstop that would keep the whole of the UK and not just Northern Ireland subject to EU rules including “level playing field” regulatory compliance. Had the Withdrawal Agreement and Political Declaration been approved, the shape of Brexit could have been relatively soft (although a change of government in the UK could, of course, have charted an alternative course). Albeit different from the approach of the European Economic Area Agreement – aka the “Norway model” – a novel and potentially far-reaching type of “association agreement” between the EU and the UK seemed to be on the cards.

The Prime Minister’s new proposal is not just for a revised backstop but for a very different type of future relationship. This had already become clear when the newly appointed Prime Minister Johnson wrote to the European Council President on 19 August. As well as making the now-familiar claim that the backstop was “undemocratic’, the Prime Minister went on that the backstop was “inconsistent with the UK’s desired final destination for a sustainable future relationship with the EU”. In express terms, the Prime Minister stated that UK regulations could in the future diverge from those of the EU; “[T]hat is the point of our exit and our ability to enable this is central to our future democracy”, he said.

In the more recent letter to Jean-Claude Juncker, the abandonment of any type of association agreement in favour of a free trade agreement is made clear and the reasoning that lies behind it is so “that the UK takes control of its own regulatory affairs and trade policy”.

What emerges is a rather interesting picture. The UK will leave the Customs Union and the Single Market and base its future relationship on a free trade agreement. This is a hard Brexit with no pre-commitment to EU regulatory standards underpinned by an agreement with the EU. Which is not to say that other forces will not push towards regulatory convergence: voluntary alignment or the pressure from market actors will have a role to play. But the free movement discipline of pre-committed regulatory alignment will be replaced by a looser free trade discipline that will open a space for regulatory divergence. The exception to this is Northern Ireland. Rather than the backstop acting as a trampoline or trap, it will be an anomaly. The Prime Minister intends that this anomaly – something which the Democratic Unionist Party had apparently sets its face against hence the May version of the backstop – will find its justification in the principle of consent and the willingness of the people of Northern Ireland to accept continuing regulatory alignment in trade in goods. Which begs the question of how consent in the rest of the UK is to be secured for potential regulatory divergence in the future.

It remains to be seen whether the Prime Minister can persuade the leaders of the EU27 to back his plan. But even if they do, can the same MPs who didn’t support Theresa May’s softer Brexit really get behind the harder Brexit that the Prime Minister is clearly pursuing?

In speeches this week, the Leader of the Opposition and the Prime Minister are setting out their visions for the UK’s future relationship with the EU. Things got underway today with Labour’s Jeremy Corbyn announcing that Labour would press for the UK to remain in the Single Market and a Customs Union with the EU through a transitional period, with the possibility of concluding a permanent Customs Union a “viable option”, provided the UK could have an “appropriate say” in future EU trade deals with non-Member States.

The political intention is to create clear water between a Labour Brexit and a Conservative Brexit. Under a Conservative Government, the UK will leave the EU, its Single Market and its Customs Union at the end of any transitional period. The Conservatives see this as vital to deliver on its promise to regain control over regulatory policy and trade policy once the UK leaves the EU. As part of its “Global Britain” strategy, the Government wants to be free to enter into free trade arrangements not just with the EU but with other non-EU states. Labour, by contrast, has decided that the pursuit of an independent trade policy is not something that makes the electorate vote one way rather than another. Instead, it is content for the UK to have tariff-free trade with the EU through a Customs Union. Crucially, and despite the insistence of some parts of the Labour Party, the Labour leader has not committed to keeping the UK in the Single Market after the end of the transitional period. This is for two reasons. Firstly, and despite contrary analysis even from Labour supporters, the Labour Leader continues to believe that EU competition and state aid rules would prevent a future Labour Government carrying out its economic programme. Secondly, and despite the warm words in his speech about EU nationals, the Labour Leader is not willing to accept free movement of people in return for free movement of goods and services.

So what might a post-Brexit Customs Union between the UK and the EU look like?

In certain respects, the Labour Party’s proposal would take the UK back to its early membership of the EEC. When the UK joined the EEC in 1973 it became part of the Customs Union which had been completed among the six founding states in July 1968. Under transitional arrangements, the UK, Ireland and Denmark adopted the EEC’s Common Customs Tariff and progressively eliminated any remaining customs duties. The Single Market as we know it now was still in its early development. While rulings of the Court of Justice were being used to remove non-tariff barriers on a case by case basis, it wasn’t until the Internal Market programme of the mid-1980s – a programme backed by the UK – that major steps were taken to advance EU harmonization efforts to converge the regulatory policies of EU Member States. But the “1992” programme was largely focused on trade in goods, with non-tariff barriers in services being slow to change. Labour mobility was also relatively low. In other words, a Customs Union without a Single Market would turn the clock back to the 1970s with the limits on cross-border market access arising not from customs but from pervasive non-tariff barriers in both goods and services markets.

Of course, the crucial difference between then and now is that the progress which has been achieved in eliminating non-tariff barriers does not automatically disappear as soon as the UK leaves the EU. Indeed, from a domestic regulatory perspective, the European Union (Withdrawal) Bill aims to domesticate all existing EU regulatory requirements as a matter of UK law. But two things are not clear from Labour’s proposals today. Firstly, how will the current system of rules be made to operate if the UK is not part of the wider European administrative and judicial landscape which makes existing Single Market rules actually work in practice? Secondly, to what extent can or will UK regulatory policy diverge under a Labour Government?

In his speech, Jeremy Corbyn referred to “staying close” to the EU and to continue to support EU agencies with regulatory tasks including the European Food Safety Authority and the European Chemicals Agency. But even the three European Free Trade Association (EFTA) states that join in the Single Market through the European Economic Area agreement have limited direct participation in the work of European agencies. Their representatives do not form part of the management boards of the agencies. The UK could hardly get a better deal on EU agencies while staying outside the Single Market than Norway which participates in the Single Market.

The Labour leader was also keen to assert that his proposals on a Customs Union would not see a hard border on the island of Ireland. However, it is regulatory alignment that is as much an issue for the border in Ireland as the elimination of tariffs. Arguably there is more reason to have a frontier control to ensure the physical security of the European market than there is to ensure the collection of tariffs on the import of goods onto the island of Ireland. Again, it is unclear why Labour is focusing on a Customs Union at the expense of the continued elimination of non-tariff barriers to trade through the Single Market.

If we step back from the specifics of Brexit and look at the wider international landscape, the vast majority of regional trade agreements that are notified to the World Trade Organization are regional Free Trade deals rather than Customs Unions. These Free Trade arrangements do the same work in eliminating tariffs in trade in goods between participating members but leave those states free to control their trade policies with non-members. As tariffs are reduced, it becomes more and more obvious that the big issues are around regulatory alignment and regulatory cooperation. Pursuit of a Customs Union on its own is simply not a strategy pursued by the world’s major trading nations.

In the end it is difficult to see how a Labour Government can credibly pursue a UK-EU Customs Union without at the same time having an arrangement with the EU on alignment of UK regulatory policy. After all, there is little point giving non-UK/EU goods the benefit of free circulation in a UK/EU market if in practice, non-tariff barriers impede their cross-border movement. Indeed, the success of the EU’s external trade policy – the free trade agreements with which a Labour Government would be aligned in a UK-EU Customs Union – is wholly predicated on the capacity of those goods to move freely in the market once they comply with common EU regulatory norms.

Today’s speech is more about trying to define a Labour Brexit that is different from a Conservative Brexit. In that respect there is a clear divide between a UK in a Customs Union and a UK that pursues a Free Trade model. But neither approach solves the border issues on the island of Ireland. And a Customs Union without barrier-free movements of goods and services is just a description of what a Labour Government under Harold Wilson inherited in 1974. If Labour is to avoid accusations that it is trying to turn back time while lip-syncing its way through difficult discussions about the Single Market it is going to have to do more than pin its hopes on a UK-EU Customs Union.

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