The UK must prioritise removing non-tariff barriers through mutual recognition and equivalence
Meeting different regulations and going through extra checks for different countries costs businesses money, and potentially reduces competitiveness. This threatens their ability to sell in other countries, and particularly their place in global value chains. Under World Trade Organisation rules, countries are allowed to regulate differently as long as this takes place in a non-discriminatory manner, and distorts trade as little as possible. WTO rules do little to remove non-tariff barriers.
The UK Government highlighted regulatory sovereignty as a key principle for future EU relations, underplayed the cost of non-tariff barriers, but still asked for mutual recognition in areas such as testing of industrial goods and professional qualifications. Given this somewhat confused signalling and the limited time available, it is unsurprising that little was achieved. However, it does suggest that much more can be gained, and that the UK Government does not in fact have a red line preventing this.
If the Government is prepared to reduce regulatory sovereignty to support UK business, then there are many ways in which modern economies cooperate on regulation. In doing this, the Government should work with UK business to identify those areas likely to be most important in retaining UK economic strength. It should also be noted that, as Northern Ireland will continue to follow EU regulations, there will be less divergence within the UK if we remain close to the EU in different areas of regulation.
Mutual recognition and equivalence
The exact meanings of the trade terms ‘mutual recognition’ and ‘equivalence’ differ in terms of the context, but are essentially mechanisms to allow goods and services produced in a country with one set of regulations to be sold in another, with fewer or no checks. There are a variety of agreements that should be considered in this area to supplement the UK-EU agreement:
- Mutual recognition – these avoid double testing of a product by allowing results in one country to be considered adequate in the other. The UK asked for these in negotiations, as the EU has existing agreements covering many different sectors such as pharmaceuticals, machinery and toys. The EU was not keen apart from in pharmaceutical inspections, possibly concerned about future UK regulatory intent. It should be possible for the UK to provide sufficient reassurance
- Veterinary equivalence – agreements that reduce or eliminate inspections on food products, which in reality account for the greater percentage of products checked on entry to a country. The EU has a number of such agreements but, in this case, it seems the UK may not have asked for something similar due to concerns about regulatory freedom. Given EU agreements with countries such as Canada and New Zealand which significantly reduce inspections, similar agreements should be possible for the UK
- Professional qualifications – see below
- Data adequacy and financial services equivalence – these are both unilateral in the EU context, which means they can be granted rather than be the subject of agreement. Data adequacy decisions allow for the transfer of personal data from the EU without further protection. Financial services equivalence for the EU involves a far more complex set of decisions, which covers both access to the market and regulatory supervision, in a number of different areas. In the case of data, a temporary agreement is in place for the next six months, during which time the UK commits to continuing with existing regulations. For financial services, the UK is waiting for an EU decision. Both should be a UK priority.
It is possible that, in some areas of regulation, the EU and UK could agree to go further. For example, there had previously been suggestions of a financial services mutual recognition agreement, which could come closer to replicating the access UK companies have under the EU single market. These were reportedly rejected by the EU, which believed too much of the thinking was ill-formed and could amount to cherry-picking the single market.
An EU desire to see some of the UK financial services sector relocate to the EU may have played a part. Though there are undoubtedly difficulties with such a proposal, it should be a longer term aspiration given the importance of the sector, accounting for close to 10 per cent of UK exports.
For a year after the end of the transition period, the UK will continue to accept products with the EU’s CE marking. This is a more informal way of regarding products from another market as safe, as well as helping integration between Northern Ireland, where the CE marking will still be used, and the rest of the UK, which will use a UKCA marking. Extending this period could be another way to encourage continued trade integration.
Dialogue and Membership of Regulatory Bodies
Many countries have established dialogues with major trade partners to discuss how they can reduce trade barriers caused by differing regulations. One of the most prominent examples is the Canada-United States Regulatory Cooperation Council, which has an extensive work programme to try to coordinate regulations and minimise business impact. Australia and New Zealand have gone further in creating a Single Economic Market which, although short of the EU single market, involves considerable integration. Even the UK Government has conceded that “Differences in regulations between countries can create some of the biggest barriers to trade” and committed to “work with a wider range of international partners to help solve global issues, [and] reduce regulatory burdens on exporting businesses…”
Following this lead the UK should prioritise regulatory dialogues with the EU to see how we can best minimise regulatory barriers. One sector where this will be of particular use is financial services, where the UK is likely to continue to be a major supplier to the EU, but a mutual recognition agreement seems at this unlikely as discussed above. Both parties aim to agree a Memorandum of Understanding by March 2021, which will be welcome. Aligning regulatory and supervisory structures, and managing divergence where required, should be advantageous for both parties. Other areas in which such cooperation should be prioritised include trade and climate change (see below), data and digital trade, and consumer safety.
Beyond regulatory cooperation, the UK should seriously consider membership of EU regulatory bodies in sectors where it is unlikely that the UK will wish to diverge. One very good example is the European Aviation Safety Agency (EASA) which, along with the US Federal Aviation Administration (FAA), is one of the big two global aviation regulators. The UK Government chose to announce Britain’s departure from this body in March, apparently due to the relationship between EASA and the European Court of Justice. This decision was condemned by UK industry, which believed it would damage UK competitiveness and the prospects of those working in the sector. Some provisions are included in the Trade and Cooperation Agreement but, given that ECJ oversight is no longer a strict UK red line (see Horizon, below), membership or a bilateral agreement with the EU are both potential options that should be pursued.
In general, there are many EU regulatory agencies which are potentially open to UK membership, as illustrated by the Institute for Government. Refusing to participate in any agency on principle is an ideological position which will damage UK industry. A more reasonable approach will be to consider UK interests, and where we are likely to want to diverge or remain aligned with EU regulations. Where it is the latter, membership of the relevant body should be the preferred approach.
Standardisation and international bodies
Voluntary standards underpin Government regulations relevant to global trade. In particular, in both the EU and UK, adherence to standards can provide a presumption that products meet regulations. Outside of formal Government control, this area has been a quiet UK success story.
BSI, the UK standards body, is a leading participant in the European standards bodies CEN and CENELEC, and the International Standards Organisation (ISO), ensuring a strong link between UK industry and internationally adopted standards. CEN and CENELEC have 34 countries represented, a membership going beyond EU countries, and are therefore open to the UK.
At this stage UK membership has been confirmed until the end of 2021, and there is no reason that this should not continue as long as Government standardisation policy remains broadly unchanged. This should be another Government priority.
There are many other international standard-setting bodies, for example the misleadingly named United Nations Economic Commission for Europe (UNECE) that sets international standards in a number of areas, including many related to the automotive sector. These act as key reference points, and the UK should seek to enhance its role in such bodies, working with the EU and other parties to benefit UK production.
Similarly, we should increase engagement with the OECD (Organisation for Economic Co-operation and Development), another international body that helps facilitate international best practice and standards. In both cases we will need to be aware that EU members are typically the predominant single voice, and we will therefore need to establish a productive relationship recognising that reality.