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The Guest Blog with Paul McGrade

EU trade talks: what lessons can the industry take for the future regulatory environment?

It is always a mistake to assume that Boris Johnson will meet a deadline before he has to. We might have hoped to have clarity on the basic deal / no-deal decision by now, if not the content of any agreement. We still await that clarity, with just over two weeks to go until the UK would move, in the absence of a deal, to trade with the EU only on WTO terms. My view remains that we will see a deal, and that the two sides now have an agreement clearly in view on the key issue of ‘level playing field’ (how shared, minimum common standards will ensure fair competition, and evolve over time), although there is still negotiating to do here, as well as on fisheries. Whether that is right or not, as this phase of negotiating draws to a close, we can draw some important lessons for the industry from the UK and EU approach – and decisions they have already taken in Northern Ireland.

1. The special status of Northern Ireland trade deal will endure, forcing adaptation by the industry. 

It came as a surprise to many that agreement was reached on the details of implementing the Northern Ireland Protocol before it was clear whether an overall trade deal was likely. However, this reflects the political reality that both the EU and the US (regardless of who had won the Presidential election in November) had made avoiding a hard border on the island of Ireland a priority in their relations with the UK. That is unlikely to change, so Northern Ireland is almost certain to continue to apply EU Customs Union rules, and Single Market rules for goods. The power of the devolved Stormont Assembly to vote itself out of these arrangements is very unlikely to ever be exercised in practice, since there is unlikely ever to be a majority in the Assembly willing to risk a hard border on the island.

Although we still await clarity on some practical issues on how this will be applied, it is clear that regulated goods placed in the market in Northern Ireland, with a conformity marking used in Northern Ireland (essentially, proving conformity to the EU standard), can be put on the market in Great Britain. Tariffs should not apply to medical products moving from GB to NI, even in a no-deal scenario, but checks will.

The industry will need to study the full requirements once these are published. However, it is clear that the background assumption of the European Commission in agreeing a set of implementation flexibilities for GB to NI goods is that, over time, the sourcing of regulated goods for the NI market will shift towards local or, more likely, EU sources (probably via the Republic of Ireland).

2. The EU sees a post-transition UK as a competitor, and will offer little recognition of UK standards

With Boris Johnson’s election victory in 2019, the EU abandoned the hope of keeping the UK largely within its regulatory ecosystem, and instead prioritised the ‘defence’ of the Single Market. In practice, this has meant rejecting UK proposals for mutual recognition of standards, and an insistence that in regulated sectors (such as medicines and medical devices) only EU standards, assessed by competent bodies within the EU, will do for access to the Single Market.

So, whatever the terms of a final deal, we are unlikely to see the kind of mutual recognition of assessments which Switzerland, for example, secured with the EU. That probably reflects mercantilist motives, to lure business from the UK to the EU, as much as fears about the integrity of the Single Market. However, it is for that very reason that the EU is unlikely to take a more open approach in the foreseeable future.

3. The UK will diverge from EU standards over time, but cautiously 

For many Brexiteers, including Boris Johnson, freedom to regulate the UK economy differently from the EU was the main point of Brexit. The Government has maintained the principle of regulatory freedom in the trade talks, willing to pay the price of much higher trade barriers to the EU Single Market in return. However, it is still not clear where and why the Government wants to diverge from EU standards. Three major constraints are likely to make future governments cautious:

• It is now clear that any deal will put a price on a major future divergence in standards, by creating a mechanism allowing the other side to impose tariffs, or otherwise restrict market access if divergence gives a significant competitive advantage to the party with lower standards;
• The Government is reluctant to tackle domestic political opposition to ‘deregulation’. We have already seen how unwilling a government with a healthy majority, elected to ‘get Brexit done’, is to tackle public opposition. This has been shown in their reluctance to accommodate US food standards in the UK – even though this is non-negotiable if the Government wants an ambitious US trade deal. Where the industry wants the Government to use its regulatory freedoms to diverge from EU standards, it will need a convincing public narrative that this is not ‘cutting standards’ – including for the devolved governments, where relevant.
• Industry support for broadly aligning with EU standards. The Government knows that the industry will generally prefer to stay aligned with EU standards, avoiding costly duplication. As a result, where the industry sees advantage in diverging, it will need to make this clear to government, highlighting the competitive advantages for the sector in the UK. The industry will also need to engage with the level playing field question, showing the government why, in its view, this should not distort competition so much as to trigger tariffs – or that if it does so it is a price worth paying.

The Government will also be very sensitive to the risk of job losses linked to the new barriers to trade with the EU. Our recent Lexington report, covered here in the Financial Times, suggested that many of the new ‘Blue Wall’ seats have many more jobs potentially at risk from a thin trade deal than the size of current Conservative majorities in those seats. This concern should be addressed in industry engagement with the Government over divergence.

If a deal is agreed soon, industry should seek to build on it over time, as some of the heat goes out of the EU issue in British politics, and more ambition in cross-channel trade may become possible. In particular, industry should argue for:

• Smoother customs procedures, with fewer checks, practical cooperation, and greater use of technology (which could all be done without renegotiation);
• Maximum flexibility in minimising checks on regulated goods from GB to NI – while recognising the longer-term sourcing implications of the Protocol;
• Easements in how the new GB-EU checks are administered, including on Rules of Origin. The government may well seek a six month ‘enforcement holiday’ in the final negotiations – the industry could support this in engagement with both sides;
• Further down the line, explore improving the terms of trade (e.g. an MRA). The UK would have to bring something to the table to make this ask negotiable; and
• Perhaps most of all, engage with the Government to promote a genuinely independent, science-led regulator, able to take account of how major trading partners like the EU are regulating, and follow them if appropriate. This will be the key regulatory relationship with the EU ecosystem – it needs to be credible.

Paul McGrade, Senior Counsel for Trade, Lexington Communications