The general shape of the likely future UK–EU Free Trade Agreement (FTA) is set out in the Political Declaration. It recognises that more than 45 years of economic integration during the UK’s membership of the EU has created complex linkages. It seeks a future partnership that is “ambitious, wide-ranging and balanced”. It will be comprehensive, encompassing a free trade agreement as well as wider sectoral cooperation where that is of mutual interest. It envisages a trading relationship with no tariffs, fees, charges or quantitative restrictions across all sectors, alongside modern rules of origin and ambitious customs arrangements.
On goods, it accepts that the EU and the UK will form separate markets and distinct legal orders. It states that:
“moving goods across borders can pose risks to the integrity and proper functioning of these markets, which are managed through customs procedures and checks. However, with a view to facilitating the movement of goods across borders, the Parties envisage comprehensive arrangements that will create a free trade area, combining deep regulatory and customs cooperation, underpinned by provisions ensuring a level playing field for open and fair competition”.
Just as the EU prioritises autonomy of its legal order (and decision-making), so does the UK; there is nothing strange about UK seeking to control its own market.
It is the regulatory relationship that is likely to be the most contentious in the forthcoming EU-UK FTA negotiations, but already misunderstandings in the terminology are at risk of confusing the debate.
For the UK, the key element of any future regulatory environment will be the ability to determine its own rules, so let us be clear at the outset that “alignment” does not mean “control”. The UK will retain its own decision-making control and any talk about what is known as “dynamic alignment” – the automatic readjustment of regulation by the UK in line with any EU changes – would be completely incompatible with the concept of Brexit and would be politically unacceptable to the UK government and those of us who voted to leave the EU.
There are those who persist in talking about frictionless trade in our new relationship with the Single Market, but this is simply not possible. Once you are outside the Single Market, you are out – no “cherry picking” as the EU like to say, and the UK accepts that. However, the EU cannot “cherry pick” itself by trying to control a state outside the Single Market and the Customs Union.
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Within this new dynamic it will be up to the UK to decide how similar or dissimilar our regulations are compared to those operated by the EU. The more similar the regulations, i.e. the more aligned they are to the EU’s, the less friction there will be at trading borders in terms of inspection and paperwork, but as a consequence there will be less freedom to innovate or pursue an independent trade policy. Consequently the less similar and less aligned UK regulations are with the EU, the greater the policy freedoms – but the more friction there will be for business at the borders. Some UK sectors may want higher or lower levels of “voluntary” alignment, but the concept of dynamic alignment is a dead duck. Even if there is voluntary similarity in regulations, the key will be that the UK must have the freedom to diverge at any point.
It is important, however, to see this debate between the UK and the EU in its wider context, for it is a microcosm of the wider global debate about the future of the global trading system.
The EU has had complete regulatory identity, known as “harmonisation”, for all members of the Single Market and has increasingly sought to replicate its internal regulations in labour, social, environmental and even political issues when negotiating potential trade agreements with countries outside the EU. This has led to delay, sometimes excessive, or even failure to complete agreements. This is because its approach is increasingly out of step with concepts around the rest of the world.
At the last World Trade Organisation ministerial meeting in Buenos Aires, it became increasingly clear that while other countries wanted global standards to be maintained, they did not want to be locked into a highly legalistic system based on how the EU has done business and regulated in the past. They want to see a system of “equivalence” where the outcomes are agreed, but different parties to an agreement can find their own ways of achieving them. This leaves the door open to innovation, creating greater efficiency in reaching these goals, and is much more compatible with a dynamic and competitive global economy.
One of the other likely contentious areas will lie around what is known as “the level playing field” in trade and regulation. The language in the Political Declaration remains suitably vague, calling for both sides to “uphold the common high standards applicable in the Union and the United Kingdom at the end of the transition period in the areas of state aid, competition, social and employment standards, environment, climate change, and relevant tax matters”. It will be the definition and extent of these different areas which will determine how politically difficult or easy a new agreement is likely to be.
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