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Hi,

The IEA “Plan A+” 24-Sep-2018 Shows BreXit To Be In A State Of Chaos Still Missing The Obvious which can be readily understood CLICK HERE

Brexit supporters  have released their much-vaunted alternative Brexit plan this morning Monday 24-Sep-2018.

They have Dubbed it “Plan A+”, the plan attempts to set out a viable alternative to Chequers and respond to the common critiques of a Canada+ model.

The paper is written by Shanker Singham and Radomir Tylecote of the IEA and will be launched later this morning by a panel including David Davis and Jacob Rees-Mogg.

In the format I have published it, unaltered save in type style andsize, below it amounts to some 190 pages though in 10pt, as in the original text version it was some 40 pages shorter, though much too small for me to comfortably read.

I have scan read it and will later delve in greater depth but rather than publish uncommented I felt those with a serious interest would care to consider some comments from an assiciate of mine with a large and largely thinking and informed following – which I have published in full prior to the actual IEA “Plan A+”

 

Brexit: a state of chaos

Monday 24 September 2018

 

Having spent most of yesterday in the relatively sane environment of a Duxford air show (pictured, taken by Pete), I returned home to find the nation, politically, in a state of chaos over Brexit. Clearly leaving the scene for even this short period was a grave mistake.

Pre-eminent amongst the madness which has descended upon us, it appears, is a Cabinet with a majority determined to dragooning Mrs May into proposing a Canada-style deal for our exit settlement, despite Dominic Raab’s warning that this would leave Northern Ireland “subject to a wholly different economic regime”.

With the oaf blathering so inanely it is painful to read, we find we are to be treated today with some more insanity from “Snake oil” Singham, courtesy of the increasingly sinister IEA, supported by those intellectual titans, Johnson and David Davis.

I am not going to critique this fully until I have seen it, but the previews are sufficient for me to expect the worst. The only thing likely to be in its favour is that it will be so mad that not even Mrs May’s government would be quite so stupid as to take it to Brussels.

That will not, of course, relieve us from the waste of time involved in assessing it, but then that is a feature of this Brexit so-called “debate”, where we expend massive amounts of time on lunacy while perfectly good proposals largely ignored by the media and politicians.

Nevertheless, some of the more sensible issues are still being aired while the sterling Peter Hitchens talks more sense in one article than any thousand I have read elsewhere.

The more the idiots thrash around ignoring the issue, trying to devise an ever madder range of alternatives, the more obvious it becomes that the so-called Norway option is the only way to manage a sensible Brexit.

What we need to be aware of, though, is that the EEA Agreement is what Pete dubbed an adaptive framework. There is no single agreement – each of the three Efta states which are party to it have adapted it to suit their own specific requirements. The UK too will need to make its own adaptations and, because it is a far more complex (and bigger) economy – with more sophisticated needs – the adaptations will have to be considerable.

Thus, in my advocacy for the Efta/EEA option, the biggest mistake I made in the early days was to argue that it was an “off-the-shelf” arrangement. It isn’t, and the process of negotiating the necessary adaptations would doubtless take a long time, with the expenditure of considerable diplomatic effort.

Furthermore, while the EEA Agreement would be a necessary step, it is not sufficient – even with adaptations covering such issues as freedom of movement, customs cooperation (with special reference to Northern Ireland), and technical matters such as rules of origin and external tariffs.

In addition, we will need separate agreements on a wide range of other issues. Norway, the largest of the Efta/EEA states, has 56 recorded bilateral (and more than 20 multilateral) treaties with the EU, including an all-important agreement covering administrative cooperation on VAT. In fact, on this one subject, we will need to go much further than Norway if we are to secure frictionless borders.

If we also include the negotiations required for us to rejoin Efta – which will be necessary in order for us to access the institutional structures of the EEA Agreement, without re-inventing the wheel – then it is unarguable that we do not have sufficient time between now and 29 March to conclude the necessary arrangements.

That really leaves us with only one realistic option. That is for Mrs May to bite the bullet and accept the draft withdrawal agreement, as it stands, complete with the (as yet unfinished) protocol on Northern Ireland.

The political declaration on our future relationship, however, should be very much simplified. It can be distilled down to a few sentences, based on a commitment to facilitate negotiations on adapting the EEA Agreement, with all parties acknowledging that UK participation would continue. This would then define our future relationship – although it would not preclude future changes to the nature of the EEA.

This notwithstanding, as long as we have legally withdrawn from the EU on 29 March – which would be the case if this option was taken – then the referendum vote is being honoured. The vote concerned leaving the EU – nothing more and nothing less. The official leave campaign ostentatiously avoided committing to a specific withdrawal plan, and was content to leave the mechanics of leaving to the government. So be it. It is time for government to govern.

The crucial thing is that we secure a legal separation, but do so with that all-important transition period. That will give us the space to secure Efta membership, the EEA adaptations and the additional agreements necessary to make for a successful working arrangement with the EU and its Member States.

Hopefully, it will also buy us time to organise and agree continuity with our global trading partners, to ensure that the current arrangements enjoyed as members of the EU are able to continue. The idea that we are going to be able to negotiate a whole raft of new trade deals with the rest of the world, in time for the ending of the transition period (which is what we would otherwise need to do), is facile to the point of being dangerous.

Furthermore, if we convey any sense that we are in competition with the EU for deals with the rest of the world, in an attempt to use them as leverage for a better deal with the EU, then we will be setting the scene for economic disaster. If they have a choice forced upon them, more of our trading partners will opt for the EU rather than the very much smaller UK market.

Nor can we assume that the Efta negotiations are going to be straightforward. To avoid complications arising from a mismatch with the EU’s external tariffs (which, for the moment, we plan to adopt via the WTO and the tariff schedules), then we will need a special dispensation from the Efta states.

It maybe that we actually need a novel form of associate membership of Efta, sufficient to give us access to the institutional structures of the EEA, without being bound by the detailed provisions of the Efta convention.

All of this is complicated. But then leaving the EU was always going to be complicated, despite the asinine assertions of diverse pundits, ranging from Peter Lilley to Gerald Batten and Liam Fox. This much Mrs May will need to recognise. If that risks having her government collapses around her, she can put to her party that any seeking alternative will precipitate a general election. And does the Conservative Party really want another election just now?

But then, what do we do about the Labour Party – apart from shake our collective heads in wonderment? If the Tories are in chaos, a new word much be coined to describe the turmoil afflicting the UK’s second party.

Looking at the disease corrupting the entire UK political process, though, Mrs May could probably get away with ignoring the opposition parties, and make her appeal directly to opposition MPs, as individuals. Here, she needs to grip the situation in a way that she has not done, and make clear to the nation the consequences of a “no deal” Brexit, inviting MPs of all parties to join her in fending off certain disaster.

Sadly, in her Friday statement she reaffirmed her original claim that “no deal is better than a bad deal”, giving herself little room for manoeuvre.

Somehow, using whatever form of words necessary, she needs to claw back on that and make it clear that the actual consequences of leaving without a deal is not something that this country can afford. She may be assisted in this endeavour by the latest trance of “technical notices” on the consequences of a “no deal” Brexit, due out today, including the long-awaited aviation paper.

But, it is probably there that the “bloody difficult woman” will fail. I cannot see her rising to the challenge. She has truly boxed herself into a corner, leaving herself no escape route.

And that leaves us in precisely the same place I found us in when I got home yesterday – in a state of chaos. Worse still, we can see the way out, but we are lacking the politicians who are capable of taking us there. The chaos of their making is so profound that they are incapable of resolving it.

To view the original of the article above CLICK HERE

I will publish Dr. Richard North’s eventual analysis in full, when it is available, at the end of the IEA article which follows.

 

Read the IEA Plan A+ in full for yourself and draw your own conclusions here:

PLAN A+

Creating a prosperous

post-Brexit U.K.

Shanker A. Singham

Radomir Tylecote

 

IEA Discussion Paper 95

 

With some exceptions, such as with the publication of lectures, IEA

Discussion Papers are blind peer-reviewed by at least one academic or

researcher who is an expert in the field. As with all IEA publications, the

views expressed in IEA Discussion Papers are those of the authors and not

those of the Institute (which has no corporate view), its managing trustees,

Academic Advisory Council or senior staff.

1

Contents

 

Acknowledgements                                           3

 

Authors                                                    5

 

Glossary                                                   7

 

Preface                                                   11

 

Executive Summary                                         13

 

Introduction                                              21

 

 

1: Keeping Our Eyes on the Prize                          23

 

2: How Independent Trade and Regulatory Policy Delivers   39

the Brexit Prize

 

3: Why the Chequers Proposal Removes Independent          45

Trade and Regulatory Policy

 

4: A Deeper Dive into the Four Pillars of Independent     59

Trade and Regulatory Policy

 

5: Strategic Approach                                     113

 

6: Domestic Reforms for the UK                            127

 

 

Annex: Regulatory Coherence                               131

 

2

3

Acknowledgements

 

The authors are grateful for the contributions and advice of the many people

who have contributed to this document. We would especially like to thank

Catherine McBride, Victoria Hewson, Julian Jessop, Jamie Whyte, Mark

Littlewood, Kate Andrews, Darren Grimes, among others at the IEA, Prof

David Collins at City University, as well as the members of our Advisory

Council: Sir Lockwood Smith, Eduardo Perez Motta, John Cooke, Srini

Rangan, Alan Oxley, Razeen Sally, John Weekes, Peter Allgeier, and Stuart

Harbinson.

 

4

5

Authors

Shanker Singham, Director, International Trade and Competition Unit

 

Shanker Singham is the Director of the International Trade and Competition

Unit of the Institute of Economic Affairs. The Unit is focussed on providing

advice to the UK government, industry and media on the Brexit negotiations,

among other trade policy issues. As one of the world’s leading trade and

competition lawyers, he has worked on the privatisation of the UK electricity

market, the transition of the Soviet, Central and Eastern European economies

and the apertura in Latin America, as well as the WTO accessions of a

number of countries, including China and Russia. Shanker was educated at

St. Paul’s School, London and has an M.A in Chemistry from Balliol College,

Oxford, and postgraduate legal degrees in both the UK and US.

 

Dr Radomir Tylecote, Senior Research Analyst, International Trade and

Competition Unit

 

Dr Radomir Tylecote is the Senior Research Analyst for the IEA’s Trade and

International Competition Unit. He has a background in trade and high-tech

sectors, and was formerly at the Behavioural Insights Team (BIT), where he

was an external advisor to HM Treasury and helped develop the Industrial

Strategy Challenge Fund, launched in the Industrial Strategy 2017. He has

an MPhil from Cambridge University, and his double-scholarship PhD from

Imperial College London Business School studied the impact of China’s

innovation policies and regulation on its technology firms and growth.

 

6

7

Glossary

ACITA: Association for International Trade

ACMD: Anti-Competitive Market Distortion

AEO: Authorised Economic Operator

AMS: Aggregate Measure of Support

AVMSD: Audiovisual Media Services Directive

BEIS: Department for Business, Energy and Industrial Strategy

BIP: Border Inspection Post

CAP: Common Agricultural Policy

CET: Common External Tariff

CETA: EU-Canada Comprehensive Economic and Trade Agreement

CEN: European Committee for Standardisation

CENELEC: European Committee for Electrotechnical Standardisation

CFP: Common Fisheries Policy

CFSP: Customs Freight Simplified Procedures

CMA: Competition and Markets Authority

COREPER: Committee of Permanent Representatives of the European

Union

CPTPP: Comprehensive and Progressive Agreement for Trans-Pacific

Partnership

CSA: Customs Self-Assessment

CTA: Common Travel Area

DEFRA: Department for Environment, Food and Rural Affairs

DIT: Department for International Trade

EBA: Everything But Arms

EEA: European Economic Area

EEZ: Exclusive Economic Zone

EFTA: European Free Trade Association

ETSI: European Telecommunications Standards Institute

FCA: Facilitated Customs Agreement

FTA: Free Trade Agreement

G7: Group of Seven

GATS: General Agreement on Trade in Services

 

8

 

GATT: General Agreement on Tariffs and Trade

GDPR: General Data Protection Regulation

GPA: Agreement on Government Procurement

GRP: Good Regulatory Practice

GSP: Generalised System of Preferences

HMRC: Her Majesty’s Revenue and Customs

ICES: International Council for the Exploration of the Sea

ICJ: International Court of Justice

ICN: International Competition Network

ILO: International Labour Organisation

IMF: International Monetary Fund

ITRP: Independent Trade and Regulatory Policy

MiFID II: Markets in Financial Instruments Directive II

MFP: Multilateral Framework on Procedures

MFN: Most Favoured Nation

MRA: Mutual Recognition Agreement

NAFTA: North American Free Trade Agreement

NATO: North Atlantic Treaty Organisation

NCP: New Customs Partnership

NEAFC: North East Atlantic Fisheries Commission

NTB: Non-Tariff Barrier

OECD: Organisation for Economic Co-operation and Development

PESCO: Permanent Structured Cooperation

QMV: Qualified Majority Voting

REACH: Registration, Evaluation, Authorisation and Restriction of

Chemicals

REX: Registered Exporter System

RFMO: Regional Fisheries Management Organisation

SEM: Single Electricity Market

SFPA: Sustainable Fisheries Partnership Agreements

SOE: State-Owned Enterprise

SPS: Sanitary and Phytosanitary

TAC: Total Allowable Catch

TBT: Technical Barriers to Trade

TiSA: Trade in Services Agreement

TRQ: Tariff-Rate Quota

TTIP: Transatlantic Trade and Investment Partnership

UCC: Union Customs Code

UKFP: United Kingdom Fisheries Policy

9

UNCITRAL: United Nations Commission on International Trade Law

UNCLOS: United Nations Convention on the Law of the Sea

UNFSA: United Nations Fish Stocks Agreement

USTR: United States Trade Representative

VIES: VAT Information Exchange System

 

10

11

Preface

 

The United Kingdom’s relationship with the European Union has been

a divisive issue in political and economic debate for many years, but

particularly so in the referendum of 2016 and in the two years thereafter.

 

Divisions in opinion have gone far beyond the wisdom of us staying in the

EU or leaving it and now encompass a whole raft of issues about what

a sensible departure might look like, whether a temporary or transitional

arrangement would be open to rapid revision or would effectively be an

end state and even the circumstances in which the decision to exit the EU

could be revisited.

 

The debate has not merely divided public opinion in the country at the

large, but has also been the principal focus of contemporary debate

between politicians and policy makers both within political parties and

between them.

 

The Institute of Economic Affairs is an educational charity which seeks to

improve the understanding of the positive role free markets can play. It

takes no corporate view on any specific policy matter, including the merits

or the precise nature of the UK’s departure from the European Union.

 

Similarly, the IEA takes no view of the politics involved in determining the

Brexit process. It may be that one particular course of action has political

or electoral implications for a specific politician or political party, but this is

a matter of indifference for the Institute.

 

However, what is undeniable is that the nature and form of the UK’s

departure from the European Union – as well as our future relationship with

the EU and the rest of the world – are likely to have substantial implications

for the UK’s economy, its ability to trade as freely as possible across the

globe and its domestic regulatory environment.

 

12

These are all matters of considerable interest to the Institute and our hope

is that this document provides an informative and educational template

of the steps the United Kingdom could take and the strategy it should

implement if the benefits of a more market-orientated economy are to be

realised.

 

Mark Littlewood, Director General & Ralph Harris Fellow, Institute of

Economic Affairs

13

Executive Summary

Delivering the Brexit Prize

 

The opportunity before the UK as a result of Brexit is huge: but if we

squander it, the “new normal” of limited economic growth will prevail, with

an EU system that is failing to respond to the challenges of the modern

economy.

 

In her Mansion House speech, the Prime Minister stated that the UK’s

regulations need not be identical to the EU’s, even if they would achieve the

same outcomes. But the Government White Paper (The future relationship

between the United Kingdom and the European Union) proposes that the

UK would have substantively harmonised regulations with the EU, which,

with the customs arrangement it outlined, would make an independent trade

policy all but impossible. It also described a swathe of other infringements

to independence.

 

The UK running its own economy will not render a deal with the EU

impossible. It will bring back real growth, let the UK do other trade deals,

and create leverage to get positive results from EU negotiations. Political,

trade, and regulatory independence is therefore not just an ideological

position, but what makes the gains possible.

 

This proposal will set these out, and demonstrate what will be lost if the

UK Government maintains a model similar to the approach adopted at the

Chequers cabinet meeting in July 2018, further elaborated in the White

Paper, or one even more closely aligned to the EU. The economic scale

of the prize shows the opportunity to unleash prosperity when we liberate

ourselves from a system with such serious distortions. This is a framework

outlining how the UK can still attain the Brexit Prize.

 

14

Four pillars

 

The governing principle of this alternative approach is the pursuit of a

competitive and thriving UK economy. We have based the approach on

four fundamental ‘pillars’ of prosperity, to create a joined up trade and

regulatory policy. It is a central tenet of this paper that the UK’s bifurcation

of EU policy and rest of the world policy has damaged its ability to use the

interactions between these pillars to its advantage. The pillars are:

 

  1. Unilateral

 

The UK should make unilateral moves in domestic policy and trade policy

terms. Many EU regulations are bad for growth: the UK needs the freedom

to do better, this includes:

 

  •    Improving the way regulations are made to better support

competitive markets: in particular to ensure a pro-

competitive environment in digital, financial services, and

other areas that are crucial to the UK’s economic success,

but where continued adherence to EU norms would

hold us back

 

  •    In agricultural policy, eliminating tariffs and quotas

on all products the UK does not produce; methods to

rebalance prices of imports of products whose costs are

reduced by distortions in other markets

 

  •    In fisheries policy, restoring sovereignty over UK waters

and sustainably addressing barriers to entry for new

fishermen.

 

In other non-trade areas:

 

  •    Defence and Security: cooperate with EU allies – but not

in the direction envisaged in the White Paper of participation

in PESCO.

 

  •    Immigration: replace free movement of workers and EU

citizenship with an efficient and balanced framework for

movement of workers from the EU and the rest of the world

that recognises the economic and social benefits and costs

of immigration.

15

 

  1. Bilateral

 

The UK must undertake bilateral agreements with others concurrently

during the EU negotiation. It should seek to replicate the EU’s agreements

with third countries to cover the UK bilaterally, and focus on major trading

partners with whom the EU does not yet have agreements. Negotiating

regulatory recognition with the EU will be challenging, but is too important

to abandon, with EU regulation damaging to growth. Tying the UK to future

EU regulation is a major threat to the UK economy.

 

Options

 

As the negotiations pursuant to Article 50 stand, most of the legal

drafting of the agreement that will include any negotiated arrangements

(the Withdrawal Agreement) has been provisionally agreed. The most

fundamental outstanding elements are the framework for the future

relationship and the so-called backstop arrangement for the Irish border

(“Irish Backstop”). It was the desire to avoid the Irish Backstop being

invoked that informed the design of the White Paper – a way of preserving

free circulation of goods without either leaving Northern Ireland in the EU’s

customs union and single market, or having the whole of the UK stay in the

single market and a customs union.

 

The UK government has options available to it that would deliver varying

levels of autonomy, negotiability and associated risk. At one end of the

spectrum, terminating the negotiations in order to focus on ‘no deal’

preparations, including protecting the positions of EEA citizens by unilateral

measures, could deliver the most independence in the shortest time frame.

This option would not mean no exit arrangements at all, as the UK could

propose self-contained agreements with the EU in areas like aviation and

nuclear safety, enabling the Council to issue the necessary mandates to

the Commission to negotiate such matters, and refer the question of the

financial settlement to independent arbitration.

 

At the opposite end of the spectrum, the UK could request an extension of

the negotiating period to enable the outstanding provisions of the Withdrawal

Agreement to be completed, and to advance no deal preparations. Against

this option are the likely domestic political consequences, the possibility

that the extension would be declined and the protracted uncertainty for

businesses and individuals.

 

The option being pursued by the Government is being resisted by the EU,

 

16

 

due to the legal and practical challenges of the FCA and the disaggregation

of goods from other components of the single market. It may also be voted

down by the UK Parliament.

 

An option is therefore required to maximise the progress already made on

the terms of the Withdrawal Agreement but unblock the impasse over the

Irish border and future framework. The government should seek to retain

all of the agreed elements (the financial settlement, citizens’ rights, the

transition period of 21 months (the Transition Period) and withdrawal terms)

and propose a new backstop and framework for a future relationship. The

new backstop would comprise a basic free trade agreement between the

UK and the EU for goods, and a commitment by the parties to undertake all

necessary investment and cooperation mechanisms to enable formalities

on trade between Northern Ireland and Ireland to be overseen away from

the border. This would enable the completion of the Withdrawal Agreement

and incentivise the parties to agree a better FTA during the Transition

Period. It would also enable the UK to negotiate more effectively with rest-

of-world trading partners during the transition, with a baseline element of

the relationship with the EU known at the outset.

 

A UK-EU Free Trade Plus deal:

 

  •    Fully activating all of the pillars listed now will start to put

the UK on a stronger negotiating footing. Requests for

more time will make the UK look weak and cause more

delays before the UK activates the strategy outlined here.

 

  •    For an FTA with maximum regulatory recognition, the UK

should put text on the table in the form of best in class

chapters in all these areas: Zero tariffs in goods and

agriculture; customs and trade facilitation chapter and

Irish border protocol; government procurement; regulatory

coherence including specific sectoral annexes (e.g.

pharmaceuticals); competition policy and state aids; open

services chapter with maximum liberalisation; no restrictions

in all four modes of service supply in market access or

national treatment; mutual recognition of occupation

licensing; specific sectoral annexes in key areas including

telecoms, data and financial services; investment; dispute

settlement.

 

FTAs with the US, India, China, and other partners:

 

Simultaneous discussions should include with partners for more difficult

FTAs in the longer term.

17

Bilateral deals with countries where an EU FTA should be rolled over:

 

  •    Negotiations should be accelerated to roll over existing

agreements and agree a new FTA with EFTA. the

Department for International Trade (“DIT”) should seek

to conclude these negotiations provisionally, so they can

come into effect on 30 March 2019 in case of no Withdrawal

Agreement and no Transition Period.

 

Alternative model of bilateral relationships for developing countries:

 

  •    The UK has an historic opportunity to create genuine

Economic Partnership Agreements that do not hinder

growth, unlike the EU’s Generalised System of Preferences

model. But better models require the UK having tariff and

regulatory control.

 

  1. Plurilateral

 

  •    The UK should seek membership of major arrangements

which involve a number of countries, including the

Comprehensive and Progressive Trans-Pacific Partnership

(CPTPP) and North American Free Trade Agreement

(NAFTA). Tariff and regulatory control would also be

needed to accede to CPTPP.

 

  1. Multilateral

 

  •    There are two aspects to multilateral strategy: using the

WTO transition to reinforce the other pillars; and using a

fully-fledged WTO membership to promote wealth creation

for the UK economy and the world.

 

At the WTO

 

The UK can use its Aggregate Measure of Support (“AMS”) offer to

signal its free trade intent, seeking no or de minimis AMS to show it will

not pursue production subsidies in agriculture beyond what it has now,

and limit direct payments to allowed green box payments. In bilateral

negotiations with TRQ (Tariff-Rate Quota) partners, and parties with

whom it has negotiations through the EU, it is critical the UK negotiates

with partners by itself.

 

18

The UK should also join numerous WTO groups as soon as possible,

showing the UK is a committed liberaliser of trade & committed to open

domestic settings, for instance:

 

  •    The Cairns Group of agricultural exporters (the UK is not

a major agricultural exporter but is locked into EU supply

chains).

 

  •    The Manchester Group. Just as Australia launched the

Cairns Group, as the world’s second-largest services

exporter, the UK should launch the ‘Manchester Group

of Services Exporters’, named for the city’s role in the

Victorian free trade movement.

 

  •    The UK can join the e-commerce plurilateral initiative &

take a leadership role in services liberalisation.

 

Strategic shifts

 

It is not possible to lay out all the required steps, but an effective strategy

is only possible once the customs union or any variant of it (such as the

Facilitated Customs Arrangement (FCA) set out in the White Paper or its

predecessor the New Customs Partnership (NCP)) is off the table.

 

  •    If the EU does not cooperate with serious UK proposals,

the UK should move to a more aggressive footing; if the EU

refuses to recognise UK regulations on day one of Brexit,

the UK should be prepared to take action in the WTO for

violations of the General Agreement on Tariffs and Trade

(the GATT) and the Agreements on Technical Barriers to

Trade (TBT Agreement) and Sanitary and Phytosantiary

Measures (SPS Agreement).

 

  •    In the event of no agreement, the UK could elect not to

impose checks on goods trade at the Irish border, and apply

zero tariffs on agri-food, on an MFN basis for all imports,

and selectively reduce and eliminate tariffs on other goods.

 

Fundamentally, progress in one pillar reinforces the others. The UK should

be playing chess on multiple chess boards, maintaining freedom to pursue

all areas simultaneously.

19

This alternative approach aims to be a framework for the adoption of a UK

independent trade and regulatory policy, including in its relationship with

the EU. As a framework, many of the areas should be developed further,

and represent ongoing work streams.

 

We seek a UK economy which employs people in good jobs, where they

are able to succeed based on the merits of their ideas and their hard work.

An economic system based on competition as opposed to cronyism will

maximise wealth creation and lead to more money in the pockets of UK

consumers, and more money for essential services.

 

No plan can predict every possible future move that our trading partners

may or may not engage in. No plan can definitely say what final or

intermediate states in our relationship will look like. This alternative

approach sets out what the overall objectives of the UK government should

be (the four pillared trade policy which we outline below). It then makes

recommendations about what initial moves the UK could make to realise

the benefits of leaving the EU.

 

20

21

Introduction

 

Membership of the European Union stifles prosperity just as it prevents

the UK governing itself. It saddles the UK with regulations that protect

large incumbent businesses from competition, harming innovation and

reducing efficiency. And it prevents the UK from entering into its own free

trade agreements (FTAs) with countries outside the EU. This increases the

prices paid by consumers and diverts capital and labour away from their

most productive uses. In short, it makes us poorer.

 

Brexit thus presents the UK with a rare opportunity to radically change

this: but the opportunity is a brief one. To take that opportunity, the UK’s

regulations and trade relations must become truly independent of the EU.

Until recently, the Prime Minister, Theresa May, seemed to envisage such

a Brexit. In her speech at Lancaster House last year, she said that Brexit

would set the UK free to have an independent trade policy, with the ability

to strike agreements outside the EU and the customs union’s Common

External Tariff. In her Mansion House speech in March this year, she

clarified that the UK’s regulations need not be identical to the EU’s, even if

they would achieve the same outcomes.

 

This summer, however, the Government’s White Paper proposed

substantially harmonising UK regulations with those of the EU after Brexit.

Combined with the customs arrangement it also outlined, this would make

an independent trade policy all but impossible. Keen to avoid potential

disruption in our trading relationship with the EU, the Prime Minister is now

set to throw away the potential gains of Brexit. Given that the latter are

greater than the former, this is a profound mistake.

 

This paper therefore proposes an alternative to the Chequers plan, one

through which the UK has genuine independence after Brexit – which must

include regulatory freedom and trade independence.

 

22

 

Many of the actions we recommend can be taken unilaterally: that is, the

UK government can act without needing to win the agreement of other

governments, inside or outside the EU. Regulatory reforms, import tariffs

and border controls (on the UK side) are obvious examples. Then there are

measures that will need agreement with individual foreign governments

(bilateral arrangements), such as the Brexit deal with the EU and, ideally,

an EU-UK FTA. Other recommended measures are plurilateral, such as

joining NAFTA, while yet others, pursued through the WTO, are multilateral.

We call these different ways of pursuing improved regulation and trading

relations – unilateral, bilateral, plurilateral and multilateral – the four “pillars”

of our alternative plan.

 

We begin by explaining the gains to be had by taking advantage of

independence from EU rule-making to improve the UK’s regulatory and

trading arrangements. From this, we show in Chapter 3, that the White

Paper would forgo these gains. Having made our general case, we use

Chapter 4 to look more closely at each of our four pillars; Chapter 5

considers strategic questions associated with the UK’s negotiations with

the EU, and Chapter 6 domestic reforms.

 

Brexit is an historic opportunity for the UK of the highest order. To benefit,

the UK must once again become a self-governing, free-trading nation.

23

Chapter One

Keeping Our Eyes on the Prize

 

A major G7 economy has the chance to embrace independent trade and

regulatory policy for the first time in forty years. This is unprecedented

and could lead to huge opportunities for the UK and the world. The Prime

Minister spoke about a Brexit Prize in the Lancaster House speech and

clearly that prize takes many dimensions. A free people exercising

their sovereign rights is a prize in and of itself; we will focus on the

economic dimensions of the prize. Its scale depends on three contextual

points. First, the direction of travel of the global trading system. Second, the

direction of travel of the European regulatory system. Third, the direction of

travel of the global regulatory system. If the prize is large, then pursuit of

this prize should drive the UK’s strategy. If it is small, then minimising the

disruptions of leaving the EU’s institutions would instead drive the strategy.

 

The Global Trading System is in crisis

 

It is uncontroversial to note that the global trading system is in crisis.

Since the Uruguay Round of 1994, no significant global round has

been negotiated.  This is one third of the lifetime of the entire GATT/

WTO system: it is unprecedented.  In 1997, when the Basic Telecoms

Agreement was signed, the outlook for further world trade liberalisation

looked bright.  Financial services and then energy services were next on

the agenda. In services, countries were expected to open their services

markets for further negotiation. But as the backlash against liberalisation

and globalisation gathered steam in the 1990s, none of this agenda was

realised. It has been said that trade negotiations are like riding a bike.

You need to keep doing it or you fall off.  As a result, key indicators are

showing the weakness of the global system. Measures of global industrial

output have been stalled since before the financial crisis.1 Global trade as

a percentage of global GDP also dipped, and global trade growth stalled

in 2015 in an unprecedented fashion.2 Christine Lagarde at the IMF has

 

1 International Monetary Fund, Global Industrial Output Growth, Data from 1980-2017. See

(Singham, S., “How the World can benefit from the Network Effects of the Commonwealth”,

Institute of Economic Affairs, April 20189) for analysis.

2 Speech by Christine Lagarde at the ECB Forum on Central Banking, “Monetary Policy in a

Changing Financial Landscape”, May 25, 2014.

Available at: https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp052514

 

24

 

called this a new normal3 where we can expect low growth in developed

markets for the foreseeable future. WTO Director General Azevedo has

noted that in terms of trade liberalisation we are not only going in the wrong

direction but doing so with increased rapidity.4

 

Opening the report, DG Azevedo said:

 

“The message of the Report before us today is serious. We are heading

in the wrong direction, and we seem to be speeding up. Growth, jobs and

recovery are at stake. I call on members to recognise the gravity of this

report and its findings. We need to see immediate steps which de-escalate

the situation. I will continue working with all members to this end.”

 

Most recently, the US administration has made its own threats to the global

system, in particular to the WTO’s dispute settlement mechanism (and

appellate body), once the crown jewels of the international trading system.

The lack of countries willing to support the global system allows more and

more pernicious activities to develop.

 

But this means a vital opportunity for the UK. The re-emergence of a G7

country and the world’s second-largest services exporter on the trade

policy stage should mean that the UK can act to lower market distortions

around the world and start to help reverse these damaging trends, if it

maintains its traditional open and free market orientation.

 

The EU regulatory system is moving in the wrong direction

 

The direction of travel of the EU economy from which the UK is emerging

is crucial to this analysis. If the EU was moving in a pro-competitive and

liberalising direction, then this analysis would be very different.  We believe

that the EU is moving in an ever more prescriptive and anti-competitive

direction.

 

The following brief examples outline various major EU-originated anti-

competitive regulations in the UK.5 The point is not that ‘deregulation’

is needed, but regulation that is pro-competitive, increasing consumer

 

3 Speech by Christine Lagarde at the ECB Forum on Central Banking, “Monetary Policy in a

Changing Financial Landscape”, May 25, 2014.

Available at: https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp052514

4 Roberto Azevedo presenting the WTO’s “2018 Trade Monitoring Report”, July 25, 2018.

Available at: https://www.wto.org/english/news_e/news18_e/trdev_25jul18_e.htm

5 Singham, S. A., Tylecote, R. & Hewson, V., 2018. “Freedom to Flourish – UK regulatory

autonomy, recognition, and a productive economy”, IEA Discussion Paper No.91, London,

2018.

25

 

welfare. Anti-competitive regulations can raise costs for businesses or,

unlike tariffs, actually prevent products and services being created at all.

 

Digital

 

  •    General Data Protection Regulation (GDPR)

(Regulation (EU) 2016/679)

 

GDPR has extra-territorial reach wherever the EU citizens’

personal data is processed. It is suspicious of innovation, and

its complex requirements mean small entrants find it harder

to comply. Fines can range from €10m or 2 per cent of global

turnover to up to €20m, or 4 per cent. Smaller firms lack the

resources to monitor compliance, and may risk sanction to

avoid the compliance costs, making GDPR self-defeating.

Firms exiting the market because of GDPR means an anti-

competitive outcome.

 

Chemicals

 

  •    Registration, Evaluation, Authorisation & Restriction

of Chemicals (2006) (REACH) (Regulation (EC) No

1907/2006 Jun-07)

 

REACH is a framework for chemicals manufacture and use in the

  1. Its stated aim is to ensure chemicals produced, imported,

sold, and used in the EU are safe. It obliges manufacturers to

gather information on new and existing chemicals they use,

submitting the information to the European Chemicals Agency

(ECHA) for review and inclusion in a central database; the UK

has the second highest number of registrations.

 

The regulation reduces third country exports to the EU by

increasing cost and, in some cases, barring products from

the single market. In the National Trade Estimate Report on

 

26

 

Foreign Trade Barriers (2017), the US Trade Representative

stated:

 

“REACH impacts virtually every industrial sector… It imposes

extensive registration, testing and data requirements on tens

of thousands of chemicals. REACH also subjects certain

identified hazardous chemicals to an authorisation process

that would prohibit them from being placed on the EU market

unless a manufacturer or user has obtained permission from

the Commission… REACH appears to impose requirements

that are either more onerous on foreign producers than EU

producers or simply unnecessary.” Its report added: “WTO

Members have emphasised [the] problems producers have

in understanding and complying with REACH’s extensive

registration and safety data information requirements”.

 

The Commission itself admits this is: “one of the most difficult

pieces of legislation for industry to deal with — in particular

SMEs”. Some businesses have moved production overseas to

avoid it, or exited the market completely, while testing costs are

often high, harming profitability and cutting smaller firms out of

the market. The result has been to drive some production out

of the EU to avoid the regulations or for companies to leave the

market altogether, thereby lowering competition and eventually

pushing up consumer prices.

 

Transport

 

  •    Port Services Regulation (EU 2017/352)

 

The EU’s Port Services Regulation (EU 2017/352) was

designed to improve competition and financial transparency

between continental EU ports, 80% of which are state owned.

The regulation seeks to achieve fair competition in the sector,

especially between the larger container ports. Few doubt

that the use of public infrastructure funding has distorted

27

competition in EU ports. For instance:

 

  •    Dutch ports are exempt from corporation tax

 

  •    Antwerp, Bremerhaven, and Hamburg’s

infrastructure costs are covered by the state

 

  •    French and Belgian ports receive tax breaks

 

All these are contrary to EU state aid rules and create a

competitive advantage over ports in other member states.

 

The UK’s much smaller and almost all privately-owned port

operators are already extremely competitive; there are over

80 ports in the UK. This EU regulation however would add to

cost pressures on UK operators, while eroding their ability to

control prices. UK port operators believe that the new rules are

unnecessary as they are already competitively managed.

 

The Ports services regulation is a good example of EU “one

size fits all” regulation: while the rules will ensure improved

competition in continental EU container ports, the additional

compliance costs the regulation imposes will make UK ports

less competitive against their continental counterparts, forcing

them to pass on costs to the consumer.

 

The EU is also pushing its regulatory system on the rest of the world.

GDPR is one example of this. Another example includes the sector-specific

Agreement on Conformity Assessment and Acceptance (ACAA) with Israel

for pharmaceuticals: this requires full alignment with EU rules. Through the

EU-Switzerland relationship in market integration, Switzerland applies EU

product standards to its own market.6

 

6 European Scrutiny Committee, 2018

Available at: https://publications.parliament.uk/pa/cm201719/cmselect/cmeuleg/301-

xxvi/30104.htm p. 1.44

 

28

 

Finance

 

  •    The Solvency II Directive (Directive 2009/138/EC Jan-

16)

 

Solvency II is the EU’s prescriptive prudential regime for

insurance. The Directive puts considerable emphasis on

unreliable data for infrequent events, thus increasing capital

required, which in turn excludes new entrants from the market

and has forced operators out of some product lines. Higher

capital requirements create higher operating costs, which

become higher premiums for consumers.

 

  •    The Markets in Financial Instruments Directive (MiFID
  1. II) (Directive on Markets in Financial Instruments,

repealing Directive 2004/39/EC of the European

Parliament and of the Council)

 

MiFID II took effect in the UK in January 2018. Its stated aim

was increased transparency across EU financial markets, and

standardised regulatory disclosures. It covers almost all trading,

including bonds and securities, reporting requirements, large

transaction limits, brokers, exchanges, and retail clients. It has

created a major compliance burden for the industry, increasing

the transaction data-gathering requirement by 270%, as well

as adding best execution policies and onerous private client

regulations. MiFID II has made off-exchange trading in volume

more difficult for large clients and forced investors to pay for

company research reports. All this has increased compliance

costs and complexity, reduced the number of firms willing to

provide private client services and decreased end-user choice

but it has not improved liquidity in the markets which most

participants believe is the major problem. The requirement

to pay for research has encouraged analysts to move their

coverage to larger companies, cutting investment in small and

medium-sized companies.

 

Furthermore, the regulation requires transaction reports

containing 65 data fields to be stored for every investment and

29

 

 

 

every client, and by buying agent, selling agent and market,

which is particularly onerous for firms dealing for private clients.

This will mean, for example, that a private client wealth manager

with 2,700 clients will create 175,500 data fields (65 × 2700)

every time they invest in a company. Trades are timestamped

to 100 microseconds and transaction data must be stored for

at least five years; under the best execution requirements,

banks and brokers must be able to show customers that their

orders were filled at the best available price. This is expensive

for brokers: some orders cannot be filled at this best price,

while the broker must make up the shortfall.

 

 

 

 

These examples illustrate that it will be increasingly important for the UK to

have the ability to diverge from EU regulation in order to capture the Brexit

Prize, and that any locking in to the EU regulatory system will prevent these

gains from being realised. It should also be noted that the direction of travel

of EU regulation is likely to accelerate as a result of the UK not having a

significant say in these regulations.  The move to Qualified Majority Voting

in 20097 has meant that the UK has been finding it increasingly difficult

to win regulatory battles in COREPER (the Committee of Permanent

Representatives to the European Union responsible for preparing the work

of the Council of Ministers).  This does not include the many occasions

when the UK has chosen not to fight, knowing that they would likely lose a

vote under QMV.  Therefore, any harmonisation to the EU rule-book would

be harmonisation to the rule book now, and as it will be in the future.

 

In this context, the UK government must think carefully not just about

the next five or ten years, but the next several decades, and not make

decisions now, that lock the UK into a permanent arrangement from which

it will be difficult to depart.

 

The global regulatory system is moving in the wrong direction

 

There has been a marked increase in the volume of global regulatory

barriers and distortions since the Global Financial Crisis.8 While the EU is

moving in the wrong direction, and imposing its regulatory system on the

 

 

7 European Parliament (2018). Fact Sheets on the European Union 2018: The Treaty of

Lisbon. Retrieved on 17th September 2018

Available at http://www.europarl.europa.eu/ftu/pdf/en/FTU_1.1.5.pdf

8 Evenett, S., and Fritz, J., “The Tide Turns? Trade, Protectionism, and Slowing Global

Growth”, Global Trade Alert, Centre for Economic Policy Research, London, 2015.

Available at: https://www.globaltradealert.org/reports/21

 

30

 

 

 

rest of the world, other countries, like China, are in this case adding Chinese

characteristics to global standards and pushing these on the rest of the

world. The net effect is an increase in prescriptive regulation, which leads

to wealth destruction, pushing people into poverty. In this environment, the

UK has the opportunity to advocate pro-competitive regulatory policies,

and so reverse the tide of anti-competitive regulation that is sweeping the

world. If the UK can execute its independent trade and regulatory policy in

such a way as to lower these market distortions both at home and in other

countries, there could be a significant gain for the world and for the UK.

 

Trade policy is not only about commercial considerations, but forms a vital

part of a nation’s geo-strategic and geopolitical approach. Here, also,

there are significant gains. There is a battle going on in the world between

a system of competition-based capitalism, such as is found in the US, UK,

Hong Kong, Singapore, New Zealand and others, and more cronyist systems

of capitalism, which we have seen in the former Soviet Union and China,

for instance. At the heart of competition-based economies is the market

structure – where competition on the merits is the organising economic

principle. Cronyism is carried by a network of anti-competitive regulation

– on the basis that such regulations are used to damage competitors. But

there is also movement between the two. Latin America for the most part

(with the spectacular exceptions of Venezuela, Cuba and Bolivia) has been

moving away from a fundamentally anti-competitive system towards more

competitive systems (especially the CPTPP members, Colombia, Peru and

Chile). India is moving slowly away from its anti-competitive past. China

initially moved away from its cronyist past after its WTO accession in 2001,

only to seem to re-embrace anti-competitive and prescriptive regulation

now. The UK can play a major part in this battle, where wealth creation

is at stake and where either the new normal will continue, or growth and

economic opportunity for all can be created. If it follows the increasingly

anti-competitive EU direction in a host of areas, then those countries which

do embrace competitive regulatory frameworks will become increasingly

isolated, and global firms will increasingly accept the burdens of anti-

competitive regulation. The result will be wealth destruction.. Innovation

will stall, and those voices who claim that the era of innovation is over will

be proved correct.9

 

 

9 Gordon, R.J., CEPR Policy Insight No 63: Is US economic growth over? Faltering

innovation confronts the six headwinds. London: Northwestern University and CEPR, 2012.

31

 

 

 

What is the Role of Business?

 

Ensuring as positive outcome from Brexit as possible is not just the job

of government, it is the job of all of us. This includes the private sector.

Business consists of many different categories – global supply chain

managers, small businesses, businesses of the future, and new and

innovative, entrepreneurial firms. The Brexit narrative seems to have been

captured by one part of one of these groups – managers of EU-UK supply

chains. Naturally these entities will always wish to preserve the status

quo. Many of the gains we have described are not part of their jurisdiction,

but are still the concern of the global firms they are part of, and perhaps

most critically of the shareholders of those firms. All firms should ask not

what the EU-UK supply chain needs, but what do they want the world to

look like. If there is, as we describe, an opportunity to unblock stalled

trade agendas, and unlock wealth by making global supply chains more

competitive, then global firms and their shareholders’ interests are best

served by recognising these opportunities. It is business that should be

most concerned about the rise of anti-competitive regulatory frameworks

as this will ultimately mean a market of ever decreasing size. Incumbent

businesses may prefer to have an increasing share of a declining market,

but this is a small corner of the total private sector. All businesses are also

consumers of something, and lowering their costs by greater competition is

a benefit for all. Shifting the discussion to one focused on consumers and

consumer welfare will be very important.

 

Determining the Scale of the Prize

 

The prize is determined by the operation of the UK’s independent trade and

regulatory policy. While the gains from tariff reductions can be modelled

relatively easily, the gains from a reduction of behind the border barriers –

the new barriers in trade – are more difficult to model.

 

Governments usually massively underestimate the gains of international

trade agreements.        In New Zealand, for example, the authorities

underestimated the benefits of the New Zealand-China FTA by some

500% (including estimating a level of exports for twenty years after the

deal, which was in fact reached in just twenty months)10. The US ITC noted

the difficulties they encountered in modelling the TPP.

 

Meanwhile, it has become possible over the last twenty years to model

the costs of the ‘anti-competitive market distortions’ that burden otherwise

prosperous nations when they are encumbered by the needlessly

 

10 New Zealand Ministry of Foreign Affairs and Trade (2008), National Interest Analysis:

New Zealand – China Free Trade Agreement, Wellington.

 

32

 

 

 

burdensome and growth restricting regulations that issue forth from political

systems like the EU in particular, and, conversely, the opportunities to

realise prosperity that can be realised by leaving such a system. To take

just one example, the OECD has shown that the ability to reform regulations

– in essence, a country’s economic ecosystem – in the direction of pro-

competitive reform, adds as much as 10-12% to the GDP of developing

countries. Similarly, analysis by the Australian Productivity Commission has

found that pro-competitive reform of regulation could boost Australian GDP

by between 2.5% and 5.5%. This does not necessarily mean deregulation,

but to the contrary and as we will describe, means reform that improves

consumer welfare and releases growth.

 

There is significant evidence that a reduction of distortions can lead to

very large economic gains.13 14 15 16 17 18 Of course, there are many cases

where government intervention is needed, where failure to act would

indeed increase distortions in the economy, including such precautions as

ensuring clean air and water. But no modern economy can thrive if groups

of firms are given unfair advantages over others by government action

instead of their innate advantages.

 

Modelling the Brexit Prize

 

Beware the consensus

 

The consensus on modelling Brexit, including assessments by the OECD,

IMF, LSE and NIESR, as well as the government’s own published analysis,

is that the long-term economic impact will be negative. However, this

observation is not as persuasive as it may first appear.

 

For a start, these studies make similar assumptions and judgements

about what Brexit will mean in practice, and apply these inputs using

similar methodologies to similar models. There is clearly a risk of “group

think” here. If these inputs and tools are wrong, or simply incomplete, the

conclusions are likely to be wrong too.

What’s more, the upfront costs of Brexit (notably any increase in barriers

 

13 Shanker A. Singham and Alden F. Abbott, “Enhancing Welfare by Attacking

Anticompetitive Market Distortions”, Revue Concurrences, No. 4–2011 (November 2011).

14 Shanker A. Singham, U. Srinivasa Rangan, and Robert Bradley, “The Effect of

Anticompetitive Market Distortions (ACMDs) on Global Markets”, Revue Concurrences, No.

4–2014 (October 2014).

15 Shanker A. Singham, A. Molly Kiniry, Dr U. Srinivasa Rangan and Robert Bradley,

“Introduction to Anti-Competitive Market Distortions and the Distortions Index”, Legatum

Institute, London, 2016

16 Bhagwati, J. Weltwirtschaftliches Archiv (1989) 125: 17. https://doi.org/10.1007/

BF02707517. This thinking builds on a body of work on domestic distortions in the 1980s by

Bhagwati and Krugman.

17 Krugman, P., “A ‘reciprocal dumping’ model of international trade”, Journal of

International Economics, Volume 15, Issues 3–4, November 1983, Pages 313-321

18 Bhagavati, J., “Shifting Comparative Advantage, Protectionist Demands, and Policy

Response”, in “Import Competition and Response”, University of Chicago (1982), 151-196.

33

 

 

 

to trade with the EU) are easier to identify and quantify than the benefits

(gains from lowering barriers to trade with the rest of the world and

regulatory optimisation at home), which, although potentially larger, may

also take longer to materialise. On top of this, the potential costs may be

concentrated among a relatively small number of losers, who are better

able to mobilise in lobby groups. In contrast, the potential benefits are

spread across a much more diverse range of people, usually consumers

rather than producers, without such a strong voice. This reinforces the

unfortunate tendency to regard the UK’s departure from the EU as an

exercise in ‘damage limitation’, rather than a set of opportunities to be

maximised.

 

The debate many years ago about whether the UK should join the euro

illustrates both these points. It’s easy to forget, but there was a strong

consensus both among academic economists19 and business leaders20

that the UK should adopt the single currency. The CBI21 and auto sector

lobbied particularly hard in favour, prompting headlines such as “Britain

must join euro, says car industry”.22 Most people surely now accept that

what was then conventional wisdom has proved to be wrong.

 

Now, many of the same voices are arguing that it is essential to keep

trade with the EU as ‘frictionless’ as possible, by retaining membership

of the single market and/or customs union. But if frictionless trade were

indeed the overriding concern, the UK should also still adopt the euro,

which would reduce transactions costs, eliminate currency fluctuations

against the euro area, and improve price transparency. These would all be

relatively tangible benefits.

 

But again, most people surely still accept that these benefits of euro

membership would be outweighed by the costs, even though these costs

are harder to quantify. The costs of euro membership include the loss

of independence on monetary policy, lack of flexibility against non-euro

currencies, and a raft of additional obligations to other members of monetary

union. There is a simple parallel here with the loss of independence on

trade policy and regulatory autonomy that comes with membership of the

EU.

 

Finally, it is important to keep a sense of perspective. People like specific

numbers (all the better to paint on the side of a bus). But these need to be

 

19 The Economist (1999). Economists for EMU. Available at https://www.economist.com/

britain/1999/04/15/economists-for-emu

20 Morgan, O. “CBI survey shows strong support for euro” , The Observer (1999). Available

at https://www.theguardian.com/business/1999/jul/18/observerbusiness.theobserver

21 Trefgarne, G. “CBI tells Blair to get off the fence and back euro”, The Telegraph (2000).

Available at https://www.telegraph.co.uk/news/uknews/1347701/CBI-tells-Blair-to-get-off-

the-fence-and-back-euro.html

22 White, M. “Britain must join euro, says car industry”,. The Guardian (2001). Available at

https://www.theguardian.com/business/2001/jan/15/emu.carindustry

 

34

 

 

 

put in context. For example, let’s suppose that conventional modelling of

all the easier-to-quantify costs and benefits of Brexit suggests that the level

of GDP would be 5% lower than otherwise over a 15-year period.

 

However, this would be relative to a baseline where GDP might be 25%

higher (if trend growth is assumed to be 1.5% per annum), or 30% higher

(1.75%). In other words, GDP would still increase by between 20% and

25% over this period, even without allowing for the harder-to-quantify

gains, both economic and non-economic, that the departure from the EU

would bring.

 

Weaknesses in the Whitehall analysis

 

Turning to the modelling of Brexit itself, it makes sense to start with the

government’s own analysis.

 

The latest official analysis of the long-term economic implications of Brexit

is the Whitehall briefing23 of January 2018. This is actually no more than a

set of PowerPoint slides and the briefing itself acknowledges that this work

is preliminary and incomplete (every page is stamped ‘draft provisional

results’). Nonetheless, this has not stopped the results from being taken by

some as definitive proof that GDP will be lower in all scenarios.

 

In short, the report modelled three arrangements for future trade between

the UK and the EU, each based on existing precedents:

 

  1. A European Economic Area (EEA) scenario (similar to

the ‘Norway option’), where the UK keeps most of the

rights and obligations of the single market, but leaves the

customs union;

 

  1. An FTA, where the UK leaves both the single market and

customs union and settles for a standard ‘low access’ free

trade agreement (similar to, but not necessarily as good as,

the EU-Canada deal);

 

  1. A ‘no deal’ WTO scenario, where the UK and EU simply

trade on World Trade Organisation rules, without an FTA.

 

The results are presented in terms of the impact on cumulative GDP over

a 15-year horizon, relative to a baseline scenario (the ‘status quo’) where

the UK effectively remains in the EU. The central estimates are that GDP

 

23 Exiting the European Union Committee, “EU Exit Analysis – Cross Whitehall Briefing”,

House of Commons, January 2018.

Available at: https://www.parliament.uk/documents/commons-committees/Exiting-the-

European-Union/17-19/Cross-Whitehall-briefing/EU-Exit-Analysis-Cross-Whitehall-Briefing.

pdf

35

 

 

 

would be 1.6% lower than otherwise in the EEA scenario, 4.8% lower in the

FTA scenario, and 7.7% lower in the WTO scenario (the range on the last

of these being -5.0% to -10.3%).

 

There are, however, many weaknesses in the analysis. Some of these

are not necessarily critical. For example, the Whitehall Briefing does not

model actual government policy (whether this was the Canada plus model

favoured at the time, or the new Chequers Plan). But it is not unreasonable

to argue that, if the report’s assumptions and methodology are correct, the

UK would land somewhere in the range of the three scenarios that it does

quantify.

 

There are six more serious problems. First, the Whitehall Briefing assumes

that there will be a large increase in non-tariff barriers (NTBs) between the

UK and the EU, especially in a ‘no deal’ WTO scenario, and that these will

have a large negative impact on trade and productivity. Indeed, this a key

assumption in most such studies.

 

This can be challenged in many ways. Technology is continually reducing

the costs of customs NTBs, so it is wrong to assume that the costs in future

would be the same as they would be now. This is a good example of the

risks in extrapolating current thinking to make forecasts over a period as

long as 15 years. The UK and EU will also have the same regulations and

standards at the point of departure. This should mitigate the impact even

in a ‘no deal’ WTO scenario, where the EU would treat the UK in the same

way as any other third country with whom it does not have an FTA. Finally,

estimates of the costs of erecting new trade barriers are typically based on

the assumption that most, if not all, of the benefits of previous reductions in

trade barriers and closer integration would be lost, even where these have

been locked in.

 

Second, the results of the FTA and (especially) the WTO scenarios in the

Whitehall Briefing are made worse by the assumption that the UK would

choose to impose tariffs on imports from the EU, rather than maintain the

level playing field required under WTO rules by lowering tariffs on imports

from the rest of the world. This assumption, again common to most of

these studies, turns a potential opportunity for gain into a loss.

 

Third, the results of these two scenarios are also made worse by the

assumption that the UK government would restrict EU migration (with no

offsetting increase in migration from the rest of the world) in ways that

exacerbate skills shortages and undermine productivity. Like the decision

on tariffs, that’s a mistake that the government can avoid.

 

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Fourth, the Whitehall Briefing is skimpy on its assessment of the benefits

of new free trade deals. The headline numbers only include the boost to

GDP from a deal with the US, itself estimated at a low 0.2% of GDP. It

does mention that the inclusion of other deals would provide a total long-

term increase of up to 0.7%, but again this seems small. Many previous

studies have underestimated the benefits of liberalisation, especially when

extended to NTBs that the Whitehall Briefing assumes will remain high.

 

Fifth, the Whitehall Briefing makes little allowance for gains from regulatory

optimisation. To be clear, the UK is already one of the more liberalised

economies in the OECD, let alone the EU. But this does not mean it cannot

do better still.

 

Sixth, the savings on contributions to the EU budget are excluded from the

headline analysis (presumably because they may not translate 1-to-1 to

an increase in GDP). Instead they are considered separately in a section

on fiscal implications, which concludes they would be dwarfed by the fiscal

costs. But these costs mainly follow from the finding that the economy

would be a lot weaker. If that is wrong, the fiscal numbers are wrong too. It

certainly seems odd not to allow any credit for savings which might amount

to 0.5% of GDP each year, or a cumulative 7.5% of GDP over a 15-year

period.

 

A brief comparison with other studies

 

The Whitehall Briefing also cites studies by other organisations which

arrive at a wide range of estimates. Some of these suggest that the long-

run impact of Brexit would be a much smaller negative than the official

figures, or that it would be positive:

 

  •    Oxford Economics24 estimated the loss in GDP at between

0.1% and 3.9%;

  •    PWC25 estimated the loss at between 1.2% to 3.5%;
  •    Open Europe26 estimated the loss at 2.2% in a worst-case

scenario, but with a potential gain of 1.6% in a best-case

scenario;

  •    Economists for Free Trade27 have estimated a gain of 7%

even in a WTO scenario (comprising a 4% gain from a net

reduction in trade barriers, 2% from regulatory optimisation,

and a further 1% from fiscal savings).

 

24 Oxford Economics, “Assessing the Economic Implications of Brexit”, 2016.

Available at: https://www.oxfordeconomics.com/brexit

25 https://www.pwc.co.uk/economic-services/assets/leaving-the-eu-implications-for-the-uk-

economy.pdf

26 Open Europe, “Where next? A liberal, free-market guide to Brexit”, 2016.

Available at: https://openeurope.org.uk/intelligence/britain-and-the-eu/guide-to-brexit/

27 Economists for Free Trade, A World Trade Deal: The Complete Guide”, 2018

Available at: https://www.economistsforfreetrade.com/wp-content/uploads/2018/09/A-World-

Trade-Deal-The-Complete-Guide-Final-Upload.pdf

37

 

 

 

The IEA’s own modelling work28 is focusing on the benefits of regulatory

optimisation and the reduction of anti-competitive market distortions.

(This does not mean abandoning safety or quality standards that are

proportionate and science-based, and which apply equally to domestically-

produced goods and services.) Preliminary results suggest that a 30%

reduction in these sorts of distortions between key trading partners by 2034

could increase the GDP of the US, CPTPP-11 plus UK by up to 7.25%,

compared to where it would otherwise have been.29

 

There are four key points to take away.

 

First, modelling the economic impact of Brexit is inherently difficult, partly

because the longer-term benefits are harder to quantify than the initial

costs. This reinforces the danger that policy-makers focus too much on

keeping as close as possible to the status quo, rather than seeking an

outcome that makes the most of the opportunities created by the UK’s

departure from the EU.

 

Second, the conventional wisdom has often been wrong (for example, on

the case for joining the euro, and even the immediate economic impact

of a vote to leave the EU, which, although negative has been much less

than many feared30). This does not mean, of course, that the consensus is

wrong this time too, but it should be taken with large pinch of salt.

 

Third, estimates for the impact need to be put in their proper context –

recognising the uncertainties and kept in perspective, especially when they

represent relatively small changes in the level of GDP compared to the

growth that might otherwise be expected over long periods.

 

Finally, it is important not to pin too much on any number. As the Whitehall

Briefing itself notes, “excessive weight should not be given to single-point

estimates, given uncertainties, ranges of opinion on assumptions, global

and sector trends and a variety of potential end states”. Instead, it should

be recognised that alternative modelling of the economic impact of Brexit

can produce very different results – both positive as well as negative.

 

Given that all the major contexts in which the Brexit process sits are moving

in a negative direction, the UK may be able to make significant gains if it

adopts an aggressive independent trade and regulatory policy designed

to knock down barriers at home and abroad. This, then, points us to the

prize that the Prime Minister once spoke of: an economy typified once

more by high growth, a world of global trade with barriers being reduced

 

29 Note that the gains would not be shared equally across all parties but this gives a sense

of the scale of reduction in distortions and behind the border barriers.

30 Jessop, J., “GDP already hit 2.1% – And it will only get worse”, Institute of Economic

Affairs, 2018.

Available at: https://iea.org.uk/publications/gdp-already-hit-2-1-and-it-will-only-get-worse/

 

38

 

 

 

not rebuilt, developing countries able to export with increasing freedom to

our country and to others, and the barriers to trade behind national borders

that discriminate against our imports being reduced, so that our service-

oriented economy is supercharged by access to new markets and sources

of growth.

 

Given that there is ample evidence that the potential gains to the world are

significant, it is the UK’s independent trade and regulatory policy that must

be preserved, while at the same time mitigating the damage caused by

leaving the EU’s institutions.

 

The disruptions caused by leaving the EU’s customs union and single

market can be mitigated, as we demonstrate in chapters 2, 4 and 5. What

is crucial, however, is that the UK has the ability to realise the opportunities

that can be set before it, which will mean that any disruption costs will be

strongly outweighed, bearing in mind that EU regulation is not static but

evolving.

39

 

 

 

Chapter Two

How Independent Trade and

Regulatory Policy Delivers the

Brexit Prize

It is the capacity to apply an independent trade and regulatory policy that

gives rise to the economic gains of the Brexit Prize. To make the most

of this exercise, the UK should follow an integrated trade policy strategy

based on four fundamental pillars.

 

All independent countries have some variant of a four pillared trade policy.

This includes autonomy over their domestic regulatory settings. To have

a credible and executable independent trade policy, the UK must have

control over its tariff schedules, and domestic regulatory autonomy.

Without both of these, it will not be a credible trade partner, and this

precludes being a member of the customs union and the single market

or either of them. The nature of the UK’s economy also determines how

it should proceed. If the UK economy was dependent, in trade policy

terms, on securing agriculture or industrial goods tariff reductions, then

some of these might be secured even with industrial goods regulatory

harmonisation with the EU. It is because the UK is a heavily services-

based economy, and the barriers to exports of services are predominantly

related to regulatory issues, that it must have maximum leverage to secure

reductions in these barriers around the world by having flexibility over its

own regulatory system. As we briefly outline the different pillars here, it is

crucial to have a combined and coherent approach to all of them, and not,

as the UK government has done so far, to bifurcate the EU process from

the rest of the UK’s independent trade and regulatory policy.

 

We discuss these pillars in greater detail in Chapter 4, but a summary is

necessary in order to then discuss how the pillars interact with each other.

The UK is playing chess on multiple chessboards, and one of the most

troubling aspects of the negotiations so far has been the propensity of the

UK to lose sight of the non-EU chessboards so that the negative impact

across these other pillars of concessions made to the EU are not fully

understood in real time. This is the where we have been led in negotiation

by the EU.

 

40

 

 

 

Unilateral

 

These are the things that the UK can do unilaterally, both in trade

policy terms (e.g. its own tariff settings) as well as domestic

regulatory choices. Unilateral regulatory change does not mean massive

deregulation, but better, pro-competitive regulation (which is also in line

with accepted best practice as set out in the OECD’s regulatory toolkit31

and competition assessment toolkit,32 and the work of the International

Competition Network).33

 

Bilateral

 

The UK can undertake negotiations of a number of bilateral agreements

simultaneously. The EU agreement itself is one part of this bilateral

agenda. While this has occupied most of the bandwidth in Whitehall for

understandable reasons, it is critical that independent trade and regulatory

policy is conducted holistically, and we do not bifurcate the EU piece from

independent trade and regulatory policy generally.

 

The major markets with whom the UK has trade agreements through the

EU – the EU-X agreements can be replicated between the UK alone and the

partner country if the partner country agrees. EU cooperation is necessary

to the extent that both parties would want to have regional cumulation of

origin so that supply chains involving both UK and EU content can enter

the third country party at the preferential rate. It is unlikely that any such

third country would resist this as it would be the price for continued access

to the UK market, and can be accomplished as long as the EU’s and

UK’s agreements with the same country have the same rules of origin.

Fortunately, EU rules of origin are relatively liberal at the moment, and

there would be no particular reason for the UK to diverge from these.

 

Additional bilaterals can be negotiated where the EU currently has none,

and the UK should focus on major trading partners such as the US,

Australia, New Zealand, the Gulf countries, India and China.

 

Plurilateral

 

The major plurilateral arrangements which the UK could accede to at the

moment include the CPTPP, NAFTA, and the Pacific Alliance. The CPTPP

is one of the most advanced trade agreements in the world, and can

 

31 OECD, Regulatory Toolkit, accessed 09/2018.

Available at: https://www.oecd.org/cleangovbiz/toolkit/regulatorypolicy.htm

32 OECD, Competition Assessment Toolkit, accessed 09/2018.

Available at: http://www.oecd.org/daf/competition/assessment-toolkit.htm

33 International Competition Network, 2009. RECOMMENDED PRACTICE

ON COMPETITION ASSESSMENT. [Online] Available at: http://www.

internationalcompetitionnetwork.org/uploads/library/doc978.pdf

41

 

 

 

become a trade policy centre of gravity as countries around the world seek

to join.34 This enables the UK to increase its access to the fastest growing

markets in the world.

 

Multilateral

 

The multilateral pillar relates to what we can do through our WTO

transition and afterwards. Full flexibility here is very important as the UK

will need to be able to offer further liberalisation in the future, i.e. soon.

 

An Integrated Trade and Regulatory Policy and the need to exploit

positive interactions and minimise negative interactions between

pillars

 

Very little attention has been paid to how the different processes the UK is

embarked on impact each other, and how the UK can use these interaction

effects to its own advantage. Given that managing this process can be the

difference between a good result and a bad one, understanding and using

these interactions is a very high priority. Progress in some of these different

pillars or areas will have an impact on other negotiations and other pillars,

especially the EU negotiations. Some of these interaction effects are

positive for the UK, while others are negative. For example, if the UK is

able to progress its US FTA and CPTPP accession, it is much more likely

to have a better negotiation with the EU. Similarly, if it looks to tariff-rate

quota (TRQ) partners that it will not have enough control over its tariff

schedules and sufficient regulatory autonomy, then they may seek to get

as much access as they can in the TRQ process, as opposed to gaining

that further access in a subsequent FTA, because they will no longer think

such an FTA is possible.

 

It is not possible to list all of the interaction effects between the four pillars

in a single document, but it is useful to consider some examples which

demonstrate the need for a coherent strategy.

 

 

 

 

34 Recently South Korea formally applied to join CPTPP: “S. Korea Decides To Join CPTPP

| WTO And International Trade Policies”. 2018. Wtocenter.Vn. http://wtocenter.vn/tpp/s-

korea-decides-join-cptpp.

 

42

 

 

 

 

Consider the UK’s application to accede to the Government

Procurement Agreement, one of the WTO agreements to

which the UK has to accede. The EU requested that they have

a role in that accession process, and agreed to assist the UK

in that process. When the EU reneged on that offer, the UK’s

accession process was temporarily off track. Here the decision

to follow the EU’s lead stemmed from an interpretation of the

duty of sincere cooperation required by article 4 of the Treaty

on European Union “to assist each other [the EU and Member

States] in carrying out the tasks which flow from the Treaties”35

which, when followed to its logical conclusion, requires the UK

to accede to many EU suggestions where a different approach

would lead to gains in the other, non-EU pillars. The result of

this, if the UK emerges from the EU without being a member

of the GPA would be damaging to many UK industries. This

is an example where the UK should conduct its own GPA

negotiations on a bilateral basis with its trading partners without

EU participation even if this has an impact on the dynamics of

the UK-EU negotiation.

 

 

 

 

Consider the proposition in the draft Withdrawal Agreement

that the duty of sincere cooperation and common commercial

policy apply during the Transition Period. Viewed through a

purely EU lens, one might be forgiven for thinking that this is a

reasonable EU request. However, the application of these two

principles could have serious consequences for any attempt to

negotiate seriously with other countries and thus activate the

other non-EU pillars of UK trade policy in a timeframe that will

help the EU negotiation. These negotiations are intended to be

carved out of the application of the duty of sincere cooperation

by article 124(4). However in practical trade policy terms, if a

member state is unhappy with the UK’s negotiating approach

with other countries, it can pressure the other country on the

basis that the UK is still bound by the common commercial policy.

The UK will have to demonstrate a much more robust approach

to the duty of sincere cooperation, common commercial policy

and the carve-out, than it has so far demonstrated. There is

little evidence that this is about to change.

 

 

35 Elsuwege, P., “The duty of sincere cooperation and its impact for the national interest of

EU Member States in the field of external relations”, Working Paper, UCAES, 2018.

43

 

 

 

 

Consider the UK’s acceptance of the position in the Joint Report

of December 2017 on the Irish Backstop. Viewed through the

lens of the EU only, the backstop seems reasonable enough.

It is an insurance policy just in case no FTA is concluded.

However, from the perspective of the rest of the world, the

backstop removes the EU’s incentive to negotiate with the

UK at all. The backstop then becomes an indefinite state and

the UK will have either ceded sovereignty over a part of its

territory or submitted to remaining in a form of customs union

and single market.

 

 

 

 

Consider the Facilitated Customs Arrangement and its

predecessor, the New Customs Partnership. If one ignores

the impact of these arrangements on the rest of the world,

they appear to mitigate the increased customs clearance

costs brought about through leaving the customs union, and

moving to a free trade relationship. However, from a rest of

the world perspective, these options would damage the ability

to execute the other pillars of trade policy, because they nullify

the potential gains which can arise from customs concessions

which the UK might give to another trading partner.36 37

 

 

 

 

There are also positive interaction effects which would be lost

if the UK continues to separate trade policy between the EU

and rest of the world. Consider the WTO transition and TRQ38

negotiations and Aggregate Measure of Support39 (AMS)

offers. The EU has sought to negotiate the transition of TRQs

jointly with the UK or on the UK’s behalf. Viewed through the

lens of the EU only, this might seem a reasonable request.

Viewed through the lens of the whole of independent trade

 

36 Victoria Hewson, “Under Control”, Institute of Economic Affairs, London, 2018.

Available at: https://iea.org.uk/publications/under-control/

37 European Foundation, 2018. “The New Customs Partnership”.

Available at: https://europeanfoundation.org/wp-content/uploads/2018/05/Customs-

Partnership-Briefing.pdf

38 The tariff rate quota is the agricultural import quota which the UK offers the rest of the

world. It has to be separated from the combined EU-28 TRQ, and this has to be agreed by

WTO members as part of the laying of the UK’s good schedules before the WTO.

39 AMS is the amount of agricultural so-called Amber Box production subsidies WTO

members are allowed to claim.

 

44

 

 

 

and regulatory policy, the UK’s favoured approach would be

to negotiate these bilaterally with the countries involved. The

UK could then maintain that these TRQ partners should be

reasonable with it on the TRQs (agreeing to the UK’s idea of

splitting the TRQ based on historic market shares between

the UK and EU) in exchange for the UK offering further

liberalisation in these products relatively quickly, and being a

positive force in the WTO. But the TRQ partners would have

to be able to convince their agricultural lobbies that this was

indeed possible, and that it would happen quickly. Hence the

length of time of any interim period (the transitional period)

after the UK leaves the EU and the time at which actual FTA

negotiations with TRQ partners might start is very important.

If the UK can negotiate TRQs bilaterally, it might be able to

secure a better deal for itself than otherwise.40

 

 

 

 

Because it is so important to manage these interaction effects which often

happen in real time and cannot wait for the standard Whitehall write-round

process, it is critical that there is coordination over all of the policy.

Read-across to other agreements is also critical. For example, if the

UK proposes language for financial services regulatory recognition, this

can be read across to other agreements such as the UK-US FTA. If this

language is then agreed in the UK-US FTA, the EU is more likely to agree

to it themselves. Unless there is a single mind over all of this policy, errors

may continue to be made that have wide-reaching consequences for the

UK’s ability to capture the Brexit Prize.

 

 

 

 

40 The UK has sought a technical rectification as part of its WTO transition which is sensible

– however technical rectification does not require an agreed position with the EU; in any

event the EU has moved itself to a modification of its schedules, which the UK may or may

not follow. The important point is that whatever process is followed, the UK has the capacity

to have direct and credible conversations with its trading partners about the benefits they

may secure as a result of the UK’s WTO transition.

45

 

 

 

Chapter Three

Why the Chequers Proposal

Removes Independent Trade and

Regulatory Policy

In Chapter 1, we described the Brexit Prize and why an Independent Trade

and Regulatory Policy is so critical to achieving it. In Chapter 2, we outlined

how coordination over all independent trade and regulatory policy is at the

heart of that policy. We reviewed examples of how the bifurcation of trade

policy into an EU and Rest of World approach has caused problems and will

cause problems in the future. We briefly explained what an independent

trade and regulatory policy could be expected to achieve.

 

We now review how the Government’s various proposals impact its

own ability to execute that policy. The Government, in the Lancaster

House speech, expressed an approach that enabled all four pillars of

the independent trade and regulatory policy to be meaningfully realised,

because the UK would maintain control over tariff schedules and regulatory

policy. Indeed this was a critical aspect of the speech itself and its reference

to a Brexit Prize.

 

However, it is our view that the Government White Paper takes that

independent trade and regulatory policy off the table, and puts the

Brexit Prize out of reach. Despite the White Paper’s statements that

an independent trade and regulatory policy is still possible, we find that

despite the creative attempts by the Government to preserve independent

trade policy and also retain sufficient harmonisation to the EU to retain key

aspects of free circulation, the White Paper does not achieve this goal for

the reasons we set out below.

 

In addition, there is not, and in fact has never been, any indication as

to how its policy positions can be delivered. This is at the heart of our

concern about the process. By bifurcating the EU and the rest of the

UK’s independent trade and regulatory policy, the UK has allowed itself

to be trapped on the EU’s battlefield, so that it is unlikely to achieve any

 

46

 

 

 

optimal results. It has also been very difficult to make any progress with

the EU without putting negotiating text on the table, which is another core

recommendation of this paper.

 

The White Paper broadly outlines a free trade area between the EU and UK,

with a common rule-book on agri-food and goods in respect of regulations

that affect checks at the border. If the “common rule book” was genuinely

a result of a shared negotiation of equal partners, then it would not

necessarily constrain the UK’s independent trade policy. A comprehensive

FTA with a management of differences mechanism could also lead to what

could be described as a “common rule book”. However the problems are

in the detail of precisely what the “common rule book” is and the limitations

in UK deviation from it (see below). The services, investment, government

procurement and mutual recognition of occupation licensing provisions are

broadly sensible proposals from which negotiating text could be drawn.

One of the major issues which troubles trading partners outside of the EU,

however, is that arrangements with the EU prevent the UK from being as

open as it needs to be, especially in goods and agri-food regulation, in

order to secure economic gains. Simply having the ability to negotiate on

services does not mean that trade deals can be done in these areas.

 

The White Paper provides for a common rule-book in goods and agri-food41,

which is by treaty harmonisation with the EU’s rule book with a commitment

to harmonise to future EU rules in these areas.42 The carve-outs for CAP

and CFP, and for marketing and labelling rules do not recognise that

most of the trade complaints about EU agricultural policy lie precisely in

the SPS area. We have given some examples of these in Chapter 1.

Especially given the direction of travel of EU regulation in this area, it is

difficult to see how having no flexibility in these SPS areas can lead to

trade agreements with others. Not only is the division between services

and goods essentially artificial, but any change that the UK might seek

would have to go through a complex process involving a joint committee

where the EU would ultimately adjudicate on whether the UK was in fact

 

 

41 See 1.2.3 & 1.2.4 of Department for Exiting the European Union, 2018. Policy paper: The

future relationship between the United Kingdom and the European Union.

Available at: https://www.gov.uk/government/publications/the-future-relationship-between-

the-united-kingdom-and-the-european-union/the-future-relationship-between-the-united-

kingdom-and-the-european-union-html-version#goods

42 The language of the White Paper suggests that the rules which will be harmonised in

goods and agri-food relate only to their trade across borders, but the SPS and some TBT

measures that are caught by these provisions are precisely those that necessitate border

inspections for these products. It is true that certain marketing and labelling rules would not

be caught by these provisions and a mutual recognition approach such as the White Paper

highlights would be appropriate (para 37 at p23) as part of an FTA’s mutual recognition

provisions.

47

 

 

 

harmonised to the EU rule.43 From a trading partner perspective, this

means that the UK is severely constrained in its ability to change rules in

the area of goods and agri-food, as well as in certain horizontal areas such

as labour, and the environment, where non-regression clauses require the

UK to maintain all current levels of standards in this area, because it would

ultimately be up to the CJEU to decide whether the UK had diverged in an

unacceptable manner.44 A determination about whether the UK had fallen

below the benchmarked level of standards would be determined by the EU

with the possible imposition of fines or other “rebalancing mechanisms”.45

Under these principles, if the EU and UK could not agree a particular

measure, the UK could be fined if it did not include the EU measure into

its rule book. Thus any change from the EU’s standards as at the moment

of leaving the EU would be liable to be met by the allegation that the UK

was violating the agreement on harmonisation to the EU rule book or the

non-regression clauses and would lead to protracted debate and litigation,

making it very difficult for the UK to improve regulations. A trading partner

seeking changes in these areas would also assume that the UK could not,

in fact, concede anything, or that the path to a concession was through

Brussels not London. This also creates the perverse situation whereby if

the UK brings its SPS rules into line with WTO decisions, it could violate

the UK-EU non-regression clauses in environmental rules, or could violate

the treaty commitment to a common rulebook. Given the direction of travel

of those rules, and the EU’s increasing position as an outlier in the world

in these areas, the separation between the EU rule book and the position

taken by the UK’s other key trading partners is likely to widen even further.

 

USTR’s National Trade Estimate (the US’ inventory of foreign country trade

barriers)46 shows that the vast majority of US complaints against the EU

relate to rules in goods and agri-food, and so taking these off the table will

mean the UK will have no leverage to obtain the changes from the US it

needs which would be primarily be in the services area where the barriers

are difficult to remove anyway. The same is true of other big agricultural

exporters like Australia, New Zealand and many of the CPTPP countries.

Acceding to CPTPP, for example, would be very difficult, if not impossible,

for a country to do, without control over its regulatory rulebook. If the UK

was in practice unable to diverge from the EU, it is doubtful that the large

agricultural exporters in the CPTPP would welcome its entry.

 

 

43 White Paper, 4.5.144

44 The proposal expressly recognises that the CJEU will be the ultimate interpreter of EU

law, not just for the EU but as regards its application in the UK.

45 White Paper, 4.4.1. para 30

46 Office of the United States Trade Representatives, 2018. National Trade Estimate

Report on Foreign Trade Barriers. Available at: https://ustr.gov/sites/default/files/files/Press/

Reports/2018%20National%20Trade%20Estimate%20Report.pdf

 

48

 

 

 

It would also be very difficult to improve domestic regulations in line with

the recommendations of the OECD47 48, if the UK remained tied to the

EU regulatory system in particular and failed to meet CPTPP members’

approaches to good regulatory practice. As pointed out in chapter two, the

EU appears to be moving away from those standards, not approaching

them.

 

Facilitated Customs Arrangement

 

The Facilitated Customs Arrangement is drawn from the earlier New

Customs Partnership, and contains most of its key elements. These

measures have been discussed at length elsewhere,49 highlighting the

WTO violations in the NCP which have tracked through to the FCA, and

the specific reasons why they make an independent trade and regulatory

policy very difficult. Others have also noted the WTO illegality of the FCA

arrangements. The track and rebate system is likely to be a violation of

GATT Art III (National Treatment) as it treats imported products differently

from like domestic products.50 The FCA could also violate WTO rules on

transparency (GATT Article X). WTO members could additionally argue

that any negotiated benefits with the UK would be nullified or impaired by

this system. In the case of an anti-dumping duty, where the UK might not

apply a dumping duty which the EU has in place, the duty recoverable

could be quite large, and the cash flow issues for importers significant.

Any consumer benefits which the UK could seek to derive from having a

more open, liberal anti-dumping policy than the EU would be vitiated by

this mechanism. In any event, the EU would have considerable problems

if products covered by EU anti-dumping orders were to leak into the EU

from the UK.

 

All that said, the fundamental problem with the FCA is not that it may violate

the WTO but rather the impact that it will have on the UK’s negotiating

flexibility with other countries. In customs, the FCA will have significant

impacts on the ability to negotiate with trading partners.51 Outside the EU,

this will have a similar de facto effect on trading partners as a customs

union, and make it impossible for other countries to fully rely on the tariff

 

47 International Competition Network, 2009. RECOMMENDED PRACTICE

ON COMPETITION ASSESSMENT. [Online] Available at: http://www.

internationalcompetitionnetwork.org/uploads/library/doc978.pdf

48 OECD (2018), OECD Regulatory Enforcement and Inspections Toolkit, OECD

Publishing, Paris, https://doi.org/10.1787/9789264303959-en.

49 European Foundation, 2018. The New Customs Partnership. [Online]

Available at: https://europeanfoundation.org/wp-content/uploads/2018/05/Customs-

Partnership-Briefing.pdf

50 Lawyers for Britain, “Chequers White Paper Briefing No. 2: Does the Facilitated Customs

Arrangement comply with WTO law?”, 2018.

Available at: https://lawyersforbritain.org/chequers-cowhite-paper-briefing-no-2-does-the-

facilitated-customs-arrangement-comply-with-wto-law

51 European Foundation, 2018. The New Customs Partnership. [Online]

Available at: https://europeanfoundation.org/wp-content/uploads/2018/05/Customs-

Partnership-Briefing.pdf

49

 

 

 

concessions they may nominally obtain as against the EU’s common

external tariff. Our soundings suggest that no trading partner will take the

FCA (or NCP, or similar variant) seriously. From their perspective, they will

act as if they were dealing with a member of a customs union.

 

The White Paper thus limits the UK’s control of tariff schedules and

regulatory policy through the FCA and harmonised rulebook. This is also

the view of leading trade negotiators. Former New Zealand trade minister,

Sir Lockwood Smith notes: “if Brexit results in the Chequers approach, with

the regulations dictated from Brussels, it’s difficult to see how the UK could

meet these important [for joining CPTPP] requirements.”52 Former Deputy

USTR, Peter Allgeier notes that “if the UK is merely a smaller version of

the EU, then it is unlikely to be a particularly interesting trade negotiations

partner. It is precisely the UK’s ability to diverge from EU regulation that

makes it interesting.”53 Former GATT Council Chairman, Alan Oxley noted

that under Chequers, “the UK would find itself bound to EU regulations

over which, as a partial outsider, it would have no control.”54

 

In any trade negotiation, countries need to know that their trading partner

genuinely has the ability to grant “concessions” in other areas, so that

trade-offs can be made. The more critical an area where trade-offs can

be made is to the trading partner, the less likely they will be to give

concessions to the UK in areas the UK deems important. The UK needs

services barriers removed, which are some of the most difficult areas in

which to make progress. The countries with which the UK would most

benefit from striking trade deals will need concessions in goods and agri-

food for instance, precisely the area where the White Paper limits the UK’s

ability to make concessions.

 

The EU as a regulatory outlier

 

The government seems to assume in its analysis that the EU regulatory

system is regarded by the world as a gold standard system. This

is not the case. Indeed most of the world regards the EU as the outlier

especially in terms of its regulations of goods and agriculture. In goods,

 

 

52 Smith, S. L. “Britain has a golden chance to join the biggest free trade agreement in

history”, Conservative Home 2018

Available at: https://www.conservativehome.com/platform/2018/08/lockwood-smith-britain-

has-a-golden-chance-to-join-the-biggest-free-trade-agreement-in-history-but-chequers-is-

likely-to-wreck-it.html [Accessed 11 09 2018].

53 Allgeier, P. F., “The Chequers proposal would prevent the UK regaining an independent

trade policy”, Conservative Home, 2018, Available at: https://www.conservativehome.com/

platform/2018/08/peter-f-allgeier-the-chequers-proposal-would-prevent-the-uk-regaining-an-

independent-trade-policy.html [Accessed 11 09 2018].

54 Oxley, A., “My reading of the Brexit White Paper suggests the Government doesn’t really

get what is at stake”, Brexit Central, September 18th, 2018.

Available at: https://brexitcentral.com/reading-brexit-white-paper-suggests-government-

doesnt-really-get-stake/

 

50

 

 

 

the EU’s top down approach to standards and the recent imposition of its

approach to data protection on the rest of the world is considered deeply

problematic.55

 

The White Paper says that the UK and EU set the highest global standards

in the SPS area for agri-foods, but here again most of the world has a

different view, and considers many of these protectionist and artificially

restrictive trade barriers. Indeed, the EU has been found in violation of

WTO rules in a number of agricultural sectors, for instance on measures

affecting poultry meat from the United States,56 and hormone treated meat

from Canada57 and the US.58

 

In this context, harmonisation to EU rules will be regarded by the world as

moving the UK further away from good regulatory practice, and therefore a

much less credible and valuable trading partner.

 

Intellectual Property

 

The White Paper also states that the UK will seek to remain in the

European Patents System and the European Patents Court. While UK

intellectual property (IP) law may be similar to EU law substantively, the

UK will need to ensure that its courts determine the scope of IP law and

policy. Implementation of IP law is a very important aspect of a country’s

economic policy. A clear statement that property rights will be protected is

a strong signal to innovators and investors alike. When countries improve

their IP rights, their economic development improves, and venture capital

and other financing opportunities are created.59 The statement in the White

Paper limits the UK’s authority over the application of its own intellectual

property laws, adopting a unitary approach to patent registration and

litigation. If the CJEU decides to adopt a more interventionist approach

which erodes patent protection along a similar economic rationale to its

approach to competition policy, this may make negotiating agreements

with demandeurs, such as the US, who seek high levels of IP protection,

more difficult, and may weaken the UK’s domestic environment.

 

There are also concerns with the non-regression clauses in a number of

areas.

 

55 Office of the United States Trade Representatives, 2018. National Trade Estimate

Report on Foreign Trade Barriers. Available at: https://ustr.gov/sites/default/files/files/Press/

Reports/2018%20National%20Trade%20Estimate%20Report.pdf [Accessed 17 09 2018].

56 EC-Poultry (US), WTO Dispute Settlement DS389, online:

https://www.wto.org/english/tratop_e/dispu_e/cases_e/DS389_e.htm

57 EC-Hormones (Canada), WTO Dispute Settlement DS48, online:

https://www.wto.org/english/tratop_e/dispu_e/cases_e/DS48_e.htm

58 EC-Hormones, WTO Dispute Settlement DS26, online:

https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds26_e.htm

59 See Singham, A General Theory of Trade and Competition: Trade Liberalisation and

Competitive Markets, Cameron May 2007 at pp319 et ff

51

 

 

 

Horizontal Measures in Competition and State Aids

 

The UK and EU have broadly similar approaches to the implementation of

competition law and policy. However, there are significant and substantive

areas where differences do arise, and it is likely that the UK will want to

have the flexibility to depart from the EU’s substantive interpretation of

competition law, as well as retain its own procedural rules. It will also

want to negotiate global agreements on procedure that the EU may not

wish to negotiate, for example the Multilateral Framework on Procedures

in Competition Law Investigation and Enforcement (MFP) which has

recently been proposed by the US and other leading antitrust agencies.60

The UK has an opportunity to be a charter member in a groundbreaking

global agreement which will ensure better procedures that protect the rule

of law and economic freedom, and ensure that antitrust is administered

fairly. The White Paper itself notes that the there are aspects of procedural

enforcement where the UK is ahead of the EU. The EU is objecting to the

MFP, and requiring member states to join it in its objections.61

 

With regard to substance, the EU applies a collective dominance approach

to single firm conduct which we believe harms consumer welfare in the

economic sense. A better approach is to include in a competition chapter in

an FTA a framework for cooperation in these areas recognising that the UK

may enforce competition law, both in terms of procedure and substance

differently than the EU. A sample competition chapter of the FTA is

forthcoming. This sort of approach recognises and builds on section 60 of

the Competition Act which recognises that there are differences between

UK competition law and European law.

 

The UK should be prepared to carry over and agree state aids disciplines

in the UK-EU agreement and a chapter on state-aids should be relatively

easy to conclude. It is certainly in both parties’ interests that the other is not

able to confer aid on an undertaking and thus distort market competition.

 

Horizontal Measures in Labour and Environment. With regard to horizontal

measures, there are provisions of the Government’s position in the White

Paper that would have a serious impact on the ability of the UK to have a

competitive economy. Although the provisions in these areas in the White

Paper are non-regression clauses (rather than outright harmonisation), and

therefore not obliging the UK to keep up with the EU’s changes, any change

the UK does make may be regarded by the EU as a lessening of standards.

 

60 Fresh Thinking on Procedural Fairness: A Multilateral Framework on Procedures in

Antitrust Enforcement”, United States Department of Justice, Washington, 2018.

61 The impasse on the MFP is but one example of likely future clashes between what the

UK will seek to do in global standard setting and rule-making bodies and what the EU will

allow it to do if alignment is too tight.

 

52

 

 

 

The European Union has recently been moving in an anti-competitive

direction in these areas, as evidenced by changes in EU labour rules,62

the working time directive,63 application of the EU’s own interpretation of

the precautionary principle,64 65 and REACH,66 among others.67 Under the

White Paper proposal, if the UK chooses to move away from the EU in

any of these areas it is likely to be treated as a reduction in standards, the

ultimate arbiter of whether the UK has violated the provisions is the CJEU.

This is likely to prevent the UK implementing pro-competitive regulation in

these areas, even if such reforms preserve or improve existing standards

of protection.

 

Exemption from the EU social chapter had previously been a core element

of UK policy since its accession to the Common Market itself. This was

to ensure that the UK could set its own labour market policies and thus

to ensure a more flexibility – one more conducive to job creation, and

a dynamic economy. The UK has since embraced a number of labour

policies which go well beyond what can be seen to be reasonable

protections of workers. Indeed some of these policies make it much harder

to hire new workers. The opportunity presented by Brexit should not be lost

by locking the UK into EU labour policies and practices which have been

demonstrated to have slowed the European economy.68 In many areas,

UK organisations have called the Working Time Directive, and the Posted

Workers Directives examples of overly prescriptive regulation that goes

beyond what are necessary for worker protection.69

 

62 The Agency Workers Regulations (AWR) 2010 (Directive 2008/104/ EC Oct-11)

63 The Working Time Regulations 1998 and Working Time (Amendment) Regulations 2003

(Directive 2003/88/EC Oct-98/ Aug- 03)

64 Parsons, D. and Garnett, K., “Multi-Case Review of the Application of the Precautionary

Principle in European Union Law and Case Law”, Risk Analysis, 37:3, pp 502-516, 2017.

65 Woolcock, S., “The Precautionary Principle in the EU and Its Impact on International

Trade Relations”, CEPS, Working Document 186, 2002.

Available at: https://www.ceps.eu/publications/precautionary-principle-eu-and-its-impact-

international-trade-relations

66 Registration, Evaluation, Authorisation & Restriction of Chemicals (2006) (REACH)

(Regulation (EC) No 1907/2006 Jun-07)

67 Singham, S. A., Tylecote, R. & Hewson, V., 2018. “Freedom to Flourish – UK regulatory

autonomy, recognition, and a productive economy”, IEA Discussion Paper No.91, Chapter 5.

[Online]

Available at: https://iea.org.uk/wp-content/uploads/2018/07/DP91_Freedom-to-floorish_web-

002.pdf

68 Woolcock, S., “The Precautionary Principle in the EU and Its Impact on International

Trade Relations”, CEPS, Working Document 186, 2002.

Available at: https://www.ceps.eu/publications/precautionary-principle-eu-and-its-impact-

international-trade-relations

69 See Chapters 3.27 – 3.35 of HM Government, Summer 2014. “Review of the Balance

of Competences between the United Kingdom and the European Union: Social and

Employment Policy.” [Online]

Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/

attachment_data/file/332524/review-of-the-balance-of-competences-between-the-united-

kingdom-and-the-european-union-social-and-employment-policy.pdf

53

 

 

 

This is also true of EU environmental protection rules, which is one of

the areas where EU regulation is moving in an anti-competitive direction.

We are supportive of environmental protection, but it should be noted that

European environmental rules apply to many different product categories,

and lead to increases in costs for many companies – sometimes they are

valid attempts to deal with real environmental problems, but frequently they

are disguised methods of protectionism, for instance the EU’s restrictions on

citrus imports and certification requirements for Specified Risk Materials.70

So agreeing with the EU not to lessen current environmental standards will

have wide ranging impacts.

 

Furthermore, the UK has a history of opposing EU rules in this area. The

move to Qualified Majority Voting (QMV) which we discussed earlier has

meant that no member state has a veto, and we have seen an increase

in the volume of regulation whose prescriptive and anti-competitive nature

goes against the grain of how the UK has historically chosen to regulate.

Since its introduction in 2009 the UK has lost three times as many of the

Council votes it has participated in by proportion as during the previous five

years, and more than twice the percentage of the next nearest member

nation, see fig 1 below.71

 

 

 

 

70 United States Trade Representative, 2017, National Trade Estimate Report on Foreign

Trade Barriers, pp152-154

Available at: https://ustr.gov/sites/default/files/files/reports/2017/NTE/2017%20NTE.pdf

71 Does the UK win or lose in the Council of Ministers? Hix and Hageman, UK in a

Changing Europe. Available at: ukandeu.ac.uk/explainers/does-the-uk-win-or-lose-in-

thecouncil-of-ministers/

 

54

 

 

 

Figure 1: Percentage of times each EU government has been in a

losing “minority” in Council votes, as a proportion of all votes it took

part in during the 2004-2009 and 2009-2015 periods72

 

 

 

 

72 Figures from: Singham, S., Tylecote, R., and Hewson, V., “Brexit Inflection Point”,

Legatum, 2017, pp 30. Source of data is reference 78 above.

55

 

 

 

Numerous UK entities seek mutual recognition, rather than harmonisation,

and many have pointed out the damaging consequences of harmonisation.

As noted in chapter 1, the goal or the regulatory provisions in any trade

agreement are to ensure that both parties satisfy Good Regulatory Practice

(“GRP”) and that as much regulatory recognition as possible is achieved

in this area.

 

There is no reason why the UK should accept the position that market

access to the EU market should be constrained by differences across

the broad horizontal areas like labour and environment. This is not how

modern trade arrangements work. Generally other countries provide

a level of standards that both sides would agree, as part of their trade

agreements. Since the UK and EU-27 consist of advanced economies,

agreeing base minimal levels of compliance (such as core ILO standards,

and core environmental standards) should be relatively straightforward,

but cannot require the UK to follow the EU’s acquis in these areas as a

precondition to market access.

 

Remaining in EU Agencies

 

The White Paper states that there would be three agencies of the European

Union that the UK would seek to remain part of, and also seek to have

some sort of role in EU rule-making. These are:

 

  1. The ECAA. The European Civil Aviation Authority is the EU regulator

for aviation, air safety and related matters.

 

  1. ECA. The European Chemical Agency regulates the chemicals industry

especially REACH.

 

  1. EMA. The European Medicines Agency regulates the pharmaceutical

industry among other areas.

 

ECAA

 

In terms of the UK regulatory rule-book, the ECAA has replaced the Civil

Aviation Agency (CAA). There is value in ensuring minimal disruption of

air travel, so we are not concerned about this offer. We also do not find that

the direction of travel of EU regulation in this area is especially troubling,

but it should be noted that under this arrangement, the UK would need

assurance that its voice would be heard – which is more likely here than

in other areas because the UK includes the world’s third largest aviation

area.

 

56

 

 

 

ECA

 

It is understandable that managers of UK-EU supply chains would want the

rules that cover their sector not to be affected. However in the chemicals

area, we already know the overall direction of travel of EU regulation as

exemplified by REACH which has had a serious impact on the chemicals

industry in Europe, not to mention increasing costs for consumers of those

products, such as the plastics and other related industries. There is a

serious risk here that this sort of burdensome and restrictive regulation

expands, and that firms around the world regard this as a global standard.

This will certainly have a negative impact on innovation.

 

EMA

 

What is true of the chemicals industry is doubly true in the case of

pharmaceutical and biotech where the UK has a competitive advantage.

Already, the global pharmaceutical industry has had difficulty with EU

clinical trials directives. In particular, the rules on disclosure of clinical trials

data, including disclosure of confidential information released to the EMA

has been a problem for pharmaceutical companies. Many member states

maintain market access barriers to pharmaceutical products73 as well as

taxes that impact various levels of production.74 The global pharmaceutical

industry in which the UK has a leadership role needs to ensure that the

overall climate on pharmaceutical related issues such as patent protection,

and patent term extension are as strong as possible and clinical trials and

pharmaco-vigilance is as pro-competitive and least distortive as possible.

The EU has not taken especially helpful positions in the TRIPs council in

the WTO on issues like compulsory licensing. It is not in the interests of the

pharmaceutical and biotech industries to become an effective rule taker (it

is hard to see how the EU will allow the UK to sit on relevant regulatory

promulgation bodies in the European Council for only this sector) for the

foreseeable future.

 

An Alternative Approach

 

An Alternative Approach, as we note in the following chapter is to offer an

advanced free trade agreement with detailed chapters which support the

provisions set out in this chapter and ensure that the UK’s ability to operate

on the global stage (and thus capture the benefits of the Brexit Prize outlined

in Chapter 1) is not compromised. A competition and state aids chapter

should give confidence to the EU that it is not the UK’s intention to use

government subsidy and tolerance of cartels and anti-competitive mergers

 

73 Office of the United States Trade Representatives, 2018. National Trade Estimate Report

on Foreign Trade Barriers. [Online]

Available at: https://ustr.gov/sites/default/files/files/Press/Reports/2018%20National%20

Trade%20Estimate%20Report.pdf

74 Ibid. pp. 195

57

 

 

 

to drive UK competitiveness. Issues like labour and the environment should

be treated as they are in all other trade agreements, with commitments that

countries make to enforce their own laws and abide by international rules.

 

58

59

 

 

 

Chapter Four

A Deeper Dive into the Four

Pillars of Independent Trade and

Regulatory Policy

  1. Unilateral

 

Domestic tariff and regulatory improvements

 

The UK should lower tariffs where it can, especially on food, clothes and

shoes. These tariffs keep the price of basic goods and staples higher,

which harms the poorest in society the most. The UK should lower tariffs

to zero on a unilateral basis for intermediate goods, so that its domestic

manufacturing competitiveness can increase.

 

It should lower tariffs to zero for agricultural products that it does not

produce, increasing the supply of these goods into the UK market. These

products include products like bananas, oranges, rice and avocados.

 

  •    In the event that no free trade agreement with the EU can

be concluded before the UK’s departure from the customs

union and single market (because the parties are unable

to agree on a withdrawal agreement that is duly ratified, or

they do, but no FTA emerges during the Transition Period),

then to combat potential food price inflation that could

otherwise be caused by the application of UK tariffs set

at the Common External Tariff rate (CET) to the imports of

European agri-food the UK will need to either:

 

  • lower agricultural duties on agri-food to zero on a

most favoured nation (MFN) basis

 

  • not apply its bound rate (to all parties), which will be

the CET at the point of exit, effectively lowering the

applied rate to zero.

 

60

 

 

 

  •    Recognising that this would subject UK farmers to

competition from highly subsidised agri-food from

continental Europe and elsewhere, the UK would have

to develop a mechanism which would let UK farmers

challenge such distortions through countervailing duties,

or through a mechanism to deal with Anti-Competitive

Market Distortions (ACMDs).75 76 77 This would provide a

mechanism through which a level playing field could be

achieved (a level playing field does not exist now however:

UK farmers must compete head on with heavily subsidised

continental European farmers).

 

At the heart of the domestic competitiveness agenda is ensuring

that markets are truly free and competitive. This refers to domestic anti-

competitive barriers, and foreign trade and competition barriers, which

affect the global supply chain and impact the UK economy. International

trade has moved on to a world of competing supply chains, but governments

sometimes operate as if companies simply produce a product in one

country, then sell it in another. A selection of actions follows.

 

Creation of UK Competitiveness Czar

 

The UK’s competitiveness relies on a reduction of barriers abroad, but also

critically a reduction of barriers at home. This goes beyond the current

activities of the Competition and Markets Authority (CMA), although it is

consistent with the competition advocacy mandate of the CMA.

 

This process can be led by a Competitiveness Czar based in the Prime

Minister’s Office, but whose remit covers barriers faced by UK firms, at home

or abroad, and who will liaise with all relevant Government Departments

and agencies, including the Department of Business Enterprise, Innovation

and Skills (BEIS), the CMA, the Bank of England, the Department of

International Trade (DIT), HM Treasury (“HMT”) and the Department of the

Environment, Food and Rural Affairs (“DEFRA”).

 

Free trade, and free and competitive markets, have done more to lift

people out of poverty than any other policy or practice: but there are many

 

 

75 Singham, S. A., Kiniry, M., Dr Rangan, U. S., and Bradley, R., “Introduction to Anti-

Competitive Market Distortions and the Distortions Index”, Legatum Institute, London, 2016

Available at: https://www.li.com/activities/publications/introduction-to-anti-competitive-

market-distortions-and-the-distortions-index

76 Singham, S. A. and Abbott, A. F., “Enhancing welfare by attacking anticompetitive market

distortions”, Concurrences No. 4, 2011

Available at: https://www.ftc.gov/sites/default/files/attachments/key-speeches-presentations/

ssrn-id1977517.pdf

77 Abbott, A. F. and Singham, S. A., “Competition Policy and International Trade Distortions”,

in European Yearbook of International Law 2013, Springer, 2013

Available at: http://thf_media.s3.amazonaws.com/2015/pdf/9783642339165-c1.pdf

61

 

 

 

areas where the UK economy is uncompetitive, because the market does

not work properly. These can be divided into horizontal anti-competitive

practices, laws and regulations; and sector-specific vertical ones. The UK

should also develop a pro-competitive regulatory promulgation mechanism,

which helps avoid new regulations damaging ordinary market processes

along OECD-recommended lines.78

 

Building a more competitive market in the UK

 

We will discuss the need for a competition chapter in a UK-EU FTA below;

the UK must have flexibility in these areas because this is crucial to ensuring

a competitive and thriving economy. The recommendations demonstrate

the need for divergence from the EU regulatory system: some, indeed, go

beyond what the EU has required in the acquis. There are anti-competitive

distortions in key UK markets in a number of sectors, especially questions

of the lifeblood of the UK economy, such as inputs into major manufacturing,

services and agricultural industries (examples would include energy, retail

banking, transport (including rail) and property). The Government, as part

of its Brexit strategy, should be considering how to make improvements in

all these sectors. The following represent examples of priorities.

 

UK Agricultural Policy

 

  •    The EU’s Common Agricultural Policy (CAP) is a system

of tariff protection, subsidy, and regulatory control that

unfairly restricts imports from the developing world, raises

prices for the British consumer, and has led to the state

of European agriculture being described as a “museum of

world farming”.79

 

  •    The Government’s White Paper would keep the United

Kingdom locked into EU agri-food regulation, without a say

on how it is made.

 

As a member of the EU, the UK’s agricultural production and trade have

been regulated by the CAP and CET. Domestic agriculture gives Britain

around 60% of its food, with 1.6% of its labour force, constituting 0.6%

of its GDP. In 2015, gross agricultural output was £23.9 billion, and total

 

 

78 OECD (2018), OECD Regulatory Enforcement and Inspections Toolkit, OECD

Publishing, Paris, https://doi.org/10.1787/9789264303959-en.

79 Owen Paterson MP quoted in “Once wedded to the EU, some British farmers think it’s

time to quit”, Euractiv with Reuters, 2016.

Available at: https://www.euractiv.com/section/agriculture-food/news/once-wedded-to-the-

eu-some-british-farmers-think-it-s-time-to-quit/

 

62

 

 

 

income from farming in the UK was £3.8 billion.80 81 But subsidy payments

from the CAP make up 50-60% of UK farming income.

 

The United Kingdom now has the opportunity for a new approach to

farming and agricultural trade. Without control over agricultural policy, the

promised benefits of leaving the EU would be nullified, just as if the UK

merely replicated the tariff, quota and sanitary and phytosanitary (SPS)

and technical barriers to trade (TBT) measures currently in place. Instead,

we should bring down tariffs, expand trade abroad, and make our food

cheaper.

 

The Common Agricultural Policy

 

Subsidies are used to incentivise (and occasionally disincentivise)

agricultural production across the EU: these are most often tied to land,

but also production (e.g. head of cattle). The CAP also mandates a regime

of tariffs and quotas which control the flow of agri-food products in and out

of the EU.

 

Exiting the CAP presents significant dividends of the Brexit process,

providing British policymakers with their first opportunity in over forty

years to decide an economically and ecologically sensible set of policies

for consumers and farmers. It will also open free trade negotiations with

third countries, growing not only the agricultural sector but the whole of the

British economy. Agriculture represents a ‘threshold issue’ in negotiations

with most countries, especially the ones which the UK is most likely to

strike initial deals with: these domestic reforms should be addressed early.

The UK has relatively few defensive interests in agriculture, making

potential trade partners more likely to agree to liberalisation in difficult areas

which are more important to the British economy, like services. The EU’s

refusal to seriously negotiate on agriculture has made negotiation

with third countries on services, investment and behind the border

barriers such as anti-competitive market distortions more difficult.

 

An Open Agricultural Policy that works for the UK’s Farmers

 

The new agricultural regime that we propose is based on openness.

The goal is to gradually liberalise tariffs in agriculture so that over time.

However, tariffs are only one side of agricultural trade barriers. Most

 

80 see page 12, DEFRA Agriculture in the UK 2015 : https://www.gov.uk/government/

uploads/system/uploads/attachment_data/file/535996/AUK-2015-07jul16.pdf

81 DEFRA, Agriculture in the United Kingdom 2015, https://www.gov.uk/government/

uploads/system/uploads/attachment_data/file/535996/AUK-2015-07jul16.pdf, page 1.

(accessed 27 September 2016).

63

 

 

 

of the UK’s trading partners are just as concerned with SPS and TBT

barriers. Here the White Paper would prevent the UK from ensuring that

these barriers are WTO compliant and based on sound science (not the

EU’s interpretation of the precautionary principle which is bringing it

into conflict with other WTO members), and a countervailing duty and

mechanism to protect British producers from anti-competitive market

distortions from abroad (including from the EU-27) Once the UK leaves

the EU, it will repatriate trade remedy measures, including traditional

anti-dumping and countervailing duties laws.

 

Many WTO-compatible mechanisms could be used to provide relief

to British farmers who might suffer from highly subsidised or otherwise

distorted imports. The UK could also develop a safeguard mechanism to

increase the tariff to the rate of the CET if the applied rate is lower (e.g. as

a result of the application of lower tariffs in certain areas as a result of a

policy of gradual liberalisation).

 

These measures will satisfy those farmers who are legitimately concerned

with import competition from products benefiting from distortions, and

satisfy those countries who want broader access to the UK market. We set

out below areas and programmes which would be affected by an exit from

the CAP regime, to demonstrate how British farming can not only survive,

but be much better off, post-Brexit.

 

Tariffs and Quotas

 

  • Eliminate quotas and tariffs on all products that the UK

does not produce, such as bananas, rice, and oranges.

 

  • After binding at the CET rate through technical rectification

or modification of our WTO schedules, gradually convert

quotas and tariff-rate quotas (TRQs) to tariffs for all

products that the UK does produce, recognising that the

country is not self-sufficient in most agricultural products.

 

  • Create a tariffication mechanism to rebalance prices of

products whose costs are reduced by distortions in their

own markets, or use the difference between the CET and

the applied rate to re-apply the CET in the event of proof of

an illegal subsidy or anti-competitive market distortion as a

countervailing measure.

 

64

 

 

 

Subsidies and Supports

 

  •    Phase out production- or land-based subsidies, moving

towards direct transfer payments by 2021.

 

  •    Redirect funding to support individual, active farmers via

direct transfer payments to prevent a shock to the United

Kingdom’s farming families and communities, and increase

transparency.

 

  •    Re-engineer greening payments towards environmental

remediation schemes on an as-needed basis, funded by

an insurance scheme covering events out of the ordinary

and out of farmers’ control (e.g. flooding).

 

  •    Maintain animal disease compensation funds.

 

  •    Maintain R&D funding for farming techniques and

equipment.

 

  •    Allow bridging funds to flow to farmers who diversify

holdings with other services (e.g. tourism).

 

Regulation

 

  •    Regulate on the basis of sound science, and in compliance

with the letter and the spirit of WTO SPS and TBT

Agreements, not the EU’s anti-innovation application of the

precautionary principle.

 

UK Fisheries Policy

 

The EU’s Common Fisheries Policy (CFP) has denied the UK control

of its own waters, depleted its fish stocks and caused severe ecological

degradation. CFP rules have also disproportionately subsidised non-UK

EU fishermen, helping cause chronic unemployment among our fishing

communities. The White Paper, however, promises that we will leave the

CFP, but states that we will continue to regulate our waters jointly with the

EU.

 

The UK has the opportunity to develop its own UK Fisheries Policy (UKFP),

once it withdraws from the EU and the CFP. As a net fish importer (we

65

 

 

 

tend to import what we eat, and export what we catch) we have a unique

opportunity to support consumer and producer interests simultaneously.

 

  •    The primary objective of a UK fisheries policy should be the

restoration of sovereignty over UK waters, then balancing

the goals of commercial fishing in UK waters, sustainability,

and cheaper fish for UK consumers.

 

  •    To limit unnecessary costs for producers and consumers,

policy should be the least trade-distortive possible,

consistent with regulatory goals.

 

  •    For cheaper food and more choice, policy should also

be the least anti-competitive possible, consistent with

regulatory goals.

 

  •    It will need to be in the context of the international framework

for fisheries, in particular UNCLOS and UNFSA.

 

  •    For continuity, some elements of the CFP could be retained

for the immediate future, like specific technical measures.

Others, like access to waters and SPS/TBT questions,

should be altered immediately.

 

  •    The UK should also enhance its scientific advisory body,

actively engaging in ICES.

 

Access to waters and management of quotas

 

  •    For sustainability internationally, the UK should join the

NEAFC, and consider other RFMOs, participating in

international negotiations on Total Allowable Catches

(TACs) for different fish stocks.

 

  •    Negotiating bilateral agreements with the EU, Norway,

Iceland, and the Faroe Islands, on access to respective

Exclusive Economic Zones (EEZs) and management of

fish stocks, should be a priority. Negotiations should be

in conjunction with those on process and methodology for

determining TACs for shared and straddling fish stocks.

 

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  •    The UK’s relatively limited need for access to others’ EEZs

strengthens its position in negotiating TACs. This leverage

must be put to use.

 

  •    The UK should consider which Sustainable Fisheries

Partnership Agreements (SFPAs) to replicate, to support

developing countries and to allow our fishermen access to

more fish stocks.

 

Fisheries management

 

  •    The UKFP should address barriers to entry for new

fishermen created by the FQA system, which favours

incumbents. Instead, our system should maximise

competition, while considering development of a fair and

transparent allocation mechanism for fishing rights, e.g.

through auctions.

 

  •    The UKFP should have mechanisms to avoid discards,

such as introduction of risk pools or quota bundles, for

quick transfers of quotas as needed.

 

  •    Policymakers may trial “days at sea” to prevent overfishing.

 

Funding and government support

 

Subsidies to fishermen should be phased out: these may support inefficient

production and limit competition and incentives for better productivity.

However the Government may need to provide interim support, such as

for transitional costs in fitting new monitoring systems.

 

  •    A mechanism should enable fishermen to seek remedies

against imports that have benefitted from government

distortion, to level the playing field and enable effective

competition.

 

  •    The UK should investigate creating markets for insurance

products, to guard against the impact of fluctuating stocks.

 

Trade in fisheries products

EU tariffs on imports are currently relatively high. Lower tariffs for seafood

consumed but not commonly caught in the UK would benefit consumers,

with little impact on domestic fishing.

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  •    The UK should set regulatory barriers at the level consistent

with the goals of human and animal health, but still the least

trade- and market-distortive, based on scientific evidence.

 

  •    A UK-EU FTA should include a comprehensive fisheries

chapter. This needs to include provisions including on

mutual recognition of standards and application of import

conditions, with a mechanism to manage divergence in

standards after the UK leaves.

 

  •    The UK should join the WTO Friends of Fish group and

actively advocate in Geneva for a WTO fisheries schedule

and the successful conclusion of fisheries subsidies

negotiations.

 

Aquaculture

 

Aquaculture has the potential to support employment in fisheries, guard

against price shocks for UK consumers, and help the UK more responsibly

steward its marine resources.

 

  •    The Government can support the industry through

streamlining planning processes, ensuring efficiency in

licence allocation, and incentivising innovation.

 

Fisheries and devolution

 

Further distribution of powers to devolved governments should be

considered. Areas such as trade and negotiations of TACs, and access to

the UK’s EEZ, would remain with the UK Government, however.

 

UK Finance: An Alternative Plan for the City

 

Protect and enhance the integrity of the UK Financial System

 

  •    Reduce the application of the EU’s Capital requirement

to only internationally active banks

 

The objectives of Basel III were to avoid systemic risk, market

fragmentation and regulatory arbitrage for ‘internationally active banks’,

but the EU applies these regulations to all EU banks and investment firms

via the Capital Requirement Regulation and Directive (CRR and CRD IV)

 

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regardless of whether they are internationally active or pose a systemic

threat to the market. This increases the amount of capital EU financial

service companies must hold, reducing the amount they can lend to,

underwrite or invest in the wider economy. In January 2019, all UK banks

will need to ring-fence their retail banking from their investment banking

activities so there will be no reason for the UK to continue to follow the

EU’s capital requirements for domestic UK banks. Instead after Brexit the

UK financial authorities should reduce the application of CRR/CRD IV to

cover only globally active financial institutions as originally intended by

Basel III. Lowering the capital requirements for domestically focused UK

financial services will increase the amount of capital available for domestic

consumers and businesses, providing a boost to the economy.

 

  •    Retain London’s position as the centre of wholesale

finance in Europe by allowing EU-headquartered

financial institutions to remain operating in the UK

 

The Bank of England will allow any EU financial institution operating in

the UK to continue if there is a cooperative agreement with their home

state regulator. The Bank will also grant temporary permission if there is

no transition period post-Brexit to allow EEA firms using a UK passport to

continue to operate and fulfill existing contracts while they seek full UK

authorisation. This will allow the UK to retain its position as the world’s

financial supermarket. Also, EU firms could set up a small UK subsidiary

with legal substance to be the recipient of any financial service business.

EU-based companies will still be able to raise money in the UK, just

as companies from all over the world raise money in London’s efficient

capital pools and it liquid secondary markets. Clients from the EU27 will

still be able to trade with UK banks by using relationship-based, reverse

solicitation exclusion, just as non-EU clients do.82

 

Promote effective Competition for both large and small consumers

 

  •    Improve Large Fund trade facilitation rather than

adopting the EU’s double volume caps

 

After Brexit, the UK financial authorities should abandon the double

volume cap or at least increase it to the 11% and 17% recommended

by the FCA to ESMA. The present 4% and 8% caps hurt the heavily

traded, UK markets, making it more difficult for large investors to trade in

large sizes without moving the market price against them. The UK has a

comparative advantage in Asset Management and trading, and should not

 

 

82 Barnabas Reynolds, Blue Print for Brexit, Politeia. Jul 2016, page 18

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risk losing this market due to a trading limit set for smaller and low volume

EU markets. According to Efama, UK is the largest asset manager in the

EEA with 36% of the market.

 

  •    Review the definition of trade incentives such as

unbundled research

 

The EU regulations that require company research to be purchased by

asset managers should be dropped post-Brexit. Reading research reports

is not an inducement to trade; it requires effort and may not convince an

investor to follow its recommendation or even to trade at all. The previous

system worked, and there was no requirement for the FCA to waste

resources monitoring research fees. Purchasing research is reducing the

research available on smaller, less traded and new companies, as financial

analysts move their coverage to larger companies that offer the greatest

return for their reports.

 

  •    Encourage new market entrants with proportional

regulations and taxation

 

It is important to encourage innovation and new market entrants, however

much of the EU’s existing regulation favours the large incumbent

companies either by explicitly protecting them from competition or by

increasing regulation so that compliance costs become crippling for smaller

competitors or new market entrants.

 

  •           Regulation

 

When we leave the EU, the UK should extend the de minimis exemptions

in regulations and increase the financial threshold so that start-up

and disruptor companies can get more than just a foothold in the UK

market. Reducing the burdens of MiFID II regulations on small firms,

especially excessive data collections, the “suitability and appropriateness”

assessments, as well as the “complex” investment determinations for retail

clients, would all help to expand private client investments and improve

the capital-raising process for new companies, which predominately rely

on private client investors.

 

Expanding the FCA’s very successful sandbox for financial innovation

to other areas and industries could be a major boost to the economy.

Taking part in the sandbox program has enabled new companies to assure

investors that their inventions/services will get approval from the regulators

 

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when complete. The program has attracted fintech companies from around

the world applying to work alongside the FCA.

 

London is also leading the world in Green Finance, having raised more than

$24bn for green bonds. The Green Finance Taskforce can be expanded by

working with industry to accelerate the growth of green finance as well as

with the British Standards Institute to develop a set of green standards to

provide clarity to financial institutions over the credentials of green financial

products. The taskforce will also work with mortgage lenders to develop

green mortgage products that reflect the lower financial risks associated

with the reduced outgoings for owners of energy efficient properties.

 

  •    Taxation

 

HMRC needs to plan for a post-Brexit tax system that encourages

investment, promotes start-up and scale-up businesses, and reduces the

complexity of the UK tax code. Every new tax makes the UK a harder place

to do business and discourages inward investment. Post-Brexit the UK’s

competition for innovators will especially be economies like Singapore,

where new firms are given tax incentives to incorporate there (although

Singapore’s corporate tax rates are already lower than the UK, at only

17%).

 

HMRC should remove the 8% bank surcharge which pushes profitable

UK banks into a tax rate that is much higher than the US, where federal

corporation tax has been cut to 21%. For many UK financial service

providers, the US offers a very viable alternative to London: indeed, in

the most recent Global Financial Centre Index, New York has overtaken

London to top place. Even many EU countries, including Luxembourg, the

Netherlands and Ireland have lower corporate taxes for financial services

than London.

 

Secure an appropriate degree of protection for consumers without

lowering market liquidity

 

A large part of any financial regulatory regime is to protect consumers of

and investors in financial products. This is important because financial

markets rely on consumers and investors who in turn rely on the knowledge

that their assets and investments will be safe. Having a liquid secondary

market that lets investors cash out or change their investments whenever

they wish is also a key element of efficient financial markets. So, any

regulation to protect consumers should also be careful not to drive liquidity

out of the market.

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The UK regulators could improve market liquidity post Brexit by reviewing

some of the MiFID II requirements that hinder competition in the market

without providing any real consumer protection.

 

  •    Data requirements

 

MiFID II now requires 65 data points for every transaction by both buyer

and seller, but it is beyond the ability of regulators to monitor this amount

of information in any meaningful way. Under the first MiFID directive,

implemented in 2007, only 24 data points were required, and even this

was considered excessive by most market participants (even major banks

with large compliance departments were fined for mistakes in their data).

The excessive data requirement disproportionally effects an investment

firm with a large number of small clients or clients who trade frequently.

 

  •    Retail investors

 

The determination of what is a “suitable” and also “appropriate” investment

for a private client greatly increases administration costs, making it too

expensive for investment banks to focus their business models on individual

wealth management and share ownership.

 

This regulation is reducing the number of retail investors in the market which

is reducing the ability of SMEs to raise funds in the equity markets, as well

as reducing the liquidity of the secondary markets. SMEs rely on private

client share ownership as they are too small to appeal to large investment

firms, who must buy larger tranches of shares to make an effective return

for their much larger funds. Ironically, larger financial services firms who

can afford the additional regulatory costs of dealing with private clients

don’t generally do so, because the potential returns are too small.

 

  •    Short selling

 

Similarly post-Brexit, UK regulators should also drop the EU’s preoccupation

with short selling. The idea that short selling is riskier than buying is partly

a symptom of a 9-year long bull market; in a bear market the reverse

will be true. In the futures market, both long and short transactions may

be uncovered by the underlying physical commodity and yet the futures

market functions well, with margins required from both sides (many market

observers believe that the recent sell off in the Crypto Currency bubble

was due to the CME introducing a futures contract that enabled investors

to short the market).

 

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  •    CFDs and fintech trading

 

Unacceptable conduct such as insider trading, price manipulation and

financial fraud must be prevented and prosecuted after the fact. But

introducing more and more hurdles for private client advisors to jump

is only lowering the overall market liquidity by driving investors towards

unregulated, offshore platforms. It is better for the whole economy if a retail

investor trades in shares listed on a regulated market.

 

Regulators need to spend their time and money keeping the whole system

afloat, and ensuring that systemic market risk is minimised or avoided

completely. Regulators watching for potential threats to small investors will

never be as effective as those investors watching out for themselves.

 

Sectoral regulatory reform opportunities and regulatory promulgation

 

Anti-competitive regulations can raise costs for businesses or create actual

blockages to trade. The acquis includes numerous anti-competitive and

over-prescriptive regulations. The UK should prioritise to determine which

to remove to make our overall economy more pro-competitive. The CMA

and other government departments should be heavily involved in reviewing

the acquis as it is ported over, to remove the anti-competitive regulations

that damage consumers, especially the poorest.

 

The following brief examples illustrate EU-originated anti-competitive

regulations in the UK.83 The point is not that ‘deregulation’ is needed, but

regulation that is pro-competitive, increasing consumer welfare.

 

Digital

 

The UK has a competitive advantage in the digital economy. Many of its

innovative firms rely on data flow, so it is imperative that the regulatory

environment accounts for this and allows these companies to flourish.

 

  •    General Data Protection Regulation (GDPR) (Regulation

(EU) 2016/679)

 

GDPR has extra-territorial reach wherever EU citizens’ personal data

is processed. It is suspicious of innovation however, and its complex

requirements mean small entrants find compliance harder. Fines can

go up to €20m, or 4 per cent of worldwide turnover. Smaller firms lack

the resources to monitor compliance, and may risk sanction to avoid the

 

 

83 Singham, S. A., Tylecote, R. & Hewson, V., 2018. “Freedom to Flourish – UK regulatory

autonomy, recognition, and a productive economy”, IEA Discussion Paper No.91, Chapter 5.

[Online]

Available at: https://iea.org.uk/wp-content/uploads/2018/07/DP91_Freedom-to-floorish_web-

002.pdf

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compliance costs, making GDPR self-defeating; firms exiting the market

because of GDPR also means an anti-competitive outcome.

 

Moving away from the strictures of the GDPR, the UK should work with

other like-minded WTO members (such as the US and members of the

Plurilateral Working Group on E-Commerce in the WTO). It should ally

with these countries in seeking provisions in the UK-EU FTA that allow

adequacy in cases where data rules are objectively achieving the same

data protection goals, but are not identical. This is one of many examples

where the EU is an outlier.

 

The UK will need to regulate in ways that differ from the EU’s approach to

data flow in order to promote this sector. At the same time, cross-border

flow of data into the EU is important, so a solution must be found where

the EU allows data to flow even if technical regulation differs, provided the

overall goals of data protection are being met.

 

Outside of the EU’s regulatory structure, the UK would not be bound by

some of the aspects of the Digital Single Market initiative which have

caused concern. Such as the copyright directive currently making its way

through the EU law-making process

 

Audiovisual

 

  •    Audiovisual Media Services            Directive    (AVMSD)

(Directive 2010/13/EU)

 

AVMSD requires member states comply with content requirements in

exchange for being able to distribute their country’s content to other EU

Member States, which includes a requirement to reserve a certain amount

of airtime for ‘European works’. The test for where a media business is

established under the AVMSD has also been criticised by Member States

for being difficult to assess and enforce. Works produced in third countries

are subject to the airtime allocation requirements for European works and

may find it difficult to access the European market. The imposition of local

content requirements is a classic example of an ACMD: these rules hamper

content producers’ ability to make investment and production decisions.

 

The UK has a very strong offering in the entertainment sector and should

not be hampered by local content rules which it does not need in order to

be successful.

Chemicals

 

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This sector is an example of advanced manufacturing where the UK should

seek the most pro-competitive regulation possible, for a vibrant, dynamic

sector. EU regulation in this area is highly restrictive.

 

  •    Registration, Evaluation, Authorisation & Restriction

of Chemicals (2006) (REACH) (Regulation (EC) No

1907/2006 Jun-07)

 

REACH is a framework for chemicals manufacture and use in the EU,

whose stated aim is to ensure chemicals produced, imported, sold, and

used in the EU are safe. It obliges manufacturers to gather information

on new and existing chemicals they use, submitting the information to the

European Chemicals Agency (ECHA) for review and inclusion in a central

database; the UK has the second highest number of registrations.

 

The regulation reduces third country exports to the EU, however, by

increasing cost and, in some cases, barring products from the single

market. In the National Trade Estimate Report on Foreign Trade Barriers

(2017), the US Trade Representative stated:

 

“REACH impacts virtually every industrial sector… It imposes extensive

registration, testing and data requirements on tens of thousands of

chemicals. REACH also subjects certain identified hazardous chemicals

to an authorisation process that would prohibit them from being placed

on the EU market unless a manufacturer or user has obtained permission

from the Commission… REACH appears to impose requirements that are

either more onerous on foreign producers than EU producers or simply

unnecessary.” Its report added: “WTO Members have emphasised [the]

problems producers have in understanding and complying with REACH’s

extensive registration and safety data information requirements”.

 

The Commission itself admits this is: “one of the most difficult pieces

of legislation for industry to deal with — in particular SMEs”. Some

businesses have moved production overseas to avoid it, or exited the

market completely. Testing costs are often high, harming profitability.

 

Pharmaceutical and Biotech

 

The biotech and pharmaceutical sector is one where the UK is and should

remain a global leader. Global pharmaceutical companies have expressed

concern about European approaches to clinical trials including the potential

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for confidential test data and confidential commercial information submitted

to the EMA to be disclosed. If the sector is subject to EU rules as the White

Paper calls for, it is unlikely the UK would be able to properly oppose the

direction of travel of EU regulation in this area. Given that approaches to

these issues are global and require global solutions, the UK is better off

negotiating them in an FTA and working with allies around the world for a

less trade restrictive and anti-competitive approach from the EU.

 

Far from locking into to the EU’s regulatory system and intellectual property

approach, the UK should agree a set of approaches and disciplines with

more like-minded parties, such as the US and to some extent Japan.

 

  1. Bilateral

 

EU – A Free Trade Plus deal

 

“Work must be accelerated with a view to preparing a political declaration

on the framework for the future relationship…” June 29, 2018, Article 50

Conclusions, European Council.

 

So far, the UK has spent a lot of time negotiating with itself, not with the

  1. For instance, the UK has gone as far as to consult with the EU on

how negotiable its proposals might be (see Olly Robbins’s testimony at the

European Scrutiny Committee on how critical negotiating documents were

shared with the EU to assess negotiability, even before releasing to the

members of the Cabinet).84

 

But negotiability in trade is only really tested in the heat of actual negotiation.

Negotiability is also a dynamic concept. UK proposals will receive better

treatment from the EU if the latter is under greater pressure, from without

and within, to accept them (we discuss the strategy for this below). A

paradigm shift is therefore required.

 

The EU meanwhile has taken the White Paper as the UK’s opening bid,

with respect to the crucial trade aspects of an agreement, meaning it will

likely seek further concessions. This could include the UK being a member

of the European Economic Area (EEA).85 However, EEA members who

are not EU members do not sit on the essential rule-making and

comitology committees, and have no say in EU rule-making.

 

“In particular, like the EFTA Convention, the EEA Agreement incorporates

 

 

84 Oliver Robbins witnessing before the Exiting the European Union Committee, 24th July

  1. (remarks at around 15:15) Video: https://www.parliamentlive.tv/Event/Index/5342afbc-

c9d3-4a2c-8bb4-c0ab9214db68#player-tabs

85 Whose precise rules were discussed in Singham, S. A., Tylecote, R., and Hewson V.,

“Brexit Inflection Point”, Legatum, London, 2017.

 

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all EU measures on technical barriers to trade, but goes further than EFTA,

also incorporating SPS measures. Given that the EEA Agreement applies

to all EU and EFTA states except Switzerland, and any others which in

theory could join the Agreement, as the EFTA secretariat describes, this

means:

 

“The EEA Agreement extends the Union’s internal market rules

to the three EEA EFTA States. This comprises the entire body

of technical regulations determining the requirements products

need to fulfil concerning safety, consumer protection, health and

the environment, as well as the procedures for testing conformity

with such requirements. The Convention incorporates the rules

established under the bilateral agreement between Switzerland

and the EU in this area, as well as the corresponding provisions of

the EEA Agreement.”86

 

The EFTA states are not part of the customs union or subject to the

common commercial policy and enter into FTAs with other countries either

in their own right or as a bloc. However, once again, the FTAs are very

limited in scope and focus mainly on goods and tariffs. With respect to

non-tariff barriers and services, they generally do not go beyond affirming

the parties’ existing WTO commitments and some hortatory language on

co-operation.

 

Compare, for example, EFTA’s agreement with Canada and the EU’s

comprehensive FTA with Canada (the Comprehensive Economic and

Trade Agreement “CETA”87). CETA covers services, investment and goods,

and includes provisions on technical barriers to trade and SPS measures,

which EFTA states would not be able to agree to as they are not in control

of their regulations in these areas, which are passed to them from the

  1. The four freedoms are indivisible and regulations that implement them

must be complied with. The history of the EEA Agreement has shown that

the EFTA states that are parties to the agreement are rule-takers, and must

take on the single market acquis, but have no vote on legislation and only

consultative input on its formulation. The potential for EFTA countries to

use the EEA Agreement’s provisions to block regulation has never been

carried out, for good reason: the EFTA parties to the EEA Agreement have

 

86 Short Overview of the EFTA Convention http://www.efta.int/legal-texts/eftaconvention/

detailed-overview-of-the-efta-convention#tbt 25 Free Trade Agreement Between Canada

and the States of the European Free Trade Association (Iceland, Liechtenstein, Norway

And Switzerland), signed January 2008 available at http://www.efta.int/free-trade/free-trade-

agreements/canada

87 Available at ec.europa.eu/trade/policy/in-focus/ceta/index_en.htm 27 See for example

the testimony of Dr Johanna Jonsdottir, Policy Officer in the EFTA Secretariat, on 25th April,

2012 the House of Commons Foreign Affairs Committee, available at http://www.publications.

parliament.uk/pa/cm201314/ cmselect/cmfaff/87/87we02.htm

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no formal access to the Council or Commission, and only limited access to

the Commission’s relevant groups.

 

Many have claimed that Section 102 of the EEA Agreement allows EFTA

members to avoid taking on EEA rules they do not like. However, since

the EEA Agreement is the agreement providing preferential access to the

single market, and since market access issues are linked, triggering Article

102 gives the EU the right to take retaliatory measures to reflect the non-

compliance of an EFTA member who declines a measure. This is why the

EFTA countries have never used this power.

 

For the UK, this would mean whenever it wanted to change its baseline

legislation (as it stood at Brexit), the consent of the EEA Joint Committee

would be needed. If it did not agree (which, when diverging from the acquis,

is inevitable) the EU could trigger retaliation against UK trade.

 

The EEA Agreement also established the EFTA Surveillance Authority, of

which the EFTA Secretariat itself states: “the EFTA Surveillance Authority

and the EFTA Court [respectively] mirror the surveillance functions of the

European Commission and the Competences of the Court of Justice of the

European Union”. (The Commission has also recommended strengthening

the EFTA Surveillance Authority and Court, to function as a mirror to EU

authorities.) This is harmonisation of regulation, not divergence, and

demonstrates that the EU would be able to enact a swathe of regulations

which the UK has blocked before, and would effectively lock the UK out of

trade negotiations with other countries.

 

Instead of continuing with the White Paper proposals, or pursuing the EEA

option, we advise that the UK now make a different bid (with relevant text),

a UK Offer based on the following concepts, which are broadly similar

to Council President Donald Tusk’s offer of an advanced Free Trade

Agreement (made on March 7th, 2018.88

 

(i)     Market Access and National Treatment for Goods. All tariff

lines to be zero. These are currently zero tariffs in goods,

and this should be replicated.

 

 

88 “Statement by President Donald Tusk on the draft guidelines on the framework for the

future relationship with the UK”, European Council, March 7th 2018.

Available at: http://www.consilium.europa.eu/en/press/press-releases/2018/03/07/

statement-by-president-donald-tusk-on-the-draft-guidelines-on-the-framework-for-the-future-

relationship-with-the-uk/

 

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(ii)   Draft, and agree, chapters that are relatively uncontroversial,

such as baseline intellectual property protection,89

government procurement, and investment rules.

 

(iii)  Start negotiating other chapters which will require more

time.90

 

(iv)  A competition policy chapter would deal not only with

cooperation between competition agencies but also with

ACMDs, i.e. typically state-created distortions that damage

competition in the market, unfairly increasing the costs

of some (especially smaller firms) and relatively lowering

the costs of others (especially large incumbents). Here,

as elsewhere, putting sample text on the table assuages

concerns about what our future policy choices might be:

where we can, we should give that comfort. As the UK can

point out to the EU, it is not the intention to erode normative

competition principles, such as to allow cartels or abuses

of monopoly power. (We suggest a sample competition

policy and state aids chapter which we do not include in

this paper, but which we will submit shortly.)

 

(v)   Maximum regulatory recognition for both goods and

services and a mechanism to manage differences that

arise because the UK or EU diverge.

 

(vi)  The regulatory coherence chapter included in the Annex to

this alternative approach starts from an assumption that the

Parties will agree maximal mutual regulatory recognition

on day one. The chapter will include a section on GRP,

setting out the obligations of both parties to commit to the

core principles, such as promulgating laws and regulations

that are the least trade restrictive and least anti-competitive

possible, consistent with a clearly stated and legitimate

regulatory goal.

 

89 Substantively, the UK and EU will have similar though not identical approaches to IP (for

example the UK may seek fewer geographical Indications (GIs) than the EU) in the areas of

patent, copyright, trademark and trade dress, and industrial design. However, procedurally,

there may be great differences (UK courts should determine the scope of IP rights). The

UK therefore cannot be within the jurisdiction of the United Patent Court, which the White

Paper proposes; this body would interpret law in accordance with the CJEU. It would also

inevitably become more anti-competitive over time.

90 The chapters of a UK-EU agreements beyond those listed here include: 1) Market

Access for Goods and related schedules; 2) Rules of Origin and Origin Procedures;

3) Customs and Trade Facilitation; 4) Trade Remedies; 5) Sanitary and Phytosanitary

measures; 6) Technical Barriers to Trade; 7) Investment; 8) Government Procurement; 9)

Competition Policy; 10) Regulatory Coherence; 11) Intellectual Property; 12) Cross Border

Trade in Services; 13) Sectoral Annexes in services including financial services, telecoms,

e-commerce and others; 14) Labour; 15) Environment; 16) Dispute Settlement.

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Given the starting point of regulatory recognition (see below), a management

of differences mechanism will be needed to broadly ensure recognition will

not be unreasonably withheld. The starting point is that as long as the

parties are implementing GRP, consistent with the overall WTO framework

and its spirit, the regulatory goals are objectively achieved even by different

regulation, recognition should not be unreasonably withheld. This means

that while it remains open to either party to exercise its legal sovereignty and

withhold or withdraw recognition, if doing so contravenes the commitment

to recognition in the FTA, this would be subject to trade consequences,

within the dispute settlement system of the UK-EU agreement. As we note

in Chapter 5, the UK’s bid may be rejected here, but negotiating this is still

crucial to the UK’s interests. Other WTO Members can also be marshalled

in support for this best in class agreement, which is in their interests to

emulate.

 

If these terms are not met, recognition may be withdrawn with trade

consequences within the dispute settlement system of the UK-EU

agreement. As we note in Chapter 5, the UK’s bid may be rejected here, but

negotiating this is still crucial to the UK’s interests. Other WTO Members

can also be marshalled in support for this best in class agreement, which

is in their interests to emulate.

 

We include text in the Annex of this document for regulatory coherence,

where the drafting of negotiating text should begin immediately. Drafts

of financial services and other chapters should be tabled. One key area

will be customs and trade facilitation with an Irish border protocol. These

should also be tabled in the negotiation towards agreeing a framework for

the future relationship, based on these concepts:

 

Customs

 

Ordinarily, customs chapters in trade agreements are quite simple and

not a source of contention between the parties. What makes the UK-EU

arrangements different is that the starting point is the low friction

and absence of customs clearance costs, as the UK is within the EU

customs union and single market. The opportunity therefore exists to

craft more ambitious customs arrangements between the two, and

better develop customs systems for a new era of trade. UK customs

clearance processes must accommodate a potentially five-fold increase

in customs documentation between the UK and EU on the day of Brexit.91

The key element of the arrangements will be to separate movement of

goods from processing of forms (electronically or otherwise) for as many

traders as possible.

 

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The agreement will provide for many of the things that already appear

in advanced trade agreements but a best in class customs and trade

facilitation agreement by itself will not solve all the disruptions caused by

leaving the customs union and single market. The UK and EU will need

other solutions. In particular the UK will need to use technology and process

improvements to upgrade its own customs systems. Some solutions have

been described by Hewson.92 Others include using newer technology

such as smart ledgers, which, it has been estimated93 could add at least

$35bn and as much as $140bn to global trade in goods each year. Former

Director of Swedish Customs Lars Karlsson has also described some of

these technologies and processes.94 Hans Maessen former chairman of

the customs brokers association in the Netherlands has noted that:

 

“This situation provides a unique starting point to formulate new and

efficient customs procedures. [The transaction based approach]

can be taken over by a system-based approach, based on trusted

traders and repetitive transactions.”95

 

A customs chapter in an FTA between the UK and the EU should

comprise the following commitments, to reduce the burden of formalities

on traders, and avoid pressure and congestion at ports and airports:

 

  •    General inter-agency and authority cooperation and

information sharing

 

  •    Use of simplified procedures and data processing at points

of departure and destination, to cover the import, export

and transit of goods.

 

  •    Maintenance of procedures for the prompt release of goods,

and for release prior to final determination and payment of

duties, taxes and fees, supported by procedures for post-

release audit, to be conducted in a risk-based manner.

Expedited procedures to be made available to qualifying

operators and mutual recognition of AEO programmes.

 

  •    Operation of self- assessment for importers to declare

imports periodically and account for any duties payable,

and support to encourage its uptake by traders.

 

  •    Agreement that physical inspection of goods is to be

carried by means of random checks, except in duly justified

circumstances.

 

95 Maessen, H., “Drive Through Borders”, SGS, 2018, pp. 1.

81

 

 

 

  •    Ensuring that any necessary formalities and inspections

are carried out with the minimum of delay and, to the

maximum extent possible, away from the border.

 

  •    Commitment to apply agreed security measures with

respect to third country trade, recognition of equivalence of

security-related risk management systems and cooperation

information exchange and risk management.

 

  •    Recognition of inspections and documents of the other

party for certification of conformity with country or import or

export, as applicable,

 

  •    Where a party requires veterinary inspections of meat or

animal products, and such requirements are not waived

for the other party, commitment to maintain veterinary

inspection facilities at all border crossings where meat and

animals may be imported

 

  •    Adherence to international standards of the WTO, WCO

and other appropriate bodies.

 

  •    Operation of juxtaposed inspection offices where possible.

 

  •    Operation of suitable de minimis exemptions from submitting

formal entry documents for low value consignments.

 

  •    Efficient and effective management of transshipment

operations.

 

  •    Special rules and facilitations for specific sectors such as

automotive, agriculture, pharmaceuticals.

 

At functional and operational levels, HMRC, DEFRA and other relevant

authorities will need to continue cooperating with the counterparts in

bordering member states. HMRC and HM Treasury will also need to invest

in improvements to systems and resources, and legislative reforms to

reduce the burdens on businesses and reduce the distortions that currently

operate against rest of world trade.96 This should include improving trusted

trader schemes like AEO and CFSP, and making them available to the most

traders possible, an ensuring that intermediaries like customs brokers and

freight forwarders have a clear legal framework that will enable them to

provide competitive, scalable solutions.

 

96 See Under Control – What HMRC can do to prepare and optimise customs processes for

all outcomes IEA and ACITA, April 2018

 

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Much has been made of the need for free circulation to preserve just in

time supply chains.  The mitigants suggested in this customs section will

ensure that there is minimal friction for supply chain managers; indeed,

these suggestions make it clear that there is also no logistical justification

for the White Paper model. In addition, the customs and trade facilitation

chapter could include an auto pact to include further mitigants. This could

also apply for other sectors if it can be genuinely shown that the mitigants

in this section do not sufficiently mitigate frictions.  It is important however

to note that it would make little sense to take the UK’s independent trade

and regulatory policy off the table for maintaining the position in an area

where the costs are going down over time anyway due to technological

advances.

 

Additional measures for the border between Ireland and Northern Ireland

are set out, however in due course they could be extended to all of the

UK’s trade with EU member states.

 

Key elements on the Irish border issue.

 

One of the most pivotal issues with respect to progress is negotiating even

the outline of the future UK-EU relationship is the Irish border. The way

forward considers the existing trade patterns between Northern Ireland,

Ireland and Great Britain and the systems and operations in place at present

to operate current border operations in respect of VAT, excise duties and

regulatory differences.97 We, therefore make the following proposals.

 

In order to progress matters in the negotiation of the Withdrawal Agreement

from the current position, it will be necessary to agree binding commitments

as to what measures will pertain in respect of the Irish border if no full free

trade agreement is agreed at the end of the transitional period. It will be

necessary to achieve a border with no physical infrastructure, respecting

the position of the parties in the Joint Report in December 2017.

 

The solution must respect the sovereignty of Ireland and the EU’s control

of its borders and the consequences of the UK being a third country. It

must recognise that for some goods, border controls on imports from

third countries are more sensitive than others in particular agriculture and

animals. The UK should therefore commit to aligning trade relevant aspects

of SPS regime in Northern Ireland with that of the EU, with suitable powers

devolved to the government of Northern Ireland to enable them to fully

cooperate and coordinate with the Irish authorities, in accordance with the

Belfast Agreement. It is recognised that this may entail border inspections

 

97 For a full examination See Singham, Morgan, Hewson And Brooks, Legatum Institute

Technical Note Mutual Interest – How The UK And EU Can Resolve The Irish Border For

Brexit and Morgan and Hewson A Hard Question – managing the Irish border through

Brexit, Irish Journal of European Law 2017

83

 

 

 

at designated posts at ports for imports of meat and animal products to

Northern Ireland from mainland Great Britain, but also that this is already

the case under existing arrangements as there is an all-island regime in

operation at present, and that veterinary inspections are a key component

of the EU’s protection of its internal market. Other regulatory matters can

be enforced away from the border and in the market, as they are at present

in respect of goods which are regulated differently in member states (of

which there are many, including for example medicines). Such oversight

should also be part of the close coordination between authorities north and

south of the border, and underpinned by arrangements both in the back-

stop and in an Ireland/Northern Ireland specific chapter of the final free

trade agreement.

 

In respect of movement of people, both the UK and Ireland wish to retain the

Common Travel Area, the well-established arrangement that allows British

and Irish people to travel to, live in and work in each other’s territories.

 

This will facilitate not just travel across the border with only the current

levels of checks to control movement of people who do not have the right

to be in either country, but also the continued provision of healthcare and

education services and ability for Irish and Northern Irish people to work on

either side of the border (third country immigration is a national competence

so it will remain the right of Ireland to accord this preference to the UK, as

are matters such as access to welfare, healthcare and education).

 

By using best practice and existing technologies, the customs and

regulatory border can be managed without infrastructure or routine

interventions at the land border. In general the solutions are measures that

would be equally applicable for other UK/EU borders, with the exception of

the establishment of a single zone for SP and animal health matters:

 

  •    Inland clearance should be made available to all traders.

This would mean electronic export and import declarations

being made and, if required, inspections by HMRC or the

Irish Revenue Commissioners (as applicable) being made

at the importer’s premises.

 

  •    Exports of goods between Northern Ireland and Ireland

must already be shown in VAT returns, in order to qualify

for the VAT exemption for exports. If a trader is not duly

submitting an export declaration, matched on the other

side of the border by an import declaration, they will not be

able to support their VAT accounting. This means there is a

strong incentive to compliance on the traders themselves.

 

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  •    Smugglers would be breaking the law not just in respect of

customs duties but also VAT. As duties are generally low,

and items where higher duties apply (such as cars, and

agriculture) are difficult to smuggle at any scale (and easily

monitored in the market and in the supply chains, which are

highly regulated), the incentive to evade duties and mis-

declare or fail to declare trade will be very low.

 

  •    Intermediaries will pay a key role in facilitating this trade

and taking the burden of compliance away from the

traders. The sector needs clarity on the legal framework

that will operate, to be able to design competitive, scalable

solutions for small and medium sized businesses.

 

  •    Certification of origin is being simplified globally and by the

EU with the introduction of self-certification by the exporter

through the REX (registered exporter) system. It will not

be necessary for traders to incur cost or inconvenience in

having goods independently certified.

 

  •    The UK and Irish governments should both make self-

assessment and periodic declarations available as widely

as possible.

 

  •    All deliverable under UCC and UK’s mirroring version of

UCC brought into domestic law through European Union

(Withdrawal) Act if the UK had to manage with no other

negotiated solutions. These elements are summarised in

the table below.

 

On a negotiated basis, it would be possible to permit waivers from import

and export declarations for originating goods where only VAT will need to

be accounted for (as no import duties will be due – it can be reasonably

expected, given trade patterns in Ireland and Northern Ireland, that this

will be the great majority of transactions as few third country goods are

traded across the Irish border). Free zones or free ports could also be

established, both for cross-border island trade and for global trade, to

benefit Irish and Northern Irish businesses.

85

 

 

Fiscal                                 Regulatory

Backstop      Zero tariffs – whole UK/EU;            UK to pass law against knowingly

limited FTA to include standard        exporting or carrying non-

provisions on state aid and            compliant goods into Irish market.

competition

SPS and animal health

UK to maintain same external

tariff as EU for time limited period   Northern Ireland to retain all

existing SPS regulations and

Intensive supervision of imports       UK to commit to updating them,

into UK of goods where EU              for Northern Ireland only in

quotas and trade remedies are in       accordance with EU law.

operation

Checks on consignments of

Maximum deployment of all              meat and animal products from

facilitations under UCC to enable      GB or rest of world (ex EU) to

100% inland clearance.                 take place at Northern Irish

ports, in accordance with current

Investment in systems, and             processes in line with all-island

resources for mobile inspections       animal health regime.

and audits, training for

businesses and expansion of            Other goods

intermediary sectors (customs

brokers, fiscal representatives).      Dispersed checks – ad hoc in

border vicinity and in market, by

Continuation of VIES                   Irish authorities/their agents in

farms/processing facilities in NI

Negotiating   Zero tariffs – whole UK; full FTA      SPS and animal health

objectives    including regulatory coherence,

services and investment.               Northern Ireland to assume

autonomy over SPS and animal

Move from transaction- to              health and determine whether

system-based approach to               the remain harmonised to EU

formalities Integrate information      requirements or diverge if and

systems and waivers for                when UK government changes

originating goods where only VAT       regulations applicable in

payable                                mainland GB.

 

Special Economic Zones/Free            Agreements on equivalence and

Zones                                  formalised certification/inspection

regimes.

 

Other goods

 

Dispersed checks – ad hoc in

border vicinity and in market, by

Irish authorities/their agents in

farms/processing facilities in NI

 

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Regulatory Autonomy and Mutual Recognition

 

Industrial Goods

 

In her speech at the Mansion House in March 2018, the Prime Minister

was right to state that UK regulations would ‘achieve the same outcomes’

as EU law, but need not be identical.98 For pro-competitive regulation,

‘regulatory autonomy’, the capacity to diverge in regulation, is vital.

 

The regulatory system the UK needs involves three components:

regulations (rules made by an authority, in particular for products and

services); standards (which show a product or service has met regulations,

or are marks of quality) and conformity assessment (the system of bodies

such as laboratories and professional bodies that assess conformity to

standards, providing certification).

 

Domestic regulatory autonomy does not mean divergence in all areas,

immediately, because capacity to diverge does not mean either side will;

however, the mandatory harmonisation of regulation via alignment of

regulations themselves (as opposed to alignment of their goals) would

fail to deliver the benefits of leaving. The UK may choose to retain EU

regulations at times in some sectors, but must be able to choose not

to.

 

The UK should put forward an open and constructive offer of mutual

recognition with the EU. Autonomy would be followed by recognition

by the UK of EU regulation, standards, and conformity assessment,

meaning institutional competition for the UK, commercial competition

from EU imports, and avoidance of unnecessary trade barriers on

imports. It is then to be expected that recognition by the EU will vary by

sector, but for the EU not to grant recognition would constitute creating

new trade barriers, because on Brexit day the EU and UK have full

harmonisation or mutual recognition. This creates a unique opportunity to

achieve maximal recognition.

 

Withdrawal must therefore deliver the following five points:

 

1) Autonomy for the UK to make its own regulation (for

both goods and services)

 

2) Autonomy for the UK to set its own standards (for

both goods and services), which can include using global

standards

 

 

98 May, T., 2018. PM speech on our future economic partnership with the European Union

[Speech] (2 March 2018). Available at: https://www.gov.uk/government/speeches/pm-

speech-on-our-future-economic-partnership-with-the-european-union

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3) Autonomy for a UK system of conformity assessment

(able to assess conformity to UK and EU standards and

regulations)

 

4) Unilateral recognition by the UK of EU regulations,

standards, and its conformity assessment system

(able to assess conformity to EU and UK standards and

regulations)

 

5) Seek recognition by the EU of the UK’s regulations,

standards, and its conformity assessment system.

 

EU regulation is growing more damaging to growth, and the concept

that the government would decide, in advance, to tie the UK to future

EU regulations, without representation, would both be very unusual,

and threaten our democracy and competitiveness. On Brexit day, UK

and EU regulations will be harmonised and recognised. Subsequently,

in the absence of a bilateral trade deal, the UK can also unilaterally

recognise the EU’s framework, for which procedures must be put in

place now. New Zealand former trade minister Sir Lockwood Smith has

noted that this starting point is precisely why the EU and UK should

agree the most advanced trade agreement in history.99 To achieve this,

the UK should agree with the EU a regulatory coherence chapter in

which both sides are committed to more pro-competitive regulation. This

is, again, best practice in all recently negotiated trade agreements, as

well as the clear approach of all OECD countries100 and we would expect

the UK and EU to be no different.

 

The Regulatory Coherence chapter (see Annex) is drawn from the

regulatory coherence chapters of the CPTPP, the EU and US offers in

the TTIP negotiations, and relevant WTO provisions in these areas. The

sample chapter represents the type of arrangement the EU and UK could

agree. The key elements are:

 

(i) Strong commitment by both sides to GRP, including

transparency in how regulations are promulgated, effective

cost-benefit analysis including taking into account both

 

99 Sir Lockwood Smith, (2018), “Britain has a golden chance to join the biggest free trade

agreement in history.” Conservative Home.

Available at: https://www.conservativehome.com/platform/2018/08/lockwood-smith-britain-

has-a-golden-chance-to-join-the-biggest-free-trade-agreement-in-history-but-chequers-is-

likely-to-wreck-it.html

100 OECD (2018), OECD Regulatory Enforcement and Inspections Toolkit, OECD

Publishing, Paris, https://doi.org/10.1787/9789264303959-en

 

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the trade effects and competition effects of regulation, and

enshrining into the agreement the best aspects of regulatory

promulgation, as found in the OECD’s Regulatory Toolkit101

and Competition Assessment,102 and WTO principles

and the work of the Competition Advocacy Group of the

International Competition Network (ICN).103

 

(ii) Commitment by both sides to the idea of

promulgating regulation which is the least trade

restrictive and least market restrictive from a competition

perspective consistent with a clearly stated, legitimate

regulatory goal.

 

The parties would negotiate the precise mechanics of these in different

sectors, but as the draft regulatory coherence chapter notes, these

provisions are likely to involve a Joint Committee and a Conciliation

Process prior to full dispute settlement.

 

Services liberalisation and regulatory issues

 

The UK-EU agreement would be based on a negative list covering all

services unless specifically exempted.

 

The opening bid would be maximal openness across all four modes of

supply, plus strong disciplines in a horizontal regulatory coherence chapter,

and vertical subject matter annexes.

 

  •    Key elements on regulatory issues in services

 

As with manufactured goods, the UK needs to ensure disciplines that

make it more likely that both parties move in pro-competitive ways,

both by agreeing GRP, and by pushing for pro-competitive regulation.

Every country that negotiates with the EU, for example the US in the TTIP,

seeks this kind of discipline. The second objective is to ensure that

there is the maximum regulatory recognition for services sectors. We

have given an example in the case of financial services.

 

  •    The key elements of GRP for services are broadly as

noted for industrial goods: commitment by both sides to

GRP, including transparency, taking into account the

right inputs when deciding to regulate, such as impact on

trade and impact on the market, and broadly speaking,

 

101 OECD, Regulatory Toolkit, accessed 09/2018.

Available at: https://www.oecd.org/cleangovbiz/toolkit/regulatorypolicy.htm

102 OECD, Competition Assessment Toolkit, accessed 09/2018.

Available at: http://www.oecd.org/daf/competition/assessment-toolkit.htm

103 International Competition Network, 2009. RECOMMENDED PRACTICE

ON COMPETITION ASSESSMENT. [Online] Available at: http://www.

internationalcompetitionnetwork.org/uploads/library/doc978.pdf

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regulating in ways that are the least trade distortive and

the least damaging to market competition consistent with

clearly stated and legitimate regulatory goals. Violation of

these elements would result in violation of the agreement,

leading to dispute resolution.

 

  •            Key elements on financial services

 

The UK and EU will seek maximum trade liberalisation in financial

services with deference between home state regulators. They already

have harmonised regulation in many important areas and many key

areas of financial regulation are based on international standards set by

the Basel Committee of Banking Supervision in order to avoid systemic

risk, regulatory arbitrage, market fragmentation and protectionism. Many

countries whose regulations have similar principles and outcomes have

formed cooperative regulatory alliances that allow cross border financial

service transactions.

 

Principle and outcome based regulatory cooperation allows greater

divergence than seeking line-by-line adherence to a prescriptive rulebook

and facilitates better customer outcomes.104

 

Cooperating countries focused on the same regulatory principles and

outcomes should permit deference to the relevant foreign regulator in

matters of host state supervision. If international standards are robust

and comprehensive the home state regulators should be confident that

adherence to them by host state countries would address their supervisory

concerns.

 

The EU and the UK should continue to operate with a consensually

established set of regulations based on international standards, mutual

transparency and cooperation between home state regulators, provided

that such cooperation does not prevent either party from diverging nor

allowing such divergence to act as a hair trigger causing loss of recognition.

At present both the EU and the UK grant access to third country providers

though their system of equivalence which is granted unilaterally. However,

the system of equivalence does not cover the full spectrum of financial

services and equivalence is not granted on purely economic concerns.105

 

When the UK itself becomes a third country to the EU, it will have

regulations that the EU already recognises and considers to be

adequate, which means both should start by granting each other

 

 

104 This has been dealt with in more detail in the IEA’s publication Improving Global

Financial Services Regulation: Singham and McBride, Improving Global Financial Service

Regulation, IEA, May 2018

105 Barnabas Reynolds, A Template for Enhanced Equivalence, Politeia, 2017

the process required to enhance the equivalence regime has been covered extensively by

Barnabas Reynolds for Politeia

 

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equivalence in all available financial sectors, as well as allowing

divergence provided that the regulation is still achieving the same

prudential goals. The nations that presently have EU equivalence do not

have identical regulations to the EU. The EU and UK agreement must

include a mechanism designed for managing divergence anchored by

one or more forms of dispute resolution. Such mechanisms may include a

specific approach that is unique to financial services as has been included

in the EU’s CETA with Canada, or they may be more broadly applied across

the whole of a mutual access regime.

 

The agreement should prohibit practices which distort competition and

trade such as cartels, abusive behavior by dominant market players or

anti-competitive mergers. Adding provisions to ensure they act fairly

and transparently when applying their competition laws or investigating

transgressions will require continued cooperation between the UK and EU

competition authorities.

 

The agreement should be subject to independent arbitration as in a normal

trading arrangement so that neither party is subject to interpretation by

the other. Maintaining the UK’s overseas persons exclusion and the EU’s

reverse solicitation exclusion will enable cross-border wholesale financial

services between regulated institutions and professional investors in the

other jurisdiction without even triggering the equivalence regime.

 

This should be understood within the context of an advanced FTA being the

UK’s first offer to the EU, with the EU invited to respond, as the negotiating

field is altered by action taken in the other pillars and pressure applied to

the EU.

 

  •    Dispute settlement mechanism

 

All modern FTAs have dispute settlement mechanisms and the UK-EU FTA

will be no different. The UK’s offer on the dispute settlement mechanism

should be an arbitration-based mechanism following generally

accepted good practice in this area.

 

UK-US FTA: the renewal of the Special Relationship

 

  •    A UK-US FTA is one of the great opportunities of Brexit

in the immediate future, and a UK Government should

greet the prospect of such a bilateral deal with our

greatest ally with genuine enthusiasm.

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The UK-US FTA we seek must encourage trade and economic liberalisation,

reduce domestic protectionism, and help create a more competitive

economy for both parties, to the improvement of consumer welfare.

 

At the centre of trade agreements, and a US-UK FTA, will be improved

market access for goods, services, and investment. This means the

elimination of tariffs to the lowest possible levels on the greatest

number of goods, with services markets open to competition from

the other party’s providers, while government procurement markets to

both goods and services providers from each party should also be open

(while preserving our NHS, for example). The FTA will also cover digital

trade, with data flows essential components of goods and services,

albeit with reasonable levels of privacy protection that are not unduly

burdensome.

 

Meanwhile, when businesses are made to meet two sets of regulations to

sell in different markets, this hinders efficiency and limits exports. This FTA,

again, should also therefore include a mutual recognition agreement

(MRA), which would allow companies from each party, in as many sectors

as possible, to export according to their own country’s regulations and

standards, which would then be recognised by the other country. Of course,

the FTA’s rules will need to be enforceable, with binding, enforceable

dispute settlement to ensure the agreement is followed.

 

The evidence also shows that the British people are increasingly

enthusiastic about a UK-US FTA, with over 60% in favour according to

recent polling.106 The UK must therefore now accelerate its negotiations

with the US. The US administration has indicated that it wants a free trade

agreement with the UK. There is a very high level of support on both

sides of the aisle in the US congress also. Recently, Republican Senator

Portman has set up the US-UK FTA caucus in the Senate with Democrat

Chris Coons;107 the Trump administration is now frequently on the record

as strongly supporting an FTA with the UK.108 US industry is increasingly

vocally supportive, and the Office of the US Trade Representative (USTR)

has recently launched a stakeholder engagement process for an FTA with

the UK. A key feature of that process is the input of small businesses who

face regulatory barriers in the UK.

A coalition of UK and US think tanks have produced a proposed draft of

 

106 Heffernan, S. “BREXIT: UK wants US Deal”, Live Trading News (2018). Available at:

https://www.livetradingnews.com/brexit-uk-want-us-deal-98466.html#.W6DQ_-hKg2w

107 Senator Portman (2018). “Portman, Coons Launch Senate UK Trade Caucus to Build

Support for Bilateral Trade Agreement”. Available at https://www.portman.senate.gov/public/

index.cfm/2018/5/portman-coons-launch-senate-uk-trade-caucus-to-build-support-for-

bilateral-trade-agreement

108 US Trade Representative, 2015. GUIDELINES FOR CONSULTATION AND

ENGAGEMENT OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE. [Online]

Available at: https://ustr.gov/sites/default/files/USTR%20Guidelines%20for%20

Consultation%20and%20Engagement.pdf [Accessed 18 09 2018].

109 Document to be made available at 14:30 BST, on Tuesday September 18th: http://

ifreetrade.org/publication/us_uk_shadow_trade_talks_an_ideal_fta

 

92

 

 

 

an FTA between the US and UK, published on September 18, 2018.109 The

UK should use the opportunity of the UK-US negotiation to craft its own

model FTA.

 

As the world’s number two exporter of services, the UK will need to use

access to its own market in goods and agriculture to secure services

concessions from the US. The US will be concerned about underlying

product regulation that may discriminate against its goods, for instance.

It is also a critical part of the UK-US FTA discussion that solutions to the

most pressing problems in international trade today are agreed by the UK

and US. These two countries could agree a very high standard agreement

that delivers both free trade and free markets between them, setting up

the conditions in which future agreements with other countries can yield

benefits. For instance, even though the US and UK do not have many

state-owned enterprises in commercial sectors, the two could agree a

free trade agreement with strong provisions to discipline state-owned

enterprises, anti-competitive market distortions by the state, and other

subsidies (see link to potential UK-US FTA). Since we envisage that this

agreement would be an open accession agreement, others could accede,

provided they could meet the terms.

 

Many commentators have rightly noted the impact of the Trump

administration trade policy on the global trading system, and argued that

therefore no trade deal with the UK will be possible or it will be very much

on the US’s terms and be detrimental to UK interests. This misunderstands

the support for the UK at all levels, and also the fact that the Trump

administration would need to do a deal with a country that is a significant

economy, where there is no trade deficit, and where there would be no

race to the bottom on labour costs. The UK is the ideal candidate for this

US agenda, and concluding a comprehensive trade agreement with the

UK would enable the US administration to demonstrate to the Congress

that it did in fact have a trade agenda that is not solely about renegotiating

or pulling out of existing agreements.

 

The UK-US FTA would therefore need to address the major concerns of the

US administration with respect to 21st century trade. The US administration

is seeking a solution to the problem of global market distortions and the

UK-US FTA could be an important step. Similar rules apply in the CPTPP

and so this would also act as a platform to gain further disciplines over

those countries that distort their markets.

While there have been concerns about the implications of a US deal for

 

109 Document to be made available at 14:30 BST, on Tuesday September 18th: http://

ifreetrade.org/publication/us_uk_shadow_trade_talks_an_ideal_fta

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the NHS, the NHS may simply be reserved from the provisions of the

agreement. However, the NHS does purchase drugs and other products

from global suppliers and it would be in the interests of the NHS (and the

British taxpayer) to ensure that procurements are as pro-competitive as

possible. US firms have not complained about the NHS, and it has not

featured in recent National Trade Estimates (the US’ inventory of foreign

country trade barriers). It is extremely unlikely that the US would be

interested in raising any issue with the UK in a trade negotiation which

has not featured in the NTE in some way. In any negotiation with the US,

it is open for the UK to rely on high standards of consumer protection

which are generally not opposed, except when they are a form of disguised

protectionism.

 

Provided that the UK is able to have control over its own regulatory

structure, it will be able to agree terms with the US that the EU would

not be able to reach because of the difference in regulatory approaches

between the EU and US in many areas. As the UK negotiates with the

US, it is critical that we explain why a trade deal with the UK is strongly in

the US interest for strategic reasons. The UK has made itself a regulatory

battleground in a world that is being rapidly divided into pro-competitive

regulatory systems, and prescriptive and anti-competitive ones. The US

understands that the value of a UK-US trade agreement is to pull a major

G-7, European economy into a pro-competitive regulatory setting.

 

A UK-India Trade Deal is Feasible

 

A deal between the UK and India is an example of one which could take

longer to negotiate, due in part to the many distortions in the Indian

economy. However, this is a deal DIT must begin preparing for, and which

represents a great opportunity for the UK.

 

A trade deal with India stands to be of substantial benefit to the UK. India is

one of the fastest-growing big emerging markets in the world. The contours

of a deal between the UK and India are visible because of the narrowly-

focused offensive interests of the UK, and of India, and because of the

UK’s limited defensive concerns.

 

Negotiations will herald opportunities to discuss helping to modernise

areas of India’s economy and lower the barriers that limit competition for

various Indian sectors. Trade barriers apply in legal and financial services,

as well as high taxes on Scotch Whiskey, for instance. Similarly, India has

significant difficulties with the EU’s regulatory bans on its foods.110

 

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The EU has struggled to conclude a deal with India for a number of

reasons. Major obstacles have been the EU’s regulatory system in

agriculture, and its aversion to allowing India Mode 4 services access

(ironically led by the UK). Furthermore, the offensive interests of the

EU were not equally shared by all the member states. The UK has very

particular focused interests, especially in legal and financial services

(especially insurance) and, in agri-food, barriers for its Scotch Whiskey

exports. In a purely UK-India context, the UK might change its overall

approach to Mode 4 precisely if those focused offensive interests look

like they may be accommodated. Singham, Rangan, and Bradley analyse

the barriers between India and the UK comprehensively in.110 The key

elements of a potential deal are as follows:

 

  •    India would provide better legal and financial services

access for the UK, especially allowing UK law firms to

establish and practice law in India, and to allow foreign

ownership in the insurance sector to increase.

 

  •    The UK would provide Mode 4 services access112 for India.

India’s trade negotiating objectives prioritise the access of

their citizens to the UK market as part of the delivery of

services. Indian high-tech companies in particular need

trading conditions such that some personnel can move

to the UK; however, the UK’s interest will naturally be

in selected numbers of highly skilled workers, and the

numbers involved would be very small

 

  •    The UK will need to provide much greater market access

to India’s agricultural produce. This means reducing

tariffs, but critically means reducing the regulatory barriers

derived from the SPS and TBT rules in the European

acquis. Thus the UK will need regulatory autonomy over

these rules in order to do a deal with India. This will benefit

Indian producers as well as British consumers through

cheaper products.

 

  •    The India-UK working groups have concluded that

 

 

110 For example, the EU ban on Indian basmati rice: Bodkin, H. “ Rice to become more

expensive due to ‘disastrous’ EU import rules”. The Telegraph (2017). Available at https://

http://www.telegraph.co.uk/news/2017/10/14/rice-become-expensive-due-disastrous-eu-import-

rules/

111 Singham, S., Rangan, U., Bradley, R., and Kiniry, M., “Anti-Competitive Market

Distortions and Their Impact: A Case Study of India”, Legatum 2016.

112 As noted earlier, the WTO provides that services are delivered across four critical

modes of supply – cross border supply (mode 1), consumption abroad (mode 2),

commercial presence (Mode 3) and movement of natural persons (mode 4). India has

always prioritised the ability of its services personnel especially in the IT Sector to be able to

move freely from India to other countries where their investments are located.

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improvement of the regulatory barriers between

them is very significant.113 In particular, India will want

to see a more open UK agricultural sector, both in terms

of tariffs and in terms of regulatory barriers such as the

EU’s environmental and other regulatory barriers in the

agricultural sector.

 

Exploring a UK-China deal

 

The UK should initiate discussions with China, but be clear that its

requirements for a UK-China deal are likely to be difficult for China

to meet in the short term. This is a longer-term discussion aimed at

moving China towards liberalising aspects of its economic behaviour,

with a view to a future trade deal.

 

A future UK-China deal is important, but cannot be rushed, requiring

mature acknowledgement that the UK would need progress in many

areas of China’s approach to trade. This does not imply protectionism

on the UK’s part; the approach should be to encourage less distortive and

protectionist behaviour by China, for the benefit of the United Kingdom

and China, and for global growth. The two countries will naturally maintain

friendly relations as we work towards a deal.

 

China’s actions have a huge impact on global trade. Ensuring that its rise

does not destroy wealth, or lead to an increase in cronyism, is a critical

challenge for the world’s major economies, including the UK. It must

therefore proceed carefully, bearing in mind the network of China’s State-

Owned Enterprises (“SOEs”) (which often receive free land and water, for

example) and other anti-competitive market distortions, which make fair

competition for British firms difficult.

 

Countries that attempt bilateral trade arrangements with China have not

generally been successful in concluding deeply liberalising agreements

that deal meaningfully with Chinese behind the border barriers (the

Swirzerland-China FTA and the Iceland-China FTAs are examples of

relatively one-sided deals that do not make a meaningful impact on China’s

behind the border barriers and its regulatory protectionism).

 

In addition, the UK should approach China’s Belt and Road initiative as

a way to promote pro-competitive regulation. It is crucial that the Special

Economic Zones that may arise as a result of Belt and Road do not become

playgrounds for China SOEs to the exclusion of other competitive, private

 

113 Business and Enterprise Committee, “Waking up to India: Developments in UK-India

economic relations”, House of Commons, 2008.

Available at: https://publications.parliament.uk/pa/cm200708/cmselect/cmberr/209/209.pdf

 

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businesses. What happens will depend on the regulatory framework which

underpins these zones, and the UK can play an extensive role. At a time of

rising hostilities, a strong but pragmatic UK-China relationship will be very

important to ensuring a better climate for the global trading system.

 

Bilateral deals with countries where an EU FTA should be rolled over

 

Negotiations should be accelerated with these countries on the basis

that the UK will need to roll over existing agreements, and agree a

new FTA in the case of EFTA. Here, DIT should be tasked to conclude

these negotiations on a provisional basis, in case there is no Withdrawal

Agreement and therefore no Transition Period. The UK should negotiate

directly with these countries on a bilateral basis (just as in the case of

British Tariff Rate Quotas (TRQs (see below)). The problem has been that

the UK has been relying on the principle of continuity of third country FTAs

in the transition period, without certainty as to whether there would be

one. As noted in chapter 5, there are considerable risks to this continuity

approach as it requires application of the common commercial policy in

the Transition Period, negatively impacting the UK’s ability to negotiate

properly.

 

EU cooperation will be required to ensure that both sides have the

same rules of origin with respect to the relevant country, so that content

in the UK and EU-27 can be cumulated to satisfy that country’s rules of

origin (rules of origin refer to how customs authorities determine where an

export has come from). Without this however, it will still be possible to have

market access between both that country and the UK and EU separately

(even if the efficiency of pan-European supply chains is partially lost). Of

course, it is in both the EU and UK interest to agree rules of origin that

allow cumulation with the third country, and this should be possible if the

UK and EU retain the same rules of origin.

 

Typically the EU’s rules of origin are relatively liberal. The direction of travel

of US rules of origin is towards more restrictions, and thus the UK should

seek maximum diagonal cumulation with countries with whom it has trade

agreements. This will be challenging with the current US administration,

but the UK should seek to negotiate as liberal rules of origin as possible

with cumulation with as many countries as possible, and take steps to

reinvigorate a crucial discussion in the WTO on the increasingly damaging

effect on global trade of diverging and restrictive rules of origin.114

 

 

114 As noted in the WTO Section, the UK should reinvigorate the stalled effort begun in

the WTO Rules of Origin Committee to ensure harmonisation of rules of origin based as

much on substantial transformation as possible (with as little supplemental local content

requirements).

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An alternative model of bilateral relationships for developing

countries and emerging markets

 

The UK will have to replicate the current EU structure of preference

programmes with developing countries and emerging markets. However,

in doing this it has an historic opportunity to transform previous EU

arrangements into genuine Economic Partnership Agreements that are

reciprocal in nature and do not discourage or hinder developing countries

growth, unlike current EU development models.

 

The current model is based around the concept of the Generalised System of

Preferences (GSP and the special programme GSP+).115 Many developing

countries are unhappy with these, however because the preferences can

be lost if a country graduates out of the programme or a particular product

exceeds a specified share of trade.116 The EU’s Everything But Arms (EBA)

initiative was a positive development as it was unconditional, but does give

a preference to producers in the poorest countries in the world. Very poor

producers in other countries that are not EBA beneficiaries must compete

against these preferences, and often lose out.

 

Problems also occur because of the lack of predictability of how exemptions

occur, and the circumstances in which they will be removed; and in which

types of products developed countries allow the exemptions to apply to.

For example, many cocoa producers have had their tariffs lowered on

exports to the EU through the GSP programme. Without GSP benefits,

these exports would be subject to tariff escalation, charging a lower tariff

on the basic raw material, but a higher tariff on the processed good. This

means firms in developed countries are more likely to reap the value-add

from processing.

 

 

 

115 The Generalised System of Preferences (and GSP +) and the Everything But Arms

initiative are the primary trade development tools that the EU uses in its trade policy.

EBA covers only the poorest countries in the world (LDC’s as defined by the UN) and is

unconditional. All other programmes are conditional. Countries may graduate out of them,

or the preference may be lost for other reasons, such as support for terrorism or failing to

support Intellectual Property laws.

116 The GSP programme is highly managed trade where a particular product from a

particular country can graduate out of the programme is its share of GSP trade exceeds

specific percentages which differ from product to product sometimes by quite wide margins.

This damages incentives for producers in those product categories to be successful.

117 For example, as from 1 January 2017 certain products no longer benefited from GSP

preferences before formal review in January, 2019. The tariff preferences for the products/

product groups originating in the countries mentioned below are suspended (see Regulation

(EU) 2016/330) because the average value of EU imports of these goods from the GSP

beneficiary country over three consecutive years exceeds the thresholds listed in Annex VI

of Regulation (EU) 978/2012. Origin and product groups ceasing to benefit from GSP India

ï S-14: Pearls and precious metals ï S-15a: Iron, steel and articles of iron and steel ï S-15b:

Base metals (excl. iron and steel), articles of base metals (excl. articles of iron and steel).

 

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Furthermore, a developing country currently benefiting from a preferential

rate may still graduate out of the GSP programme if their economy grows

above a certain level (one example of this is India for many products117).

Perversely, countries therefore lose their preferences if they succeed,

discouraging investment, locking in existing supply chains (as GSP can

be lost for a variety of reasons, producers are less willing to go up the value

chain and invest in the necessary equipment, because they might lose

the preference and be subject to higher tariffs). So developing countries

remain stuck in a poverty trap.

 

Currently, gains are captured by developed country producers who use the

raw material inputs at low tariff rates to lower their input costs (although

this also distorts developed country economies). In our example, cocoa

producers in Ghana might be able to invest in partnering with dairy and

sugar producers to produce chocolate on a commercial scale. Under the

current arrangements they would not be advised to do so, as if the GSP

benefits were withdrawn, the chocolate tariff would significantly increase

(crippling potential new business).

 

The UK can be more open and not penalise developing country

exporters for success, and be more open to the products of developing

countries without strings and conditionality. A better development model

for poor countries is therefore a true economic partnership: but this

requires the UK having tariff and regulatory control.

 

If the UK is more open on the products that developing countries produce

– and those higher up the value chain, but which they could produce under

more favourable trade conditions – their producers will be better able to

make the necessary capital investments to upgrade, which they would not

be if the preference could easily be withdrawn.

 

To successfully make this transition, the UK will have to find a solution

to the preference erosion problem: this is a dynamic whereby developing

country beneficiaries of the preference in fact lobby to keep the developed

countries’ tariff rate (or Most Favoured Nation rate) high, so that they

continue to benefit from the preference. This harms poor consumers in the

developed country (meanwhile, countries that are too developed to benefit

from GSP but still have large numbers of poor people, like India, see fewer

benefits from the system).

 

The UK could provide, as part of its suite of trade remedies, an option

for developing countries which face competition from other countries

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whose producers have their costs artificially lowered by ACMDs to

complain about the distortion and point out the damage it does to their

own exports to the UK. This distortion could be tarifficated for the offending

country, to correct the unfair trade that the GSP/GSP+ beneficiary was

competing with.

 

  1. Plurilateral

 

Accession to the CPTPP

 

The CPTPP (Comprehensive and Progressive Agreement for Trans-

Pacific Partnership) replaces the Trans-Pacific Partnership (TPP),

following the withdrawal of the US. This plurilateral agreement

consists of eleven countries – Australia, Brunei, Canada, Chile,

Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

 

CPTPP is an open agreement and its signatories indicate they would

welcome the UK seeking to be a member. Indeed, the Government is to

be commended for successfully getting major CPTPP partners to offer

CPTPP Membership to the UK.118 119 The UK has also officially launched its

consultation process for the CPTPP (along with the US, Australia and New

Zealand agreements120), and should officially apply to join the CPTPP as

soon as it can.

 

CPTPP accession for the UK is also a central geo-strategic move.

This is an important platform agreement of some of the fastest growing

countries in the world.121 Not only does the CPTPP consist with the UK of

17% of global GDP (40% if the US re-joins), but the CPTPP is also an open

accession agreement which other countries can join; most recently, South

Korea indicated that they wish to join the CPTPP.

 

The e-commerce and SME chapters of CPTPP go further than any other

trade agreement (with prohibition on data localisation, non-discrimination,

as well as privacy protection. The UK is an e-commerce champion, and

 

118 Department for International Trade (2018). “Japan will “spare no effort to support the

UK” in joining the CPTPP, Available at: https://www.gov.uk/government/news/japan-will-

spare-no-effort-to-support-the-uk-in-joining-the-cptpp

119 Sydney Morning Herald, “Australia will pursue one-on-one deal even if UK joins revived

TPP trade bloc”, January 25th, 2018. Available at: https://www.smh.com.au/world/australia-

will-pursue-oneonone-deal-even-if-uk-joins-revived-tpp-trade-bloc-20180125-h0nxzl.html

120 Department for International Trade (2018). “Liam Fox launches consultations on UK’s

trading future outside of EU”. Available at: https://www.gov.uk/government/news/liam-fox-

launches-consultations-on-uks-trading-future-outside-of-eu

121 Department for International Trade (2018). “New public consultations announced for

future trade agreements”. Available at: https://www.gov.uk/government/news/new-public-

consultations-announced-for-future-trade-agreements

 

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the CPTPP would only strengthen this position, helping spread digital

trade around the world at a time when its liberalisation is badly needed.

This is the most liberalising of regional platform agreements (China has

its own version of a regional agreement involving the ASEAN countries,

the Regional Cooperation and Economic Partnership (“RCEP”), but this is

limited to eliminating border measures, and does not deal significantly with

behind the border barriers and regulatory issues, partly because China has

taken the position that these issues are internal issues for China and not

relevant to trade policy. This is becoming a less tenable position).

 

As noted in Chapter 5, the UK should, as soon as its stakeholder process

is complete (even if this is before actual leaving of the EU on March 29,

2019), formally apply to join the CPTPP and go through the relevant CPTPP

mandated mechanisms to avail itself of the open accession clause. The

UK cannot join unless we have control over our regulatory system.

This has been made clear by a number of commentators.122 Many of the

latter do not meet CPTPP standards, such as in agriculture, where they

violate the WTO SPS rules on sound science-based animal, human and

plant health protections.123 124 125 126 127 128

 

Tariff and regulatory control, and changes, would be needed for the

UK to accede to CPTPP. Accepting the European acquis would violate

the CPTPP provisions in SPS and TBT measures. If the UK accedes to the

European Patents Court, and the enforcement of patents in the UK differed

from CPTPP practice and requirements, then it would also be hard for the

UK to join.

 

 

 

 

122 Smith, L. “Britain has a golden chance to join the biggest free trade agreement in

history. But Chequers is likely to wreck it. ”, Conservative Home (2018) Available at: https://

http://www.conservativehome.com/platform/2018/08/lockwood-smith-britain-has-a-golden-chance-

to-join-the-biggest-free-trade-agreement-in-history-but-chequers-is-likely-to-wreck-it.html

123 DS337: European Communities — Anti-Dumping Measure on Farmed Salmon from

Norway https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds337_e.htm

124 DS137: European Communities — Measures Affecting Imports of Wood of Conifers

from Canada https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds137_e.htm

125 DS48: European Communities — Measures Concerning Meat and Meat Products

(Hormones) https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds48_e.htm

126 DS26: European Communities — Measures Concerning Meat and Meat Products

(Hormones) https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds26_e.htm

127 DS293: European Communities — Measures Affecting the Approval and Marketing of

Biotech Products https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds293_e.htm128

128 DS389: European Communities — Certain Measures Affecting Poultry Meat and Poultry

Meat Products from the United States

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Evaluating NAFTA accession

 

Many US members of Congress over the last two decades have called

publicly for the UK to accede to NAFTA.The Trump administration has

sought to pull the US out of NAFTA,129 and renegotiation is ongoing. The

US is seeking to do this by two bilateral conversations with Mexico and then

Canada. The UK would be in a better position to accede to whatever form

of NAFTA prevails (whether or not Canada is ultimately included), because

the UK will not have hold-outs regarding the protected dairy sector (as

Canada does). There is nothing inconsistent with the UK seeking a trade

deal on a bilateral basis with the US and also evaluating NAFTA accession

(since NAFTA has an open accession clause).

 

The UK in the Commonwealth

 

The Commonwealth is an alignment of nations gathered especially around

concepts such as rule of law. It is an unusual network in that it contains

some of the most developed countries in the world, as well as the smallest

micro-states. Far from being a weakness, as it is often perceived to be, this

diversity is the source of its strength. One of the most important things the

Commonwealth can bring to the debate is to help facilitate an unblocking

of the global economic architecture by enabling its members to discuss

issues prior to interacting with their various affinity groups in international

organisations.

 

By surfacing and discussing international issues, Commonwealth

countries, while not necessarily agreeing as a bloc to a particular

approach, may nevertheless subscribe to similar philosophies and broad

positions. Ministers from these countries, if they meet in advance of

global meetings, will, in effect get two bites at the apple when it comes to

forging coalitions in support of a more liberalising approach. In the case

of trade, many Commonwealth countries belong to affinity groups with

others who have historically been opposed to efforts to liberalise trade. A

Commonwealth trade pre-meeting could be used to broker solutions in the

WTO ministerial meeting which follows it. It could also be used to discuss

how non-Commonwealth members might react to proposals that members

might be making. In the trade context we have seen countries emerge

to salvage aspects of trade ministerials, such as when Australia’s trade

minister Steven Ciobo led an effort to develop a plurilateral agreement

on e-commerce, when the multilateral work appeared to be foundering.

 

 

129 United States Trade Representative, “USTR Releases Updated NAFTA Negotiating

Objectives”, November 2017.

https://ustr.gov/about-us/policy-offices/press-office/press-releases/2017/november/ustr-

releases-updated-nafta

 

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Often in WTO ministerial meetings, trade ministers do not have much

time to break through logjams (typically 48 – 72 hours maximum), and so

unless there is a degree of alignment prior to the meeting, it is extremely

unlikely that big differences can be papered over sufficiently to allow

for a Ministerial Declaration that all can live with. We are entering into

a particularly dangerous time now, as the US apparently withdraws from

playing the brokering role it has historically played. Many of the countries

the UK would be seeking to negotiate free trade agreements with as it

executes its independent trade policy (such as Australia, New Zealand,

Canada, and others) are Commonwealth countries. These countries

are like-minded in terms of a shared commitment to trade liberalisation

and competitive markets, and have worked together in other contexts to

deepen liberalisation, such as through the Trans Pacific Partnership (TPP).

They are discussing the kinds of concepts which should ultimately be

multilateralised and could play a significant role in pushing them proactively

in WTO councils.

 

Commonwealth Network Effects

 

The Commonwealth has significant network effects which could be

exploited. It is important that these are used to ensure pro-competitive

and liberalised trade, so that the overall levels of market distortions

around the world are lowered, and consequently wealth is created in the

global economy. The Commonwealth could also play a role in helping its

members engage in the structural reform that is so necessary to improve

their own economies. Such structural reform would also make members

better trading partners, as they would then be able to negotiate both tariff

reductions and regulatory improvements. Another potential use of the

Commonwealth network is to bring together businesses that can integrate

into global supply chains which feature Commonwealth countries. There

are a number of Commonwealth groups, including the Commonwealth

Enterprise and Investment Council (CWEIC) that can play a role in

bringing Commonwealth businesses together. Finally, the Commonwealth

can be used as a vehicle for members to identify trade barriers faced by

their members which are imposed by other members. This could be a

Commonwealth Trade Barrier Mechanism (CTBM), and could be used

to identify trade and regulatory barriers in all Commonwealth countries.

 

  1. Multilateral

 

There are two aspects of our multilateral strategy: first, how to use

our WTO transition to reinforce work in the other pillars; and second,

how we can use our fully-fledged WTO membership to promote trade

liberalisation and wealth creation, for our own economy and the world.

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At the WTO

 

  •    Use TRQ negotiations as a springboard for FTA

negotiations with major TRQ partners

 

The government has conceded that its TRQ proposals should be

jointly presented with the EU. It has therefore lost the opportunity

to make direct, bilateral presentations of its TRQ proposals to TRQ

partners, preventing it from making the argument that it is able to offer

greater liberalisation in (the near) future.

 

If the UK cannot do this, TRQ partners will seek to extract as many

concessions from both UK and EU as possible during the TRQ process.

New Zealand, for instance, has refused to accept the UK’s schedules as

placed before the WTO.130 The UK should immediately move to a bilateral

discussion with TRQ partners, where it is clear it will be able to gradually

liberalise tariffs in agriculture to zero over time (depending to an extent on

the benefits we can secure for our industries in this process), even if the

EU claims this is a violation of the duty of sincere cooperation.

 

Customs union or similar language remaining on the table also prevents

the UK conducting the process above; TRQ partners will be unwilling to

negotiate given a risk that the UK will remain in the customs union.

 

  •    In the event of no trade deal with the EU, the UK could

choose not to have a TRQ for TRQ partners that were also

CPTPP members, and could discuss gradual liberalisation

schedules now.

 

  •    Use the WTO transition process to send important

signals to our partners: e.g. the example of Aggregate

Measure of Support (AMS).

 

The UK can use its Aggregate Measure of Support (AMS)132 offer to signal

free trade intent; we should seek no or de minimis AMS as an indication

that we will not pursue production subsidies in agriculture beyond what it

has now, and will limit direct payments to allowed green box payments.

 

130 Global Meat News, “New Zealand opposes UK’s WTO quota plan”, July 27th, 2018.

Available at: https://www.globalmeatnews.com/Article/2018/07/27/New-Zealand-opposes-

EU-and-UK-s-quota-split-proposal

131 The EU is one of the few WTO members that has a country specific TRQ; the UK could

have a global TRQ or simply move to gradual liberalisation.

132 Aggregate Measure of Support (AMS) is the amount of Amber Box (i.e. allowed)

production subsidies that countries can adopt. The EU has a very high level of AMS set at

€70bn (WTO, G/AG/N/EU/26 (2 November 2015) Notification of domestic support by the

European Union for the 2012/2013 marketing year.) but it only uses €5bn as an insurance

policy just in case some of its direct payments are included in the amber box and not the

green box as they presently are.

 

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The UK currently has two small production subsidy programmes, for beef

and lamb in Scotland amounting to £39m, a very low amount, especially

compared to the EU AMS level.

 

For too long, farmers have been subject to financial compliance burdens,

instead of prioritising farming, and have been prevented from using

technology to improve productivity, due to the EU’s application of the

precautionary principle. By integrating global supply chains, and linking

British farmers with supply chains they have been outside for forty years,

British farming can have a bright future without the need for subsidies,

which ultimately destroy wealth for all. The current government position

of a share of the very large European AMS will cause trading partners

to question the UK’s intentions, and whether a future government might

engage in larger production subsidies to the detriment of producers around

the world.133

 

In bilateral negotiations with TRQ partners, and parties with whom

the UK has have negotiations through the EU, it is critical the UK

negotiates with partners by itself, to discuss the flexibility it has

regarding the potential for further trade liberalisation in an FTA.

 

In the case of no deal, the UK should consider a global, as opposed

to a country specific, TRQ134, or even dispense with a TRQ altogether

and initiate gradual tariff liberalisation.

 

  •    The UK’s relationships at the WTO in general

 

The UK can play an active, leading role, supporting the rules-based

international order in its own interest, and bring a strongly pro-trade,

pro-development message to the table. This also means contributing

significantly to badly needed reforms of a system in crisis. But to

influence WTO discussions, the UK needs to demonstrate that it is an

independent player.

 

 

 

 

133 Domestic Policy Settings are the domestic regulatory approach the UK will maintain in

agriculture and other related areas. Settings may tend towards being more open if the UK

does not maintain subsidies and regulatory barriers, or more closed if the UK pursues more

subsidy and regulatory barriers.

134 Unlike a country-specific TRQ, a global TRQ operates on a first-come-first-served basis,

where the UK would have a global quota for a particular product that countries would seek

to fill.

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There has recently been another challenge to the global trading system,

namely the US approach – for example to the dispute settlement mechanism

and the appellate body.  While the dispute settlement mechanism is not

perfect, it has often been referred to as the “crown jewels” of the WTO

system itself.

 

It is very important that the US, as a major bulwark of the global trading

system, acts as a constructive reformer. Given the US approach, this is

clearly calling for other leadership from a nation that is committed to free

trade principles. Here the UK can play a vital role, using its negotiations with

the US to help ensure that the US attempts to deal with the problems it faces

in international trade by helping strengthen, not weaken, the system. One

example is the recently agreed joint group (US, EU, Japan) set up to

deal with market distortions in third countries.135 The UK should join

this. If the US sees progress here, it is less likely to subvert the system,

because it will see the WTO framework as one capable of dealing with

major global challenges such as distortions in China, for example.

 

Looking ahead, in terms of the United Kingdom’s future role in the WTO,

there are many WTO groups the UK should join as soon as possible. This

would signal intent to Friends of the WTO System136 that the UK has a

liberalising vision of itself, and is committed to open domestic settings.

 

(i) The UK could join the Cairns Group of agricultural

exporters. The founder nations have sought the reduction

of agricultural trade barriers, and while the UK is not

currently a major agricultural exporter, it is locked into EU

supply chains. Embracing new technologies like synthetic

biology stand to make the UK a net exporter of agricultural

products.

 

(ii) The Manchester Group. Just as Australia launched

the Cairns Group of agricultural exporters, as the

world’s second-largest services exporter, the UK

should launch the Manchester Group of Services

Exporters. As the Cairns Group was named for the city of

its founding, the Manchester Group would pay tribute both

to the North’s transition from a manufacturing- to service-

based economy, and of the central role of that city in the

Victorian free trade movement.

 

 

 

 

135 It is ironic that DG Trade in the EU supported the creation of this group, but that

member states were concerned about it as it could apply equally to the increasing number

of market distortions in the EU.

136 Friends of the WTO System is a term of art and means the coalition of around 44

countries who seek progress and greater liberalisation at the WTO.

 

106

 

 

 

(iii) The UK could join the e-commerce plurilateral

initiative, which is already fragmenting between the US,

which wants a more extensive approach including dealing

with local content regulation and other localisation rules,

and the EU, with a more limited attitude, partly because

of its commitment to spreading its regulatory approach

on data protection (e.g. the General Data Protection

Regulation (GDPR)). It is likely the US will lead a smaller

group, which the UK could join, provided it is more open on

data flows than the EU would be.

 

(iv) The UK can take a leadership role in the Trade in

Services Agreement (TiSA), in which the EU has been

unable to include new services because of its approach

to data flow. To play a meaningful role, the UK will need

to separate itself from the EU data flow approach, while

seeking to ensure adequacy with the EU’s data regime.

The group has been languishing partly as a result of

disagreements between the US and the EU, an is in need

of revival. There would be no better agent of revival than

the world’s second largest exporter of services.

 

(v) The UK could also table services liberalisation

offers to revive the GATS built-in agenda on services,

a much-neglected area. When the GATS was launched

in 1996, it was anticipated that countries would submit

a series of services offers, as the GATS is a positive list

agreement where only services that are affirmatively put

on the table for liberalisation are included. But the GATS

has lacked a services’ champion, an economy that

will be an effective advocate for bilateral and plurilateral

arrangements for liberalisation. The UK can take a leading

role in the Services Working Group to expand services

coverage, and as a services and digital trade champion

can take a leading role in both working groups. The UK can

also support multilateral recognition initiatives in certain

professions rather than a series of bilateral ones through

FTAs (currently there is only a multilateral recognition

discipline for accounting).

 

(vi) The UK can also help with WTO dispute settlement

reform, but as with digital and services, the UK needs

107

 

 

 

to take these steps now, demonstrating to WTO Friends

of the System and others that the UK will be a force for

liberalisation.

 

(vii) The UK could revive the stalled work in the WTO

Rules of Origin committee, recognising that increasingly

restrictive rules of origin have become tools of trade

policy, and that the original GATT provisions, which left

it to members to decide their rules of origin, were not

developed at a time of so many preferential arrangements,

and are unfit for purpose. The UK should, over the long-

term, ensure liberal rules of origin apply; this would unlock

considerable supply chain efficiency across the world.

This is another example of a WTO group covering an

increasingly important area that has stalled.

 

(viii) Geneva is a much better context for the UK’s global

aspirations than Brussels. The government should seek

to notify (even if not officially) its intent to negotiate

an FTA with the EU in the WTO and encourage WTO

partners to pressure the EU to behave in a constructive

fashion, and negotiate based on commercial logic instead

of political considerations. These countries have a stake in

ensuring that this is indeed the EU approach. Anything that

increases the cost of global supply chains (imposing tariffs

and unnecessary friction between the UK and EU) will be

bad for the managers of big global supply chains that flow

through them, like the US, Japan, and others.

 

At the OECD

 

The UK should step up activities at the Organisation for Economic Co-

operation and Development (OECD), where it has its own seat. The UK

should increase its work in the OECD Trade Committee and re-launch

and lead the OECD Joint Group on Trade and Competition, which

would cover much of the interface of trade, competition and regulation.

 

The UK and standard setting bodies

 

The UK should play a leadership role in all standard-setting bodies,

using the historic credibility of the British Standards Institute

 

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(an example of soft power) to move these bodies in a more pro-

competitive direction. Instead of the top-down regulation favoured by the

EU through its standards setting bodies CEN, CENELEC and ETSI, the UK

should promote a more voluntary standard setting mechanism, subject to

a requirement to ensure standards do not exclude new entrants. This can

be supplemented by the competition advocacy of the CMA and other

competition agencies through the International Competition Network

(ICN).

 

The UK should also spearhead an agreement between the main

financial centres to include Singapore, New York, Tokyo and others,

to promote a shared approach to global financial services standards,

but which also allows UK sovereignty, while addressing barriers to services

trade and agreeing a common pro-competitive position in international

bodies.

 

Planning for the UK and EU not agreeing a Free Trade Agreement

(FTA)

 

A ‘no deal’ scenario, as defined by the government,137 is one where the

UK leaves the EU and becomes a third country at 11pm GMT on 29th

March 2019 without a Withdrawal Agreement and framework for a future

relationship in place between the UK and the EU. This result would

clearly be far from ideal and it is one that very few people would favour.

Nonetheless, it is right to prepare for it seriously, for three reasons:

 

  1. The UK’s bargaining position in the negotiations with

the EU would be fatally undermined if there is no credible

alternative to doing a deal;

 

  1. It is always possible that the two sides fail to reach an

agreement despite their best efforts, for example because

time simply runs out, or because domestic political

conditions change;

 

  1. Many of the steps that need to be taken to prepare for ‘no

deal’ will be necessary anyway in other Brexit scenarios,

depending on the degree of disengagement from the EU’s

single market and customs union.

 

In preparing for and assessing the impact of ‘no deal’, however, it is

important to recognise that this term could cover a range of outcomes.

The media headlines have tended to focus on a chaotic no-deal Brexit,

 

137 https://www.gov.uk/government/publications/uk-governments-preparations-for-a-no-

deal-scenario/uk-governments-preparations-for-a-no-deal-scenario

109

 

 

 

where there are no agreements at all, on anything, and where both sides

allow relations to break down more or less completely, despite their own

economic interests and legal obligations. This is a very literal interpretation

of ‘no deal’, and potentially just a straw man.

 

Nonetheless, the fact that actions can still be taken to mitigate any additional

costs of ‘no deal’ does not mean that the risk can be dismissed lightly. For

example, if the UK simply becomes a third country, planes would indeed

be unable to fly.138 Air traffic rights are not covered by WTO rules and only

exist between the UK and EU (and between the UK and much of the rest of

the world) as a consequence of the UK’s current membership of the EU’s

Single Aviation Market. There would also be problems with the certification

of UK aircraft, components and personnel.

 

There are some straightforward solutions to these problems, typically

revolving around some combination of retaining UK membership of the

European Common Aviation Area (ECAA) and/or negotiating new air

services agreements. The key question for the EU is whether the necessity

of keeping planes flying outweighs any threats to the integrity of the single

market or the risks of giving the UK special treatment. The answer to this

must surely be ‘yes’.

 

But this still requires flexibility on both sides. On the UK’s part, the

government may need to recognise some continued role for the CJEU

in supervising the aviation sector. And to avoid a temporary hiatus after

Brexit, the EU would need to be willing to negotiate a new agreement on

aviation with the UK before it becomes a third country, and separately from

the Article 50 process.

 

The upshot is that there are a number of crucial elements in ‘no deal’

planning.

 

First, it will be important to maintain goodwill as far as possible. ‘No deal’

does not necessarily have to be acrimonious, but this may also require

concessions on both sides. On the UK’s part, this is likely to mean

unilaterally agreeing the rights of EU citizens already in the UK and

reaffirming commitments made on the free movement of people

across the Irish border. These are things that the UK would, or should,

be doing anyway.

 

More controversially, the UK might still have to pay some, if not all, of the

estimated £39 billion financial settlement. This is discussed further below,

 

 

138 https://iea.org.uk/publications/planes-wont-fly/

 

110

 

 

 

but even the full £39 billion could be a small price to pay to help avoid a

chaotic Brexit.

 

Second, it will be important to ensure that the UK strengthens its own

institutions. Some opponents of Brexit appear to believe that we would be

lost without EU institutions to set rules and regulate our lives. In practice,

most EU rules are implemented by national regulators. The UK therefore

already has a Civil Aviation Authority, Food Standards Agency, medicines

regulator, and so on. But they may end up with more work to do, and need

to be properly resourced. The same applies, of course, to UK border and

customs agencies.

 

Third, and perhaps most importantly, the UK should be ready to act

unilaterally and in ways that best serve the long-term interests of the

economy as a whole. Again, some opponents of Brexit assume that the

UK can’t fix problems on its own, or even that the government would act in

ways that make problems worse.

 

One example here is the common assumption that the government would

choose to maintain the level playing field required under the WTO’s MFN

rules by imposing tariffs on imports from the EU, rather than by lowering

them on imports from the rest of the world. Another is the fear that the

government would impose restrictions on migration that compound skills

shortages in key sectors.

 

These principles can be applie to many of the challenges that a no-

deal Brexit would present, for which responses are being prepared. For

example:

 

  1. There are many areas where the UK could simply

recognise EU standards, unilaterally, as just as good as its

own. This has already been proposed139 and accepted140

for many medicines and medical devices. Crucially, this

pragmatic approach would still allow the UK to recognise

different standards applied elsewhere in the world, and

would not require all UK producers to follow a Common

UK/EU Rule Book;

 

  1. There are other areas where the problems are grossly

overstated and can be dealt with easily, ranging from

maintaining the Single Electricity Market (SEM)141 on the

island of Ireland to continuing the Tripartite Agreement

governing the movement of racehorses142;

 

 

139 https://iea.org.uk/publications/medical-provisions-post-brexit/

140 https://www.gov.uk/government/publications/how-medicines-medical-devices-and-

clinical-trials-would-be-regulated-if-theres-no-brexit-deal/how-medicines-medical-devices-

and-clinical-trials-would-be-regulated-if-theres-no-brexit-deal

111

 

 

 

  1. There will be areas where the UK government should

step aside and allow market forces to do their job, rather

than replicate market-distorting intervention previously

undertaken by the EU. This includes regulations to

set mobile roaming charges143, where the interests of

consumers are already well served by strong competition

and new technologies.

 

Encouragingly, these principles already seem to run through most of the

government’s own papers144 on preparations for a ‘no deal’ scenario. But

there is still a need for a shift in mindset so that all parties recognise that a

‘no deal’ is a credible alternative.

 

Finally, customs preparedness is also a central part of no deal planning.

Here, Government should implement self-assessment for customs

declarations, reducing the burden of more returns on the HMRC system

and resources; train and support businesses to achieve authorisations for

the full extent of available facilitations; use the private sector to carry out

training and audits, alleviating resourcing pressures on HMRC; relax or

repeal requirements for comprehensive customs guarantees, alleviating

the burden on businesses; and extend postponed accounting for all

imports, negating the cash flow impact from ending acquisition VAT and

boosting the competitiveness of supply chains that import from the rest of

the world.

 

 

 

 

141 https://iea.org.uk/publications/generators-on-barges-in-the-irish-sea/

142 https://iea.org.uk/publications/grand-national-would-be-hit-by-a-no-deal-brexit/

143 https://iea.org.uk/publications/mobile-phone-bills-will-soar/

144 https://www.gov.uk/government/collections/how-to-prepare-if-the-uk-leaves-the-eu-with-

no-deal#overview

 

112

113

 

 

 

Chapter Five

Strategic Approach

 

 

 

This chapter makes recommendations about what immediate steps can be

taken to ensure that the goals set out in this alternative approach can be

achieved.

 

From the outset, it should be the UK Government’s objective to use the

different pillars outlined here to apply pressure on the EU. It is not possible,

or indeed advisable, to lay out all the required strategic thinking of a party

to a trade negotiation in a public setting, so these areas must by definition

be limited. We therefore set out central non-exhaustive areas.

 

First, it is vital that the negotiating dynamics with the EU are carefully

handled. These relate to the following areas:

 

  •    Pressure to isolate the EU by agreements with other

countries, demonstrating that on issues like good regulatory

practice and regulatory recognition, the EU is an outlier in

recognising regulations only when they are identical, or in

limited circumstances.

 

  •    Pressure internally on EU member states where there

would likely be significant losses in the event of no EU

trade deal. These include Bavaria (cars and dairy), Ireland

(beef and dairy), Catalonia (cars and dairy), and Northern

Italy (textiles and dairy) (see Figure 2 below).

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Figure 2: Estimated impacts of applying the Common External Tariff

on selected industries145 146

 

Country      Sector      Change          Changes     Net annu-     Net im-        Estimated         Regions poten-

in annual       in annual   al impact     pact on        impact on         tially impacted

exports         exports     on over-      annual         jobs

to UK           to UK in    all sector    producer

in 2019         2019 (%)    exports       revenues

(Euro m)                    (%)           (Euro m)

 

 

EU27         Automo-     (4,180) –       (10%) –     (1%) – (5%)   (4,013) –      (15,552) –        –

biles       (14,675)        (36%)                     (12,820)       (49,688)

 

EU27         Dairy       (1,584) –       (56%) –     (4%) – (8%)   (1,171) –      (6,875) –         –

(2,812)         (100%)                    (1,726)        (10,136)

 

Germany      Automo-     (2,245) –       (10%) –     (2%) – (6%)   (2,218) –      (8,597) –         Baden-Württemberg,

biles       (7,880)         (36%)                     (7,586)        (29,403)          Bavaria, North

Rhine-Westphalia

 

 

 

 

Germany      Dairy       (247) –         (66%) –     (3%) – (5%)   (214) –        (1,259) –         Bavaria, Lower

(378)           (100%)                    (299)          (1,756)           Saxony, North

Rhine-Westphalia

 

France       Dairy       (335) –         (57%) –     (6%) –        (294) –        (1,147) –         Bretagne, Pays de

(591)           (100%)      (10%)         (466)          (1,814)           la Loire, Basse-Nor-

mandie

 

France       Beverages   (114) – (413)   (8%) –      (1%) – (3%)   (138) –        (537) – (1,566)   ïle de France,

(24%)                     (402)                            Champagne-Ar-

denne, Rhône-Alpes,

Provence-Alpes-Côte

d’Azur

 

Ireland      Beef        (656) –         (68%) –     (34%) –       (579) –        (3,397) –         West (Mayo, Ro-

(971)           (100%)      (50%)         (802)          (4,711)           scommon, Galway

and Galway City)

and Border (Cavan,

Donegal, Leitrim,

Louth, Monaghan,

Sligo) regions

 

Ireland      Dairy       (409) –         (56%) –     (23%) –       (209) –        (1,224) –         West (Mayo, Ro-

(732)           (100%)      (42%)         (255)          (1,495)           scommon, Galway

and Galway City)

and Border (Cavan,

Donegal, Leitrim,

Louth, Monaghan,

Sligo) regions

 

Italy        Clothing    (145) –         (12%) –     (1%) – (3%)   (136) –        (1,222) –         Lombardia, Veneto,

(529)           (43%)                     (371)          (3,336)           Toscana

 

Italy        Dairy       (106) –         (52%) –     (4%) – (8%)   (93) – (176)   (545) – (1,034)   Lombardia, Emilia,

(204)           (100%)                                                     Romagna, Veneto,

Piemonte, Cam-

pagnia

 

Spain        Automo-     (390) –         (10%) –     (1%) – (5%)   (368) –        (1,426) –         Cataluña, Castilla y

biles       (1,371)         (36%)                     (1,053)        (4,080)           León, Comunidad

Valenciana

 

Spain        Clothing    (68) – (251)    (12%) –     (1%) – (2%)   (63) – (170)   (565) – (1,531)   Cataluña, Galicia

(43%)

 

 

 

 

145 Singham, S., “If EU intransigence results in tariffs, it could cost continental exporters

dear in revenues and jobs”, Brexit Central, October 16th, 2017.

Available at: https://brexitcentral.com/eu-intransigence-tariffs-cost-continental-exporters-

dear-revenues-jobs/

146 The above does not include the increased cost of capital if no trade deal leads to a

fragmentation of the single capital pool in the City of London.

115

 

 

 

Any such attempts can only be initiated once the customs union or any

variant of it (such as the FCA, NCP or other similar arrangements) has been

taken off the table. Indeed if it proves necessary to unilaterally apply a zero

tariff rate in some sectors, even with a view to re-applying the bound rate

in a fixed period after stabilisation, this could cause many EU producers to

have different agendas, allowing the divergence the UK would benefit from

to emerge.147

 

Dealing with EU Non-Cooperation

 

It may well be that the EU does not cooperate with UK Government

proposals. In this case, the Government will need to move to a more

proactive footing in response to EU obstructionism, not accepting the

EU’s negotiating mandate and demands.

 

The operating assumption seems to have been that supplicatory behaviour

will lead to a desirable outcome. This fails to understand how the EU

works. Indeed, the EU has obstructed the UK in a number of ways, such as

reneging on an undertaking to assist the UK’s application to accede to the

Government Procurement Agreement. The EU has published a number of

position papers suggesting a lack of cooperation with the UK that violates

the duty of sincere cooperation (which flows in both directions), and the

principle of good neighbourliness in Article 8, of the Treaty on European

Union.148 149 The UK should be prepared to inventory these violations and

if necessary litigate these issues as part of a signaling mechanism. Many

other countries have similar difficulties dealing with the EU. This approach

will confirm their views and strengthen the UK’s hand.

 

  •     In this vein, if the EU refuses to recognise UK

regulations on day one of Brexit, the UK should be

prepared to take action in the WTO under the GATT and

the SPS and TBT Agreements . It is true that such claims

can take years to resolve, but the UK should use threats of

trade litigation to help support its negotiating objectives, as

is normal practice around the world.

 

The purpose of these actions is not because we expect them to cause an

immediate change in EU behaviour, but because this is one of the ways we

can highlight that the EU is in fact an outlier in its behaviour.

 

The UK’s right to negotiate and the Duty of Sincere Cooperation. The

UK has the right to negotiate with third parties now, and does not have to

 

147 When the US government imposed the steel and aluminum tariff under section 232 (US

Customs and Border Protection, 2018, Section 232 Tariffs on Aluminum and Steel), France

and Germany took significantly opposing views on what the approach should be. If one

tariff line can cause such division, this carefully calibrated strategy should yield significant

divergence which the UK could then exploit.

148 Articles 8 and 50 (13 December 2007)

149 European Union (Notification of Withdrawal) Act 2017, Chapter 9.

 

116

 

 

 

wait until it exits the EU. This makes sense given that the UK is currently

negotiating its WTO transition: it cannot be limited in that regard until the

moment it leaves the EU, as WTO partners need to know what their trading

terms will be on the UK’s exit. However the UK should negotiate across all

pillars simultaneously. The duty of sincere cooperation flows both ways,

and the UK is entitled to cooperation from the EU, as the UK as a current

member state. The UK should be robust in its approach to the duty of

sincere cooperation and not accept the EU’s interpretation. The UK should

also include in its outreach to other countries a clear explanation of its

own interpretation of the duty of sincere cooperation, and why it believes

that it has right to negotiate agreements ready to come into effect at the

end of the Transition Period or as soon as possible in the event that no

Withdrawal Agreement is reached.

 

  •    Transitional Period

 

The UK cannot accept a Transition Period that includes the EU’s

interpretation of the Duty of Sincere Cooperation and the Common

Commercial Policy continuing to apply, nor can it accept the principle

of continuity that appears to be the current government view, because

this will impede the exercise of this plan and push the UK further onto the

EU’s chosen field.

 

While the Transition Period is necessary, and its terms as set out in the

Withdrawal Agreement should, for pragmatic reasons, not be re-opened

at this stage, the provision specifically acknowledging the UK’s right to

negotiate and sign agreements with third countries and bodies151 is critical.

The present interpretation of the duty of sincere cooperation, if continued,

will limit the usefulness of these important and hard-won provisions.

Similarly the Common Commercial Policy also can be used by other

member states to impede the UK’s ability to negotiate properly.

 

EU complaints about a particular UK negotiation, both to the UK and the

other party, are liable to render the UK unable to be a credible negotiating

partner. The presence of the Common Commercial Policy means there

is no incentive for the UK to negotiate properly with the countries it has

agreements with through the EU, except in the most general of ways. By

allowing the EU to negotiate these arrangements on behalf of the UK, the UK

will lose the ability to convey to these countries that it is capable of greater

liberalisation in the future (which needs to mean very soon). The UK has

allowed itself to be trapped on the EU’s playing field. If the UK does continue

with the Transition Period, then it must take a far more robust approach to

 

 

151 Her Majesties Government, “Draft Withdrawal Agreement – 19th March 2018”, Article

124:4.

Available at: https://www.gov.uk/government/publications/draft-withdrawal-agreement-19-m

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the duty of sincere cooperation, and seek assurance to safeguard the right

of the UK to progress its own negotiations during the Transition Period. We

suggest amending article 124(4) of the Withdrawal Agreement by adding

“neither the principle of the duty of sincere cooperation, nor the common

commercial policy will be relied on by the Union or any Member State to

disadvantage in any way the UK or third party’s negotiations. Violation of

this provision shall be, itself a violation of the duty of sincere cooperation

by the Union.”

 

Simultaneous Non-EU Approach

 

In these contexts, the UK Government should proceed as follows

 

UK-US FTA

 

  1. Make the case to the US why it is strongly in the US

interest to have an FTA with the UK, on the basis that the

US needs allies in its advocacy of good regulatory practice

and a reduction of anti-competitive barriers and distortions,

and that the UK would be a major ally in this process.

 

  1. Galvanise the support of US firms and global supply

chains to understand the value of a major G-7 nation

diverging from the EU regulatory system.

 

  1. Accelerate US negotiations by moving to chapter-by-

chapter negotiations of an FTA, closing chapters and

agreeing a time-line.

 

 

CPTPP

 

  1. Formally apply to join CPTPP as soon as possible

 

  1. Work with CPTPP members to keep pushing for UK

accession to CPTPP.

 

WTO

 

  1. Negotiate TRQs bilaterally, having proposed to the EU

an FTA+ deal.

 

118

 

 

 

  1. Informally notify WTO Membership of FTA+ intent with

the EU, unilaterally if necessary.

 

  1. Offer a de minimis AMS amount as a signal of UK

commitment to liberalisation.

 

  1. Indicate which groups the UK seeks to join on transition,

thus showing coalitions like the Friends of the System the

immediate value of UK independence.

 

  1. Be prepared to offer a package deal on TRQs/AMS and

further liberalisation for key TRQ partners and potential

trade partners.

 

  1. Prepare a default option of unilateral liberalisation in key

sectors (at least at the applied rate for a temporary period)

and announce these to WTO members as a fixed two or

three year applied rate of zero, on the basis that the UK will

apply the bound rate to all members with whom it does not

have a deal in March 2022.

 

The Approach to the UK-EU FTA and Withdrawal Agreement

 

  •    UK-EU FTA

 

  1. The government should present a UK offer along the

lines suggested in this document, with negotiating text

on the table (for example the draft chapter in the Annex),

recognising that closing text improves the negotiating

environment and makes a final deal more likely (this has

occurred even in the NAFTA re-negotiation process, where

chapters, including relatively controversial ones such

as Regulatory Coherence, have been closed already).

Even if the EU maintains that the time is not ripe for a

trade negotiation, preliminary soundings of Task Force 50

suggest that the EU would welcome text, from which to

agree the future framework for the trade relationship.

 

  1. The core elements of the offer will be comprised in an

FTA to include the following:

 

  1. Zero tariffs in goods and agriculture including

119

 

 

 

liberal rules of origin allowing both parties to

cumulate across other FTAs;

 

  1. Customs and trade facilitation chapter and

Irish border protocol;

 

  1. Government procurement

 

  1. Regulatory coherence including specific

sectoral annexes (e.g. pharmaceutical, etc.)

 

  1. Competition

 

  1. State aids

 

  1. Services with maximum liberalisation based

on a negative list approach (all sectors to be

included); no restrictions in all four modes of

service supply in either market access or national

treatment columns.

 

  1. Mutual recognition of occupation licensing;
  2. Specific sectoral annexes in key areas including

telecoms, data and financial services;

 

  1. Investment;

 

  1. Dispute settlement.

 

 

If the advanced FTA concept outlined above cannot be agreed as the

framework for the purposes of the Withdrawal Agreement, or if a Withdrawal

Agreement cannot be agreed at all, the EU will need to justify to its citizens

and trading partners why it has been able to agree advanced measures in

its existing FTAs like CETA, and its existing MRAs, such as the agreement

with New Zealand on sanitary measures in meat and animal products and

the suite of MRAs in place with the US, but is not able to agree similar

arrangements with its closest neighbour and key trading partner.

 

The UK would be seeking to negotiate the ceiling, but be prepared to fall

back onto the reserve parachute.

 

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In negotiations, the EU has successfully used time against the UK in the

hope that it would be forced to concede to the EU’s terms. Given that this

was a specific strategy of the EU, it would be an error now to say that the

negotiations out of time and must accept the EU’s terms. Many negotiations

are resolved in the final period of negotiation; however, the most important

thing the UK can do is reset the process, retake control of the agenda, and

move forward rapidly across all the pillars simultaneously as a matter

of urgency.

 

Options

As the negotiations pursuant to Article 50 stand, most of the legal drafting

of the Withdrawal Agreement has been provisionally agreed. The most

fundamental outstanding elements are the framework for the future

relationship and the so-called backstop arrangement for the Irish border

(“Irish Backstop”). It was the desire to avoid the Irish Backstop being

invoked that informed the design of the White Paper – a way of preserving

free circulation of goods without either leaving Northern Ireland in the EU’s

customs union and single market, or having the whole of the UK stay in the

single market and a customs union.

 

The UK government has options available to it that would deliver varying

levels of autonomy, negotiability and associated risk. At one end of the

spectrum, terminating the negotiations in order to focus on ‘no deal’

preparations, including protecting the positions of EEA citizens by unilateral

measures, could deliver the most independence in the shortest time frame.

This option would not mean no exit arrangements at all, as the UK could

propose self-contained agreements with the EU in areas like aviation and

nuclear safety, enabling the Council to issue the necessary mandates to

the Commission to negotiate such matters, and refer the question of the

financial settlement to independent arbitration.

 

At the opposite end of the spectrum, the UK could request an extension of

the negotiating period to enable the outstanding provisions of the Withdrawal

Agreement to be completed, and to advance no deal preparations. Against

this option are the likely domestic political consequences, the possibility

that the extension would be declined and the protracted uncertainty for

businesses and individuals.

 

The option being pursued by the Government is being resisted by the EU,

due to the legal and practical challenges of the FCA and the disaggregationof

goods from other components of the single market. It may also be voted

down by the UK Parliament.

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An option is therefore required to maximise the progress already made on

the terms of the Withdrawal Agreement but unblock the impasse over the

Irish border and future framework. The government should seek to retain

all of the agreed elements (the financial settlement, citizens’ rights, the

transition period and withdrawal terms) and propose a new backstop and

framework for a future relationship. The new backstop would comprise a

basic free trade agreement between the UK and the EU for goods, and

a commitment by the parties to undertake all necessary investment and

cooperation mechanisms to enable formalities on trade between Northern

Ireland and Ireland to be overseen away from the border. This would

enable the completion of the Withdrawal Agreement and incentivise the

parties to agree a better FTA during the transition period. It would also

enable the UK to negotiate more effectively with rest-of-world trading

partners during the transition, with a baseline element of the relationship

with the EU known at the outset.

 

Position on the Joint Report

 

If the UK determines that the EU’s position makes a backstop

impossible without jeopardising the integrity of the UK single market

and the Union itself, then it should state that clearly as a non-

negotiable item that it does not agree with the EU’s interpretation of

the Joint Report.152

 

It can then make an offer to the EU on the basis that it no longer agrees

with the EU’s changing interpretation (for example, even though there

are currently different VAT regimes on the island of Ireland, the EU is

suggesting that there should be no difference; as well as the notion that

alignment of regulation consistent with the all-island economy in the Joint

Report has been interpreted by the EU and UK to now mean regulatory

identicality over all of the economy).

 

This would not need to have the effect of re-opening other questions such

as payments of money, citizens and the Transition Period, which were

settled in principle in the Joint Report and have legal drafting agreed in

the draft Withdrawal Agreement. However, given that the Irish Backstop

issue is holding up progress on the Withdrawal Agreement, we think a

new approach is more likely to lead to a conclusion of this part of the

negotiation.

However, the UK must recognise that the difficulty with the EU

approach is much deeper, in the negotiating mandate of the EU itself

which was accepted by the UK government. It is not logical to seek

 

152 Commission to the European Union, “Joint report from the negotiators of the European

Union and the United Kingdom Government on progress during phase 1 of negotiations

under Article 50 TEU on the United Kingdom’s orderly withdrawal from the European

Union.”, Presented jointly by the negotiators of the European Union and the United Kingdom

Government, December 8th, 2017.

Available at: https://ec.europa.eu/commission/sites/beta-political/files/joint_report.

 

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to negotiate a future framework for the trade relationship without at least

commencing negotiations on what that framework could be, for example

on the basis of an advanced FTA. From these initial discussions, a

framework consistent with the Article 50 negotiating mandate can be

agreed, and the transition period can be preserved, provided the UK

acts now.

 

The UK could present the EU with its own vision of what an FTA looks like,

with an Irish border protocol in the FTA (as part of the customs and trade

facilitation chapter), and a version of what arrangements the UK would

seek to have in place in the event of no trade deal.

 

Strategic Actions Across Other Pillars

 

The UK would action the other pillars described in this document

immediately, so that negotiations with the US, application to join the

CPTPP, and the final stages of WTO transition run concurrently with the

EU negotiation.

 

The government would seek to ensure that TRQ partners were reasonable

in the WTO transition and accepted the UK’s bilateral offer of historic

market shares plus,153 in exchange for initiating negotiations to gradually

liberalise immediately, and to play a role in arguing for greater liberalisation

in the WTO.

 

If no Withdrawal Agreement can be reached with the EU or if the

Withdrawal Agreement is rejected by a vote in the UK Parliament or

via the EU’s own processes

 

If the UK and EU are unable to come to terms, the UK will leave without

a Withdrawal Agreement and Transitional Period. This would result in the

UK falling back onto the Common External Tariff as an independent WTO

member. It would mean a considerably more limited financial arrangement.

Both the UK and EU need to plan for this eventuality.

 

  •    Financial settlement

 

The UK’s stated willingness to pay a large ‘divorce bill’ as part of the

Withdrawal Agreement from the EU still rankles with many – and

understandably so. It is not immediately obvious why the UK should continue

 

 

 

 

153 The current UK and EU offer in the TRQ negotiation is for a split based on historic

market shares. The UK could offer historic market shares plus a small amount to improve

its offer.

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to contribute to the EU budget long after Brexit, especially when the EU

appears reluctant to offer the UK better terms on the future relationship

than it would to any other country. This concern would, of course, be all the

stronger in a ‘no-deal’ scenario.

 

Nonetheless, the UK should be guided by the principle that it will honour

commitments made to the EU in the past. The Prime Minister pledged

in her Florence speech154 in September 2017 that ‘the UK will honour

commitments we have made during the period of our membership’.

 

It is therefore wrong for some to claim that the divorce bill is an additional

‘cost’ of Brexit. In reality it is simply money that the UK would have had to

pay anyway had it still been a member. But nor is it necessarily anything

to do with the future relationship, or meant to be a down payment for a

comprehensive free trade deal or streamlined customs arrangements.

Indeed, the UK shouldn’t be expected to pay extra for these benefits

anyway, since they would help both sides.

 

One could argue that the UK’s willingness to continue to contribute to the

EU’s annual budget until the end of 2020 should be seen as a quid pro quo

for the EU’s offer of a standstill transition period over this timeframe. But

that’s not strictly what it’s supposed to be either. In any event, these annual

payments account for less than half of the estimated £35-39 billion total

cost of the financial settlement, as detailed by the NAO155.

 

It is true that many (including a House of Lords committee156) have argued

that the UK would be on strong legal ground if we decided to walk away

with paying a penny. And even though the UK and the EU have signed up

to a methodology157 for the financial settlement, ‘nothing is agreed until

everything is agreed’.

 

But the threat of refusing to pay would not be costless. Whatever the legal

technicalities, refusing to settle up could be seen as bad faith – and not just

in the rest of Europe. Some third countries looking to do trade deals with

the UK might not be impressed if we appear to go back on promises to our

former partners in the EU.

 

154 https://www.gov.uk/government/speeches/pms-florence-speech-a-new-era-of-

cooperation-and-partnership-between-the-uk-and-the-eu

155 National Audit Office, “Exiting the EU: The financial settlement”, Her Majesty’s Treasury,

April 20th, 2018.Available at: https://www.nao.org.uk/report/exiting-the-v-settlement/

156 European Union Committee, “Brexit and the EU budget”, House of Lords, March 4th,

  1. Available at: https://publications.parliament.uk/pa/ld201617/ldselect/ldeucom/125/125.

pdf

157 Commission to the European Union, “Joint report …” Presented by the negotiators of

the European Union and the United Kingdom Government, December 8th, 2017.

Available at: https://ec.europa.eu/commission/sites/beta-political/files/joint_report.

 

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Finally, even £39bn would be less than 2% of one year’s UK GDP, spread

over many years, and just a few tenths of a percent of the GDP of the rest

of the EU. It would be difficult for the other countries of the EU to have to fill

the gap, but these sums are simply not large enough to be game-changers.

Overall, then, the divorce bill probably isn’t as powerful a bargaining

chip as many seem to think. But it remains part of the UK’s hand. If the

negotiations do stall, the money should surely come back into play. Indeed,

it still seems perfectly reasonable for the UK to attach conditions to the

financial settlement, even at this late stage.

 

For example, the UK could agree now to pay the annual net contributions

up until the end of 2020 (perhaps £16bn), regardless of the progress of

the talks. This would go a long way towards meeting the Prime Minister’s

Florence pledge, which was that the UK’s partners shouldn’t fear ‘they

will need to pay more or receive less over the remainder of the current

budget plan as a result of our decision to leave’. Other interested parties

elsewhere in the world would probably also regard it as a fair offer.

 

In summary, even in the absence of a comprehensive withdrawal

agreement, paying at least some of the financial settlement could be a

relatively small price to pay for maintaining goodwill. However, if the UK

and the EU can’t agree a satisfactory long-term deal (or, of course, if the

UK withdraws from the EU with no deal) we could retain some or all of the

remainder of the settlement that relates to payments beyond 2020.

 

  •    Irish Border in the event of no Withdrawal Agreement

 

In the event of no agreement, the UK (and the EU if it so chose) could

choose not to impose any checks on goods trade at the Irish border, using

legal and technical solutions to manage the trade away from the border. It

would also be possible to seek a WTO waiver (allowed under Article IX:3),

available when the precise application of WTO obligations would conflict

with some other overarching principle of international law, or if there is an

emergency situation in a WTO member. While waivers are narrowly drawn,

the potential for conflict in Northern Ireland and a return to the troubles would

appear to be fully justify any request for a WTO waiver. For example, the

waiver process has been used with respect to the Kimberley Certification

Scheme for Rough Diamonds, and for the TRIPs Access to Essential

Medicines agreement. Under the WTO’s waiver power, a contracting party

can request the General Council or the Ministerial Conference to waive

a WTO obligation by consensus (the GATT rule required three quarters

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of the membership to approve). The time period for a response from the

General Council is ninety days. Such a waiver could be granted until the

next WTO Ministerial Conference at which it could be renewed depending

on the circumstances. Additionally or in the alternative, a national security

exemption under Article XXI would be possible on the basis that it is

necessary to take this action in order to protect the UK’s national security

interests in time of war or other emergency in international relations (Article

XXI(b)(iii))or under Article XXI(c)’s provisions which allow parties to act

to maintain United Nations Charter obligations to maintain international

peace and security.

 

It is extremely unlikely that any WTO member will complain, given the

question of the security of Northern Ireland. It is open to the EU to do the

same, and if it does not, it would need to explain this to the Republic of

Ireland. The Waiver or National Security exemption could be for a limited

(say two-year period) as the systems referred to above are brought on-

line. In any event, the UK should activate the measures set out in this

document, and should have started to prepare for them much in advance

of the date of this plan.

 

  •    Economic Relationship

 

In a no trade deal scenario, the UK could apply zero tariffs in agri-food (to

control food price inflation)158, but would have to do so on an MFN basis

for the world. It could selectively apply other tariffs at the zero level also.

EU member states are more likely to diverge at this point from each other

if some tariffs are retained at the Common External Tariff level (the bound

rate) while others are reduced to zero for the world. For example, French

farmers and German car manufacturers would have very different interests

and might react differently to unilateral tariff reduction on an MFN basis,

especially in agriculture, if the UK were also to use a mechanism to protect

its farmers from subsidies or other anti-competitive practices, as described

in this document. It is at this point that member state harmony might be

disrupted.

 

If the UK chose to apply tariffs at the zero rate, while maintaining

its binding at the CET rate, it could reapply the bound rate within

two years of leaving the EU, creating an incentive for all parties to

negotiate trade deals with it.

 

 

 

 

158 The UK would bind its tariffs to the CET in the WTO, but apply lower tariffs for a time-

limited period.

 

126

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Chapter Six

Domestic Reforms for the UK

 

 

 

Domestic Aspects of Autonomy for the UK

 

There are a number of areas which, while outside the scope of trade and

regulatory policy, are serious concerns arising from the White Paper, and

will need to be addressed as the UK leaves the EU. It is not the intent of

this paper to discuss these issues in great detail, but they are flagged up to

the extent that they have a trade implication or spill-over effect.

The main questions here are as follows:

 

  •    Defence and Security

 

The UK should remain open to cooperating on an ad hoc basis with EU

allies, but not to the detriment of its Five Eyes relationships. This is an area

of particular concern. The EU is moving in the direction of a European army,

according to the President of the European Commission, and a common

defence policy, with severe implications for the Article 50 negotiations and

UK sovereignty. It is crucial that major UK security partnerships, such as

NATO, and the US-UK relationship, remain the focus, and nothing is done

with the EU to imperil this.

 

It will be especially important for the UK to avoid the White Paper’s

proposals of “coordination on foreign policy [and] defence”. The White

Paper makes a range of hazardous commitments to UK-EU defence

integration, including the implication that the EU itself will be able to use

“civilian and military assets and capabilities”, and pursue “commitments

to support a collaborative and inclusive approach to European capability

development and planning”. This also covers a UK offer to “host an

Operational Headquarters (OHQ) and consider future contributions to EU

Battlegroups as part of the enhanced future partnership”, with the ambition

that “the EU [make] best use of UK assets”. White Paper “collaboration”

would also include collaboration with Permanent Structured Cooperation

 

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(PESCO), but in which the UK should not be an official, or de facto, member.

It is also important to note that in the defence area, there is a spill-over into

UK trade relationships because defence cooperation in the trade area with

the US is so important. The UK’s defence and procurement commitments

with respect to the EU should not risk cooperation with the US in this area.

 

  •    Immigration

 

Free movement of workers and the associated rights of EU citizenship

cannot continue after the UK has left the EU. The UK will therefore need

a comprehensive and sensible immigration policy. This policy needs to

enable dynamic recruitment of skills and talent where the market requires.

 

Government functioning

 

Constitutional adjustments will be needed once the UK leaves the EU,

because with full regulatory autonomy the UK will need to operate on the

global stage in a different way from how it has operated since joining the

  1. If appropriate attention is not paid to this area, the UK will not have the

institutional machinery to be able to operate in an effective manner on the

global stage. Central changes should include the following:

 

(i) Greater devolution of powers to local government and

devolved administrations, where feasible.

 

(ii) Injection of more specific long-term subject matter

expertise into the Civil Service through the use of political

appointments at senior levels with the understanding that

the civil service should do less, and elected officials more.

 

(iii) Upgrading of parliamentary capacity to scrutinise

foreign trade and other policy decisions of the government.

The relevant parliamentary committees will become more

important over time, and it is important for them to be treated

with the seriousness they deserve. In other countries which

operate their own independent policies, these committee

chairs are very important political figures in their own

right, and remain in these positions for significant periods

of time which enables their offices to build up expertise.

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They are often selected for Cabinet positions as they have

developed relevant expertise and experience over long

periods of time, and so these positions become sought

after, and committee chairs (and ranking members) remain

in place for long periods of time.

 

130

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Annex

 

 

 

REGULATORY COHERENCE

 

  1. Definitions

For the purposes of this Chapter:

 

(a) “Competition Agency” means:

(i) in the case of the United Kingdom, the

Competition and Markets Authority; and

(ii) in the case of the European Union, the

European Commission Directorate-General for

Competition;

 

(b) “Covered Action” means any of the following actions to

the extent they are material:

(i) legally binding substantive rules including

subordinate regulations;

(ii) interpretation of rules that have a binding

effect on agencies or private parties;

(iii) adjudications that have a binding effect on

one or more parties;

(iv) procedural rules that bind agencies or the

public; and

(v) decisions to grant, revoke, extend, or modify

a License;

 

(c) “International Instruments” means any document

adopted by international bodies or fora in which both Parties’

Regulatory Agencies participate, including as observers,

and which provide requirements or related procedures,

recommendations or guidelines on the supply or use of

a service, such as, for example authorisation, licensing,

qualification or on characteristics or related production

 

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methods, presentation or use of a product;

 

(d) “Joint Committee” means the committee formed by the

Parties pursuant to Article 1.

 

(e) “License” means any license, permit, grant, approval,

registration, charter, statutory exemption or other form of

government permission or approval required for a person

to engage in a regulated activity;

 

(f) “Regulation” means:

(i) in the case of the European Union:

(A) Directives;

(B) Regulations; and

(C) any delegated directives, regulations,

regulatory       technical     standards,

implementing technical standards, orders

or guidance promulgated under either of

the foregoing;

 

(ii) in the case of the United Kingdom:

(A) Acts of Parliament;

(B) Statutory instruments; and

(C) any rules, regulations, codes, orders,

requirements or guidance promulgated

under either of the foregoing, including

any rules, guidance, examples, practice

documents and handbooks of regulators

including the Financial Conduct Authority,

Prudential       Regulation     Authority,

Competition and Markets Authority and

Bank of England;

 

(g) “Regulatory Agency” means a governmental department

or commission of a Party that engages in any Covered

Action.

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  1. General Provisions

 

2.1. For the purposes of this Chapter, regulatory coherence refers to the

use of good regulatory practices in the process of planning, designing,

issuing, implementing and reviewing legal and regulatory measures in order

to facilitate achievement of domestic policy objectives, and in efforts by

the Parties to enhance regulatory cooperation and to minimise regulatory

divergence provided that the ultimate goal is to promote international trade

and investment, markets characterised by competition, economic growth

and employment.

 

2.2. The Parties affirm the importance of:

 

(a) sustaining and enhancing the benefits of this Agreement

through regulatory coherence in terms of facilitating

increased trade in goods and services and increased

investment between the Parties;

 

(b) promoting an effective, pro-competitive regulatory

environment which is transparent for citizens and economic

operators;

 

(c) furthering the development of international instruments,

and their timely implementation and application, as a

means to work together more effectively with each other

and with third countries to strive towards consistent

regulatory outcomes;

 

(d) aligning with international standards (including, without

limitation, those developed by the International Organization

of Securities Commissions, the Financial Stability Board,

the Basel Committee on Banking Supervision and the

Financial Action Task Force) and conforming with related

international obligations;

 

(e) each Party’s sovereign right to identify its regulatory

priorities and establish and implement legal and regulatory

measures to address these priorities, at the levels that the

Party considers appropriate;

 

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(f) the role that law and regulation plays in achieving public

policy objectives;

 

(g) taking into account input from interested persons in the

development of legal and regulatory measures;

 

(h) developing legal and regulatory cooperation and

capacity building between the Parties; and

 

(i) developing mechanisms to ensure that unnecessarily

burdensome, duplicative or divergent regulatory

requirements do not emerge over time, consistent with

the Parties’ efforts to stimulate economic growth and jobs,

and with their commitments to protect the environment,

consumer welfare, innovation, working conditions, human,

animal and plant health, and other prudential objectives.

 

2.3. The Parties affirm their shared commitment to good regulatory

principles and practices, as laid down in the OECD Recommendation of

22 March 2012 on Regulatory Policy and Governance, and the OECD

Competition Assessment Toolkit, based on the OECD Recommendation

of 22 October 2009.

 

  1. Establishment of Joint Committee

 

3.1. The Parties have agreed to establish a joint committee for the

purposes of assisting and monitoring the regulatory coherence relationship

established under this Chapter (the “Joint Committee”).

 

3.2. The Joint Committee’s roles shall consist of:

(a) [•];

 

3.3. The Joint Committee shall consist of [3] permanent members

appointed by the United Kingdom and [3] permanent members appointed

by the European Union.

 

3.4. The Joint Committee’s permanent members shall elect a seventh

member to carry out the functions of the chairperson of the Joint Committee,

at its first meeting by mutual consent of the permanent members, and

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thereafter in accordance with any relevant internal procedures established

by the Joint Committee.

 

3.5. The Joint Committee shall conduct itself by majority vote, and in the

event of a tied vote, the chairperson shall cast the final binding vote.

 

3.6. The Joint Committee shall adopt its internal procedures initially

by mutual consent of the permanent members, and subsequently in

accordance with Article 1.1

 

3.7. The Joint Committee’s chairperson, permanent members and any

other ancillary staff shall be chosen on the basis of appropriate technical

or regulatory expertise, practice or other relevant experience.

 

3.8. The Joint Committee shall meet [at least every [•]] / [in accordance

with its established procedures, as necessary] to carry out its duties.

 

3.9. The Joint Committee shall be able to request specialist technical,

legal or other advice and employ ancillary additional staff if it considers

necessary.

 

3.10. The costs of the Joint Committee shall be shared equally by the

Parties.

 

  1. Scope of Covered Action

 

Each Party shall promptly, and no later than one year after the date of

entry into force of this Agreement, determine and make publicly available

the scope of its Covered Actions. In determining the scope of its Covered

Actions, each Party should aim to achieve significant coverage.

 

  1. Coordination and Review Processes

 

5.1. The Parties recognise that regulatory coherence can be facilitated

through domestic mechanisms that increase inter-agency consultation

and coordination associated with processes for developing regulatory

measures. Accordingly, each Party shall endeavour to ensure that it

has processes or mechanisms to facilitate the effective inter-agency

coordination and review of proposed Covered Actions. Each Party should

 

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consider establishing and maintaining a central coordinating body for this

purpose.

 

5.2. The Parties recognise that while the processes or mechanisms

referred to in Article 1.1 may vary between the Parties depending on their

respective circumstances (including differences in levels of development

and political and institutional structures), they should generally have as

overarching characteristics the ability to:

 

(a) review proposed Covered Actions to determine the

extent to which the development of such measures adheres

to good regulatory practices, which may include but are not

limited to those set out in Article 17 (Implementation of Core

Good Regulatory Practices), and make recommendations

based on that review;

 

(b) strengthen consultation and coordination among

domestic agencies so as to identify potential overlap and

duplication and to prevent the creation of inconsistent

requirements across agencies;

 

(c) make recommendations for systemic regulatory

improvements; and

 

(d) publicly report on regulatory measures reviewed, any

proposals for systemic regulatory improvements, and any

updates on changes to the processes and mechanisms

referred to in Article 1.1.

 

5.3. Each Party should generally produce documents that include

descriptions of those processes or mechanisms and that can be made

available to the public.

 

  1. Legitimate Regulatory Objectives

 

6.1. The Parties will promulgate regulation which is the least trade

restrictive, and anticompetitive consistent with a legitimate, publicly stated

regulatory goal.

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6.2. A legitimate regulatory goal means a regulatory goal that is either

prudential, protective of animal, plant or human health, or to protect

national security.

 

6.3. Legitimate regulatory goals cannot be so detailed, prescriptive or

specific as to require a specific regulatory solution, and cannot be to

ban products, or prescribe a particular technological process without an

adequate explanation as to why it is necessary for the ban to have such

broad coverage.

 

  1. Trade Effects

When developing a Regulation, a Regulatory Agency of a Party shall give

notice to, give opportunity for submissions by and consider any information

provided in comments by, the other Party or a Regulatory Agency of the

other Party [or private party established in or authorised by the Other Party

that would be affected by such a Regulation] regarding the potential trade

effects of the Regulation that it receives during the comment period and

provide its views on substantive issues raised.

 

  1. Competitive Effects

 

8.1. When developing a Regulation, a Regulatory Agency of a Party shall

give notice to, and give opportunity for submissions by and consider any

information provided in comments by the other Party or a Regulatory

Agency of the other Party [or private party established in or authorised by

the Other Party that would be affected by such a Regulation] regarding the

potential competitive effects of the Regulation that it receives during the

comment period and provide its views on substantive issues raised.

 

8.2. The Party’s Competition Agency shall be given notice, at the earliest

practicable stage in the regulatory promulgation process of the competitive

effect of Regulations.

 

8.3. The Party shall ensure the relevant national regulator makes itself

available to the Competition Agency, as well as making sure that any

data, studies, market surveys or other preparatory work is shared with the

Competition Agency in as expeditious a manner as possible.

 

8.4. In making its decisions, the Parties agree that the Competition Agency

will utilise the following methodology:

 

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(a) The analysis must take into account the issues

addressed in Article 1.1.

 

(b) Such analysis must include:

(i) a treatment on the impact on

related industries, consumers and

competitiveness, including whether the

Covered Action will erect entry barriers

that might reduce innovation by impeding

new entrants into the market; and

(ii) whether the Covered Action has any

other effects on competition.

 

  1. Statement of Cost-Benefit Methodology

 

9.1. The Parties agree that a Regulatory Agency proposing a Covered

Action will produce a statement of cost-benefit methodology to describe the

methodology employed by the Regulatory Agency, including a description

of its assumptions in calculating a base-line scenario (the scenario without

the Covered Action) and the policy scenario (the scenario with the Covered

Action).

 

9.2. The statement shall include the results of the analysis using the cost-

benefit methodology, including separate and itemised lists of the costs and

benefits identified, as well as descriptions of costs and benefits that cannot

be monetised.

 

9.3. If a Regulatory Agency proceeds to engage in a Covered Action even

though the analysis using the cost-benefit methodology shows that the

costs outweigh the benefits, that Party must include reasons why it is

overriding the analysis either in the original statement or in a subsequent

statement referring to the original statement.

 

9.4. In cases where the governing statutes or other authorities would

expressly prohibit the use of the cost-benefit methodology or any other

form of cost-benefit analysis or impact analysis or any aspect hereof

in respect of a Covered Action, the Regulatory Agency engaging in the

Covered Action shall include in its statement an explanation of why it is

unable to perform a cost-benefit analysis (or ignore the result) as otherwise

required by this Chapter.

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  1. Access to Government Documents

 

10.1. Each Party shall make publicly available the following:

 

(a) a description of each of its Regulatory Agencies’

functions and organisation, including the appropriate

offices, through which the public can obtain information,

make submissions or requests, or obtain submissions; and

 

(b) any rules of procedure or forms utilised or promulgated

by any of its Regulatory Agencies as well as any associated

fees.

 

10.2. Each Party shall adopt or maintain laws or procedures that allow

for persons to request access to documents from a Regulatory Agency

of a Party. Such laws or procedures that allow for persons to request

access to documents from a Regulatory Agency of a Party shall provide no

less favourable treatment to persons of the other Party than it provides to

persons of the Party.

 

  1. Description of Regulatory Processes

Each Party shall make publicly available a detailed description of the

processes and mechanisms employed by its regulatory agencies to

develop Regulations. The description shall identify:

 

(a) the applicable guidelines or rules for providing the

public with opportunities to participate in the development

of Regulations;

(b) the procedures for ensuring that regulatory agencies

have considered public input;

(c) the judicial or administrative procedures available to

challenge Regulations or the procedures by which they

were developed; and

(d) the processes or mechanisms referred to in Article 1.

 

  1. Regulatory Collection

 

12.1. Each Party shall ensure that all of its Regulations that are currently

in effect are published in a designated collection. The collection shall be

 

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organised logically to promote easy access to relevant Regulations. To

that end, the collection should be clearly organised by topic.

 

12.2. Each Party shall make its respective collection of Regulations

available on a single, freely accessible public internet website that is

capable of performing searches for Regulations by citation or by word

search.

 

12.3. Each Party shall make sure that its collection is updated when

Regulations are amended, repealed or replaced.

 

  1. Decision-Making Based on Evidence

 

13.1.Each Party recognises the need for Regulations to be based upon

information that is reliable and of high quality. To that end, each Party

should adopt or maintain publicly available guidance or mechanisms that

encourage a Regulatory Agency when it is developing a Regulation to:

 

(a) seek the best reasonably obtainable information,

including scientific, economic, technical, or other

information relevant to the Regulation it is developing; and

 

(b) rely on information that is of high quality (including with

respect to utility, objectivity, integrity, clarity and accuracy).

 

13.2. When publishing any final administrative decision with respect to a

Regulation, the Party shall make publicly available an explanation of:

 

(a) the Regulation, including its policy objectives, how the

Regulation achieves those objectives, and the rationale

for and an explanation of the material features of the

Regulation; and

 

(b) the relationship between the Regulation and the key

evidence, data, cost-benefit analysis and other information

the Regulatory Agency considered in preparing the final

administrative decision.

 

Such explanation should also identify any major alternatives that the

Regulatory Agency considered in developing the Regulation and provide

an explanation supporting the alternative that is selected for the final

administrative decision.

141

 

 

 

13.3. Each Party shall prepare, on an annual basis, a public report setting

forth:

(a) an estimate, to the extent feasible, regarding the total

annual costs and benefits of major final Regulations issued

in that period by its respective regulatory agencies;

 

(b) any proposals for systemic regulatory improvements;

and

 

(c) any updates on changes to relevant processes and

mechanisms.

 

  1. Petitions

Each Party shall provide for any interested person to petition any Regulatory

Agency of the Party for the issuance, amendment, or repeal of a Regulation.

The basis for such petition may include, for example, that in the view

of the person submitting the petition, the Regulation has become more

burdensome, trade restrictive or damaging to competition than necessary

to achieve its objective, as well as technical or legal commentary. For the

purposes of this Article, an “interested person” means any person in the

jurisdiction of either of the Parties who is directly or indirectly affected by

a Regulation.

 

  1. Retrospective Review of Regulation and Management of

Differences

 

15.1. Each Party shall maintain procedures or mechanisms to promote

periodic reviews of Regulations that are in effect in order to determine

whether they are in need of revision or repeal, including on a Regulatory

Agency’s own initiative or in response to a petition filed pursuant to Article

1.

 

15.2. Each Party shall make publicly available the results of any such

retrospective reviews or analyses conducted by its regulatory agencies,

including any supporting data whenever practicable.

 

15.3. Each Party shall include in procedures or mechanisms adopted

pursuant to Article 1.1 provisions addressing Regulations that it considers

to have a significant impact on a substantial number of small entities.

 

142

 

 

 

15.4. Acknowledging that on the effective date of this Agreement, both

Parties’ regulatory systems are closely aligned and subject to either

harmonisation or mutual recognition, the Parties agree to recognise

each other’s laws and regulations in respect of goods and will accept

certification of conformity to applicable laws and regulations by duly

authorised conformity assessment bodies of the other Party to the fullest

extent allowable by law

 

15.5. Each Party agrees that it will not withdraw this recognition provided

that the other Party has adhered to the provisions of this Chapter, and the

respective laws and regulations of each Party in the relevant field achieve

the respective policy objectives.

 

15.6. The Parties agree that it is the intention of the Parties to include

detailed agreements in the following sectors [sectoral annexes]

 

15.7. Any disputes concerning this will be submitted to the Joint Committee

for resolution in the manner described in this Chapter. [Linked to Dispute

Settlement Mechanism].

 

  1. Reducing Information Collection Burdens Associated with

Regulation

 

Each Party shall provide that, to the extent regulatory agencies use

surveys to request or compel information from the public in developing

a Regulation, these regulatory agencies should endeavour to do so in a

manner that minimises unnecessary burdens and avoids duplication.

 

  1. Implementation of Core Good Regulatory Practices

 

17.1. The Parties agree that the optimal way of avoiding unnecessary

differences in laws and regulations is to agree similar core good regulatory

practices.

 

17.2. The Parties agree that in achieving the legitimate and publicly stated

goal(s) of any Covered Action, Covered Action taken or to be taken by a

Party to achieve such goal(s) should be the least anti-competitive and least

restrictive on trade while being consistent with the relevant objective(s) for

the Covered Action.

143

 

 

 

 

17.3. To assist in designing a measure to best achieve the Party’s

objectives, each Party should generally encourage relevant regulatory

agencies, consistent with its laws and regulations, to conduct regulatory

impact assessments when developing proposed Covered Actions that

exceed a threshold of economic impact, or other regulatory impact, where

appropriate, as established by the Party. Regulatory impact assessments

may encompass a range of procedures to determine possible impacts.

 

17.4. Regulatory impact assessments conducted by a Party should, among

other things:

 

(a) assess the need for a regulatory proposal, including a

description of the nature and significance of the problem;

 

(b) examine feasible alternatives, including, to the extent

feasible and consistent with laws and regulations, their

costs and benefits, such as damage to international trade

or to competition, recognising that some costs and benefits

are difficult to quantify and monetise;

 

(c) when highlighting the costs and benefits of new laws and

regulations, the Parties agree to separate the costs analysis

from the benefits analysis, in particular recognising that

benefits are often difficult to quantify and monetise, but the

costs side can be more objectively analysed if it is limited to

business compliance costs, impact on international trade,

and impact on competition;

 

(d) explain the grounds for concluding that the selected

alternative achieves the policy objectives in an efficient

manner, including, if appropriate, reference to the costs

and benefits and the potential for managing risks; and

 

(e) rely on the best reasonably obtainable existing

information including relevant scientific, technical,

economic or other information, within the boundaries of

the authorities, mandates and resources of the particular

Regulatory Agency.

 

144

 

 

 

 

17.5 When conducting regulatory impact assessments, a Party may take

into consideration the potential impact of the proposed Regulation on

SMEs, and shall apply principles of proportionality in determining the level

of regulation required.

 

17.6 Each Party should ensure that new Covered Actions are plainly written

and are clear, concise, well organised and easy to understand, recognising

that some measures address technical issues and that relevant expertise

may be needed to understand and apply them.

 

17.7 A Regulatory Agency of either Party, when considering a Covered

Action, shall propose such Covered Action to the public and will provide

for a public notice-and-comment period. This notice and comment period

shall be of reasonable duration, having regard to the nature, scope and

complexity of the Covered Action. The Notice shall include a statement of

cost benefit analysis as expressed in Article 1. This publication requirement

shall apply to all statements of policy and all interpretations issued by a

Regulatory Agency in its official capacity that are not solely internal and

related to the internal management structure of the Regulatory Agency.

 

17.8 The Parties agree that Regulatory Agency decisions on License

applications will be made in a reasonable period of time. Apart from voluntary

or requested Licence cancellations, suspensions or modifications, a

Regulatory Agency may not revoke or modify Licenses without prior written

notice, and it must afford the affected person a reasonable opportunity

to demonstrate compliance with the law. Parties must provide written

reasons for license rejections or modifications. Parties may not revoke or

modify licenses without prior written notice, and must afford the affected

person a reasonable opportunity to demonstrate compliance with the law.

 

17.9 Subject to its laws and regulations, each Party should ensure that

relevant Regulatory Agencies provide public access to information on new

Covered Actions and, where practicable, make this information available

online.

 

17.10 If a Party submits a request for information to a Regulatory Agency of

the other Party, the Regulatory Agency of the responding Party should, in a

manner it deems appropriate, and consistent with its Regulations, provide

145

 

 

 

the requesting Party with notice of any Covered Action that it reasonably

expects to issue within the following 12-month period from the date that the

request made by the requesting Party is received.

 

17.11. To the extent appropriate and consistent with its law, each Party

should encourage its relevant Regulatory Agencies to consider Regulations

of the other Party, as well as relevant developments in international,

regional and other fora when planning Covered Actions.

 

  1. Cooperation

 

18.1. The Parties shall cooperate in order to facilitate the implementation

of this Chapter and to maximise the benefits arising from it. Cooperation

activities shall take into consideration each Party’s needs, and may include:

 

(a) information exchanges, dialogues or meetings with the

other Party;

 

(b) information exchanges, dialogues or meetings with

interested persons, including with SMEs, of the other Party;

 

(c) strengthening cooperation and other relevant activities

between regulatory agencies; and

 

(d) other activities that the Parties may agree.

 

18.2. The Parties further recognise that cooperation between Parties on

regulatory matters can be enhanced through, among other things, ensuring

that each Party’s Regulations are centrally available.

 

  1. Notification of Implementation

 

19.1. For the purposes of transparency, and to serve as a basis for

cooperation and capacity building activities under this Chapter, each Party

shall submit a notification of implementation to the Joint Committee through

the contact points designated pursuant to Article 1. (Contact Points) within

two years of the date of entry into force of this Agreement and at least once

every four years thereafter.

 

146

 

 

 

19.2. In its initial notification, each Party shall describe the steps that it has

taken since the date of entry into force of this Agreement, and the steps

that it plans to take to implement this Chapter, including those to:

 

(a) establish processes or mechanisms to facilitate effective

inter-agency coordination and review of proposed Covered

Actions in accordance with Article 1 (Coordination and

Review Processes);

 

(b) encourage relevant regulatory agencies to conduct

regulatory impact assessments in accordance with Article

1 (Implementation of Core Good Regulatory Practices);

 

(c) ensure that Covered Actions are written and made

available in accordance with Article 1 (Implementation of

Core Good Regulatory Practices);

 

(d) review its Covered Actions in accordance with Article 1

(Implementation of Core Good Regulatory Practices; and

 

(e) provide information to the public in its annual notice of

prospective Covered Actions in accordance with Article 1

(Implementation of Core Good Regulatory Practices).

 

19.3. In subsequent notifications, each Party shall describe the steps,

including those set out in Article 1.1, that it has taken since the previous

notification, and those that it plans to take to implement this Chapter, and

to improve its adherence to it.

 

19.4. In its consideration of issues associated with the implementation and

operation of this Chapter, the Joint Committee may review notifications

made by a Party pursuant to Article 1.1. During that review, Parties may

ask questions or discuss specific aspects of that Party’s notification. The

Joint Committee may use its review and discussion of a notification as a

basis for identifying opportunities for assistance and cooperative activities

to provide assistance in accordance with Article 1 (Cooperation).

 

  1. Relation to Other Chapters

In the event of any inconsistency between this Chapter and another

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Chapter of this Agreement, this Chapter shall prevail to the extent of the

inconsistency, except where there is a sectoral annex for specific services

areas in which case that sectoral annex shall apply.

 

  1. Non-Application of Dispute Settlement

No Party shall have recourse to dispute settlement under Chapter [•]

(Dispute Settlement) for any matter arising under this Chapter. Instead,

the specific dispute settlement provisions of this chapter [and its sectoral

annexes] shall apply.

 

  1. Dispute Settlement Mechanism

 

22.1. If one Party withdraws recognition from the other, and the other Party

considers there to have been a violation of the agreement, it shall bring a

complaint to the Joint Committee.

 

22.2. If a Party considers that a valid petition has been made under Article

1 and believes that this petition has not been validly dealt with by the other

Party, the other Party shall bring a Complaint to the Joint Committee.

 

22.3.The Joint Committee shall conduct a consultation mechanism for

30 days, and if the Parties have not resolved the issue the complaining

Party can suspend concessions made under this [Chapter] [Agreement]

[or impose fines].

 

  1. Contact Points

 

23.1. The contact points for each Party in relation to submissions to the

Committee under this Chapter shall be as follows:

 

(a) For the United Kingdom: [•]; and

 

(b) For the European Union: [•].

 

The Institute of Economic Affairs

2 Lord North Street

London SW1P 3LB

Tel 020 7799 8900

Email iea@iea.org.uk

Brexit: the madness of Shanker Singham

Tuesday 25 September 2018

Having flagged up the IEA/Singham paper yesterday, I am more or less committed to writing a review of it, even if it is a dreadful piece of work that is hardly worth the effort – and there are the latest “technical notices” to review, which will have to wait until tomorrow.

It has been billed by Jacob Rees-Mogg as the “most exciting contribution” to the Brexit debate in months yet, only a few hours after publication, Singham’s “plan” had been trashed on Twitter and then ripped apart by John Crace with such verve that it should not survive. However, it still gets a better press from The Times than it deserves, which makes it all the more imperative that it is given a timely burial.

In fact, Crace gets it absolutely right. Under the headline, “Hard Brexiters’ new plan gets A+ for idiocy”, he derides the country’s “leading trade lawyer”, for “failing to grasp the basics of international trade”. And having failed so spectacularly, Singham goes to prove “he really was as stupid as he sounded”, suggesting that post-Brexit, “the UK might do some individual trade deals with separate EU countries”.

This is part of the Singham fantasy where he advocates an “alternative approach” to the Brexit negotiations. He argues that the UK would seek to put “pressure internally on EU Member States”, where there would likely be significant losses in the event of no EU trade deal. These, he says, include Bavaria (cars and dairy), Ireland (beef and dairy), Catalonia (cars and dairy), and Northern Italy (textiles and dairy).

This would amount to manipulating tariff rates, causing many EU producers to have different agendas, allowing divergence between Member States, which the UK could then exploit.

Clearly, we are being enjoined to adopt a variation on the strategy already adopted by the UK, where it has sought to split the Member States from the Commission and then practice its “divide and conquer” techniques to engineer splits in the unity of the members.

But, if we have learnt nothing else from the last two years, the one thing that should have sunk in is that the Member States are rock solid behind M. Barnier, and will not allow the UK to divide them.

Another illustration of the fantasy world in which the IEA and their favourite child, Shanker “Snake Oil” Singham, lives can then be seen in these immortal lines in his report, which address bilateral deals with countries where an EU FTA should be rolled over.

“Negotiations”, Singham writes, “should be accelerated to roll over existing agreements and agree a new FTA with EFTA. the (sic) Department for International Trade (“DIT”) should seek to conclude these negotiations provisionally, so they can come into effect on 30 March 2019 in case of no Withdrawal Agreement and no Transition Period”.

The reason why this is fantasy is not at all difficult to determine, especially if we take our cue from the Vienna Convention on Succession of States in respect of Treaties , which sets out the customary or settled law on the matter of continuity of treaties.

The essential point made several times in the Convention is that the law would have the effect of requiring the consent of all parties to a treaty before the UK could participate in treaties in which it had previously enjoyed participation by virtue of its membership of the EU.

Since in all the cases where the UK wants to roll over bilateral deals with countries where there is an EU FTA, the EU would, perforce, be one of the parties from which consent would be needed.

There lies the rub. In the event of the UK leaving the EU without a Withdrawal Agreement – a “no deal” Brexit – it is highly unlikely that the EU will give its consent to the UK’s continued participation in its external trade deals. With no consent, the treaties simply cannot be rolled over. The UK would have to start again, and negotiate new treaties from scratch.

Given how vital these deals are to the UK, in enabling it to maintain its post-Brexit global trade, it is therefore, essential that we keep on good terms with the EU. And that effectively precludes the UK leaving without a Withdrawal Agreement and Transitional Period. Thus, the core part of the IEA/Singham case collapses.

The actual name of the Singham extravaganza is “Plan A+ – Creating a prosperous post-Brexit UK” but I prefer to call it “Plan A for amoeba”, my title representing the number of brain cells expended in producing it. Mostly, it is a tired amalgam of regurgitated Legatum ideas which include the wholly impracticable proposition that the UK can trade with the EU on the basis of “mutual recognition”, this giving us the fabled status of “regulatory autonomy”.

“The UK”, Mr Singham says, “should put forward an open and constructive offer of mutual recognition with the EU. Autonomy would be followed by recognition by the UK of EU regulation, standards, and conformity assessment, meaning institutional competition for the UK, commercial competition from EU imports, and avoidance of unnecessary trade barriers on imports”.

Here, one does not have to rehearse, once again, the reasons why the EU cannot and will not accept mutual recognition. Suffice to say that there is no prospect, whatsoever, of this forming the basis of any trading relationship with the UK.

But, if the idea itself is fantasy, Singham then lurches into madness. “If the EU refuses to recognise UK regulations on day one of Brexit”, he writes, “the UK should be prepared to take action in the WTO under the GATT and the SPS and TBT Agreements”.

Setting out what is involved here, we have a situation in Brexit whereby the UK acquired the status of a third country, whence the EU then applies the full corpus of regulation applicable to third countries – as indeed it must under the non-discrimination rules of the WTO.

Under WTO rules, every contracting party is permitted to frame its own standards and require imported goods to meet them, with the further requirement that conformity may be demonstrated, by means of border checks.

The EU customs code, with the revised version now being implemented, works within the framework of WTO rules and, despite multiple challenges over the decades, has proved WTO compliant. There are no obvious or straightforward grounds on which the UK could base any action.

Yet Shanker Singham, hailed by some as “one of the most brilliant trade experts of his generation” asserts that these established points, which have so far resisted global challenge, can be taken on by the UK, acting on its own.

This silly, dismal, venal little man is so far from the real world that it has become a modern mystery as to why anyone could take him seriously. What he proposes it utterly barking mad, with not the slightest possible chance of success.

Nevertheless, he has just enough brain cells to understand that “such claims can take years to resolve”. To Singham, though, that is not the point. The UK, he says, “should use threats of trade litigation to help support its negotiating objectives, as is normal practice around the world”.

So here we go: the UK is supposed to re-enter the Brexit negotiations with an “alternative approach” which involves demanding the impossible from the EU against the threat of invoking the WTO dispute procedure, launching cases which would have absolutely no chance of success.

And, despite the EU being fully in compliance with WTO rules, Singham then goes on to tell us that “the purpose of these actions is not because we expect them to cause an immediate change in EU behaviour”, but “because this is one of the ways we can highlight that the EU is in fact an outlier in its behaviour”.

With only just over six months left for negotiations, just precisely where could that stance take us, except to an ignominious “no deal” outcome? But that then leaves The Times complicit in the Singham madness. “The Brexiteers’ alternative comes late in the game”, it writes, “and is short on detail, but would be better than no deal at all”.

Singham’s efforts, courtesy of the increasingly sinister IEA, are nothing but a recipe for a “no deal” Brexit. His facile, nonsensical nostrums go beyond unrealistic into the territory of lunacy, so bad that even the BBC smells a rat. They are an insult to all right-thinking people who have put the effort into exploring what is needed to secure a workable exit plan.

And those who support him, or fail to point out the fatuity of his work, are almost as bad as the man himself. For some, such as Ambrose Evans-Pritchard in the Telegraph – who sees that plan as “a breath of fresh air” – it represents a final retreat into bovine stupidity.

Richard North 25/09/2018

Regards,
Greg_L-W.

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