Brexit: Quo vadis?

By
Pieter Cleppe
-
brexit

After the brief spell of Liz Truss as British PM, the British Conservative Party continues to struggle, now running a whopping 22 percent points behind the Labour opposition in opinion polls. New Prime Minister Rishi Sunak and 15 of his Cabinet Ministers are at risk of losing their seats in a general election “wipeout” in 2024, as former PM Boris Johnson is more popular than Sunak.

British GB News journalist Tom Harwood has been lamenting the reduced support for free market economics among the Tory party leadership, after the Rishi Sunak takeover. He noted: “Truss was going to cut tax, Rishi raised it. She legalised onshore wind and shale extraction, Rishi banned it. She set out turbocharging housebuilding in investment zones, Rishi scrapped it. She had plans to accelerate transport, energy, comms infrastructure, Rishi ditched it.”

Things also seem to moving on the Brexit front. In November, senior UK ministers would have been preparing to propose a Swiss-style relationship between the UK and the European Union. Senior conservatives, including Rishi Sunak, have denied all of this, but something was clearly afoot. UK Chancellor Jeremy Hunt stated that he would seek to “remove the vast majority of the trade barriers that exist between us and the EU”. Also the Financial Times has been pushing for a renegotiated deal, arguing: “Britain needs to improve its Brexit deal. Large parts of industry want more alignment with the EU, not less.”

Meanwhile, according to a Savanta survey for The Independent, two-thirds of the British now support a referendum on rejoining the EU. However, only 22 per cent believe a new vote should happen within the next five years, while 24 per cent say it should be within 6 to 10 years. Support for “rejoin” is currently also enjoying a 13 percent lead, even if this may quickly fall in case the EU would be overly stringent when it comes to the conditions for the UK to rejoin, for example when joining the eurozone would be put forward as a requirement. Ahead of any new EU referendum, the Eurosceptic press will surely be on the outlook for quotes from EU Commissioners and MEPs that cannot keep themselves from making grand statements about strict conditions awaiting any British application to rejoin the EU.

Regulatory competition

If the UK government – perhaps with Labour in charge – ends up renegotiating its relationship with the EU, after sorting out the Northern Ireland standoff, thereby more closely aligning its regulations, this would amount to Swiss-style relationship. In fall, it emerged that the UK government would be eying to scrap 80% of the checks between Great Britain and Northern Ireland and open up access to the single market, in return for the UK aligning with a number of EU regulations and paying into the EU budget, without however including freedom of movement. If the EU would agree to this, it would lead to greater openness between the EU and the UK markets, but for Britain, it would signify a step back in terms of sovereignty, as it would become a partial rule-taker.

More importantly for Europe, such a renegotiated EU-UK relationship would mean less regulatory competition. A better alternative to achieve greater trade between the EU and the UK would therefore be that both sides would recognize each other’s regulations as of sufficient quality. After all, most of the UK regulations are still the same as the EU’s, and trade is ultimately about trust.

Regulatory competition is key in order to promote innovation, in particular when it comes to regulating new economic sectors, like the digital sector. There, it enables jurisdictions to learn from each other on how to cope with new phenomena. The UK may for example at one point no longer go along with regulations like GDPR, which are a testament to the EU’s innovation-hostile and burdensome regulation of the digital sector. German CDU MEP Axel Voss described it as follows: “Europe’s obsession with data protection is getting in the way of digital innovation.” If the UK would then reap the benefits of no longer going along with the EU approach, also EU industry and even EU regulators may be forced to rethink their approach.

A diverging United Kingdom

Already now, there are areas where we can see the UK opting for a different approach to the one taken by the EU. This is the case for example with the EU Commission’s proposal for a “Corporate Sustainability Due Diligence” directive, which would require certain companies to undertake due diligence across their value chains, whereby they are being held responsible for all kinds of things that go wrong, particularly in terms of sustainability and human rights. While it makes sense to require to root out things like forced labour out of supply chains, surely businesses should not be turned into regulatory supervisors tasked with forcing the EU’s labour and environmental policy choices onto trading partners.

Companies importing products like soy, palm oil and coffee would be severely affected if this regulation would be passed, especially as it would come on top of other protectionist EU initiatives, like the new EU regulation to introduce mandatory due diligence to stop deforestation in supply chains.

This requires companies to check whether goods sold in the EU have not been produced on deforested or degraded land anywhere in the world, but in reality disproportionally hits the palm oil sector in Malaysia and Indonesia, this while great progress has achieved already by producers over there.

Think tank Chain Reaction Research (CRR) found that palm oil deforestation in Indonesia, Malaysia and Papua New Guinea has fallen to its lowest level since 2017. Also, Malaysian companies like Sime Darby, the world’s largest producer of certified sustainable palm oil, have committed to a sustainability agenda which includes achieving net-zero emissions by the year 2050. In Sabah and Sarawak, two Malaysian regions, the company also intends to reforest a 400-hectare area of peat crops.

Some nevertheless even want to go further and ban palm oil altogether, thereby ignoring a study by researchers at the University of Bath, published in Nature, which has pointed out that such a ban may worsen deforestation, given that alternatives like sunflower or rapeseed oil require more land, water and fertilisers.

Interestingly, the UK is taking a different, more sensible approach, clearly already taking advantage of the policy freedom resulting from Brexit. Instead of imposing all kinds of specific standards on trading partners, the UK simply requires products to be in line with the local regulations, thereby effectively applying the principle of mutual recognition. When it comes to a commodity considered to be linked to the risk of deforestation, UK legislation foresees that “a regulated person in relation to a forest risk commodity must not use that commodity in their UK commercial activities unless relevant local laws were complied with in relation to that commodity.”

Such an approach is not only more in line with the spirit of free trade to trust the standards of trading partners, but it is also much more practical. Defining what EU standards, like “sustainable”, mean in other jurisdictions is very tricky and bound to result in all kinds of legal disputes. Surely, specific labour or environmental standards would not be acceptable in Europe, but in reality, low labour or environmental standards have tended to increase as a result of trade, not as a result of threats to end trade if they aren’t adopted.

Still a long way to go

Obviously, at the moment, there only are few examples where the UK has already used its policy freedom acquired following Brexit. The truth is that the UK electorate isn’t as eager to fully embrace liberalization as is sometimes portrayed and the ideological change of heart at the Conservative leadership, following the departure of the more libertarian Liz Truss – even if she wasn’t libertarian in responsible budgets, something which markets penalized, isn’t helping either. Rishi Sunak quickly shelved the plans by Liz Truss to legalise fracking, even if he originally supported it and despite the fact that also the UK is currently suffering a massive energy crisis. Also the EU’s climate policies, still very much on the statute books in the UK, are not about to be scrapped soon, looking at UK government policy.

For now, EU-UK trade has mostly experienced the bad aspects of Brexit – the predicted trade disruption as a result of the increase of bureaucracy. Most benefits are likely to only emerge over time and probably won’t be the result of the UK deliberately scrapping all kinds of regulations that stem from the era of British EU membership.

Even if the UK would agree some kind of Swiss relationship including more regulatory alignment, it is unrealistic that the UK would simply copy the EU’s updates of burdensome, protectionst and innovation-hostile regulations like GDPR, REACH or MifiD. Surely this refusal would come at a cost of further restricting UK market access to the EU, but it would strengthen UK competitiveness. Good things come to those who wait.

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