The world needs Britain to have its own trade policy and not align too closely to the EU’s regulatory system

The world needs Britain to have its own trade policy and not align too closely to the EU’s regulatory system

This month, decisions are being taken in the UK and in Brussels that will determine what the framework for the trade relationship between the UK and EU could be for the long term future. Commentators have focused on the EU-UK relationship, but not always considered that relationship in light of the UK’s position in the world.

If the global economy was doing well, and if the European Union were a promoter of pro-competitive regulation around the world (as well as in its own borders), then the UK might wish to align as closely with the EU as possible. On the other hand, if the global economy is not doing well, and the EU is actively promoting anti-competitive regulation that will destroy wealth out of the economy and push people into poverty around the world, then it would be important for the UK to maintain as much independence as possible. The future would then be contraction of the EU economy, while the rest of the world grows. A darker future would be a contracting global economy, stagnation, unemployment, budget deficits and hopelessness for the foreseeable future. In either case, the UK suffers.

So it is important to examine which of these is correct. Are we in fact in the new normal with limited future economic growth as many, like Christine Lagarde of the IMF, have suggested? If you look at actual measures of wealth creation, such as global industrial output, these have been stalled for some time, and this malaise pre-dates the global economic crisis.

There’s a good reason for this. Since the Second World War, with the development of the GATT system and the progressive reduction in trade barriers, we have seen a process of gradual and continuing liberalisation which reached its apex at the conclusion of the Uruguay Round in the mid-1990s. Since then, however, there has not been a concluded multilateral trade round of significant liberalisation (the trade facilitation round was good, but ensuring customs facilitation is hardly at the cutting edge of dealing with modern trade barriers).

Unless we get back on the trade bicycle and start cycling again, the increase in behind-the-border barriers and regulatory distortions will continue without abatement. This will eat into economic growth like a cancer plunging the world into more economic stagnation, falling real wage levels, unemployment, budget deficits and recessions.

What role has the EU been playing in that global context? When the UK acceded to the European Community as it then was, the country had nationalised a large amount of its industry and could hardly be said to have a competitive market. The Treaty of Rome disciplines on competition, state aids and free movement of goods and services were invaluable in improving the UK’s economy by enabling it to develop into an economy where competitive forces, rather than the monopoly of the state, prevailed. Similarly for the former Central and Eastern European nations, accession to the EU enabled them to use the acquis to improve formerly highly-distorted economies.

However, in the last decade, EU law has been moving in an ever more prescriptive and anti-competitive direction as we note in our study, released today, The Brexit Inflection Point: The Pathway to Prosperity. There are many examples of this regulatory trend, such as REACH chemicals regulation, the data protection restrictions of the General Data Protection Regulation, MiFID 2 in financial services, local content rules embedded in audio-visual regulation and other regulations that flow from a very restrictive interpretation of the precautionary principle.

Each of these regulations once imposed on all 28 member states destroys wealth in those economies by damaging the ordinary competitive process. More troublingly, the EU is now on record as stating that its goal is to push its prescriptive regulatory system on the rest of the world, by forcing firms to adopt the regulatory standards of the EU. This upward harmonisation threatens to foster anti-competitive regulation around the world which threatens the global economy. The fact that China is also seeking to impose its regulatory system compounds the scale of the problem we face.

The solution should be for countries around the world to give each other regulatory recognition, provided that the ultimate end goals of regulation are the same – even where technical regulation differs – while at the same time pushing for a reduction of border and behind-the-border barriers, as well as more pro-competitive regulation around the world. This is the spirit of international trade rules in the WTO, as most clearly expressed in the agreements on sanitary and phyto-sanitary measures as well as on technical barriers to trade.

In this context, the UK faces a clear choice. If the UK aligns itself too closely to the EU’s regulatory system, where the EU has the ability to prevent the UK from diverging by instantly taking away regulatory recognition, it will end up being a promoter of the EU’s regulatory system to the Rest of the World – and will be restricted in what it can negotiate with other countries. This case would see the UK contributing to, not reducing, anti-competitive regulation around the world. The Prime Minister’s eloquent description of Global Britain would be taken off the table and the essential logic of leaving the EU will have been undercut. This would take the opportunities off the table and leave the UK only able to minimise disruptions. In such a case, it would have been better not to leave at all.

So the UK could be a force for improving the global economic environment. But it must also consider how the disruptions associated with leaving the EU could be minimised in the final end-state agreement and any interim period before that is reached.

Our report outlines a comprehensive free trade agreement between the UK and EU which would include zero tariffs, a new customs arrangement, a maximum of regulatory recognition including a regulatory coherence chapter and regulatory colleges in some sectors. These would involve a high degree of consultation including on how regulation is being promulgated and what factors are taken into account. Finally, a comprehensive agreement should include disciplines on anti-competitive regulation. In the interim, we are allowed under WTO rules to have zero tariffs and a special customs arrangement for a limited period of time – and we can have regulatory recognition agreements for an indefinite period.

If particular industries want to stay in European regulatory arrangements for an implementation period, that is something the UK government can negotiate and pay for, provided those industries have had a clear-sighted look at the direction of travel of EU regulation and are satisfied that they can live with being rule-takers for a short period. This is what both parties should be focusing their attention on.

None of this would take away our opportunity to execute an independent trade and regulatory policy. This would mean working unilaterally on our own regulatory environment (to make it more pro-competitive), bilaterally in deals with others like the US, to join existing platform agreements like the TPP or predecessor agreements if the TPP is not extant on day one of Brexit. Perhaps most importantly for the global system, it would not prevent the UK from taking up a leadership role in the WTO, particularly in services liberalisation and in the new economy which is so critically dependent on data flow.

This is the direction of travel the UK must follow to realise the opportunities before it. There will be many course corrections and buffeting winds on the way, but if we set our course and keep our eyes on the prize, this inflection point could herald a re-start of the global economic engine which will benefit not only the British people, but people all over the world.