For regulatory ‘alignment’, read ‘de facto convergence’, and a symbolic Brexit

For regulatory ‘alignment’, read ‘de facto convergence’, and a symbolic Brexit

by Professor Simon Deakin, Director of Centre for Business Research and Professor of Law, University of Cambridge

The document agreed by the EU and UK in the early hours of 8 December 2017 is not a contract or treaty, merely a ‘joint report’ on progress made in phase one of the Brexit negotiations (https://ec.europa.eu/commission/sites/beta-political/files/joint_report.pdf).  However, its contents are likely to be incorporated into the withdrawal agreement envisaged by Article 50 TEU and, in due course, into a free trade agreement (FTA) between the UK and EU.  These will be treaties with legal effects.

The EU’s price for proceeding to phase two of the Brexit negotiations was UK agreement to the ‘alignment’ of its laws and regulations with those of the EU’s single market and customs union.  The key to understanding what was agreed lies in paragraphs 49 and 50 of the report.

In paragraph 49 the UK undertakes to maintain ‘North-South cooperation’.  This phrase is a reference to the Belfast Agreement of 1998 and it refers to cooperation between Northern Ireland and the Republic of Ireland.  Specifically, the UK agrees to maintain the Belfast Agreement’s ‘guarantee of avoiding a hard border’ between north and south.  ‘North-South cooperation’ and ‘avoiding a hard border’ are, according to paragraph 49, ‘overarching requirements’, with which any ‘future arrangements’ governing UK-EU relations must ‘be compatible’.

Paragraph 49 then states that the UK intends to achieve compatibility through ‘the overall UK-EU relationship’.  This is a reference to a future trade deal or equivalent arrangement between the EU and the UK.  If there is no such deal or arrangement, the UK must propose solutions which are specific to the ‘unique circumstances of the island of Ireland’.  If there is no agreement on these specific solutions, the UK undertakes to ‘maintain full alignment with those rules of the Internal Market and Customs Union which, now or in the future, support North-South cooperation, an all-Ireland economy and the protection of the 1998 Agreement’.

This means that in future negotiations over a UK-EU trade deal, the alignment of the law of Northern Ireland (or to be more precise, UK law as it applies in Northern Ireland) with the rules of the EU single market and customs union is to be taken as a given.  Not only must any future trade agreement respect ‘full alignment’; even if there is no such agreement, the UK undertakes to ensure that the principle of full alignment is still observed.

Then comes paragraph 50 of the report.  This in effect repeats the same formula of ‘full alignment’, but this time with respect to relations between Northern Ireland and the UK.  The UK undertakes to ensure that, whether or not agreement on an EU-UK trade deal is reached, ‘no new regulatory barriers [will] develop between Northern Ireland and the rest of the United Kingdom, unless, consistent with the 1998 Agreement, the Northern Ireland Executive and Assembly agree that distinct arrangements are appropriate for Northern Ireland’.  Moreover, ‘in all circumstances, the United Kingdom will continue to ensure the same unfettered access for Northern Ireland’s businesses to the whole of the United Kingdom internal market’. The UK will only be free to make its own laws and rules on internal market matters if the Northern Ireland Legislative Assembly allows it to do so.

It has been suggested that the term ‘alignment’ is ‘constructively ambiguous’ https://www.ft.com/content/b378c086-d9c4-11e7-9504-59efdb70e12f or even ‘meaningless’ http://www.politics.ie/forum/brexit/260925-downing-street-aides-describe-commitments-ireland-meaningless-12.html).  It appears to be novel, but this is not the same thing as it being meaningless.

The EU treaties use the terms ‘harmonisation’ and ‘approximation’ to refer to the convergence of laws.  ‘Harmonisation’ implies the use of legal measures such as directives and regulations to set standards which are binding on the member states.  ‘Approximation’ is the term used to refer to convergence through other means such as cooperation between the member states.

‘Approximation’ is also used in the context of association agreements between the EU and third countries. For example, the EU’s agreement with Ukraine refers to the ‘approximation’ of technical standards as a condition for establishing tariff-free trade, and commits Ukraine to ensuring ‘gradual approximation to EU law, standards and practices in the area of employment, social policy and equal opportunities’.   The EU-Ukraine association agreement sets out in detail the social policy (and other) directives which Ukraine must sign up to, along with a timetable for doing so (http://ukraine-eu.mfa.gov.ua/en/page/open/id/2900).

A plausible meaning of ‘alignment’ is that it contains elements of both harmonisation and approximation.   Its use in the joint report does not mean that the UK has agreed to stay in the EU customs union and single market.  It may, however, be read as a commitment by the UK to keep its laws and regulations in line with those of the EU’s internal market after Brexit.  This is likely to be how the EU understands the term in the coming negotiations.

The UK may end up agreeing a bespoke customs union on goods, similar to the one between the EU and Turkey, along with an FTA containing elements of the Ukraine association agreement and the EU-Canada Comprehensive Economic and Trade Agreement (‘CETA’).   If the Ukraine agreement is the model, the future EU-UK FTA is likely to contain legally binding requirements for the approximation of laws.  If that is the case, ‘alignment’ will be another way of saying ‘de facto convergence’.

The expectation is that the EU-UK FTA will come into force at some point after a ‘transitional arrangement’ (in EU language) or ‘implementation phase’ (as the UK prefers to call it).  According to the negotiation guidelines for phase two which were agreed at the European Council meeting of 15 December 2017, the EU is going to insist that, during this transition phase, the UK is fully bound by internal market rules as they evolve, and that it will continue to be fully subject to the jurisdiction of the CJEU (http://www.astrid-online.it/static/upload/2017/2017-12-08-08-37_01.pdf).   The UK will also be fully subject to the ‘four freedoms’ of internal market law, including free movement of persons.  The UK is signalling that this transition phase should last no more than two years but it will most likely take longer than this, possibly up to a decade, to negotiate an FTA.

The upshot is that the UK has agreed to maintain de facto convergence with EU laws and standards going forward.  In the transition phase, which may last up to a decade, it will be bound by EU laws as they develop.  At the point of agreeing an FTA, if the Ukraine agreement is a guide, it will have to make a legal commitment to abide by EU laws in force at that time, and possibly to future laws as well.

As it will no longer be a member of the EU from March 2019, even as it stays within the single market and customs union during the transition phase, the UK will cease to have any influence over the content of internal market rules.  Thus it will no longer be in a position, for example, to weaken social policy measures as they are being negotiated, or to seek derogations from them once they are agreed, as it regularly did while it was an EU member.  The UK will be a ‘rule taker’.

How will alignment affect the UK’s trading relations with the rest of the world? On Brexit day, 29 March 2019, the UK will leave the EU, so even if there is a transition phase, it can start negotiating with third countries.  It will have a pressing need to do so as all the FTAs it currently has will fall away as a result of Brexit.  Under WTO law, these agreements will not automatically ‘roll over’ (http://www.blogs.jbs.cam.ac.uk/cbr/post-brexit-options-for-the-uk-combining-legal-and-economic-analysis-3/).  Nor will renewing them be a simple matter of ‘cutting and pasting’ as the dynamics of any negotiations will be fundamentally different from those which applied when the UK was part of the wider EU.

Moreover, these negotiations will take place under the shadow of the agreement which the UK will be attempting at the same time to negotiate with the EU.  If, as seems likely, this commits the UK to de facto convergence of its laws with those of the single market, it will not be in a position to do deals with third countries which depart from EU laws and standards.  Thus it will not be able to agree an FTA with the United States, for example, which is premised on the convergence of UK standards with those prevailing in the US, or even one which provides for mutual recognition of US and UK standards, as this would undercut the commitment to EU-UK ‘alignment’.

Why is the UK on a pathway to an arrangement under which it cedes regulatory autonomy to the EU while restricting its ability to do trade deals with third countries?  It is because the alternative, the ‘hard Brexit’ scenario of falling back on WTO rules, is not attractive.

A ‘hard Brexit’ would imply the imposition of tariffs on UK exports to the EU.  These will be in the range of 10% for certain manufactured goods, such as motor vehicles, and over 40% for some agricultural products (https://www.rand.org/randeurope/research/projects/brexit-economic-implications.html).  A falling pound would offset some of these extra costs but would not save some sectors from a severe competitive shock (http://www.cbr.cam.ac.uk/fileadmin/user_upload/centre-for-business-research/downloads/working-papers/wp483.pdf).  As the same tariffs would apply to imports into the UK from the EU, there would be an increase in prices of food and other necessaries which would hit low income groups the hardest.  Customs controls would return, and not just at the Irish border.  There is no realistic prospect of the necessary physical infrastructure being in place by Brexit day.  Nor will it be possible by then to have replicated existing arrangements for UK-EU cooperation on a host of matters including some highly sensitive ones such as security and transport.

The ‘hard Brexit’ option is no more attractive in the medium to long term.  If the UK leaves without the prospect of an FTA with the EU, while also losing its current FTAs with third countries, it will have cut itself off from the mainstream of world trade for an indeterminate period of time until it can make new agreements.  It could adopt a policy of reducing its tariffs, maybe  to zero, consistently with WTO law, but other countries are unlikely to reciprocate as this would place them in breach of their own FTAs or, barring universal tariff abolition, the WTO’s ‘most favoured nation’ rule.  This option of ‘unilateral free trade’ has been advocated by Economists for Brexit and the Institute for Free Trade, but has never been the policy of the UK government, or indeed of any other government. It’s not hard to see why: even some of its advocates accept that it would ‘effectively eliminate’ UK manufacturing (http://patrickminford.net/wp/E2016_1.pdf).

The joint report may be just ambiguous enough for British politicians to continue debating the ins and outs of Brexit into 2018.  The reality, however, is that Brexit cannot be delivered on the terms promised at the time of the June 2016 referendum.

From the point of view of trade and regulatory convergence, the UK is on a path to a symbolic Brexit.  This Brexit will change some things: it will cause significant detriment to the interests of EU citizens living in the UK, whose rights are far from guaranteed by the emerging UK-EU deal, and to UK citizens resident in mainland Europe, whose interests seem to have been entirely forgotten in the Brexit negotiations.  So it’s not at all without costs.  It is hard to know what the gains are meant to be.


Listen to the podcast

“Simon Deakin, Director of the CBR and Professor of Law at the University of Cambridge, discusses where things stand with Brexit after the December 2017 European Council, and argues that the UK is on a pathway to a form of ‘soft Brexit’ which could be largely symbolic”.

In this special two-part CBR audio podcast you can hear Professor Deakin talk to CBR journalist Boni Sones about his new article, which examines the recent discussions between Prime Minister Theresa May’s UK government and the EU, and what Deakin thinks of the long view of Brexit over the next five years.

You can also read Professor Deakin’s full article here  https://www.socialeurope.eu/alignment-convergence-symbolic-brexit 

These are just some of the important snapshots that Deakin tells Sones in this podcast:

  • After the December 2017 European Council, the UK is set on a pathway to a form of ‘soft Brexit’ which, on issues of trade and regulation, will be largely symbolic.
  • The UK is still due to Brexit on 29 March 2019, but to avoid leaving the EU with no trading arrangements in place, it is seeking an implementation phase (or transition phase in the EU’s language) pending the conclusion of new free trade agreement with the EU.
  • The EU is signalling that during this implementation or transition phase, the UK will have to agree to follow the rules of the single market, including new laws and regulations added by the EU after Brexit.
  • In the implementation or transition phase, the UK will not be in the EU single market, or in the EU customs union, but will probably end up agreeing a bespoke version of single market participation little different in practice from the so-called Norway option, and a customs union like the one Turkey has with the EU.
  • The UK expects the implementation phase to last no more than two years, but since it takes on average a decade or more to do trade deals, a longer period of transition seems likely.
  • The eventual shape of a free trade agreement with the EU is still unclear; if it is based on the deal the EU has with Canada (CETA) it will not provide for full single market participation, but nor, conversely, will it provide for full access to EU markets for the UK’s service industries.
  • It remains open to UK negotiators to walk away from discussions with the EU if the EU’s terms for the implementation phase are deemed to be unacceptable.
  • But if this were to occur, a hard border between the North and South of Ireland would be unavoidable.
  • A hard Brexit would also lead to the imposition of tariffs on UK exports to Europe which would be highly costly for certain sectors, including agriculture.
  • Tariffs would also add to food costs and prices of other essential items imported into the UK from the EU.
  • In a hard Brexit scenario the UK could reduce its external tariffs, conceivably to zero, but WTO rules make it practically impossible for other countries to reciprocate.
  • For these various reasons, falling back on WTO rules is not a credible negotiating position for the UK. This point has not been lost on the EU’s negotiators.
  • So the UK is likely to commit itself, going forward, to a form of ‘regulatory alignment’ with the EU which will last for several years, and may become permanent.
  • Regulatory alignment between the EU and UK will reduce (and perhaps eliminate) the scope for the UK to agree trade deals with other countries which depart from EU trading standards and regulations.
  • Thus we are looking at a Brexit that is not so much ‘soft’, more ‘symbolic’, although still harmful to EU citizens living in the UK and to UK citizens living on the mainland, whose interests have been marginalised.

Some quotations from the podcast:

‘Having conceded alignment between North and South in Ireland the UK was bound, I think, to practically concede alignment between Northern Ireland, the whole of Ireland, and Great Britain. That was almost inevitable.’

‘I think the Brexiters’ “have cake and eat it option” was never realistic, could never be delivered, and that has now become, after the events of 8th December 2017, crystal clear, we can’t have our cake and eat it.’

‘I think we are looking at a symbolic Brexit. We will have left by March 2019 but it is a symbolic change on trade and regulation.  It is not symbolic for EU citizens living in the UK who will not have the security and certainty they previously had. Their rights will not be guaranteed once we leave the EU as they were when we were in. For UK citizens living in mainland Europe it is a catastrophe. The interests of individuals and families have been sacrificed for the symbolism of Brexit.’

‘During 2018 we will continue to hear “nothing is agreed until everything is agreed”, we will continue to hear that things are not legally binding and there will continue to be calls for a hard Brexit. But we are on a pathway to a very, very soft Brexit, a formal Brexit. Yet because of the political turbulence, companies will continue to disinvest.  And there are real negative effects which will have consequences for the economy and for individuals and families.’

 

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