Professor Chris Grey’s latest analysis on last week’s statements about regulatory divergence. Government ministers may not understand the implications of what they say but the message to businesses is clear.
First published in January 2020.
Hardly had the electronic ink dried on my previous piece, which included some discussion of the government’s approach to the business effects of Brexit, than Sajid Javid gave a clear and strong indication of just what that is to be. In an interview with the Financial Times, the Chancellor stated that “there will not be alignment” with EU regulations, that businesses have already had since 2016 to prepare for this, and still have until the end of the year to “adjust”.
Forget staying close to EU after Brexit, chancellor tells business https://t.co/eRWQaccCxM— Financial Times (@FT) January 17, 2020
In a way, there was nothing new in this. Ever since Boris Johnson came to power, and certainly since the changes to the Withdrawal Agreement and Political Declaration that followed, it has been clear that his government will be far less committed to alignment than, even, Theresa May’s (the ‘even’ is worth stressing since, of course, she had already taken the biggest step towards divergence by ruling out single market membership). Yet Javid’s was perhaps the hardest statement so far, and significant in coming from the person in charge of economic policy. For it seemed to suggest that there would be no regulatory alignment at all.
One problem with assessing such statements is that it is by no means clear that government ministers, even including the Chancellor, actually understand the full meaning of the terms they use and, therefore, the implications of what they are saying. But business groups certainly took him at his word, with the motor industry immediately warning – for the umpteenth time – that this would add billions of pounds to their costs, and aerospace, chemicals, and food and drinks industry spokespeople giving similar responses.
There are multiple problems with what Javid said. One is that it is simply absurd to suggest that businesses have had since the Referendum to prepare. As anyone who has followed even the cursory details since then knows, the entire British polity has been convulsed in the debate about what leaving the EU actually means. Even now, with 11 months to go until the end of the transition period, the nature of that relationship has still to be negotiated. So how are businesses expected to prepare?
It is not enough just to know the general shape of what is in prospect (‘a free trade deal’) since that says very little about the detailed operational issues which will arise according to the specific nature of that deal. Moreover, a strict interpretation of the ‘no alignment’ line might well suggest that no such deal will even be reached, or only one of the most minimal sort, so in that sense even the general shape of things is not clear. At the very least, as things stand, there is no assurance of any deal, so even the most basic question of whether and what tariffs will apply is still open, and for some businesses the answer to that in itself will be the make or break issue.
Beyond that, if alignment with the EU is to end, then what regulations will replace them? None of that has been specified (except in a very few areas, such as the post-Euratom nuclear regulatory system), and so no business can know what it is supposed to be adjusting to. Very large businesses might be able to afford to plan for various scenarios, but even that would not be enough to make all the detailed operational preparations.
Did Javid know what he was saying?
One clue to the fact that Javid may not really have understood the implications of what he said lies in his comment in the same interview that Japan exports cars to the EU, yet does not follow EU regulations. That’s clearly nonsense – those cars it sells to the EU must conform, and the extensive investment by Japanese car firms within the UK and elsewhere, in order to be in the single market, is partly explained by this. But I think that what Javid probably had in mind was one of the basic, but mistaken, beliefs of many Brexit advocates (who, presumably, are now influential as advisors to the government). It is that what is at stake is adherence to product standards and that, therefore, a firm simply adopts the standards of the country it wants to export to for the products it wants to sell there. Meanwhile, firms which are solely domestic should not be subject to EU regulations, and their being so represents an objectionable intrusion into national sovereignty.
There are numerous difficulties with this. First, it ignores the fact that the issue isn’t just one of conforming with standards – as if all that meant was a business making internal changes to what it produced, though that in itself is a cost – but of the licensing and/or inspection needed to ensure or to demonstrate that conformity. The more regulatory regimes a business has to comply with, the higher the cost. So, far from ‘reducing the regulatory burden’ on business, that burden is increased when countries have their own regulations. Indeed, that is the foundational insight and basis of any single market, including that of the EU.
Second, it is not just about the EU. EU standards are substantially intertwined with wider, global, standards. That is, they have to some extent spread beyond the EU (e.g. chemicals regulations) or themselves incorporate standards systems from outside the EU (e.g. automotive regulations). Thus divergence from EU regulations is incompatible with the ‘Global Britain’ strategy that supposedly underpins Brexit. Or, to put it better, the distinction that Brexiters draw between being an EU member and being a global trading nation is a totally false one.
“Divergence from EU regulations is incompatible with the ‘Global Britain’ strategy that supposedly underpins Brexit.”
Conversely, the idea of a British set of regulations is deeply constraining. It is inconceivable that such regulations would themselves become a new international standard, so as to, again for example, supplant existing international chemicals and automotive regulations. In this sense, the question of whether these British standards would be ‘higher’ or ‘lower’ than those of the EU – whilst potentially important in its own right – isn’t so much the issue as the fact that, higher or lower, they would only apply to British businesses (though see below for clarification on what ‘British’ means here). Even if the standards are the same – which makes the whole exercise pointless anyway – there would still be a need for double registration/licensing of conformity.
Regulatory independence has no benefits
For those businesses that currently export, that just adds a layer of regulatory cost (i.e. regulation for the domestic market only), whilst for those that currently don’t it adds a huge barrier to developing export business in the future (i.e. having to shift to, and/or demonstrate conformity with, the international standards). And it is actually even more constraining than that, because these domestically-regulated businesses would also be precluded from supplying exporting companies to the extent that their products were components within a finished product that did need to comply with EU and international regulations. There is simply no business benefit to this at all – its only conceivable value is political flag waving that we have ‘our own’ standards.
As regards the automotive industry – but something similar would apply to many others – all of this was laid out quite starkly by the Brexit Select Committee in 2017 when it considered the question of regulatory alignment: “there is no argument for a separate set of UK standards” (paragraph 27) … “we have not identified any potential benefits for regulatory divergence from the EU … There are only costs.” (Paragraph 30)
The impact of Brexit on the automotive sector, Brexit Select Committee. / UK Parliament
There is a further and very important dimension to all this. Not only does divergence from EU regulations damage British participation in the European single market, it also substantially damages the existence of the UK single market. That is to say, because of the terms of the Withdrawal Agreement for Northern Ireland, the more (Great) Britain diverges from the EU, the more significant the Irish Sea border becomes. That has economic consequences in shrinking the UK single market, but it also has major political consequences, most obviously for Northern Ireland but also for Scotland, since it further cements the ways in which Northern Ireland will remain in the EU single market. That is to say, the more Great Britain diverges from the EU, the more Northern Ireland diverges from the UK.
“The more Great Britain diverges from the EU, the more Northern Ireland diverges from the UK.”
Subsequent to Javid’s interview, some supposed clarifications were made by the Business Minister, Nadhim Zahawi, but if anything these muddied the waters further. First, he said that a zero tariffs, zero quotas trade deal would mean that there would be no cliff edge at the end of the transition period, and would eliminate the bulk of the paperwork for exporters. But, apart from the fact that such a deal has yet to be done, it would certainly not solve the paperwork problem, as Pauline Bastidon of the Freight Transport Association pointed out.
"Ruling out tariffs & quotas will eliminate the bulk of paperwork"... WHAT???? @AlexJFMorales 1. That's incorrect. You still have to demonstrate goods can benefit from 0 tariffs/quotas -> rules of origin, customs formalities. You need to comply with regulatory requirements 1/ https://t.co/WvM2gsVnWL— Pauline Bastidon (@BastidonPauline) January 21, 2020
Second, as so often in the Brexit debate, it seems that Zahawi doesn’t appreciate the different issues posed by tariff and non-tariff barriers to trade. A tariff deal is irrelevant to the regulatory issues and, on those, he was back in the same territory as, implicitly, Javid had been. That is, again, he seems to think that it is just a matter of British firms following particular standards. He implied that these might be the same as EU standards – for example of chemicals – but that Britain would no longer be a rule-taker.
But this makes no sense at all. If Britain simply replicates EU rules then it is, effectively, a rule-taker. Yet at the same time, unless it is formally within the ambit of EU regulatory agencies then simply following the rules will not be enough, without licensing and enforcement, to gain the economic benefits of doing so. And, as noted above, it would entail double registration and licensing processes simply in order to follow the identical standards. So, if he actually understands and means what he says, it is yet another Brexit lose-lose: as a rule-taker there is a loss of ‘sovereignty’, whilst without formal participation in regulatory systems there is also an economic loss.
Sajid Javid also made some subsequent remarks on the subject, this time at the World Economic Forum in Davos (in between being taught some brutal, public lessons in realpolitik by the US Trade Secretary). In response to questions he re-stated that there was no point leaving the EU and still “sticking to all its rules”. This can be parsed in two ways. It might mean, as he implied before, exiting ‘all its rules’, or it might mean sticking to some but not others. The next day he spoke of not diverging “for the sake of it”, which might imply the latter. But, in that case, which of them? Without saying, businesses can’t be expected to prepare.
NEW:— Faisal Islam (@faisalislam) January 23, 2020
Chancellor Sajid Javid tells business leaders in Davos that though “we cannot be a rule taker” for democratic and economic reasons... “that doesn’t mean we will diverge for the sake of it” from EU rules and standards
He also reiterated his belief that a trade deal could be done by the end of the year, but mentioned as if in passing that this would include “services”. But since any deal on services would necessarily include some element of regulatory alignment, did this mean that he now accepted this? Or did he not realise that this was an implication? And which specific services was he referring to anyway?
When dogma becomes policy
It’s by no means impossible that our politicians simply don’t understand what they are doing. If so, that isn’t unusual – they are not elected or appointed as ministers for their technical expertise – but it is being compounded by not listening to those who do and, very likely, listening too much to Brexit dogmatists who do not, or do not want to, understand. It really would not be a big ask to expect them to sit down for short lectures from non-partisan experts like Dmitry Grozoubinski on trade, Pauline Bastidon on logistics, and Anna Jerzewska on customs. Not with a view to coming to terms with the horrendously complicated technical details of these domains, which isn’t their job, but just to grasp the broad outlines of each which, on current evidence, they don’t.
“It’s by no means impossible that our politicians simply don’t understand what they are doing.”
That seems unlikely to happen. So we have to conclude that they may not know what they mean, but they do mean what they say. That is, perhaps without really understanding the consequences, they will pursue a policy of wholesale regulatory divergence. For this is not now a matter of an interview here or a speech there. There have been reports that government ministers actually regard whole, highly successful, sectors of the economy as expendable. Even that might – just about – make sense if at the same time they could point to sectors which are going to be boosted by their Brexit plans. So far, none have been identified.
Certainly there was much Brexiter excitement about a Reuters’ report this week that more than a thousand EU financial firms are to open new offices in London because of Brexit. But, alas, beneath the headline lay a different, more complex and less positive story – that, precisely in order to cope with the separation of regulatory regimes (i.e. the anticipated shift from ‘passporting’ to ‘equivalence’), these firms were establishing London offices. This would create an estimated 2,400 jobs. There was some ambiguity in the report as to whether this was across the headline 1,000+ firms (<2.4 jobs per firm) or just across 300 of them (8 jobs per firm) but, either way, these are presumably ‘brass plate’ operations for registration purposes, not substantive operational moves.
Thus, as the report confirmed, it only mitigates the flow of jobs the other way. For example, just this week investment bank JP Morgan announced the latest phase of its relocation from London to Paris, where hundreds of its staff will be amongst the estimated 4,000 from across the financial services who by the end of the year will have moved to Paris alone, with Dublin, Frankfurt and Amsterdam also pulling in jobs (and business and taxes).
As soon as the decisions was made that Brexit could not mean the ‘Norway model’ of single market membership that many leavers voted for, it was clear that the services sector was going to be substantially damaged. And frictionless trade for goods has long been a pipe-dream. But this apparent hardening to complete regulatory unilateralism suggests that manufacturing industry, too, is to be sacrificed simply in order to proclaim ‘independence’. Like blue passports, the value is purely symbolic. Unlike blue passports, the economic consequences will be severe in terms of jobs, the tax base and, hence, public services.
For in telling businesses so clearly that they have less than a year to prepare for a scenario that is still unknown but which looks to be deeply problematic for them, and which they have repeatedly and explicitly warned against, Javid has sent a message as clear in its own way as Boris Johnson’s revealing “f*** business”* comment. For businesses that export, have international supply chains, or which supply such firms, the message to those that can do so is to use the transition period to relocate. For others, perhaps especially SMEs, for whom relocation may not be an option, it may simply mean closing down. The costs and complexities just of new customs procedures, let alone those of future but unspecified regulatory changes, may simply be overwhelming.
But, as suggested in my previous piece, we seem now to have reached a point where all costs are irrelevant and all that matters is the bright, shining light of Brexiter purity. Which may be a fine and splendid thing to some, but you can’t eat it and it doesn’t pay the bills.🔷
(*) I dislike the coy use of asterisks, but have used them because I have the idea that, otherwise, some internet filter settings may prevent readers accessing this article.
Check their Voting Record:
🗳️ Sajid Javid
🗳️ Theresa May
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