Escape from EU regulations is loss of leverage
About 100 British officials will arrive in Brussels today to start the mammoth negotiations on the future relationship between the EU and the UK. The two sides are poles apart. The UK wants regulatory detachment from the EU while the EU insists or regulatory alignment.
Effective regulations are binding. Therefore, it is not surprising that the UK government believes that the withdrawal from the European Union should give it a free hand to write its own regulations as it sees fit.
However, as has already been pointed out by businesses on both sides of the English channel, regulatory divergence will cause trade friction between the UK and the EU. The UK government appears to consider trade friction to be a price worth paying for regulatory freedom.
But if trade friction is the overt price of regulatory freedom, loss of leverage is its covert price. By accepting less regulatory independence one gains leverage over the regulations of other countries.
In addition, the loss of regulatory independence is compensated by gains from stronger enforcement arrangements. Given the fact that countries often flout their own rules, a strong enforcement mechanism is always essential for effective compliance with international trade agreements.
Let us consider for a moment which country is more likely to benefit from a system with strong enforcement mechanisms: the country that tends to comply with or the country that tends to infringe the common rules?
A country like the UK which has traditionally been more open to trade, less interventionist and more respectful of the law poses little risk to its trade partners. In fact, it is a country like the UK that should want strong enforcement mechanisms to prevent others from violating the spirit and the letter of whatever common rules they adopt. Even if there are no common regulations, a liberal country like the UK should still want to ensure that its trade partners do not renege on any agreement to open up their markets.
The UK has not been a friend of the European Court of Justice. This is strange because in a world of protectionist forces and vested interests, the Court and the European Commission have been the natural allies of the UK. This is borne by the statistics on actions by the European Commission against Member States who fail to comply with either their Treaty obligations or requirements of secondary legislation or who grant state aid that is incompatible with the rules on free trade and undistorted competition. In order to have comparable data, the table below shows the statistics for those countries that were Member States in the period from January 1986 to December 2019.
Member States are divided in three groups: large Member States, best performing Member States and the rest, respectively. With the exception of Denmark, the UK is the most compliant country, as indicated by the relative lack of cases against it.
Germany, France and Italy have the largest economies and the markets which are more important for UK exports. They are also the countries which are more likely to infringe the rules and grant state aid that is excessively distortive. All other Member States, with the exception of Denmark, perform worse than the UK.
The unavoidable conclusion must be that the UK has benefitted from the EU’s rules on free trade and its binding enforcement procedures that keep markets open.
We should also not forget that a unique advantage of the EU enforcement system is that, unlike the WTO or bilateral dispute-resolution mechanisms, an independent institution – the Commission – is responsible for enforcement. That prevents politicisation of disputes and threats for reprisal on unrelated issues. Even more importantly, non-compliance in the EU results in financial penalties rather than authorisation for counter-action which creates more trade barriers.
The future dilemma for the UK will not be whether to deviate from EU regulations, but rather how to get its trade partners to respect common rules without a strong enforcement mechanism. Enforcement independence, just as regulatory independence, will come at a price too.
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