Costly EU demands on regulatory alignment could prevent us securing trade deals elsewhere
Our government on our behalf is reportedly offering to pay the EU around €45-50 billion of money that we don’t legally owe, to submit to our courts being overruled by a wholly foreign court after we have left the EU, and to make commitments keep our regulation in agriculture and possibly other fields “aligned” with the EU in order to resolve the Irish border issue. This is all so that we can reach the nirvana of having not a trade deal, but talks about a trade deal.
It is clear that we do not legally owe these sums to the EU, and indeed probable that in law we have a net credit in our favour (as per this analysis of the UK’s potential financial liabilities by myself and Charlie Elphicke MP).
The fact that we do not owe the money does not necessarily mean that it is wrong to agree to pay some money. I would advise a client as part of a settlement to agree to pay money that is not owed, if the overall benefits of a settlement including achieving a harmonious and beneficial future relationship with the other party, were sufficient to warrant the payment.
But if you are going to agree to pay a large sum of money that you do not owe, you need to look carefully at what is the value of the benefit you will get in return. The benefit is supposed to be the trade agreement that we will negotiate with the EU once we get to the stage of actually talking to them about our future relationship. But no one has actually looked at what the EU will realistically offer in the way of a trade agreement, and demonstrated that it would really be worth €40-45 billion, or indeed that it would be worth paying any money at all for what is on offer.
The key question about any trade deal with the EU is whether it will be open or closed. An open trade agreement is one which allows goods and services to be exported between the parties if they satisfy certain standards, but does not restrict the right of either party to allow in goods and services from third countries. The most that an “open” trade agreement should say about goods and services from third countries is that if they are let in on easier terms than laid down in the trade agreement, then exporters from the other party to the trade agreement should also have the right to export their goods and services on those easier terms (a “most favoured nation” or MFN clause).
By contrast, a closed trade agreement will specify that goods and services that meet a certain standard may be traded between the parties, but will prohibit the parties from allowing in goods and services from third countries which do not meet that standard. While such an agreement will facilitate trade between the parties, it does so at the cost of restricting trade with third countries and preventing the importation of goods and services from outside which are cheaper or better than those available within. This is particularly so where the standards adopted are artificial and really designed to shield domestic producers from competition rather than being truly necessary to safeguard the interests of consumers.
The paradigm example of a “closed” trade agreement is the EU’s internal market (the actual accurate Treaty name for what is often referred to as the “single” market). That is based on harmonised detailed and prescriptive rules and regulations for all kinds of goods and services. While this assists in facilitating free trade between countries within the internal market, it does so at the expense of driving up costs and more importantly it restricts trade with third countries whose exporters are required to comply with the rules. In addition, and unlike a closed free trade agreement where the common standards are mutually agreed, a country which joins the EU internal market from outside must submit to the EU unilaterally imposing changes and further rules on it with which it must comply.
These features of a closed trade agreement restrict unilateral trade liberalisation but more importantly will render it difficult or sometimes impossible to conclude beneficial trade agreements with third countries. For example, you may be unable to offer a third country access to your own market for its insurance companies on the basis of home country regulation, because you are bound to apply a prescriptive set of rules under the trade agreement to any insurer who does business on your market. The third country will then be most unwilling to agree to a trade deal under which your insurers can access their market on the basis of home country regulation.
The government rightly rejects seeking continued UK membership of the EU internal market for this reason, as well as for the reason that internal market membership would necessarily also involve continued free movement of persons.
So what will be on offer from the EU under a free trade agreement which gives preferential access to the internal market? A lot of light was cast on this question by a lecture given by Michel Barnier on 20th November 2017 (emphasis added):
“The UK will, of course, have access to the Single Market. But this is different from being part of the Single Market. And a good deal on our future relationship should facilitate this access as much as possible. And avoid a situation where trade would happen under the WTO rules for goods and services. To achieve this, there is the third key: we need to ensure a level playing field between us. This will not be easy. For the first time ever in trade talks, the challenge will be to limit divergence of rules rather than maximise convergence. There will be no ambitious partnership without common ground in fair competition, state aid, tax dumping, food safety, social and environmental standards. It is not only about rules or laws. It is about societal choices – for health, food standards, our environment and financial stability. The UK has chosen to leave the EU. Does it want to stay close to the European model or does it want to gradually move away from it?”
He went on to link these issues to the ratification of the UK’s future partnership with the EU. Those who choose to ignore these comments do so at their peril. It is clear that the EU will not be willing to conclude a free trade agreement with the UK unless we accept wide-ranging obligations across our own internal market, and also necessarily as regards imports from third countries. Of particular significance are the references to “food safety” and “food standards”.
The EU has no legitimate interest in the food standards of food eaten by UK consumers after we have left the EU. The references to these issues are pure protectionism: to lock in the highly profitable UK food market for EU producers and to exclude competition from outside. We are a net food-importing nation with a strong interest in having low food prices – which would be of particular benefit to the many low-income families who voted Leave. Our consumers have spent the last 45 years paying prices for food inflated well above world levels, with the benefits of our captive market going mainly to EU producers outside the UK.
It is obvious that the EU wants to maintain this situation as far as possible and will ruthlessly use a free trade agreement with the UK as lever to achieve that objective. If we accede to such restrictions, the problem is not just that our consumers will carry on paying well over the odds for their food for the long-term future. It will also severely damage or destroy the prospects of concluding free trade agreements with major trading partners, such as the USA and Australia, both of whom have very significant agricultural export interests.
This is what the row over the Irish border is about. The Irish government present this as being of concern for the Northern Irish peace process. It is nothing of the kind. Both the Irish government and their EU27 backers are cynically exploiting that issue as a lever to drive the UK to agree to follow EU agriculture rules after we have left, in order that Irish and other EU27 producers can continue to exclude competition from the rest of the world from the lucrative UK food import market.
That the UK government is contemplating agreeing to this as a condition of accessing talks on trade is sheer madness, whether the words used are “convergence”, “alignment”, “no divergence” or whatever. If the UK gives such a commitment, however, worded, the EU will not back down from insisting on such requirements as a condition of any free trade agreement. This then will severely damage or scupper the UK’s chances of concluding free trade agreements with other countries, locking in our dependency on the EU and ensuring that our future will be one as an EU vassal state subject to its regulatory regime, but as a non-Member unable to participate or vote in shaping that regime.
The reported Northern Ireland border offer is particularly crazy because it is expressed to apply if we do not reach a trade agreement with the EU. Thus if we fail to reach an agreement with the EU on a trade agreement, we have agreed to restrictions that will damage and probably destroy our ability to conclude trade agreements with other major partners. This would completely undermine and destroy such limited negotiating power as we have with the EU over the terms of a free trade agreement.
Far from it being worth paying the money in order to reach a beneficial free trade agreement with the EU, it is increasingly and glaringly clear that the only free trade agreements on offer from the EU are likely to be ones which it would be worth paying good money not to belong to. And it seems that in order just to reach the stage of having talks with the EU about future trade that are likely to prove worthless, our government is willing to compromise the independence of our courts and to give a commitment about aligning our regulation with the EU’s which will endure even no trade agreement is reached.
Martin Howe is a leading barrister in the fields of intellectual property and EU law. He was called to the bar in 1978 and became a QC in 1996. He is Chairman of Lawyers for Britain.