26 January 2018

This article originally appeared on the website of ConservativeHome

Months ago, I revealed on this site that the Cabinet had not yet properly discussed their desired “end state” for the Brexit negotiations. That debate is now raging inside Government but is far from resolved. On Saturday, James Forysth quoted a Cabinet insider saying that they were “nowhere close to any conclusion being reached”. The key question remains whether we will have the ability to choose to have different regulations from the EU, and how that regulatory divergence will be managed.

Given that the Government announced that we will be leaving the Single Market, the choices are presented as either a so-called ‘EEA minus’ option or a ‘Canada plus’ deal. The former would put Britain just outside of the European Economic Area (of which Norway, for example, is part) but as close as possible to the Single Market. ‘Canada plus’ – or ‘Canada plus plus plus’ as Brexit Secretary David Davis suggested – would mean a deeper version of the Canada-EU CETA trade deal.

In her Florence Speech, the Prime Minister argued that there would be some divergence in regulatory terms between the UK and the EU. But she didn’t make it totally clear that the UK would have the ability to make its own rules unilaterally. Will we be able to opt-in or opt-out of EU rules? And would the EU accept us ‘opting in’ into certain areas only?

When it comes to regulation, many people imagine divergence only from one side. They fear (or perhaps hope) that the UK will quickly tear up or replace the body of EU law which the Repeal Bill will have incorporated. But even if the UK keeps things exactly the same, the EU27 will introduce new rules. This will mean an inevitable divergence from the day zero position when we both have precisely the same rules.

In Florence, the Prime Minister outlined three ‘buckets’ of regulation. Ever since, Whitehall insiders have pointed to those passages of her speech as the key to understanding the Government’s approach to Brexit. Theresa May noted that there “will be areas of policy and regulation which are outside the scope of our [future] trade and economic relations [with the EU]”. Then she said there will be areas “which do affect our economic relations” but “where we and our European friends may have different goals” or “where we share the same goals but want to achieve them through different means”. Finally, she said “there will be areas where we want to achieve the same goals in the same ways”.

May stated that in some areas (her final bucket) the UK can accept being a ‘rule-taker’ – having regulation without representation. But those areas ought to be relatively limited. Without a seat around the table it will be hard to prevent damaging regulation harming our economy. Even the fiercest Whitehall advocates of the need to stay as close as possible to the EU post-Brexit, Treasury officials, recognise the risks of long-term rule-taking. In a wonderful example of departmental Nimbyism, Treasury civil servants are prepared for most sectors of the economy to take Brussels’s rules, but want protections for financial services lest the City be subject to regulatory ‘attacks’ by the French. But in the future, the EU will inevitably want to introduce new regulations covering key growth industries – Artificial Intelligence, biotech, big data and so on. Do we really want to relinquish the right to decide how to regulate these industries? Even if we are happy with the existing rules, how can we be sure we could accept future rules?

Having different regulatory rules from the EU won’t mean we can’t trade together. Some people seem to believe that we would need to impose all the EU’s rules, after Brexit, to do any trade with the Continent. But if that was the case, China, India and the US would have had to align all their internal markets to Brussels’s regulations. Instead, those companies outside the EU which look to trade with Europe have to make sure their goods comply with relevant regulations.

Our goal should be to reach an agreement with the EU which gives as much equivalence as possible for areas where we have different regulations from the EU. This would mean that UK goods could be easily sold in the EU and vice versa. If it’s not possible to agree equivalence, the administrative cost of trade will increase, but UK companies will still be able to trade with Europe.

Open Europe is looking closely at the Canada-EU deal to examine the ways in which it could be improved. That deal offers some regulatory equivalence, including on certain aspects of financial services. But we should aim for something deeper with the EU. CETA established a Regulatory Co-operation Forum, a body which allows the EU and Canada to exchange information and identify areas where regulators can work together. That forum is voluntary and lacks decision-making powers. We might prefer something with greater powers but which allows both sides to retain more regulatory independence from one another than European Economic Area members, who have little ability to deviate from EU Single Market rules.

This weekend the French President confirmed that the UK could secure a bespoke trade deal, deeper than Canada’s but further away than the Single Market. That’s exactly where we should be aiming. It will be hard to negotiate such a deal and major unresolved issues remain (not least the question of the Irish border, which was fudged in December). But if the UK doesn’t have the ability to decide its own rules in key areas, the Government will have sacrificed future prosperity to minimise short-term disruption. Leaving the EU, the Single Market and the Customs Union, will come with costs. Arguably, the public heard that message during the referendum campaign and voted to Leave nonetheless. If the Government isn’t bold, our economy won’t be able to benefit from the longer-term opportunities of leaving.