Will the Post‐Brexit EU-UK Trade Agreement Limit Regulatory Competition

On Christmas day, the EU and UK released the text of their new Trade and Cooperation Agreement. It still needs to be cleaned up by having the lawyers go over each word with a fine‐toothed comb, but with this agreement, the post‐Brexit trade relationship between the EU and UK is now mostly spelled out.

There’s a lot to digest in this text, and I won’t try to do it all in this one blog post. Instead, I want to focus on one particular point that has received a good deal of attention: The “level playing field” relating to regulation in the EU and UK. In a nutshell, the level playing field is about concerns from the EU that the UK will use its newfound regulatory independence to lessen its regulation of various sectors of the economy so as to give UK producers a competitive advantage over their European counterparts. (To be clear, under the rules as written, things could go the other direction too — the UK could be upset about EU regulations).

Are such changes to UK regulation likely to happen? I really have no idea, and British politicians probably don’t know yet either. I hear talk from some Brits about deregulating and I hear talk from other Brits about ratcheting up regulations. I’m not sure which way this is all headed.

But now we know what the EU-UK trade agreement says about the possibility of regulatory changes, and the level playing field parts are a little worrying. I put forward some specific comments and questions on the level playing field provisions here, but to offer a broader take, I would say the following. On paper, what these provisions do is let one party to the agreement impose “rebalancing measures” whenever the other party “regresses” in the following policy areas: “labour and social, environmental or climate protection, or with respect to subsidy control.” So, as a simple example, if the UK were to ease up on environmental regulations in its auto industry (not that I think they are planning to), the EU could impose tariffs — which are one possible rebalancing measure — in response.

Now, it’s not actually as simple as that, because there’s a whole set of criteria to satisfy before tariffs can be imposed. For example, there must be “material impacts on trade or investment between the Parties” that “aris[e] as a result of significant divergences between the Parties in the [policy] areas”; and the rebalancing measures must be “restricted with respect to their scope and duration to what is strictly necessary and proportionate in order to remedy the situation.” I expect that some sort of domestic procedure will be set up for the EU and UK governments to make a determination that these criteria are met. In addition, if a rebalancing measure is proposed, the party that will be subject to that measure can challenge it before a neutral tribunal, arguing that the criteria for imposing it have not been met. For these reasons, in practice it may not be all that easy to impose these measures, and if that’s the case, there won’t be much impact on a government’s regulatory decisions.

Nevertheless, this agreement goes further than any other trade agreement I’ve seen in providing for what look like “trade remedies” for situations where one party changes its regulations in a way that the other party considers to be less strict and somehow unfair. Recall that “trade remedies” typically refers to anti‐dumping, countervailing duties, and safeguards, which permit the use of extraordinary tariffs under certain conditions. In a sense, the level playing field provisions look like a new category of trade remedies. Given the abuse we have seen with trade remedies over the years, we should be concerned about what might happen here.

It was always risky to go too far with including issues related to regulation in trade agreements. The more you do with regulation there, the harder it gets to control what happens. In some areas, today’s trade agreements require stricter domestic regulations (intellectual property is a good example); in others, they impose constraints on regulations (such as the requirement in most U.S. trade agreements that food safety standards be based on science). Here, we had a situation where there were concerns from the EU over UK intentions about loosening regulations. As a political matter, the level playing field provisions helped smooth the issue over and get this deal done in the specific context of the EU-UK situation.

Now, as I noted above, it may turn out that the provisions don’t have much impact. They are untested and it’s unclear how they will be applied. But it’s also possible that they could serve as an impediment to governments who want to revisit regulations that they believe are not serving their purpose or are excessively burdensome. It’s a mistake to see regulations as a one way ratchet, with more somehow always better. And it’s a mistake to think there is only one appropriate way to regulate, with any deviation considered problematic somehow. If that’s how these level playing field provisions operate in practice, they should not be replicated in future agreements.

Source: CATO Institute