Level playing field commitments and another looming Brexit row

In the swirl of political chaos it is easy to miss important developments. Although no announcement has been made, there have been persistent and well-sourced rumours that the Johnson government wishes to row back on the May government’s agreement to “level playing field” (LPF) commitments in the final UK/EU relationship. That agreement is incorporated in the political declaration setting out the bare bones of the envisaged final relationship: paragraph 79 records that:

“The future relationship must ensure open and fair competition. Provisions to ensure this should cover state aid, competition, social and employment standards, environmental standards, climate change, and relevant tax matters, building on the level playing field arrangements provided for in the Withdrawal Agreement and commensurate with the overall economic relationship.” 

The headlines have focused on the Northern Ireland backstop and on Johnson’s “do or die” fight to keep the 31st October Brexit date, but the LPF issue is a contentious one which could yet come to a head. It is therefore worth exploring in some detail.

The basis for the LPF commitments is “open and fair competition.” The EU’s anxieties on that score are set out in the March 2018 European Council negotiating mandate: “Given the UK's geographic proximity and economic interdependence with the EU27, the future relationship will only deliver in a mutually satisfactory way if it includes robust guarantees which ensure a level playing field. The aim should be to prevent unfair competitive advantage that the UK could enjoy through undercutting of levels of protection with respect to, inter alia, competition and state aid, tax, social, environment and regulatory measures and practices.”

In other words, whatever the position might be for third countries such as Canada or Japan, the UK is too big and too close to be allowed privileged access to the EU market, over and above what is required by World Trade Organisation rules, if it does not meet EU standards or, at least, something broadly equivalent. The brute political reality is that, given the size of the UK and the volume of trade at stake, the EU27 cannot sell a deal to their own public if it appears to allow the UK to compete freely in the EU while being able to subsidise, or lower the regulatory costs of, its own suppliers in a way not open to EU member states.

That point will apply just as much, and probably even more, to a deal (or series of mini-deals) negotiated in the aftermath of a crash-out Brexit as it does to a final agreement negotiated after an Article 50 withdrawal agreement.

Of course, the problem here is that, for many right-wing Brexiters, the prospect of escaping EU regulations on precisely the areas listed by the EU is one of the major reasons for supporting Brexit. This technical-sounding debate therefore cuts to the heart of the Brexit issue.

Some other points about the LPF provisions in the political declaration are worth noting.

- The precise extent of the LPF commitments required from the UK will depend on the scope and depth of the relationship. The more access the UK wants, the more demanding the LPF commitments will be.

- The standards required will be EU or international standards. There will need to be mechanisms to ensure implementation and enforcement, and a mechanism to resolve disputes about whether the UK is honouring its commitments.

- The expectation from the EU was that the LPF commitments would build on those set out in the Withdrawal Agreement. These were essentially in the Northern Ireland protocol, or “backstop.” Those arrangements basically required the UK to maintain existing labour and environmental standards, with an enforcement mechanism confined to an EU/UK Joint Committee and an arbitration panel (with the European Court of Justice ruling if it was necessary to interpret EU law). In the area of state aid the arrangements were tighter: the UK had to import EU rules and policy as they developed, and its internal state aid regime was subject to detailed input from the Commission, which could indicate the correct ruling in all cases—an indicationfrom which the UK could only exceptionally depart.

The government still claims to be pursuing a deal. If we take that claim at face value, or at the very least accept that eventually the UK will have to face up to its responsibilities, what replacement for these provisions might be available under a revised plan for the long-term relationship? The initial difficulty here is that (as so often) it is not at all clear what the UK wants. During the May government, relevant ministers would assure everyone who asked that there was no intention of adopting lower standards of environmental or labour protection than the EU. As for state aid, there have been mutterings from Conservative politicians about the constraints these rules impose when working out whether and how to rescue industry in trouble and when creating tax breaks for research. But it is not clear that the government will want to abandon a regime that also serves an important role in regulating the extent to which the devolved governments can offer subsidies that distort the UK internal market (and also bearing in mind that the EU will in any event be in a strong position to impose protective tariffs under WTO rules if the UK starts assisting industries that export to the EU).

That said, there is force in the point that, outside the EU, it is probably not sustainable in the long run for the UK to be legally bound to EU standards of environmental and labour protection or state aid over which it will no longer have any say. If you take state aid as an example, without the UK, EU state aid policy might well start to diverge from policy appropriate for the UK, not least because EU state aid often reflects other EU policy objectives which will no longer be shared by the UK. Further, any commitment by the UK to stick to EU standards ultimately involves the jurisdiction of the Court of Justice of the EU, since only that Court can rule on what EU standards actually are in any particular case. Since the UK will have no judge on the CJEU, that is not an attractive long-run outcome.

The problem, though, is that if the UK is to have freedom to set up its own independent standards in these areas, that solution has to be sold to an EU that is already deeply distrustful of the UK approach post-Brexit, and will certainly not just take it on trust that the UK will not let regulatory standards slip, or that the UK will not subsidise exporting industries. Indeed, since what there is of the economic case for Brexit usually depends on heroic assumptions as to cost savings from deregulation, it is hard to dismiss such suspicions as unfounded. Moreover, the effect of abandoning LPF commitments is to make the Northern Ireland backstop even more important, as there is likely otherwise too significant a difference in the regulatory regimes between Northern Ireland and Ireland to make an open border viable as the border of the single market.

If the EU is therefore prepared to give any ground on LPF commitments, it would almost certainly be on the basis that it remained free to restrict access to its internal market for UK goods and services unless the 27 remained satisfied that UK rules on environmental and labour standards, and state aid rules, were at least equivalent to its own. The UK’s difficulty will be that any decision by the Commission along those lines would be hard to challenge effectively.

It may be that negotiations collapse in acrimony before we get to this point. But in that scenario the UK will soon seek measures to mitigate the damage. And these same tough choices will confront it.

Insecure (at best) rights of access to the single market may be the best that can be achieved if the government is determined to rule out LPF commitments. And it is not at all clear that the EU will go even that far, given its anxiety that the UK in its current mood is too unreliable a partner, and too eager to tow itself across the Atlantic, to be given the benefit of any doubt.