We are almost one year down with one more to go in the Article 50 negotiating window, and the broad contours of the post-Brexit order are slowly coming into focus. Notwithstanding the non-negligible risk of a “no deal” scenario, following Theresa May’s Mansion House speech and the leak of the European Union’s draft negotiating guidelines for the new relationship, we have a good sense as to the likely direction of travel.
One striking feature of this new order is that rather than serving as the launch ramp into a low-tax and deregulatory cornucopia, Brexit is likely to entail an increase in the overall bureaucratic burden. This is no small irony given that hostility to “EU red tape”—both genuine and perceived—has long been a key driver of anti-EU sentiment, particularly among adherents of the Thatcherite tradition. For the likes of Jacob Rees-Mogg, Priti Patel and Owen Paterson, the best post-Brexit template for the UK is not Norway, Switzerland or even Canada, but rather Singapore, which entails scrapping a swathe of EU rules they believe are holding back British business.
For a variety of reasons however this ambition is likely to be frustrated, at least for the foreseeable future. Firstly, the EU has made the maintenance of the so-called Level Playing Field—a euphemism for the UK not undercutting the EU in areas like social and employment laws, environmental regulations and taxation—a precondition for any form of new preferential trade deal. The UK is simply too big and too close for the EU to be relaxed about it pursuing a radically different economic model, hence the EU’s demands for concrete safeguards of the sort it did not expect of Canada or Japan.
The UK economy would be badly hit by having to move to World Trade Organisation rules in March 2019. The EU knows this and has not been afraid of using its leverage to cajole the UK into accepting its position. Back in January 2017, Philip Hammond hinted to the German media that the UK might abandon “mainstream European social and economic thinking,” an exercise in kite-flying that went badly across the EU. Just over a year later, David Davis pledged Brexit would not plunge the UK into a “Mad Max-style dystopia,” and that the UK and EU faced a common competitive challenge from the rest of the world that “will not be met by a reduction in standards… [only] by an increase in quality.”
“The UK is simply too big and too close for the EU to be relaxed about it pursuing a different model”Doubtless many see the EU’s insistence on “non-regression clauses” as another example of “Brussels bullying,” but it is worth noting the other powerful forces pushing the UK in this direction. First is public opinion—while UK voters may be scornful of specific EU regulations widely covered in the media such as those banning incandescent light bulbs, there is no appetite for a much more fundamental rolling back of regulations in areas like employment law or consumer protection. Indeed, post-referendum Davis said that “The great British industrial working classes voted overwhelmingly for Brexit. I am not at all attracted by the idea of rewarding them by cutting their rights.”
Proposing to rip up employment protections as well paring back environmental standards on clean air and water would constitute a brave move from a government that is neck-and-neck with Jeremy Corbyn’s Labour in the polls, notwithstanding the fact that it would not be in keeping with May’s natural instincts anyway.
The next powerful force pushing the UK towards broadly maintaining its current regulatory model is lobbying by those businesses which rely on trade with the EU and are worried that regulatory divergence will result in the erection of new non-tariff barriers to trade. This is particularly true of firms in sectors such as food and drink, automotive and aerospace, chemicals, pharmaceuticals and technology, hence the UK government has now changed its position on membership of several key EU regulatory bodies governing those sectors, even though this would mean abiding by their rules. Even if the EU agrees, in several other areas the UK is going to have to establish new national regulators or significantly beef up capacity at existing agencies from the Food Standards Agency to the Financial Conduct Authority, to be funded via new sectoral levies.
It is noteworthy that the chemicals sector wants to maintain regulatory alignment even though it complained bitterly when the EU introduced its Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) regulation in 2006, and it was frequently cited by Brexiteers as a prime example of EU over-regulation that would be scrapped once the UK was free. Some Brexiteers claim that while businesses exporting to the EU will still have to comply with EU rules like REACH, regulations on domestic businesses could be eased. However, a dual regulatory regime would be burdensome and unwieldy in practice, especially for firms that produce for both the UK and EU markets. In any case, such an arrangement would likely not be accepted by Brussels given concerns about ensuring the applicability of EU standards throughout the whole supply chain.
“Desperate to demonstrate divergence, some Brexiteers have begun to talk about exceeding the EU’s standards”Immigration is another area where Brexit will entail more rather than less bureaucracy. Given the central role of this issue in the campaign, free movement will eventually end. In practice, EU nationals will almost certainly still be able to freely enter the UK, but they will no longer be able to apply for jobs and access public services and the benefits system on virtually the same terms as UK nationals and EU nationals who have secured settled status. The bureaucratic burden of enforcing the new regime is likely to fall disproportionately on businesses, landlords and public-sector bodies such as the NHS. Illegal employment has remained a significant problem even with unrestricted access to EU workers; this will only get worse when the eligible labour pool shrinks considerably.
Simply applying the current onerous Tier 2 visa regime for non-EU nationals to EU nationals post-Brexit would be a disaster from the perspective of UK businesses, though even a relatively liberal and light-touch regime will create new administrative hurdles for employers and migrants. The UK will of course remain an attractive destination for many EU migrants, but for highly skilled and ultra-mobile workers in areas like finance, tech and advanced engineering, it will be less attractive than before the referendum, in part due to the additional red tape. Since the referendum, businesses in these sectors are already complaining that recruitment is getting harder.
Finally, even if the UK signs a post-Brexit free trade agreement (FTA) with the EU which maintains zero tariffs, outside of a new customs union businesses are going to have to comply with bureaucratically onerous rules of origin designed to ensure that only goods covered by that agreement benefit. In practice, this means having to demonstrate that a certain proportion of the overall value of the product was sourced in either the UK or the EU as opposed to ineligible third countries, which given the global span of modern supply chains can be a costly process. There is evidence to suggest that in many cases the costs of complying with rules of origin outweigh the benefits of zero tariffs, meaning that some businesses, particularly SMEs, either just choose to pay the tariffs or forgo exporting opportunities altogether.
This is not to say there will be no post-Brexit scope for deregulation or flexibility to amend EU rules. However, the great, transformative regulatory liberation envisaged by leading Brexiteers is unlikely to materialise. Since the referendum, a further interesting dynamic has emerged. Given the imperative of demonstrating tangible evidence of divergence, some Brexiteers have begun to talk about exceeding the EU’s standards; Michael Gove has led this particular charge at DEFRA, for example by pledging to ban exports of live animals. There is now talk about “Global Britain” setting the benchmark for global regulatory standards. This is in no doubt a laudable objective, but it is a far cry from the Singapore model.
