More euro-parochialism from the FT

Chris Giles, Economics Editor of the FT has finally discovered something this blog has spoken at length about. 

Beyond the headline-grabbing claims from both sides of the Brexit argument lies a more prosaic fact that could make Britain’s departure from the EU much more complicated. In the 21st century, gains from trade can often depend less on eliminating tariffs on imports and exports than bringing down “non-tariff” barriers created by different rules and standards between countries.

Gosh, whoddathunkit?

The EU’s average external tariff on industrial goods — which the UK could expect to be charged in the instance of a hard Brexit that gives no access to the single market — is just 2.3 per cent, although it is much larger in sectors such as motor vehicles. But academic studies generally show the cost of the bloc’s other barriers to trade is two or three times as large.

Non-tariff barriers to trade are “extremely important” says Stephen Woolcock, associate professor of international relations at the London School of Economics. While leaving the single market could mean long and arduous border checks, many economists and trade experts do not expect anything like such an apocalyptic scenario.

Howard Kerr, chief executive of BSI, the business standards group, emphasises that EU regulations do not require most goods to be checked for conformity with rules at borders, only when they are put on sale.

Sensitive goods — food, chemicals, pharmaceuticals and potentially hazardous goods — are subject to strict rules. A hip replacement part, for example, requires a certificate of conformity to be put on sale in the single market.

But for most goods, it is the job of trading standards officials in EU member states, not customs officers, to check whether products have the CE — Conformité Européenne — mark. This shows they meet EU legal requirements and can be sold in the European Economic Area of all member states, plus Iceland, Liechtenstein and Norway.

In addition, products from the UK will not necessarily diverge from European regulations even after Brexit. On day one after leaving the EU, Mr Kerr contends, all products produced for the UK market will still comply with CE rules. This is partly because the UK government is planning to incorporate a large majority of EU regulations into UK law after Brexit and to prune the legislation at its leisure after that.

But there is a bigger reason why differing regulations might not be a large problem: the agreed standards that are the cornerstone of the regulations. European product standards are normally voluntary, agreed outside an EU framework and led by industry to promote competition. The UK has played a leading role.

About 80 per cent of the standards governing manufactured goods in the single market are voluntary and have been progressively harmonised across Europe. During the past 30 years, the number has fallen from 160,000 to about 19,000.

Typically, EU regulations state that if a product meets these standards it can be sold in the single market. While Brexiters say Britain has an opportunity to simplify regulations outside the EU, many experts see costs rather than benefits. British business would need to establish new UK rules and standards, while exporters to the EU would still need to comply with those rules.

Andrew Grainger, assistant professor of logistics at the University of Nottingham, says he can see “nothing good” in tearing up the current rules.

Mats Persson, head of international trade at professional services firm EY, previously served as adviser on Europe to David Cameron, the former prime minister. “The potential impact of regulatory divergence differs between sectors and firms. For some the impact could be limited, while others could benefit from better tailored rules,” he says. “However, particularly for some companies in competitive export sectors and with low margins, separate EU and UK standards could require costly duplication of production lines.”

Duplication could also affect the retail market for strictly regulated products, such as innovative medical devices. If the duplication of costly regulatory approval meant it was only worth exporting to the large EU single market, rather than also seeking UK approval, UK consumers might have no means of getting their hands on the product unless the government accepts EU approval as acceptable.

Some Brexiters are happy to accept the product standards and regulatory approval of other countries as a badge of quality, allowing sale in the UK. But trade experts say that large economies — the EU and the US, for example — would not allow such mutual recognition agreements to be reciprocal.

The UK could not, for example, agree to recognise US regulations as compliant with domestic sales without the EU wanting to ensure those same products were not routed through the UK for sale in Europe unchecked.

Peter Holmes of the University of Sussex says this will severely limit Britain’s ability to bring down non-tariff barriers to trade with countries outside the EU, in case it becomes a “back door” route for goods into Europe.

The upshot is that the question of regulations and standards will be a fiendishly difficult part of Britain’s negotiations with the EU and other potential trading partners. There is no obvious solution that satisfies all the UK’s goals of simple and cheap regulations, easy trading relationships with the EU, deals with non-EU countries and full sovereignty over regulations.

Much of this was discussed by this blog long before the referendum. As much as the WTO tariff trading system has stalled we are no looking at peak regulation where the gains from bilateral horse-trading are minimal. But you will note my emphasis in bold, "European product standards are normally voluntary, agreed outside an EU framework and led by industry to promote competition".

And this is central to the entire Brexit debate. The continued obsolescence of the EU as a rule making body. These days if business wants to lobby for change in regulation they are best focussing their efforts in the various standards bodies rather than wasting their time in Brussels. Quite a lot of major companies do exactly that.

Where it comes to mutual recognition, the article is about right. "The UK could not, for example, agree to recognise US regulations as compliant with domestic sales without the EU wanting to ensure those same products were not routed through the UK for sale in Europe unchecked".

Moving forward that is less of an issue because the USA has an executive order to the same effect as our various statutory instruments which automatically adopt global standards as per the WTO TBT agreement as illustrated in the image above. This should be not be news to regular readers.

The Brexiteer case for less regulation was always based on a flawed concept of what it is and what it is for - but especially where it comes from. Bilateral horse-trading on tariffs and regulations is a non starter. What matters is that we take a more active role in their creation. As the article states, the UK already plays a leading role but there are instances where the lack of a free vote can have a very real effect on British jobs.

Further to this, if we want to boost trade, since regulatory harmonisation is already in hand - and the main focus of the EU and the WTO it falls on the UK to rethink trade policy entirely and look at means of bringing emerging economies into line. This could be a central component of our aid policy.

The general thrust of the piece is about right in that Brexit offers us no silver bullets and the Brexiteer arguments are woefully thin, but it is yet another crack in the dam that exposes the EU as a bit part of a much larger system where our agility, by way of being an independent actor with the right of initiative, can outsmart the creaking EU. Rather than seeking precarious bilateral deals we can sidestep the process in the same way that corporates already do by engaging on the global regulatory forums.

What Chris Giles and other have not yet woken up to is that the game has evolved and Giles is still wrapped up in euro-parochialism - as indeed are all FT hacks. He's right in that the old approaches will yield little in the way of progress, but the whole point of Brexit is to reignite the debate and seek out new approaches.

One thing I would note is that outside the EU the UK gains its own vote on the global regulatory bodies and it also gains the right to say no. There may be penalties for doing so, but that is a matter for parliament to debate rather than being told what to do by the ECJ.

In a lot of respects the UK will find it has more freedom, more influence, and more support for its views outside of the EU. On bodies like the International Maritime Organisation the EU is not very popular.

As to whether this issue will be "a fiendishly difficult part of Britain’s negotiations with the EU" remains to be seen. If there is a sudden outbreak of sanity and we remain part of the EEA then most of these issues are sidestepped and require little negotiation. It does not give us the carte blanche Brexiteers unrealistically expect, but it does make us an independent actor, like Norway, with a far freer hand in the creation of the rules that make up what is now a global single market in standards and regulations.

With that in mind, I wonder if Chris Giles will now revise his February 2016 view that "If Britain were to remain a full part of the single market, it would have to accept EU regulations, including the free movement of people, without any influence in setting them". I expect not since this is not the first time Giles has been keen to display his profound ignorance. Why he continues to occupy office space at the FT beats the hell out of me.