Thursday, 26 January 2017

Deregulation? Not so fast!

What most people do not understand about Brexit is that it isn't a factory reset on the system. In or out of the EU or the single market there is a rules based trading system which depends on a number of interdependent agencies and subsystems. Pulling out of the EU does not give us a free hand to rewrite those rules. More to the point, we don't want to.

To understand why regulation is such a big feature of this debate you have to go back to 1992 and the Single European Act. The Single European Act (SEA) was the first major revision of the 1957 Treaty of Rome. The Act set the European Community an objective of establishing a single market.

What this did was replace all UK technical and industrial regulation to the European standard. This was to create a level playing field - to prevent regulatory disparities being used as an excuse to block imports.

Rather than introduce it gradually, the government took the view that it was better to swallow it whole and get the job done. This was a mistake and one which pretty much made Brexit an inevitability. Le grand project was henceforth tainted.

The problem was that bad regulation was taking the place of better regulation, imposed by inexperienced officials who were quite brutal about it and deeply unfair. There was no system of appeal. It had been decided.

The transition costs that finished off small and medium sized operators from slaughterhouses to electronics manufactures. Conformity, training and equipping for a new regime is no small undertaking and in the case of small producers, too much to ask. John Major did to small businesses what Thatcher did to the mines.

Arguably it was a revolution that needed to happen. We were entering a new age of globalisation and what was founded then was the basis of what is now a global system of regulation designed to facilitate free and fair trade the world over. Whatever you may think of it, what is done is done. 

Now that we are leaving the EU, we discover that as these rules have been refined, they are intrinsically interwoven with a number of customs and surveillance systems designed to protect against illicit trade, counterfeiting and food fraud. It doesn't always work and like counter-terrorism efforts we only ever hear of the egregious failings rather than the many invisible successes. That makes disengagement from the EU a tricky business. More so since we are leaving the single market.

One of the negotiating objectives of leaving the EU will be to grandfather many of the trade deals we have via the EU. These are not simple agreements on tariffs. They can comprise of mutual recognition agreements on conformity assessment to memorandums of understanding on regulatory cooperation. 

In the decades since the formation of the single market, many of the technical standards and practices invoked by EU regulation have become the global benchmark for nearly all comprehensive trade deals including TTIP, CETA and TPP. Below the surface there are thousands of smaller agreements which each take their cue from international standards bodies and global regulators. That means Brexit deregulation is a slow and meticulous process where each strand must be examined for legality and relevance.

In that regard we are looking at thousands of regulations, many of which are entirely valid and we would not see any value in deviating from them. Then there are those regulations which give effect to EU institutions and systems and confer specific rights on EU member states. 

That means Mrs May's Great Repeal Bill (GRB) is not so straight forward. The intent of the GRB is to avoid a regulatory cliff edge. A degree of continued conformity is required to avoid significant disruption to trade and to avoid lumbering industry with costs and confusion.Were we to suddenly declare all of it null and void then systems would rapidly cease to function, certifications and insurances would become invalid and and qualifications would no longer be recognised. 

This is why Brexit necessarily requires a transitional period. As discussed previously, simply porting all EU regulations word for word is not going to be enough. We can have regulatory equivalence but there is nothing that compels the EU to recognise that - and even if it did there would need to be an independent mechanism to ensure continued mutual recognition, be it a court or a secretariat - or in the case of Efta, both. 

Suffice to say untangling this mess is no easy feat, it cannot happen in a rush and if we wish to continue participating at the global level we must honour our commitments as a WTO member. That means the continued adoption of global regulations, standards and guidelines. The deregulation potential of Brexit has been wildly overstated. More of it comes from Geneva than Brussels and even Brussels is a recipient of regulation. Increasingly the EU has ceded control of the regulatory agenda and is no longer the centre of the regulatory universe. Cutting out the middleman is one of the many reasons why Brexit is worthwhile. 

This phenomenon is what we describe as the "double coffin lid" where we get rid of the "inner lid" only to find global rules stand between us and liberation. We face a choice of continued participation in the global trading order or complete withdrawal from it. The latter would put us more in line with the USA and would likely see a return to tit-for-tat trade wars, messy bilateralism and protectionism. 

Some would have it that unilateral deregulation and removal of tariffs is the silver bullet. I am not convinced by this. As much as tariffs exist to protect strategically important industries, they exist to prevent competitors dumping their produce and collapsing markets. Unilateral deregulation would likely lead to fewer opportunities to trade, higher tariffs and more non-tariff barriers. Such shock therapy for the UK would be wildly unpredictable, destabilising and probably very destructive. It would most likely hurt the bottom two deciles the most. 

Some argue that a little creative destruction might go along way. It is a seductive thought. Many on the extreme economic right and left find this notion attractive in that it brings about a contest for an entirely new order. The question though is whether that is what people voted for, and whether the nuclear option is really necessary. I don't think it is. 

In most regards the regulation we now get is eminently sensible. The issue I have is that we have never had sufficient scrutiny or power of veto. Brexit resolves that to a point. Moreover, the UK tax code has 10 million words and that's mostly a British achievement. When it comes to red tape, we are a leading producer. Technical regulation is to facilitate trade whereas domestic regulation is more about social manipulation. Leaving the EU dispenses with much of it but culturally we are still predisposed to telling people what to do and how to live. Brexit doesn't really cure that. It is part of the national psyche. 

In any eventuality the process of de-merging from the EU is a messy business. Regulation is far from the only consideration. Just the process of establishing ourselves and an independent customs entity is tricky and unscrambling agriculture and subsidies will take on a life of its own. The ironically named repeal bill (or something of its type) is a means of parking the regulatory issue until such a time as there is the political runtime to evaluate it with the care that it deserves. 

Disestablishing the single market is a mighty task that will require armies of officials and wider consultation with industry. That is not something we should seek to complete in two years lest we repeat the mistakes of 1992. Big business can manage. SMEs however, will be hung out to dry.

Brexit is seismic enough as it is even on a superficial political level. The very last thing we want to do is create more work for ourselves and shoot ourselves in the foot. The mountain of red tape is not going to get any smaller and attempting to reduce it without understanding it will likely create more. It may be a disappointment but there is no clean Brexit. Only degrees of messy. It's up to us to decide how much of a headache we wish to make for ourselves.

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