Dr. Rebecca Harding

CEO Coriolis Technologies

Boris Johnson’s post-Brexit approach to the UK’s relationship with the EU had its first airing on Monday. He excluded the possibility of regulatory alignment or level playing fields and instead laid out a vision for the UK based on its right to set its own standards, trade in its own way with whomever it likes, and control its own borders. His government, and specifically the foreign secretary Dominic Raab, is already urging a zero tariffs and quotas approach that covers some intellectual property and access to public procurement similar to that negotiated in the Canada-EU trade agreement (CETA).

CETA differs from what the UK government is taking as its primary negotiating stance in three core ways. First, the deal does not have extensive provisions for financial services. For example, it does not allow so-called ‘passporting’ whereby a country’s financial institutions can trade freely in another signatory state under the same rules with minimal regulatory approval. As a result, the UK’s financial services will be severely restricted in terms of their EU operations if the CETA model is followed. The rules would be little different to those under the WTO: EU member states will have to treat the UK as a “most favoured nation” (MFN) and therefore must allow them to compete in their markets, but the EU will not need to give the UK free or preferential access in the form of authorisation as they have under the single European market (SEM).

Second, the CETA agreement commits the EU and Canada to close cooperation in creating aligned regulations and standards. Because Canada and the EU are working more closely to align standards, something which, as the larger trade partner, the EU has the power to insist upon. The UK, conversely, is seeking to “decouple” from the EU’s regulatory and compliance frameworks – it wants the right to diverge more over time rather than converge more over time.

Finally, the CETA agreement moves the EU and Canada towards a “level playing field.” This refers to the rights of EU businesses to tender for Canadian government contracts and vice versa. Effectively, this means that the EU’s businesses could launch a dispute with Canada if there are legal reasons that suggest that they are not able to compete fairly. In the transition period the level playing field requirements will remain and disputes will be settled through the European Court of Justice. The UK currently has a level playing field and again is laying down a marker to say that it wants to create its own rules. This will particularly affect state aid, taxation policy and, in the words of the political declaration, any “harmful practices of trade distortion.”

Expect to hear more about regulatory alignment and level playing fields, because this is where the flashpoints will be. The EU does not want, in Angela Merkel’s words, to see a “strategic competitor” on its doorstep. Its negotiating stance, which will be launched in March, is likely to make it clear that there is little scope for the UK to diverge by much if it wants to retain tariff and quota free access to European markets for goods.

The Johnson government is prepared to walk away, apparently, and revert to WTO rules for goods and services if it cannot have freedom to set its own standards. It is difficult to understand why it wants to insist on this: divergent regulatory standards simply mean higher costs for businesses, which the government itself has admitted. Adding tariffs and quotas to those costs creates a structural change for the UK economy by limiting access to EU markets, the impact of which will likely be  equivalent in size to that of the Thatcher revolution of the 1980s. While the chancellor has already told businesses to adapt to this new reality, the fact is that it takes time to build contacts, expertise and capacity to trade in new overseas markets.

In the last 20 years, the UK’s share of world exports has declined by almost half: from 4.5% to 2.4%. Much of this is of course accounted for by the rise of China and this applies equally to the US, Japan or Germany. But the material point is this: every other trading nation except Mauritania operates within some kind of free trade agreement with other countries that represent important, or neighbouring, trade markets. Negotiations with the EU, as with the US, will similarly require level playing field requirements on goods, services and competition policy. The UK is not as free to set its trade rules as it may like to think it is.