Understanding the Transatlantic Economy: Brexit - Part II

The United Kingdom’s decision to abrogate its treaty relationship with the 27 other countries in the European Union is one of the most significant geostrategic events of this still-young 21st century. The political and security implications of “Brexit” are far-reaching for the United States and the transatlantic relationship, but the economic consequences are also enormous: the $580 billion U.S. firms have invested in the U.K. are directed more to building on the unique $5 trillion U.S.–EU economic relationship than serving the considerably smaller English market. The U.K. formally began the process of withdrawing from the EU Treaties on March 29, 2017; negotiations on both the withdrawal and a successor agreement should be concluded by March 30, 2019. Given the enormity of the decision for the transatlantic economy, German Marshall Fund experts will post regular columns alerting readers to the most important developments.

One of the most confounding aspects of international trade is dealing with different countries’ regulatory regimes. Businesses wishing to export must ensure their products or services comply with the importing country’s requirements as well as those of their home markets, a daunting and often expensive task.

The countries in the European Union — with the United Kingdom’s enthusiastic support — together made the sovereign decision in the Single Market Act of 1987 to jointly determine these regulatory requirements, so that a product made in any EU country could be sold in any other; this approach now also applies to most services. In so doing, the European Union has created what is by far the world’s most ambitious and comprehensive “free trade agreement,” a unique arrangement that has been uniquely successful, with over $5 trillion in goods and services now traded among the 28 member countries each year, over twice the value of their trade with the rest of the world.

The U.K. decision to withdraw from its treaty relationship with its EU partners means this unique legal framework of jointly determining the regulatory requirements for products and services traded among the EU countries will no longer apply to it as of March 30, 2019. The potential this has for disrupting the $200 billion in trade between the United Kingdom and the EU is enormous, especially should the regulatory requirements of the two, now virtually identical, diverge over time. And in any event, traders on both sides will need to prove they meet the other side’s requirements, a costly and time-consuming additional step that does not now apply.

This week, the British government published proposals[1] to begin addressing this conundrum. Recognizing the EU’s sensitivity that the U.K. address issues relating to its withdrawal from the European Union before discussing any successor arrangement (the other EU countries reasonably question whether they can trust the U.K. following its decision to end the existing legal framework), the British paper is surgically focused on “legacy” issues — how the U.K. and EU should address decisions and actions taken by their companies prior to March 29, 2019. Her Majesty’s government specifically suggests four principles:

• goods placed on the market before March 30, 2019 (produced to then-current EU law) should be allowed to circulate freely in the U.K. and EU (existing inventories; foods held in storage);

• product type approvals, certificates, and registrations demonstrating compliance with EU law issued before that date should continue to be valid (so cars, medicines, or medical devices subsequently made that comply with those requirements can be sold without further certifications);

• U.K. and EU/member state regulatory agencies should continue working jointly to ensure compliance of those products; and

• service arrangements for goods (e.g., machinery and equipment) sold prior to exit should be allowed to continue freely.

These are all reasonable suggestions, and the British government rightly hints that they could also lay the foundation for a successor agreement on U.K.–EU regulatory cooperation. But they may not stand scrutiny as presented precisely because they do not simultaneously address that future relationship. Without an agreement on how regulators of cars or pharmaceuticals should work together after the U.K. leaves the Union, EU regulators may be unwilling to trust their U.K. counterparts to ensure that British products continue to comply with EU regulations.

While the British government apparently decided it could not at this stage offer such proposals without politically offending the EU, the answer should be clear to both sides. The U.K. has been a member of the European Union for over 40 years; for the last 30, its officials and regulatory agencies have been working on a near-daily basis with their EU counterparts to develop, and to enforce, EU regulatory requirements. Both sides daily demonstrate confidence in the ability of their counterparts to prevent unsafe products and services from being sold to each other.

It is this trust and confidence in the two sides’ levels of protection and enforcement capability that should allow the U.K. and EU, even as two separate jurisdictions, to agree even before March 30, 2019 deep mutual recognition agreements for all products and services currently regulated by the EU[2]  that would allow the continued trade in all these products between them after that date. These mutual recognition agreements — which could either stand alone or be separate annexes to any overall U.K.–EU successor agreement — should be negotiated and agreed by the relevant EU, U.K., and member state regulatory agencies. They should refer to the existing EU rules and the U.K. legislation implementing the relevant EU Directives (or the “Great Repeal Bill,” where it implements EU Regulations that now apply directly in the United Kingdom) as the basis for determining that the levels of protection for these traded products and services are equivalent, name the relevant regulatory agencies, and accept the relevant testing and certification bodies.

And most critically, either they or the overarching agreement of which they are a part must allow the relevant regulator of either side to immediately suspend, and eventually unilaterally terminate, the arrangement in the event something happens that undermines the trust and confidence on which each annex is built. This ensures that mutual recognition in specific products and services can be easily stopped should U.K. and EU regulatory requirements diverge over time. In addition, this approach, which guarantees regulatory autonomy, vitiates the need for European Court of Justice oversight, since the U.K. and EU enter into these mutual recognition arrangements under international law, not as an extension of the EU acquis.

Some in the EU may believe that this broad mutual recognition approach is too “easy” on the U.K. But they should focus instead on their primary obligation, which is to ensure that EU citizens continue to benefit from safe products and services. The U.K., for its part, will have to live with substantial constraints on the sovereignty Brexit was meant to bring and ensure that its regulations continue to align with EU rules, rules over which it will no longer have a say. In addition, any trading arrangement between the two will entail new tedious administrative burdens, no matter how liberal the agreement. That surely is cost enough.

Peter Chase, a senior fellow with The German Marshall Fund of the United States, was a 30-year career U.S. diplomat specialized in international economic policy issues, whose assignments included tours at the U.S. Mission to the European Union, U.S. Embassy London, the Office of the U.S. Trade Representative and the U.S. Senate. He also served between 2010 and 2016 as the U.S. Chamber of Commerce’s vice president for Europe based in Brussels.