WATCH Professor Michael Dougan: How the UK's 'internal market' is dependent on EU rules

Welcome to another short video from the Liverpool Law School, tracking the process of the UK’s departure from the EU.  There is a lot going on at the moment – there always is – but this time, our topic is one that you might not have heard so much about in the news.  Yet it is a crucially important issue – it’s just that, with everything else going on, this one simply hasn’t received anywhere near the attention and scrutiny it deserves.

Around the same time as the Government decided that the UK will leave the EU’s single (internal or common) market, the Government also started to talk about the importance of protecting the UK’s own single (or internal) market – that between England, Scotland, Wales and Northern Ireland.

It’s always exciting when a new concept is born.  But what does it mean, this “UK single / internal market”?  By what principles does it operate?  By what standards should we judge its successes and its weaknesses?

The key message of this short video is that there is a lot more to any “internal market” than the current UK debate would suggest.  Internal markets are not merely about “trade”.  They are also about fundamental policy choices concerning how to structure your economy and society; as well as basic constitutional questions about the institutions, processes and values that underpin your public and democratic realm.

The choices being made right now about the “UK internal market” will therefore have a profound influence on the future character of the UK and relations between its constituent authorities.  But so far, the signs are hardly promising.

Let’s explain and explore those propositions in a little more detail: first, by recalling some basic ideas about any “internal market”; then by offering some more specific comments about the UK situation.

Any internal market between two or more territories, each of which is capable of enacting its own laws and regulations, needs to address two main issues.

• how to define and address “barriers to trade” between the constituent territories. In particular, as viewers will already know from our previous videos: how far will this idea of a “barrier to trade” cover what is undoubtedly the main problem in cross-border commerce: the existence of simple variations in how different territories regulate the sale of goods or provision of services, so that goods lawfully sold or services lawfully provided in Territory X cannot be lawfully sold or provided in Territory Y, without having to comply all over again with the different regulatory standards that Territory Y applies to its own goods and services: different product standards, different qualifications, different supervisory bodies.  Such barriers to trade may not be protectionist or discriminatory – but they undoubtedly compartmentalise any aspirant internal market along territorial lines – so how far do we want to tackle them?
• how to define and address “distortions of competition”. Different regulatory standards not only create barriers to trade.  They also impose different compliance costs upon economic actors: more safety checks in one territory mean greater costs and higher prices than in territories with lower standards.  Some people see those variable compliance costs as an artificial distortion of merit-based competition between private undertakings that needs to be eliminated.  Others believe that variable compliance costs encourage undertakings to select the optimal jurisdiction for their regulatory needs, in turn creating a valuable competitive pressure between legislatures to meet the real needs of the market.  But of course, for many others that is simply a polite way of saying that private undertakings can in engage in “social dumping” by picking the territory that has the most permissive standards, and forcing other countries into a damaging deregulatory cycle.  The question is: which of those views should we hold, in any given internal market project?

So, we have two main issues that any internal market needs to address: defining which “barriers to trade” and which “distortions of competition” are to be considered a problem that needs to be solved.  In turn, we then have two highly stylised models for addressing those twin issues.

• mutual recognition. Taken to its logical extreme, mutual recognition would mean that any good which is lawfully sold or service which is lawfully provided in Territory X, should be allowed to be lawfully sold / provided also in Territories Y and Z as well, without having to comply with any further standards or checks or requirements in the host country.  That solves the problem of barriers to trade, and does so in a relatively straightforward way.  But it leaves intact distortions of competition, actively encourages the process of regulatory competition between different territories, and places significant limits on the ability of any given country effectively to enforce its own social policy choices.

So: I might well decide to restrict genetically modified organisms or high polluting cars or gambling by undertakings established within my territory – but a strong duty of mutual recognition would mean that I could no longer stop GMOs or high polluting cars or gambling services coming in from the rest of our “internal market”.

• Again, taken to its logical extreme, harmonisation means that a central regulatory body is capable of adopting a single regulatory standard that must be complied with by all the territorial jurisdictions within the internal market. That obviously solves the problem of barriers to trade: there are no more differences between local laws.  But it also eliminates any distortions of or opportunities for competition that would otherwise arise from the existence of regulatory variations across territories.  And of course: it is difficult to reconcile with the idea of regional autonomy or local policy preferences.

Now, those are highly stylised models.  In reality, no internal market is going to be built simply upon one or other of those two extremes.  Instead, we have to find the answers to two more real-world questions.

• How will the principle of mutual recognition and the practice of harmonisation be combined together, suitably adapted and appropriately qualified, so as to find a workable system that reconciles the competing interests at stake: respecting each territory’s regulatory autonomy, while promoting cross-border trade within the internal market, at the same time as protecting important social policy objectives?
• It’s not just about finding the right balance between those competing interests in the abstract. It’s also about creating the institutions, structures and processes that will operationalise the entire system in practice: common decision-making fora, independent enforcement bodies, impartial umpires in case of dispute.  Though of course, the converse is often equally true: the type of “internal market” you might like to create can be decisively influenced or even limited by the institutions and processes that (realistically) you just have to live with already.

The key point is that every “internal market” is a product of its own unique circumstances and conditions – whether it is the internal market which operates within a single sovereign federal state (such as the USA, Canada or Australia); or the internal market which is created between sovereign states through international treaties in a regional project of economic integration (as with the EU of course, but also in the more embryonic forms we find in South America or South East Asia).

Every internal market is defined by how all those variables interact: the substantive balance between regulatory autonomy, greater trade and social interests; together with the potential and the limits created / imposed by its underpinning institutional framework.  And of course: the relative weight of those variables will inevitably vary from sector to sector; and the balance struck or compromises reached will inevitably change and evolve over time.  Internal markets are not end-states or final destinations: they are ongoing processes which need to be constantly directed and managed.

And the UK will be no different.  So what do we know about the UK’s plans and vision for our “single market” after leaving the EU? Let’s highlight 4 key points for reflection and debate.

• It is unclear how far our political leaders in the UK Government are even aware of many of the underlying issues which should inform discussions and decisions about our “internal market”. Or at least: the UK Government is hardly communicating and debating these issues to and with the public in a transparent way.

Instead: we seem to be making things up as we go along, in the middle of a much wider crisis of state policy, with little clear reflection or discussion about the choices to be made or their potential consequences.

In that regard, it is particularly worth noting the Government’s treatment of the devolved authorities throughout this whole process of deciding what our “internal market” should be and how it might impact upon the federal structure of the UK.  After all, Scotland and Wales have each complained consistently and quite legitimately about being effectively sidelined and ignored by London when it comes to making the key decisions consequent upon UK withdrawal from the EU – even as regards their impact upon the existing devolution settlements.

And the treatment of Northern Ireland – whose interests are so closely tied up with specific and legitimate concerns about the border with the Republic – is effectively being held hostage to the partisan demands of the DUP, whose stranglehold over the minority Conservative government in London offers its hard right MPs a disproportionate degree of influence, not only over the future of Northern Ireland itself but over the whole of the UK – a point made abundantly clear by the contents of the Joint Report agreed between the EU and UK in December 2017.

Indeed: one of the most interesting points to come out of that Joint Report was the UK Government’s promise that businesses in Northern Ireland should have unfettered access to the market in the rest of the UK (even if businesses in England, Scotland and Wales do not enjoy the same economic opportunities in Northern Ireland) – a rather lopsided version of mutual recognition if ever there was one.

• What can we learn from the available documentation, when it comes to the substantive policy choices that might underpin the UK internal market?

The UK Government claims that its guiding principle will be ensuring that “no new barriers to living and doing business within our own union are created”.  Taken at face value, that principle could be fully realised only in two ways: either through a strong rule of mutual recognition (which means greater local autonomy but also varying complaince costs, regulatory competition and less effective social policies); or through a far-reaching programme of centralised harmonisation (which means extensive intrusions into regional autonomy and local policy preferences).

But let’s not assume that the Government actually has any well thought out plan here.  After all, there is no sign that they are preparing or proposing some sort of underpinning “charter” that would define the basic principles and frameworks to govern the UK’s internal market in a clear and coherent manner.

Instead, the main focus of the Government’s energy has so far been to identify which existing fields of EU harmonisation should be preserved or replicated at the UK level; versus which sectors can be handed back to the devolved authorities after withdrawal.  As we all know: those choices are the subject of strong and unresolved tensions with Scotland and Wales – both of whom have accused London of using the UK’s withdrawal from the EU, and the empty rhetoric of “protecting the UK single market”, as an excuse for a naked power grab.

Even without taking sides in that on-going constitutional tussle, what we can say is: there is surely only limited value in drawing up a list of the fields where “common frameworks” already exist at the EU level and should now be retained by London for the sake of protecting the “UK internal market”.

After all: such a list presupposes that we have already made clear and considered choices about a whole range of prior questions: what is our internal market seeking to achieve?  how do we define barriers to trade and how far do we want to tackle them?  how do we define distortions of competition and how far do we see them as a problem?  what balance do we want to strike between harmonisation and mutual recognition in any given field?  what degree of harmonisation do we think we need to achieve in any given sector?  what are the obstacles to cross-border trade we should be prepared to tolerate, and for the sake of which social interests?

Without answers to those questions – indeed, apparently without even openly debating those questions – how do we know that the UK’s “list” is the right one?  Instead, it feels like fundamentally important judgments are being made, based on little more than a selective trawl through the EU’s own unique experience of what the EU’s own internal market should consist of and how it should operate.

• Nor is there much evidence of a critical reflection about the institutional arrangements that will or should underpin the functioning of the UK’s internal market, so that it operates in a clear and controlled, territorially balanced or democratically representative manner.

If anything, the UK Government seems content to graft the policy choices which might be inherited from the EU, simply onto the pre-existing institutional framework of the UK constitutional order – with its highly particular method of balancing power between the central and the devolved authorities (let alone between the constituent legislative, executive and judicial branches of government).

Let’s recall a few of the key issues here:

• by its very nature, the UK is a deeply asymmetrical federation in which England is by far the dominant player;
• that dominance is reflected in the fact that the central legislative power is overwhelmingly comprised of English MPs, and indeed, England as a territory has no legislative representation distinct from the Westminster Parliament itself;
• the protections afforded to the devolved authorities are essentially process based and political in nature rather than substantive or legal in character, especially after the Supreme Court in Miller found that the so-called Sewel Convention, on obtaining legislative consent from the devolved assemblies, was incapable of judicial enforcement;
• there are few other constitutional devices to protect the interests of the devolved authorities, e.g. there is no domestic equivalent of a principle of subsidiarity, which creates a legal presumption in favour of regional power and requires centralised harmonisation to be positively justified.

So: where are the clear rules of the game, the even-handed institutions and the independent umpires that will operationalise the UK internal market?

• Of course, all of these questions about the nature of the UK internal market cannot be answered in isolation. They are closely tied up with the UK’s external policy choices and future international relations.

The UK Government does recognise that, albeit in a limited manner, insofar as it seeks to justify the choice of fields where “common UK frameworks” may be required, not only so as to avoid creating new barriers within the UK single market, but also where they are necessary to enable the UK to strike free trade deals with third countries.  As we saw in Liam Fox’s speech on 27 February 2018: the power to negotiate large numbers of ground-breaking trade agreements all across the world is one of Brexit’s most cherished pipedreams.  But one of the many costs of Liam Fox’s fantasy trade policy may well be an ill-thought-through and ill-defined set of restrictions on the regulatory competences of Scotland, Wales and Northern Ireland.

Because, once again, the relationship between any internal market and its external trade relations is far from self-executing.  Different choices can be made about just how far a state’s pursuit of its external trade policy should impact upon the instruments and structures of its own single market: for example, how far external commitments can or must be reconciled with internal choices about the balance between mutual recognition and harmonisation; or the ways in which regional governments and legislatures should be able to represent or defend their local policy preferences when external trade objectives are being formulated by the central government.  Where is our open and rigorous debate, about the choices that are being made by the UK Government?

And of course, in the UK context, much will also depend upon fundamental decisions which remain to be made about future relations with the EU and how these will impact, back at home, upon the policies and institutions of the UK internal market.  For example, if the UK does eventually remain closely aligned to the rules of the customs union and the single market, EU law might well continue to provide a framework for organising cross-border trade within the UK as well as with the EU itself.  And if not the EU – maybe it will be the Americans or the Chinese or the WTO who end up shaping or making those decisions for us – whichever of the major global economic powers that “takes back [our] control”.

Let’s conclude.  Will the UK’s newfound “single market” be the product of rational and informed choices; made on the basis of clear and considered options; decided through inclusive and transparent democratic debate?

It appears not.  Instead, the UK internal market seems to be evolving through ad hoc discussions and decisions; undertaken as part of wider crisis management strategy; conducted largely behind closed doors with minimal public or stakeholder scrutiny.

So far, at least: if the UK’s chaotic and opaque approach to building a “market federation” proves sustainable at all, it will surely be more by accident than by design.

For all the latest updates from the EU law team at Liverpool Law School, please follow @livuni_EULaw

[callout title=More]Professor Michael Dougan considers Brexit transition[/callout]