EU Referendum

Brexit: Legatum's amateur time


If I was Christopher Chandler, funding the Legatum Institute to the tune of £4 million a year, I would demand my money back – or hire new staff. There is no way he is getting value for money. That much is transparently evident from the Institute's latest report on trade liberalisation in the context of Brexit.

In his own inimitable style, Pete dissects the "pretty thin gruel" but, normally, to evaluate such thin gruel wouldn't be worth my time. I certainly would not waste my readers' time with a detailed analysis. So much of it is so transparently wrong that anyone promoting it should feel acutely embarrassed. 

However, in describing an interim arrangement that should take effect when we leave the EU, before a full-blown free trade agreement is concluded, the report argues for the negotiation of a "mutual recognition agreement", which "must be in place by the beginning of the interim period", in order to facilitate trade between the UK and EU Member States.

It is this promotion of the idea that "mutual recognition" is somehow that answer to our trading relations with the EU which is of interest and, since that fallacy is oft-repeated by so many, it is worth addressing in its own right. The Legatum Institute report thus provides a useful topical hook on which to hang a critique.

From the declared aims of the report, entitled "The Brexit Inflection Point", it is clear that "mutual recognition" largely refers to standards (rather than conformity assessment), thereby suggesting that regulatory barriers are overcome between the EU and the UK by a beguilingly simple expedient: we recognise the EU's regulatory standards in relation to goods while they recognise ours.

Oddly enough, I dealt with this concept, in brief, in a blogpost written just over a year ago, where I discussed its application within the framework of the EU's Single Market.

The crucial thing to appreciate here is that mutual recognition of standards is a relatively latecomer in the EU as a tool to reduce regulatory barriers. The first and most favoured tool is the harmonisation of regulation so that all (currently) 28 Member States are working to exactly the same rules.

Within the EU context, mutual recognition comes in only where a harmonised standard is absent. Then, national laws apply on the basis that, if the product has been legally marketed in any one Member State, the regulation that applies to the goods in the (EU) country of origin must be accepted by the country to which the goods are exported. The receiving Member State cannot apply its own local law.

For obvious reasons, this can give rise to considerable problems. If a product is produced in multiple states, each to their own different standards, then that single product, sourced from different locations but sitting on one shelf, can be subject to many different standards. This creates confusion for buyers, for consumers and for enforcement officers – and will often lead to the promulgation of a harmonised standard.

The point to take from this is that, within the EU, mutual recognition is an adjunct to harmonisation and then it is regarded as a secondary least-favoured option. Furthermore, while it has utility within the EU, there is no example whatsoever of the EU adopting mutual recognition of standards as a mechanism for reducing regulatory barriers between Member States and third countries.

On that basis, there is not the slightest prospect of the EU, in relation to a post-Brexit environment, accepting mutual recognition of standards as the basis for trade in goods. Not only would this be unprecedented, it would run contrary to the core methodology of the Union. Harmonisation is the usual requirement and, where there is no harmonised standard, exporters into the EU are required to conform with the local standards in the markets where their products are sold.

Furthermore, when looking at regulation on a global basis, we find that harmonisation of standards is still the preferred option. This is manifest in the WTO's Agreement on Sanitary and Phytosanitary Measures (the SPS Agreement), where WTO Members are encouraged to use international standards as the basis of trade. As a second option, exporters can be required to meet the standards set by importing countries – which cannot be so onerous as to create arbitrary barriers to trade.

Nowhere in this measure, however – or in any similar ordinance – is there provision for mutual recognition. In the entire SPS Agreement, there is not a single mention of it.

Interestingly, in the Legatum report (page 23), we get the assertion that: "On the basis that laws and regulations will be harmonised on the day of Brexit, interim measures should include maximum regulatory recognition", which would seem to suggest that harmonisation is the issue. However, in multiple other references (as in page 4, for instance), we see that: "any agreement to maintain harmonised regulations within the interim must allow divergence afterwards".

In other words, Legatum is asking for a free pass. It wants harmonisation of standards to start with, and then freedom for the UK unilaterally to change its regulations – which must still be recognised by the EU. A snowball would have a better chance in Hell.

But the passage cited from page 23 does not stop at recognition of harmonised standards. It goes on to say that: "WTO rules on TBT and SPS measures mean that it could be a violation for the EU to cease recognising UK product and SPS regulation and conformity assessment requirements (which will be identical to those in the EU at the point of Brexit)".

And it is because of this, in particular, that Mr Chandler should demand his money back. As we point out on Leave HQ, the authors of this report, Shanker Singham, Dr Radomir Tylecote and Victoria Hewson, have only the shakiest ideas of what they are talking about.

The point these amateurs miss, and it is absolutely central to understanding how a post-Brexit EU will relate to the UK is that the Single Market – which Mrs May is determined to leave - is a regulatory union. And, for this to work effectively, there have to be not one but two fundamentals. The first is common (harmonised) regulation (with mutual recognition as a fall-back). But the second – which is just as important – is common (coordinated) surveillance and enforcement, including record-keeping.

Subscribing to common regulation (or mutual recognition) is not sufficient. The crucial additional element is that members commit to the same level and style of market surveillance and enforcement. Furthermore, these processes must have teeth. They must be harmonised under the jurisdiction of Union institutions, subject to direction by the Commission and the European Court of Justice.

And the degree of coordination in some sectors is quite staggering – although almost totally unknown to the general population, and especially to Legatum who suffer from the most profound ignorance on this matter.

By way of example, the UK has produced a 145-page Multi-Annual National Control Plan for food standards and related matters, in which it sets out its enforcement strategy, which provides "the basis for assessment of the effectiveness of performance of UK control systems" by the Commission's Food and Veterinary Office. The role of the EU is to assure that the control systems at national level are effective. Thus, every other Member State has to go through a similar exercise.

Because of this two-tier approach – and only because of the co-existence of the two tiers - it can be assumed that goods produced by enterprises within the Single Market will automatically conform with union regulation. There is, therefore, no need for conformity assessment at the internal borders. Goods can be traded without border checks or other formalities. Freedom of movement across borders is thus bought through subscribing to common regulation and common enforcement (with its handmaiden, common surveillance processes).

When goods are produced outside the regulatory union – as will be the case when the UK leaves the EU – there may well be an agreement to produce to common (or equivalent) regulatory standards. But, by virtue of the UK removing itself from the EU treaties and the jurisdiction of the EU institutions (or the EEA equivalents), there can be no common enforcement regimes. A key element of the Single Market system has been cut away.

In the absence of this common, uniformly-applied enforcement system, the Union cannot assume that regulatory conformity is necessarily equivalent to the EU's provisions. Therefore, at the external border of the Union, goods entering from third countries are subject to varying levels of border checks. This is the process of conformity assessment, and this is where Legatum have gone badly wrong.

The authors assert that the UK's "conformity assessment requirements" … "will be identical to those in the EU at the point of Brexit". But, post-Brexit, they will not be. Pre-Brexit, because of common enforcement standards, conformity is assumed. There is no need for separate conformity assessment – it is part of the process. In other words, there is no conformity assessment, as such. Only when the UK steps out of the Single Market will conformity assessment apply, and the EU will be entitled to apply it.

For stable, mass produced goods (i.e., where items are identical and are not likely to change during distribution and transport), the checks can be minimal, amounting sometimes to no more than documentation checks – especially where there are agreements on the mutual recognition of conformity assessment, which covers a wide range of manufactured goods.

This is not the case with perishable goods, and particularly those of animal or vegetable origin – the types of goods subject to the SPS Agreement. These are highly variable and can deteriorate through the production and distribution chain. This means the quality (and safety) of even similar products may vary from batch to batch and the goods can be substantially different depending on production, handing and transportation.

Such goods are produced extensively by third countries and exported to the EU and those countries are entitled to rely on the SPS Agreement. And here, there is an alternative to complete harmonisation. Exporting countries can claim regulatory "equivalence".

This, however, is not a magic bullet. Where measures differ from the EU's standards, the UK, on a case-by-case basis, must objectively demonstrate that their measures achieve the EU's "appropriate level of sanitary or phytosanitary protection".

"Equivalence" is sometimes assumed to be the same as mutual recognition but, plainly, it is not. Apart from having to be satisfied on a case-by-case basis, there is nothing mutual about it. The exporting party effectively has to make a case that its standards achieve the same outcome as the importer's standards. That is a test that does not apply to mutual recognition. And even then, there are other complications.

However, neither mutual recognition nor equivalence is the issue when it comes to "frictionless" trade with the EU. As we've already pointed out, standards are only the starter for ten.

In the absence of common surveillance and enforcement measures and the fact that any measures applied lie outside the jurisdiction of the EU, full conformity of inherently variable products cannot be assumed. Therefore, the EU will be entitled to insist on conformity assessment of UK products at its external border.

When it comes to meat and similar products, to do so is entirely compatible with the SPS Agreement. EU procedures are considered to be WTO compliant. There will be no "violation" for the EU to insist on such checks. In fact, the EU would be breaching WTO rules if it did not carry out its checks. Any easing of the regime, without good cause, would be contrary to the non-discrimination provisions.

Yet, despite getting it so wrong, Legatum still claims "expertise" in such matters, seeking "to understand and guide the process that the UK and other governments are engaged in as a result of the Brexit referendum". It might do well to expend more of its riches on understanding the process, and a little less on trying to guide it, until it has learned more of how the system works.