EU wants a post-Brexit level playing field
Brussels worries that London could undermine the bloc’s competitiveness if it does not commit to upholding standards
Unless the United Kingdom remains a member of the single market, it will no longer automatically be subject to EU rules after Brexit. This has raised concerns in the EU that the United Kingdom could gain a competitive advantage by moving towards a ‘low tax, low regulation’ economic model, which could undermine the competitiveness of the EU and trigger a regulatory race to the bottom.
What next
The EU will push for provisions to ensure a 'level playing field' after Brexit. The United Kingdom is likely to resist firm commitments in areas other than competition and state aid. However, even without binding provisions, existing policy preferences in the United Kingdom and the government’s limited capacity to focus on issues other than Brexit are likely to prevent drastic divergences in the foreseeable future.
Subsidiary Impacts
- Lower UK environmental standards could impose direct costs on EU consumers, for example through cross-border air pollution.
- London may be tempted to accept lower food standards in securing more favourable trade deals with non-EU countries.
- A no-deal Brexit would put the UK government under greater pressure to adopt a tougher stand vis-a-vis the EU and deregulate.
Analysis
The EU defines a level playing field as "a state in which conditions in a competition or situation are fair for everyone''.
Brussels focuses on four areas: competition and state aid, taxation, labour standards and environmental standards. It is concerned about two types of interventions: firm-level or sectoral action such as state aid for certain companies or industries; and horizontal public policy that has a systemic impact, such as taxation, environmental or labour policies.
Insufficient international frameworks
Though international frameworks have sought to limit unfair competition among countries, they are insufficient in this case:
- Multilateral environmental agreements, OECD standards and ILO conventions tend to be weaker than EU regulations.
- WTO state aid rules do not cover services, which make up around 80% of the United Kingdom's GDP and 40% of its exports to the EU27.
- Non-regression clauses, which are included for example in the EU's free-trade agreements with Canada and Japan, are difficult to enforce in bilateral dispute settlement.
Evolution of EU position
To address the challenges posed by the United Kingdom after Brexit, the EU has included level playing field considerations in its guidelines (see EU: Second Brexit phase could see greater EU-27 splits - January 11, 2018).
The European Council said in April 2017 that any EU-UK trade deal has to "ensure a level playing field". It went further in its March 2018 guidelines, calling for "substantive rules aligned with EU and international standards, adequate mechanisms to ensure effective implementation domestically, enforcement and dispute settlement mechanisms in the agreement as well as Union autonomous remedies".
Brussels is concerned lest a post-Brexit United Kingdom gain a competitive advantage over the EU
The Council is not the only EU institution considering this issue. In March 2018, the European Parliament passed a resolution saying it would back a framework for the post-Brexit EU-UK relationship only if a level playing field was guaranteed.
Perhaps the clearest indication of the EU's thinking can be found in slides published by the European Commission in January 2018. They suggest a three-pillar model comprising substantive provisions based on the principle of non-regression, an enforcement mechanism and a dispute settlement system.
Notably, the slides also mention possible sanctions and EU autonomous measures, including cross-retaliation, fines and the blacklisting of jurisdictions that fail to cooperate on tax issues.
The EU's various positions were reinforced in the recently signed 'withdrawal agreement'.
UK position
Comments by senior UK politicians suggesting that the country could embrace a more mercantilist, US-style model after Brexit have fuelled the EU's concerns.
In January 2017, Chancellor of the Exchequer Philip Hammond warned that in the event of a no-deal Brexit, the United Kingdom could move away from the European economic and social model, reducing taxes and deregulating.
In September 2018, former Foreign Secretary Boris Johnson suggested that rather than raise taxes to fund public services, the United Kingdom should draw inspiration from the United States to create a "happy and dynamic economy" after Brexit.
Senior UK politicians have sent mixed signals
Meanwhile, other politicians have adopted more conciliatory rhetoric. David Davis, then Brexit secretary, said in February 2018 that the United Kingdom would not pursue a "Mad Max-style" race to the bottom.
In her March 2018 Mansion House speech, Prime Minister Theresa May suggested the United Kingdom could commit to the EU's competition and state aid rules. This may have been motivated by a desire to restrict the room for manoeuvre of a future Labour government.
She also said "the EU should be confident that we will not engage in a race to the bottom" on environmental and labour standards.
The government's July 2018 White Paper echoed these positions but explicitly did not make any concessions on taxes.
Challenges
It will be difficult to design effective rules to preserve a level playing field after Brexit (see EU/SWITZERLAND: Scope for a deal is decreasing - November 22, 2018).
Public policy vs unfair competition
In the case of horizontal interventions, it can be far from straightforward to define clearly what counts as legitimate public policy and what is unfair competition. For example, the UK government could argue that lowering certain labour standards is necessary to bring more people into work.
Heterogeneity
Some divergence between member states is generally accepted, as it reflects different policy preferences and allows poorer countries to catch up. For example, there is no EU-wide minimum wage provision.
Since UK standards tend to be high, this raises the question whether the United Kingdom should have to follow stricter rules than some EU countries after Brexit and how fair that would be.
Regulatory developments and reciprocity
It is unclear whether level-playing-field provisions would only prevent non-regression, or whether they would also force the United Kingdom to mirror regulatory developments in the EU, leaving the country as a rule-taker with little say.
It is also unclear whether the United Kingdom would be able to challenge regulatory regressions on part of the EU. If it had effective legal mechanisms to do so at its disposal, this would give it the power to intervene in EU policymaking. From the EU's perspective, this would be undesirable.
Governance
Designing an effective governance and dispute settlement system will be difficult. The EU is likely to insist on some sort of institutional framework to bind not just the current but also future UK governments, which would be controversial in the United Kingdom. It is also not clear how the three elements -- supervision, dispute settlement and enforcement -- would be designed.
Establishing an EU-UK institutional framework will be extremely difficult
Outlook
Assuming a Canada-style post-Brexit EU-UK relationship, the most likely outcome is relatively firm commitments on competition and state aid, and vague provisions on the other issues, especially tax policy where the United Kingdom will argue that any restrictions would limit its ability to 'take back control' after Brexit.
Ultimately, some asymmetry between EU and UK regulation may be inevitable, but large divergence is unlikely, as there is no indication that UK public policy preferences are going to change drastically in the foreseeable future, existing economic structures create inertia and the government has little capacity to deal with issues other than Brexit.
In any case, the impact of any changes in the regulatory environment -- except for taxation -- may be limited as factors such as exchange rates are likely to be much more important for firms' decision-making.
