Brexit is leading to growing Balkanisation for business

Good afternoon. Another busy week in Brexitland where London mayor Sadiq Khan upset Brexit purists for suggesting that a youth mobility deal with the EU might be good for London.

Conservative party chair Richard Holden told GB News that Khan was “plotting to rip up our new relationship with the EU” and “drag us back” by “stealth” — I wonder if anyone sent him the memo about the British government trying to negotiate exactly such deals with EU countries such as Spain, Netherlands and Germany?

We also heard trade secretary Kemi Badenoch having to confess that the government had missed its manifesto target of signing trade deals that account for 80 per cent of trade by the end of 2022 — she blamed Joe Biden.

More substantively, the government produced an update on its plans to “review or revoke” all the retained EU law (REUL) that was sucked on to the statute book when the UK left the bloc to preserve legal certainty at the point of exit.

You’ll recall this caused a significant kerfuffle last year when the government pledged to complete this mammoth task by the end of 2023, with any law that wasn’t reviewed by the deadline simply falling off the statute book by virtue of an automatic “sunset clause”. 

This was obviously a bad idea given the sheer amount of law involved and Prime Minister Rishi Sunak was inevitably forced to ditch the guillotine idea, much to everyone’s relief. (Although, lest we forget, Sunak had promised to do it in 100 days during the Tory leadership contest against Liz Truss.)

So where are we at with this project? The business department published an update this week on the progress, which has been handily summarised by Simon Usherwood, professor of politics at the Open University.

As his charts show, the vast bulk (67 per cent) of what we must now call “assimilated law” is at present unchanged, but that is partly because the amount of REUL being discovered by government departments has continued to grow. 

Usherwood calculates that on the planned trajectory for reviewing the REUL to 2026, the UK still ends up “with more pieces of unchanged (if assimilated) REUL at the end than we originally thought existed” thanks to the rate of new discoveries. Amazing.

The material question is whether this great stocktake of EU regulation is going to yield the promised Brexit benefits in a way that will make a difference to the UK economy.

I was talking this week to a British company in the food technology space that does want a piece of EU law repealed (which sets a mandatory time limit on approvals for novel technology), arguing that it was a function of the need to consult 27 other countries.

Go-it-alone Britain shouldn’t need such long lead times, the food company bosses argued — and said the regulator privately agreed — but it still hadn’t found the bureaucratic capacity to get the law changed. That is itself a story of Brexit in miniature.

Realistically, it is too early to say how much benefit will be accrued by this process, although on past performance the size of the task and gravitational pull of the EU suggests the wins will be hard-fought.

This week, the UK in a Changing Europe published the latest version of its Divergence Tracker which logs some important changes to EU-era law, namely on bankers’ bonuses, some elements of GDPR data protection rules and the banning of live animal exports for fattening and slaughter.

The accompanying briefing from Joël Reland finds, however, that while politically totemic, the changes will have “limited impact in practice” since they are “watered down versions” of previously more ambitious proposals.

On the other side of the ledger, the EU is piling up its own new rules on areas including products made with forced labour, corporate sustainability, due diligence, carbon border taxes, plastic packaging and sustainable product design.

These will land on UK companies that trade with the EU or are indirectly part of EU supply chains because they supply larger companies that do trade with Europe. Swings and roundabouts.

The overall picture is one of complexity, combined with inertia. This was neatly summed up this week by the deepening retreat over the use of the “UKCA” conformity assessment mark, with another announcement slipped out by the business department.

The UKCA mark was initially envisaged as a British rival to the EU’s own “CE” mark but has slowly been ditched under pressure from business. Per the latest announcement, a “fast-track provision” now allows you to slap a UKCA label on your product if it conforms to EU standards. Truly, a paper tiger.

But what’s symbolic of the broader regulatory Balkanisation caused by Brexit is that the business department announcement only covers those industrial products that fall under its remit. 

Some products, such as medical devices and construction products, have different rules because they’re covered by different departments, such as health and housing.

Overall, the impact of these changes will take time to play out, for good or ill, or most likely a bit of both.

What’s interesting is that even where the government has tried to create certainty in the REUL process, lawyers warn that uncertainty is created simply by removing the EU as the reference point for pre-existing laws.

One vital area is employment law, according to Louise Mason, a senior associate at Linklaters, because it is a body of law that has essentially grown up during the lifetime of UK membership.

As part of the REUL process, the government took steps to codify the case law governing working-time regulations covering areas including holiday pay and equality rights, such as protections for pregnant women, in order to avoid such core employment rights being lost.

So far, so good. But Mason warns that condensing a large body of case law into written principles has itself thrown up questions about how to interpret that codification, which will lead in time to further litigation.

And as Mason observes: “All the codification is doing is trying to solve a problem that was created by passing the act in the first place.”

It’s not yet clear how that will play out in the courts in areas such as holiday rights and the rules that trigger consultation for collective redundancy (UK and EU law differ on this point) and only as new cases pass through the UK courts will we find out. 

But as Christophe Humpe, a competition and regulatory legal specialist at Macfarlanes, puts it, the removal of the old EU foundation of the law created that uncertainty. “Effectively it gives you a new set of tools and you await to see if an opportunity arises to use those rules.”

As ever, the lawyers never lose.

Brexit in numbers

This week’s chart is a newsletter exclusive and comes courtesy of John Springford, at the Centre for European Reform. It addresses one of the conundrums of post-Brexit trade patterns that have perplexed researchers and economists.

Here’s the question Springford poses: “The UK’s goods exports to the EU have not performed any worse than to the rest of the world, and its services exports have grown strongly. How come?”

On goods trade, the answer — set out beautifully in this short paper — is that the superficially strong headline numbers conceal the fact that when markets reopened after Covid-19 lockdowns the UK got left behind.

What the numbers show is that while trade between EU member states boomed during the bounceback, the UK didn’t get in on the action — and the obvious reason for that, Springford argues, is the barriers to trade erected by the Trade and Cooperation Agreement (TCA).

If Britain’s total exports to the EU had grown in line with those of EU member-states, they would have been 27 per cent higher than they were in August 2023 (the last month for which we have comparable data). Since exports to the EU make up around half of Britain’s total, this suggests its total goods exports are around 13.5 per cent down, or £13.4bn on a quarterly basis.

So, on the basis of that analysis, as Springford observes, “the fact that EU and non-EU [goods] exports moved together is a sign of weakness, not robustness” because really UK exports to the EU should have been booming.

On services, where the UK has continued to perform strongly — contrary to the pre-Brexit consensus of many economists — Springford also uses a counterfactual analysis that again paints a less rosy picture than the headlines suggest.

Although UK services exports growth has outperformed the average of advanced economies in some categories — such as business services (consulting), insurance and pensions — in two important sectors that are both exposed to the barriers created by the TCA — financial services and transportation — the UK performance is below par. 

If the UK’s exports in these two sectors had performed in line with the global average of advanced economies from single market exit to the second quarter of 2023, then Britain’s total services exports would be 11 per cent, or £10bn higher in that quarter. Again, that’s broadly in line with the 4-5 per cent hit to GDP.

Taken together, the “hit” against the counterfactual is about £23bn, which Springford notes is consistent with the counterfactual modelling that predicts a 4 to 5 per cent hit to gross domestic product from Brexit, predicated on a 10 to 15 per cent hit to trade in both goods and services.

Counterfactuals are always contentious, but while imperfect, logically they have to be the best way to assess the impact of Brexit — even if we’ll never definitively find out because no one actually lives in the UK that didn’t Brexit.

It will be fascinating to see how other trade economists respond.

Britain after Brexit is edited by Gordon Smith. Premium subscribers can sign up here to have it delivered straight to their inbox every Thursday afternoon. Or you can take out a Premium subscription here. Read earlier editions of the newsletter here.

Source: Economy - ft.com