Shanker Singham is CEO of Competere. He is a former adviser to Liam Fox when he was Secretary of State for International Trade, and to the Office of the United States Trade Representative.
When the founding fathers of the emerging United States of America declared their independence from their British rulers, they were acutely conscious that the success of the American project would depend not only on the claim to independence but, critically, on how they actually exercised it.
The Declaration of Independence was just the beginning of the American story. It laid the foundations for the choices that would ultimately define who they were as a people. It is the US Constitution that answers the question of who Americans are as a people.
The UK-EU Trade and Co-Operation Agreement is, for the UK, that “declaration of independence”. It sets out how we can claim regulatory autonomy – crucial for our independent trade policy but also for our domestic regulatory choices. But how we choose to use that independence is up to us and how we interpret this agreement.
The question of why we need freedom was set out clearly in David Frost’s Brussels speech, which argued cogently that such freedom was not a tactic, but the whole purpose of the project.
I have argued for the last four years that, in order for Brexit to be a success, we must maximise the benefits while minimising the disruptions as best we can. The Agreement starts the process of minimising those disruptions.
There are gaps of course: in mutual recognition, in financial services and in many other areas. But the basic framework is in place. The key element of preserving the UK’s regulatory autonomy, so critical for both its external trade policy and its domestic regulatory improvements, has been successfully secured.
And no trade agreement marks the end of the story: they are constantly iterated with new versions, developing further liberalisations over time. It will be no different with this one. The non-binding declarations which accompanied the Agreement make it clear that on key areas such as financial services, there will be ongoing regulatory cooperation processes, for example.
The critical test of the agreement is whether the UK can execute an independent trade and domestic regulatory policy of its choice, or whether the Agreement prevents this. The most important articulation of such a policy was Boris Johnson’s Greenwich speech, which spoke to what we do with our freedom.
That speech and the Brussels speech contain the constitutional principles which will govern us as the ship of state sets out on the rough waters of global trade as a country with its own unique commercial policy. In my view, the deal (and the devil is of course in the detail) suggests that those constitutional principles have been safeguarded. There is no EU legal order over ours, and no EU dispute settlement mechanism that overrides our independence.
The EU had a reasonable concern that the UK could distort its market through subsidy or regulatory distortion for trade or competitive advantage, and this has now been dealt with by the rebalancing mechanism based on the potential for tariffication if there is a significant divergence, which leads to a material impact on trade and investment (for more detailed analysis, see this Explanatory Note).
For the UK, this has been done without subjecting the UK’s economy to European legal order. This is a significant contribution by both parties to global trade policy. The trade policy world has been crying out for something like this for the last 23 years, since the failure to introduce the so-called Singapore issues of competition and trade which had been agreed in the eponymous round of 1997.
Those of us who have argued since the mid-1990s that trade theory can no longer ignore anti-competitive market distortions inside borders will be pleased that an agreement between these two major economies includes such a measure. Essentially, if the UK or EU do distort their markets through regulatory change or subsidy, and a significant effect on trade and investment can be shown, a tariff can be applied.
It is here in particular that the way in which a test is implemented is crucial. If it becomes about protection of competitors, and not the process of competition itself, this will be a bad result, damaging competition and leading to wealth destruction and economic contraction.
If, on the other hand, both parties are required to lower their anti-competitive market distortions as a result, the deal will lead to wealth creation, the lifting of people out of poverty, and a mechanism which can be replicated by other countries and, ultimately, in the World Trade Organisation.
I am encouraged that, because the Level Playing Field provisions are rooted in competition principles, a pro-competitive approach which seeks to avoid market distortions that have negative competition effects should be the guiding principle. The provisions of the Good Regulatory Practice (GRP) chapter are also very relevant, as this sets out the need for it to rely on proper impact assessments, and be bound by transparency and due process considerations in the promulgation of regulations. The EU is relatively new to GRP chapters, while other countries have been using them for years, so seeing one in the UK-EU CFTA is an important and positive development.
Administered properly, through the independent dispute settlement body that is envisaged for the agreement, the Agreement will itself develop a body of law that will ensure the parties improve the quality of their own regulatory systems, and also constrain each other not to introduce anti-competitive market distortions into their systems.
Compere has shown in other papers that the impact on the economy of the reduction of these distortions is orders of magnitude bigger than pure border barrier reductions (see here, here and here). But the core principles that are developed in the litigation that will surely follow are still to be fully decided, and what they are will determine the success of this agreement for the economies of both parties.
We must now, as a country, choose to use our freedom wisely. We must use it to create wealth, not destroy it – to be governed by competition on the merits as an economic principle, not intervention and government distortion. We must put consumers above producers, recognising that all producers are consumers of something.
If we choose this in the articulation of our domestic regulatory, trade policy and the selection of our trade partners as Liz Truss’ Department for International Trade has started to do; if we embrace pro-competitive regulation across the whole of government, rejecting policies that damage consumers, increase price and lower choice, then we can use our independence to secure a lasting prosperity for our people. The battle is won, but the war is far from over. We have our freedom. It is now up to each and everyone of us to make sure we exercise it well.