Sunday, 15 July 2018

Breaking the impasse (part 2) - Ditch the Common Rule Book

The Brexit negotiations appear stalled, with much confusion over the issue of alignment with EU rules and a proposed Common Rule Book. Michel Barnier has consistently made clear the choice facing the UK: we can either be inside the single market and follow all the rules, without dividing the 4 freedoms, so including free movement of people (i.e. Norway), or we can be outside the single market and free from the obligations of the single market (i.e. Canada).

A pre-requisite for Single Market participation is adopting the EU's Single Market Rule Book, or EEA acquis. Theresa May's proposed Common Rule Book is in reality the EEA acquis, minus some elements (services, free movement of people) that she hopes to exclude. Ultimately, the EU will insist on all the rules being included. It is also clear that in seeking a Common Rule Book, May is negotiating to stay in the Single Market, despite her repeated promises to the contrary. If we simply wish to trade with the Single Market, as per Canada, a Common Rule book is not required.

The leaked DExEU alternative proposes broad regulatory equivalence as an alternative to Single Market harmonisation and Common Rule Book, based heavily on the Swiss model. However, the EU have repeatedly stated they regret agreeing the Swiss model (agreed as an EEA alternative while the Swiss application for EU membership still stood) and the EU will not offer this model to anyone else, least of all a departing UK. In any case, the EU's measure of equivalence is barely distinguishable from full harmonisation. The Conservative Brexiteers have gone up a blind alley with this approach.

The main trade gain comes from using common standards. A UK product designed, manufactured & tested to harmonised European CE standards for the UK market can also be marketed in the EU/EEA  market without needing a separate design, manufacturing or assessment process. But of course, an independent UK can voluntarily choose to recognise and use harmonised European CE standards, without membership of the Single Market.

So the question arises - what are the gains from a Common Rule Book / Single Market membership  over and above the use of common standards ? Does being outside the Single Market for goods mean other expensive or insurmountable barriers to trade ? I'll try to answer that question with an overview of the impact of leaving the Single Market on UK goods.

Manufactured Goods - Conformity Assessment

As I described in a previous blog, all manufactured products conforming to EU harmonised CE standards are afforded "presumption of conformity" by EU legislation, whether the manufacturer is based in EU/EEA or third country outside the single market.

For the vast majority (~95%) of manufactured products covered by EU  harmonised regulations, the manufacturer certifies the product, issues a Declaration of Conformity (DOC) & affixes the CE label. A minority (~5%) require certification by an independent EU/EEA based Certification Assessment Body (CAB). The mitigation for this is straightforward:
● UKAS (UK Accreditation Service) is applying to retain membership of  EA (European Accreditation), so that UKAS accreditation will continue to be recognised by the EU.
● A Mutual Recognition Agreement (MRA) on Conformity Assessment would allow UK based CAB's and their certificates to be recognised by the EU (and vice-versa).
● In any case, UK-based CABs can use subsidiary/subcontract relationships with an EU-based CAB to allow their certificates to be recognised in the EU/EEA (and vice-versa).

The primary difference for third country manufacturers is the need to use an EU/EEA-based importer - who holds the declarations of conformity / technical file and acts as a contact point - but is not responsible for conformity assessment. Companies who have a subsidiary, office or even an individual based in the EU/EEA can act as their own importer. The end customer can act as importer. Shipping/Warehousing companies, agents etc. all offer importer services. It's not onerous.

Outside the Single Market, goods will become subject to regulatory checks at the border. Checks are determined on the basis of risk assessment, and even today EU-UK trade is subject to risk assessment and checks for contraband and counterfeits. Overall rates are low (just 1% of third country goods entering RoI are subject to checks) mostly checking paperwork or container seals / labels - only a very small number of consignments are subject to opening and physical inspection. Attention is focused on known sources of risk, e.g. counterfeit goods from the Far East. Non-compliance with standards is mostly identified via market surveillance (not at the border), which then feeds back as intelligence into customs risk assessment for future consignments.  The risk of increased border checks for regulatory non-compliance (as opposed to deliberate counterfeits and fraud, which is already checked today) is negligible, especially for established and trusted traders.

Highly Regulated Sectors.

Some sectors are more highly regulated, requiring product pre-approval via an EU agency. In her Mansion House speech, Prime Minister Theresa May identified 3 such key sectors : Chemicals, Pharmaceuticals, Aviation.

In the Chemicals & Pharmaceuticals sectors, the impact of leaving the single market is transferring approvals/authorisations to an EU/EEA based agency via an EU/EEA based individual (while manufacturing can remain in the UK) e.g.
●REACH registrations via an "Only Representative"
●BPR (Biocidals) product authorisations via an "Authorisation Holder"
●BPR (Biocidals) product suppliers via a "Representative"
●Pharamaceutical products via a "marketing authorisation holder"
Pharmacovigilance (batch quality control and monitoring of pharmaceuticals for adverse affects) via a "Qualified Person for Pharmacovigilance" (QPPV)

Standard third country MRAs (as enjoyed by Swiss, Canada, Australia, New Zealand, Japan etc) can mitigate barriers in Chemical & Pharmaceutical sectors:
● MRA on Good Manufacturing Practice (GMP) would allow Pharamacovigilance to be undertaken in the UK territory and simply signed off by the EU/EEA-based QPPV (and vice versa) - waiving re-testing of products on import.
● MRA on Good Laboratory Practice (GLP) would allow mutual acceptance of data generated in the testing of chemicals, which means approvals in both regimes can refer to the same lab tests.

In the aviation sector the EU Parliament Proposal (paras 31 & 32) exhibits a strong desire for a bi-lateral agreement on air transport and aviation safety, "in the interest of the passengers, air carriers, manufacturers and workers' unions", based on "similar agreements with other third
countries". The UK would need to adopt EU aviation safety law & ECJ rulings (as for example Turkey's "working agreement"). UK's Civil Aviation Authority (CAA) would then retain the right to issue EASA certifications of air-worthiness. Swiss-style observer status at EASA may also be a possibility. In time, CAA will recover capacity and a mutual recognition agreement with EU may then be more appropriate (as per USA, Canada).

Car industry

The Car industry is also a vital sector where product pre-approval applies. The UK's Vehicle Certification Agency (VCA) issues whole car type approvals which allow a model to be marketed throughout the Single Market

EU vehicle regulations are increasingly driven via UNECE WP.29, an international forum for harmonisation of automobile regulations. UN International regulations annexed to the UNECE 1958 Agreement provide mutual recognition of car component type approvals (even without any UK-EU agreement). UN Global Technical Regulations annexed to the 1998 agreement allow mutual recognition of regulatory equivalence for car components (included in EU's Free Trade Agreements  (FTAs) with Korea, Japan & Canada). This removes regulatory barriers for car components (where covered by UNECE regulations), and UNECE approvals can substitute for elements of the EU's whole car type approval.

What is missing is the continued recognition of VCA's whole car type approval outside the single market. Is there scope for a form of "working agreement" (as per the aviation sector) to allow VCA to continue issuing EU recognised whole car type approvals ? I think so:
● EU has tabled regulatory co-operation on vehicles for talks on the future trade agreement.
● Korea, Canada, Japan do not have national bodies for vehicle certification in any case. Whereas the Swiss do and the EU-Swiss MRA provides for mutual recognition of whole car type approvals in return for adoption of relevant EU regulations.
● At EU's behest, UNECE is developing Regulation 0 to provide for international whole car type approval. So EU is already actively planning to extend mutual recognition of approvals beyond the EU/single market.
● UK's VCA has also issued approvals for some EU and third country car manufacturers. Why should they be punished and denied EU market access ?
● UK's VCA would need to continue commitment to UNECE WP.29 and adopt EU regulations / ECJ rulings where UNECE has not (yet) legislated. In time UNECE regulations (including Regulation 0 on whole car type approval) will replace all EU car regulations.
● UK exports 800k cars to EU but imports 2.3 million from EU every year. Who loses by erecting a huge trade barrier in this sector ?

Agriculture

EU Sanitary & Phytosanitary (SPS) regulations provide a very high barrier to agricultural trade for third countries outside the Single Market. Third country meat/dairy imports face veterinary checks at Border Inspection Posts: 100% documentary/identity checks; varying percentages for physical inspections (50% for some products).  EU agricultural equivalence agreements with third countries allow for lower rates of physical inspections  (e.g. Canada 10%, New Zealand 2%).  The Swiss have harmonised their SPS regulations with the EU and are deemed to be part of the EU/EEA SPS regime, with no border checks required for Swiss-EU/EEA trade.

The EU's SPS regulations are particularly protectionist. They require UK to apply the same protectionist measures to third countries (as discussed in a previous blog here), ruling out FTAs with USA (chicken etc), India (Basmati rice etc), Liam Fox's hope of joining the TPP and a host of others. Scientific research & development in GMO is blocked. A WTO ruling/fine against the EU's ban on Canadian beef will be served on the UK if we keep EU SPS rules after leaving the EU. We are currently a captive customer for EU agricultural products, with a 3:1 trade deficit.

It is clear to me that we will be much better served leaving the EU's SPS regime. UK-EU trade will face border veterinary inspections in both directions, so UK meat/dairy exports to EU would be diverted to the domestic market. We can quickly strike agricultural equivalence & Tariff Quota agreements w/ Australia, New Zealand, Canada, Commonwealth states, South  America etc - removing tariff and non-tariff barriers to these alternate (and generally lower priced) non-EU suppliers. Subsidies (Green-box etc) & use of quotas should be deployed to protect the UK meat/dairy sector through a transition. But ultimately, we will end up in a much better place and secure more trade globally on the back of it.

Conclusion

In the manufacturing sector, there will be some relocation of individuals/roles to fulfill the requirement for an EU/EEA based importer/representative, but some EU/EEA individuals/roles will also relocate to the UK - a one-off adjustment but not a long term issue. The risk of extra border checks for regulatory compliance is negligible. Breaching the EU law/ECJ red line in the car & aviation sectors is a small price to pay and in time the need for EU jurisdiction in these sectors will pass. In the agriculture sector, there is a clear case for breaking free from the EU's protectionist SPS rules in the interests of consumers and greater trade opportunities globally.

We are likely to broadly continue using harmonised European CE standards in any case, so reaping the benefit of a single design, manufacturing & assessment process for both UK & EU markets. But outside the Single Market, we are free to diverge as and when it makes sense to do so - in full consideration of the interests of our domestic economy and global trade. We would also be free from the EU's indivisible 4 freedoms and free movement of people. This would make negotiaing and maintaing a new relationship much easier and cleaner. In short, we should ditch the Common Rule Book and become a fully independent and sovereign third country - like Canada.

The fly in this ointment is the NI border, which I will look at in my next blog.

8 comments:

  1. Paul - this is very good work again. What it might benefit from are a few more real-world examples of how firms use these various work-arounds.

    Interested you say some countries have no authorities for certifying cars eg Japan - how does that work both with respect to selling to the domestic market and perhaps more interestingly, to the EU?

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  2. There was an article in FT recently (typically negative spin of course) "UK companies prepare EU bases in the lead-up to Brexit" https://www.ft.com/content/208e27e0-7df0-11e8-bc55-50daf11b720d

    There was also a BBC Radio interview sometime back with pharma/chem company who were opening an office in Dublin so they can act as their own "market authorisation holder" but he emphasised that manufacturing would stay in UK.

    RE Japan, Korea, Canada etc. Car Manufacturers undertake assessment / approval for placing on home market. To sell into EU, they need a whole car type approval from a national EU/EEA car approval body (like UK's VCA until Brexit).

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  3. OK - so really all UK carmakers would need to do in future if UK approvals weren't acceptable would be to get one from an EU-based source? Very hard to see why that would be a problem, no?

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  4. Whole car type approvals take time (up to 18 months) and are not cheap (up to £500k). That said, if UNECE approvals are used to substitute for elements, the that cuts it down. It would make a lot of sense if we could agree mutual recognition on whole car type approvals - more so for the EU / Germany actually. As a minimum, there would have to be an arrangement whereby existing approvals can be transferred to an EU body from UK (and vice-versa). As I mention in the blog, some EU car companies have their approvals via UK's VCA, as do a number of third country car companies. I think EU's reputation would suffer if it simply cut them off and it may breach WTO law in case of third countries.

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  5. The last point is an important one I think. It would be surprising if legal advice hadn't already been taken on this.

    On your broader point about exaggeration - the Treasury's estimates of average non-tariff barriers facing UK firms post-Brexit are probably about ten times higher than the most reputable academic estimates (30% vs 3%)

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  6. Despite my knowing nothing of the regulatory/certification processes in the goods and agri sectors, I was able to glean how current requirements could be adapted to and met once outside tge SM or Common (EU) Rulebook. It should be made available to MPs/ journalists.(Telegraph?)
    The main question is going to be: "but what about the Irish border?". An increased number of checks on goods is in my view not going to trigger troubles whereas preventing free travel for commuters or personal journeys may. So is it akin to the border between Norway & Sweden and can that example be followed? Is it even relevant here?
    Do you have a link to your blog on NI border? At the beginning how about stating which version of Leave applies here? Assuming it is Canada and/or WTO ie outside EEA.
    Would it be best then to publish the two blogs together?
    Paul, I don't know your background but assume it's trade-related? Clear blog anyway.

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  7. Tim Williams' 2016 paper on the Electromagnetic Compatibility Directive is an eye-opener and highly instructive. http://doortofreedom.uk/wp-content/uploads/2016/06/Tim-Williams-re-EMC-A_view_on_Brexit.pdf

    The standards are international but the EU regulations are weak in that they have essentially no third party certification requirements. Non-compliance is up to 91%!!

    'For many years the professional EMC community expected that the main purpose of the EMC Directive was to protect the radio spectrum from interference. How wrong we were: in fact, the purpose of all product-related Directives is free movement of apparatus within the EU.'

    Some other countries eg Australia from memory - require 3rd party certification for the higher risk cases. EMC can affect emergency service communication for example, so this is not a trivial matter.

    The creation of the single market necessitated bringing down national regulatory barriers so it is not surprising that it resulted in a weak system. Because it is weak the propaganda is that it is strong. WTO non-discrimination means that it is weak for third countries also - so that the EU is much easier to export to than many countries. (SPS is different as Paul has explained.)

    r-EU might be more concerned about our raising standards than lowering them since this would create new barriers for their manufacturers exporting to the UK. If that is the case then they would probably say that they are concerned about lowering of standards.

    Andrew

    Note: I am not sure that Tim's section on enforcement is correct. The rest is dynamite.

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