Regulatory Divergence Is The Very Point Of Brexit

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So now we get to – having agreed that Brexit is going to happen – having to decide what the new trade deal is going to be. At which point there are all sorts of people insisting that we shouldn’t have regulatory divergence. Yet gaining that regulatory divergence is the very point of our having Brexit. We want to be able to do things differently than the European Union.

Thus this sort of worry is thinking about it the wrong way around:

Brexit is nearly done, but don’t expect an easy ride on trade. The EU is terrified of regulatory divergence

We are still very much in the early honeymoon period of the new Government, when flush with a stunning election victory all things seem possible. Even the traditionally hostile Financial Times seems to have been partially won over by the infectious optimism that for now flows through the nation’s veins, warming to some of the opportunities for positive change that Brexit may allow.

Yet at some stage, with the feelgood mood colliding with harsh realities, there is going to be a comedown. The first of these awakenings is likely to centre on trade.

In reaching a trade deal with the EU by the end of the year as promised, the Government will either have to compromise on scope for regulatory divergence,…

The point being that since the divergence is the very thing we want it’s not the thing to compromise upon.

Start from the very basics. There is no version of voluntary trade that is worse than autarky. There are versions of trade that are better than simple unilateral free trade. Like, for example, the other people adopting unilateral free trade too.

So, our baseline starting point for any negotiation on trade is that any trade is better than none, but we must measure any specific proposal against the effects of unilateral free trade. If it would be better to have this extra thing then all well and good, let’s have it. But if the conditions attached to that make the overall deal worse than the unilateral position then we should not have it.

For example, UK farm goods gaining tariff and quota free access to the EU would be a nice thing to have. But a likely cost of that is that British consumers would not be allowed tariff and quota free access to the farm goods of the rest of the world. The cost of that second is greater than the benefits of the first – we don’t do it therefore.

On regulation much the same becomes true. The negotiating stance at least. What would be the paradisical effect of a system of perfect regulation? Not that one exists nor ever will but that’s what we need to imagine. Then, anything we’re asked to accept which is worse than this has to be tested for whether what we lose from the restriction is worth what we then gain elsewhere.

Given EU regulation this is always going to lead to the answer “No”.

At which point we simply agree that whatever we try to export to the EU must meet EU regulations. Just like whatever we export to the US does. We already have that CE system by which people can mark that their products do meet such standards. And what we do internally is up to us.

To give a trivial example. The EU has rules on the size and suckiness of vacuum cleaner engines. It’s entirely fine that Dyson only sell into Europe those which meet this standard. There is no benefit to us of not being allowed to buy vacuums of greater suckiness. So, we do not accept the EU vacuum cleaner regulations for local consumption.

This then goes on throughout all such regulation. Light bulbs, chemicals and REACH, working hours on lorries, everything.

And of course the EU is right to be petrified of this. For if we free ourselves of these rules and then prosper – I would insist prosper by freeing ourselves from these rules – then this will emphasise the cost that all of Europe is paying to be burdened with these rules. It will no longer be some Far East island that is 50% richer, it’ll be Singapore on Thames that is. And having the English that much fatter, happier and richer only 26 miles off the coast is going to make a lot of continentals unhappy with the costs exacted from them by Brussels.

Which is, of course, why the EU doesn’t want it to happen. And also, equally of course, why we must do it. For us leaving the EU isn’t the end stage, not at all. True freedom will come when we liberate Europe once again.

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Gavin LongmuirTim WorstallSpikejamesJames BAYLEY Recent comment authors
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Jim
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Jim

Does the EU have regulatory convergence in the new trade deal with Japan? If not we don’t need it either do we?

Lurker
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Lurker

Oh but it takes the EU 10 years to make such a deal. Why we should be in awe of the EU for taking 10 years I dont understand but so it is.

Gavin Longmuir
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Gavin Longmuir

“Singapore on Thames” — that made me smile! Singapore has a large population of intelligent hard-working Chinese people; London has … well, you know. People keep talking about this hypothetical “free trade” — but a real “free trade” agreement would take about 1 minute to negotiate. Anything that is legal to sell in your country is legal to sell in ours — no tariffs, no regulatory barriers, no packaging rules, nothing. Unilateral free trade is possible — but then the UK would have no negotiating leverage with other countries, who will of course maintain tariffs and regulatory barriers against the… Read more »

Spike
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Spike

Gavin, your point about brevity was also made in the run-up to the 1000-page North American “Free Trade” Agreement, this week being replaced by the USMCA, which is good for US exports, but likewise not free trade but managed trade (racketeering).

“No packaging rules” etc. was never a goal. Free cross-border trade requires imported goods to meet the same rules as goods produced domestically, not to be marketable with no rules at all.

Gavin Longmuir
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Gavin Longmuir

Requiring imported goods to meet the same rules as goods produced domestically is getting very close to regulatory convergence. The idea that UK businesses post-Brexit are going to produce two versions of products & services — one for domestic consumption and the other for export to their main export market — is not going to be realistic in general. If most of that product/service is sold in the UK, UK producers will simply stop selling to EU, USA, wherever. If a large part of the product/service is sold in the EU (for example), UK producers will adopt EU rules regardless… Read more »

James BAYLEY
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James BAYLEY

Tim always makes the assumption that regulation is a cost not a benefit to consumers. This is wrong in many scenarios but particularly when we consider externality costs. If you are hit by a car you will be grateful for standardisation of bumper heights. Regulations force commodisation which increases competition and lowers prices for consumers. People who actually run product businesses don’t complain about regulations. That is why the CBI is a remainer. Journalists do.

Spike
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Spike

No, the main reason “people who actually run product businesses don’t complain about regulations” is that they have legal/regulatory staffs to deal with them, and they know that potential entrants to the product business will not. Regulation is a barrier to entry.

Standardization is often a benefit. Regulation (standardization at gunpoint) is not an additional benefit. Regulation meaning consequences for misbehavior is already present through litigation and damage to reputation.

james
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james

The British Empire literally imposed standardisation at gunpoint and saw massive growth because of it. I cannot think of any product business where regulation is a barrier to entry that is detrimental to the customer – can you?

Spike
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Spike

Cutting hair in the District of Columbia (licensees must receive absurd training in styling white people’s hair). Retailing petrol in the United States (every gallon receiving a serial number by which to determine if enough have been diluted with ethanol).

I am not enjoying parrying your junk claims of causation (spread of Imperial Gallons was a trivial effect of empire) and games of yes-but so that you can #VirtueSignal about being on the side of the little guy, dead babies, etc.

james
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james

I agree with you about the service regulation examples that you give above. These are great examples of regulatory capture which as Tim points out lead to cartels. However as someone who works in manufacturing industries I find the idea that a bonfire of regulations will create significant value completely farcical. It is blinding obvious that free trade is promoted by having common sets of regulations. If I had to manufacture 25 different products for 25 different markets it would cost me and the consumers much more. If my competitors could sell dangerous goods they could undercut me. Common regulations… Read more »

Spike
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Spike

Repeating: Standardization is often a benefit. Regulation (standardization at gunpoint) is not an additional benefit.

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