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07 November 2017

Britain’s post-Brexit bind on trade

The UK is likely to find itself squeezed by both the EU and US on regulation, writes Alan Beattie.

[...] This week began with the UK government’s favourite think-tank arguing a typically optimistic case. Britain, its latest report said, having bounded free from the heavy shackles of the EU single market, could become a global leader in spreading a more balanced, risk-based approach to regulation while still having its rules recognised in Europe.

The next day, Wilbur Ross, Donald Trump’s commerce secretary, said Britain needed to accept US rules — which allow the now internationally notorious chlorine-washed chicken — rather than EU regulations if it wanted a trade deal.

The contradiction illustrates the bind in which a Brexit Britain will almost certainly find itself. In reality, product regulation is not global; international laws to constrain national rules are weak; the regimen of trade is frequently based more on economic clout than reason.

To preserve low-friction EU-UK trade, Legatum proposes that Brussels recognises UK rules as equivalent, based on guidelines in the World Trade Organization. This is “ambitious” in the traditional British civil service sense of the word, which is to say very highly improbable. [...]

In the real world, economic heft usually beats quality of argument. The export of European regulation around the world often depends not on its embodiment in a formal agreement, but on the practical effect of exporters having to meet EU rules to sell to the world’s biggest consumer market. It is often cheaper for a multinational company facing several national regulatory regimes to follow the most stringent. This is known as the “Brussels effect”, after the “California effect” that has long played the same role in intra-US trade.

Even the US, the world’s most sophistication regulation-export machine, struggles to repel EU influence. It tries to compel countries to adopt US rules through deals such as the Trans-Pacific Partnership. But the US trade representative’s office still fulminates against the spread of European regulations.

It is very hard to see a post-Brexit UK avoid being squeezed between regulatory behemoths either side of the Atlantic. International constraints are too weak, and protectionist motivations too strong, for the UK to remake global regulations on its own model. It is Mr Ross’s blunt warnings about the need to choose rather than Legatum’s habitual optimism about the UK’s freedom to act that is likely to determine Britain’s future.

Full article on Financial Times (subscription required)

© Financial Times

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