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Brexit Will Only Mean Brexit If We Regain Control of Economic Rules

Ryan Bourne

The litmus test of whether “Brexit means Brexit” is
if the UK has regulatory sovereignty after leaving the EU. That
became clear last week, as the UK Government agreed to “full
alignment with those rules of the internal market and the customs
union” if no solution was agreed to prevent a hard Irish
border.

Theresa May has insisted that “full alignment”
doesn’t mean being a supplicant EU rule-taker unable to
differentiate our laws. Instead, she says it’s about
achieving the same regulatory goals through different means.
But that’s not how other Europeans see it.
The Irish prime minister, Leo Varadkar, insists continued free
trade requires EU-UK harmonisation on everything from the
environment to food standards and labour laws.

Regulatory sovereignty is
a necessary condition for the UK to sign effective free trade
agreements with other countries.

Varadkar’s thinking is obviously an economic nonsense.
Mutually agreed standards, or harmonisation that breaks down
barriers, can deepen markets. But free trade does not necessitate
sharing maximum working hours regulation or directives on
collective redundancies. The EU itself has free trade agreements
with third countries which say nothing of these kinds of
regulations on processes.

As phase two of the talks begins then, and we seek our own free
trade deal with the EU, domestic sovereignty of economic regulation
must be a May red line. That means the UK must cease to be
regulated — directly or indirectly — as a member of the
single market, and instead be free to set domestic regulatory
policy. There are three reasons why this is important.

First, because it would be completely unacceptable for the UK to
be a rule-taker from Brussels. Having exited the EU, the UK would
have no vote on new single market rules, and would be a hostage to
potential damaging legislation. This would be particularly
worrisome for the financial sector, where the Commission has long
pushed for a highly disruptive financial transactions tax. But
similar concerns arise elsewhere.

Take the regulation of ports. The EU’s recent Port
Services Regulation is shaped by a desire to liberalise the
continent’s public sector port authorities with new
one-size-fits-all rules. But the UK’s ports are already
overwhelmingly privately owned, efficient and self-regulating.
Subjecting them to the EU’s new regulator, with the power to
enforce alternative providers of services and to cap fees, will
simply add inefficiencies and deter investment.

There are many other areas where the UK tends to be more
liberal, and where centralised EU laws could be damaging and
inappropriate.

Mooted EU harmonisation on labour, bankruptcy, tax and corporate
laws can surely only be bad news for the UK, especially absent an
ability to vote and shape it. That’s to say nothing of
regulatory frameworks as new technologies arise, given the
EU’s tendency for lethargy and being overly cautious.

Second, and more importantly, harmonised regulation with the
single market would preclude us from altering existing laws in a
more pro-growth direction. The focus since the referendum has been
on external trade. But arguably the biggest potential boost from
not having to accept the acquis communautaire is provided
to internal trade — where deregulation could lower costs and
enhance GDP.

Now, at this point, sceptics usually invoke a caricature of
deregulation and talk about diluting safety in a “race to the
bottom”. So let’s take some specific examples.

Mark Carney, the Governor of the Bank of England, has
highlighted how Brexit is an opportunity to roll back regulations
which harm the City, including the bankers’ bonus cap,
elements of EU insurance regulation, and rules weighing heavily on
challenger banks.

The UK Treasury likewise wrote in 2015 about how
“European-level rules and agreements affect a range of policy
areas, from energy to financial services” in the context of
constraining productivity. It’s widely acknowledged that the
Common Agricultural Policy constrains innovation, while the
EU’s precautionary principle in farming regulation and GM
crops lowers crop yields.

Previous work by Open Europe from 2013 showed that 24 of the 100
most economically costly EU laws at the time, including the
Temporary Agency Workers Directive and the Energy Performance of
Buildings Directive, had costs exceeding benefits. A further 33 had
benefits that were intangible or not quantifiable.

Successive previous Tory manifestos pledged to seek repatriation
of employment law too, presumably because they thought beneficial
changes could be made.

Altering any of these regulations in isolation might not have a
big impact, but the cumulative effect is likely to be large. Yet
assessments of the economic impact of the UK leaving the EU tend to
ignore all these possibilities.

Finally, regulatory sovereignty is a necessary condition for the
UK to sign effective free trade agreements with other countries.
The UK is primarily a service-based economy, and will be seeking
deals to liberalise those sectors. That requires being able to
negotiate mutual recognition of regulatory standards with other
major economies. Yet if the UK is an EU rule-taker and does not
control its own regulatory frameworks, not only would this increase
uncertainty to third parties, but they would have little incentive
to agree deals with the UK, opting to deal with the EU
directly.

The conclusion is therefore clear. If the UK Government wants to
avoid damaging legislation being imposed upon it, if it wants to
enhance the growth potential of the economy, and if it wants (as it says) to sign lots of free trade deals
with third countries
, then it must regain control of domestic
economic regulation. If the price the EU sets for maintenance of
tariff-free trade is complete regulatory harmonisation, then no
deal would be better than that bad deal.

Ryan Bourne
holds the R Evan Scharf Chair for the Public Understanding of
Economics at the Cato Institute.