By Pieter Cleppe
After Liz Truss’s brief interlude as British prime minister, the British Conservative Party is still struggling. In the opinion polls, the Tories are no less than 24 percentage points behind the Labour opposition. The new prime minister, Rishi Sunak, and 15 of his ministers even risk losing their seats in the upcoming elections in 2024, with former prime minister Boris Johnson being more popular than Sunak into the bargain.
British journalist Tom Harwood regrets the reduced support for the free market economy among the Tory party leadership after Rishi Sunak took over. He notes: ‘Truss would lower taxes, Rishi raised them. She legalised onshore wind and shale extraction, Rishi banned it. She wanted to accelerate housing construction in investment zones, Rishi scrapped it. She had plans to accelerate transport, energy and communication infrastructure, Rishi scrapped it.’
Brexit
There is also a lot going on on the Brexit front. In November, the British government was said to have prepared to propose a ‘Swiss’ relationship between the UK and the European Union. Leading Conservatives, including Rishi Sunak, have denied this, but it was clearly something to consider. British Finance Minister Jeremy Hunt has stated that he would try to remove ‘the vast majority of trade barriers between us and the EU’. So there will be a renegotiation. The Financial Times also calls for a renegotiated Brexit agreement: ‘Britain must improve its Brexit deal. Large parts of industry want more alignment with the EU, not less.’
Meanwhile, the culture war over Brexit rages on. According to a poll for The Independent, two thirds of Britons are in favour of a referendum on returning to the EU. However, only 22% think such a new vote should take place within the next five years, while 24% say it should happen within 6 to 10 years. The support for ‘re-entry’ also enjoys a 13 percent lead, although this could quickly decline if the EU were too strict when it comes to the conditions for UK accession, for example if joining the eurozone were to be made a requirement.
In the run-up to a possible new EU referendum, the Eurosceptic press will certainly be on the lookout for quotes from EU commissioners and members of the European Parliament who cannot resist making grandiose statements about the strict conditions that a possible British request for EU accession would have to meet. That would obviously help the Brexit camp. If, on the other hand, the EU were to offer the British a return to the EU with all their opt-outs restored and some additional flexibility, a return to the EU would have a chance. However, this would require the leading politicians within the European Union to recognise that they too are to blame for Brexit by having ignored legitimate British complaints for years.
Competition in the field of regulations
If the British government – perhaps with Labour at the helm – starts to renegotiate its relationship with the EU after it has resolved the impasse in Northern Ireland – which may happen soon – and has harmonised its regulations more effectively, this would amount to a relationship based on the Swiss model. In the autumn, it was leaked that the British government would be seeking to eliminate 80% of the checks between Great Britain and Northern Ireland and to open up access to the internal market in exchange for the United Kingdom’s compliance with a number of EU regulations and the payment of contributions to the EU budget, without, however, restricting free movement. If the EU were to agree to this, it would lead to greater openness between the EU and the British markets, but for Great Britain it would mean a step backwards in terms of sovereignty, as it would become a partially subservient follower of rules.
More importantly for Europe, such a renegotiated relationship between the EU and the UK would mean less competition in the area of regulation. A better alternative for more trade between the EU and the UK would therefore be for both parties to recognise each other’s regulations as being of sufficient quality. After all, most British regulations are still the same as those of the EU, and trade is ultimately about trust.
Competition in the regulatory field is essential to promote innovation, particularly when it comes to regulating new economic sectors such as the digital sector. There, jurisdictions can learn from each other how to deal with new phenomena. The United Kingdom may, for example, decide at some point to no longer follow regulations such as GDPR, which is evidence of the EU’s innovation-hostile attitude towards the digital sector. The German CDU MEP Axel Voss described it as follows: ‘Europe’s obsession with data protection is standing in the way of digital innovation.’ If the United Kingdom were to reap the benefits of no longer going along with the EU approach, EU businesses and even EU regulators might also have to rethink their approach.
A divergent United Kingdom
There are already areas where we can see that the United Kingdom is taking a different approach from the EU. This is the case with the EU Commission’s proposal for a ‘Corporate Sustainability Due Diligence’ directive, which would require certain companies to perform extra due diligence in their value chains, holding them responsible for all kinds of things that go wrong, particularly in the areas of sustainability and human rights. Although it makes sense to demand that things like forced labour be kept out of supply chains, it is not a good idea to turn companies into regulatory supervisors that impose the EU’s labour and environmental policy choices on trading partners.
Companies that import products such as soy, palm oil and coffee would be seriously affected if this regulation is adopted, especially since it comes on top of other protectionist EU initiatives, such as the new EU regulation on mandatory due diligence to halt deforestation in supply chains.
This regulation requires companies to check that goods sold in the EU have not been produced on deforested or degraded land anywhere in the world, but in reality it disproportionately affects the palm oil sector in Malaysia and Indonesia, even though producers there have already made great progress. This is also leading to ever-increasing trade tensions between the EU and that part of the world, which is considered a true growth market.
The think tank Chain Reaction Research (CRR) has concluded that deforestation for palm oil in Indonesia, Malaysia and Papua New Guinea has dropped to its lowest level since 2017. South-East Asians are frustrated that the EU does not seem to recognise this progress. Malaysian companies such as Sime Darby, the world’s largest producer of certified sustainable palm oil, have also promised to reforest 400 hectares in Sabah and Sarawak, two Malaysian regions, as part of a sustainability agenda that includes achieving net zero emissions by the year 2050. The United States recently imposed an import ban on the company, which indicates that the region is making progress in terms of sustainability.
Banning palm oil completely would also be counterproductive, according to a study by researchers at the University of Bath, published in Nature. The researchers point out that such a ban could exacerbate deforestation, as alternatives such as sunflower or rapeseed oil require more land, water and fertilisers.
Interestingly, the UK has opted for a different, more sensible approach and is clearly already benefitting from the policy freedom that Brexit has brought. Instead of imposing all kinds of specific standards on trading partners, the UK demands only that the products comply with local regulations, effectively applying the principle of mutual recognition.
Such an approach is not only more in line with the spirit of free trade, which is based on trust in the standards of trading partners, but is also much more practical. Defining what EU standards, such as ‘sustainable’, mean in other jurisdictions is very difficult and will undoubtedly lead to all kinds of legal disputes. Of course, certain labour or environmental standards in Europe are not acceptable, but in reality, the situation regarding labour conditions or the environment usually improves as a result of more trade, not as a result of threats to end trade if our own standards are not adopted.
Still a long way to go
It is clear that there are currently few examples of the UK having already used its policy freedom, acquired after Brexit. The truth is that the British electorate is not as keen to fully embrace liberalisation as is sometimes suggested. The ideological turnaround in the conservative leadership does not help either, after the departure of the classical liberal Liz Truss – even though she was not so classical liberal in terms of responsible budgetary policy, something for which the markets punished her. Rishi Sunak quickly dismissed Liz Truss’ plans to legalise fracking, even though he was originally in favour of it, and despite the fact that the UK is also currently experiencing a huge energy crisis. Given the British government’s policy, the EU’s climate policy, which is still in force in the UK, will not be scrapped anytime soon either.
For the time being, mutual trade between the EU and the UK has mainly experienced the negative aspects of Brexit – the disruption forecasted as a result of increased bureaucracy. Most of the benefits of Brexit will probably only become apparent over time and will probably not be the result of the UK scrapping all kinds of regulations from the era of British EU membership, but simply by no longer adopting all kinds of new red tape from Brussels such as GDPR, REACH or MifiD. This refusal may be at the expense of a further restriction of the UK’s market access to the EU, but it will also strengthen British competitiveness.
A version of this article is also being published in Dutch by Doorbraak magazine.