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3 August 2018

Photo of Emily LydgateDr Emily Lydgate is a lecturer in Law, Dr Peter Holmes is a reader in Economics and Dr Michael Gasiorek is a Senior Lecturer in Economics at the University of Sussex.  They are all fellows of the UK Trade Policy Observatory.

 

In describing the future regulatory relationship between the EU and UK, the recent UK White Paper proposes the notion of ‘equivalence’ in some areas. This may seem like a mere technical requirement, but equivalence is a loaded word in trade policy circles, and the UK government’s reliance on it bears further scrutiny.

With respect to goods, ‘equivalence’ shows up in two main ways. First, the UK states that it will maintain equivalence (rather than exact harmonisation with EU regulation) for some food policy rules in the context of a Common Rule Book covering manufactured and agri-food regulations (Section 1.2.4).[1] Also, it proposes that, when the UK diverges from existing or new legislation covered under the Common Rule Book, the EU can agree that the UK’s regulation is equivalent.[2]

The overall objective of the Common Rule Book is to allow for goods to pass between the EU and UK without regulatory border checks. So this amounts to a procedural requirement for the EU to consider maintaining an open border if the UK wants to go its own way on regulation on the basis that it can achieve equivalent outcomes. Albeit with more detail, this sounds eerily similar to the ‘managed divergence’ and three baskets approach proposed in the PM’s earlier Lancaster House speech, with an increased emphasis on the second basket. That proposal was rejected by the EU.

The White Paper does not elaborate on its interpretation, but generally in trade policy, ‘equivalence’ with respect to goods refers to achieving the same objective via different means, such as, for example, through performance-only standards rather than production or process based standards. The WTO SPS (food safety, animal and plant health) and TBT (technical barriers to trade) Agreements both encourage countries to recognise the equivalence of other countries’ regulation, but it is not an obligation.

This distinction between (equivalent) ends and (different) means has become a contentious issue in the context of EU-US relations with respect to SPS regulation in particular. The US Trade Representative has written that:

“The United States remains concerned about a number of measures the EU maintains ostensibly for the purposes of food safety and protecting human, animal, or plant life or health. Specifically, the United States is concerned that these measures unnecessarily restrict trade without furthering their safety objectives because they are not based on scientific principles, maintained with sufficient scientific evidence, or applied only to the extent necessary. Moreover, the United States believes there are instances where the EU should recognize current U.S. food safety measures as equivalent to those maintained by the EU because they achieve the same level of protection. If the EU recognized the equivalence of U.S. measures, trade could be facilitated considerably.”[3]

The above paragraph concerns a number of regulations that have become controversial in the context of a possible UK-US trade deal, covering not only the infamous chlorinated chicken but also hormone-treated beef and GMOs (see our recent briefing paper: http://blogs.sussex.ac.uk/uktpo/publications/the-future-of-us-uk-trade/). The EU, of course would argue that the US is not achieving the same level of protection – in other words, equivalent ends. But who determines what constitutes equivalence, and are countries required to waive border checks for equivalent regulation?

Some have argued that the EU is obliged by the WTO to mutually recognize equivalent UK regulation, and that under WTO rules the EU could therefore not prevent the UK from continuing to export to the EU post Brexit. For example, Patrick Minford has argued, in relation to UK produced goods:

‘On a Monday (pre-Brexit) they satisfy EU standards. Can the same products on Friday (post-Brexit) be deemed not to satisfy them? Certainly not. Any attempt to do so would wind up in the WTO courts rapidly and would be thrown out as illegal.’[4]

A Legatum report last autumn argued that:

‘…WTO rules on technical barriers to trade and sanitary and phytosanitary measures broadly require mutual recognition of different regulatory systems, as long as the end goal of regulation is the same—even where there are technical differences in the regulation itself.[5]

Similarly David Collins argues that under WTO rules:

‘If there is no risk from British foods today while we are still in the EU, then there is no risk the day after we leave, as long as the products themselves do not change…    …the EU cannot treat products from the UK differently than they did before Brexit.[6]

However, this is mistaken and shows a lack of understanding of the WTO rules. Arguing that the WTO requires the EU to recognize the equivalence of UK products conflates two things – Single Market access versus trade on WTO terms – that are quite different.

Both the WTO TBT and SPS agreements encourage – but do not require – countries to recognize the equivalence of each others’ regulation. TBT Article 2.7 provides a qualified obligation to ‘give positive consideration to accepting as equivalent technical regulations of other Members’ but only if they are satisfied that they ‘adequately fulfil the objectives of their own regulations’. The SPS Agreement Article 4.1 requires that Members shall accept other Members’ regulations as equivalent if an exporting Member ‘objectively demonstrates’ equivalence. However, the exporter must establish that its measures meet the objective, defined here as ‘appropriate level of protection’ as determined by the importing country. Article 4.2 also stipulates that ‘Members shall, upon request, enter into consultations…’ to recognise multilateral or bilateral equivalence. Article 4 was further clarified by a 2001 ‘Decision on Equivalence’, which requires countries to, among other things, provide exporters reasonable access to relevant procedures.

In other words, these rules impose an obligation to talk – but ultimately it is down to the importing country to determine whether the regulation meets its standards.  For the UK the issue is not whether or not the goods are produced to the same standard on Monday or Friday. On Monday the UK does not need to prove this, on Friday it may have to. And this would be WTO compatible.  If the UK wants to maintain frictionless trade on as close terms as possible then ‘alignment’, or a ‘common rule book’, or whatever term one wants to use to effectively proxy the single market, does matter.

Another element of the ‘toolkit’ of deep trade agreements is mutual recognition of conformity assessment, which the UK addresses with respect to Manufactured Goods in para. 29 of the White Paper,. Countries can negotiate Mutual Recognition Agreements (MRAs), which enable producers in one country to certify that products meet the regulatory standards of another. This falls short of recognising that regulatory outcomes for diverging regulation are ‘equivalent’. But it does eliminate the need for two sets of checks for regulatory compliance.

The WTO TBT Agreement encourages – but does not require – countries to enter into negotiations for such MRAs (TBT Article 6). Also, the National Treatment and Most Favoured Nation Obligations of the WTO would prohibit countries from, for example, charging some countries higher fees than others for conformity assessment. It does not, however, prohibit them from undertaking border checks to ascertain that regulatory requirements have been met.[7]

It is surprisingly rare for countries, including the EU, to waive the requirement for border checks on the basis that another country’s regulation is ‘equivalent’.  Such agreements have only been achieved very narrowly – for example, in the car sector of the EU-Korea FTA.

Mutual recognition of conformity assessment is also the exception rather than the rule. Indeed, the EU has become increasingly reluctant to undertake sectoral recognition of equivalence with regard to conformity assessment.  It has, in the past, agreed some sectoral MRAs with no harmonisation of national rules but it has moved towards systemic harmonization –in which third countries are expected to model their own regulations on EU regulations. The EU’s 2016 formal policy states that “Agreements on Conformity Assessment and Acceptance of Industrial Products”:

‘requires the prior full alignment of the partner country’s legal framework with EU legislation and standards and the upgrading of the implementing infrastructure in line with the model of the EU system, in relation to standardisation, accreditation, conformity assessment, metrology and market surveillance.’ [8]

Some of the rationale for this stems from the EU’s interest in trying to create a ‘level playing’ field by requiring harmonization in a larger number of regulations that might otherwise undercut its competitive advantage, such as poor environmental regulation or tax breaks. The more the UK wants to diverge from EU legislation, the less likely it is the EU will accept the possibility of mutual recognition of conformity assessment.

Therefore, whilst the UK is trying to build into its relationship with the EU, something that the WTO encourages, the EU’s desire to control the process – and not just the outcome – of regulations, and the wriggle room provided by WTO rules may be antithetical to the UK‘s aim for equivalence / ‘managed divergence’.

References

[1] For more on the scope of the Common Rule Book see our recent blog: ‘Tilting the playing field? The asymmetry in the UK and EU’s regulatory “ask”.’ 

[2] If it does not, the UK can propose another approach; finally there will be arbitration and potential compensation or suspension of the relevant parts of the agreement (Section 4.4.1, para. 30(b)).

[3] https://ustr.gov/sites/default/files/files/Press/Reports/2018%20National%20Tra

[4] https://brexitcentral.com/threat-post-brexit-border-friction-fiction-big-business/

[5] https://lif.blob.core.windows.net/lif/docs/default-source/default-library/brexitinflectionvweb.pdf?sfvrsn=0

[6] https://brexitcentral.com/busting-remain-inspired-myths-trade-wto-terms/

[7]  https://wto.org/english/tratop_e/tbt_e/tbt_info_e.htm

[8] 2016/C 272/01 Commission Notice — The ‘Blue Guide’ on the implementation of EU products rules 2016

Disclaimer:

The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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