Tuesday, 20 February 2018

An important admission

Without meaning to dig up the issue of regulatory divergence yet again, I thought it was extremely important that David Davis made mention of the globalised nature of regulation and standard setting in his Vienna speech this morning. There he reminded business leaders that "the future of standards and regulations – the building blocks of free trade — is increasingly global", and that "by leading from the front and setting standards, you can drive innovation and enable new technology to thrive." This is an important new direction for the Brexit debate to head in.

I am happy to hear David Davis mention this because it has thus far been one of the detail elephants in the room. Important too was his assertion that standards form the building blocks of 'free trade'. What we call free trade is most effectively encouraged by harmonising regulation, and where residual tariffs are a problem, by the necessary reduction. A new standard can bind together two former diverging standards into a new, harmonised one, which in turn facilitates trade by freeing supply chains from a technical barrier to trade.

One thing I need readers to understand is that as far as trade is concerned, regulation itself is not the problem. The problem is differences in regulation, and in finding ways to reconcile divergent regulatory architecture. That all starts at the agencies referred to in Davis' speech. Importantly, not all non-tariff barriers to trade (usually regulatory) are what is called 'actionable'. A 2013 study by the Centre for Economic Policy Research concluded that about half of all present non-tariff barriers to trade are actionable, meaning they can be eliminated for the sake of liberalising the conditions for trade.

I describe Davis' comments as a new direction for the national debate because these points have largely escaped Brexit's public domain. We have spent so much of the past few years complaining about "EU rules" and "EU red tape" that we have failed to see a bigger picture. Even trade experts have often been guilty of casting their gaze too narrowly and focusing solely on the influence of the WTO. As far as I have seen they have not really acknowledged the activity undertaken horizontally of the WTO, in regulatory agencies seldom mentioned but ultimately vital to trade discussion.

Of these, UNECE, the ISO, CODEX, OECD and WCO (World Customs Organisation) are the most influential. Often what is seen on the ground as public policy derives from action taken at these forums. The shape of the headlights on your car, for instance, is determined not in Brussels but in Geneva, by UNECE 'working parties'. Incidentally part of the reason for the non-existent trade in cars between the EU and USA is that the Americans refused to adopt UNECE standards which would have forced US-based car companies into widespread redesigns.

During the referendum campaign almost no attention was paid to the origin of technical standards embedded within EU law. This is basically because it is not interesting. But, as with most boring political detail, it is important. The only regulation I remember being raised was the infamous 'bent banana directive', which was offered as a sort of meme to point out the ludicrousness of some EU rulemaking. Of course, the trouble here was that the EU is not responsible for the aforementioned regulation. That burden lies with Codex Alimentarius, a major agricultural regulator.

Mundane though the standard is (which bans fruit of abnormal curvature or damaged by pesticides and contaminants), it is interesting in that it captures quite neatly some of the intricacies of the globalised regulatory agenda. What we begin to see is that hidden agencies, granted their regulating authority by the WTO, are responsible for creating many of the rules governing trade systems. These are the arenas we will need to learn to re-assimilate ourselves into after Brexit. They are where much of our manoeuvring will need to be concentrated when trying to influence new global standards.

Towards the latter end of 2017 I wrote this blog post (read, incidentally, by two current cabinet ministers), which detailed the two major reasons why there will be no Brexit-induced regulatory sovereignty. The first reason was the crux of what I have discussed here, and the second was the inconvenient fact that we find ourselves alleyed between two regulatory superpowers in the EU and United States, who just so happen to be our two largest trading partners. We cannot converge with both, because the regimes are fundamentally very different. We have a choice to make.

My use of the term 'regulatory superpower' merely reflects the EU's important role in influencing international standard setting. To add another layer to the bent banana fiasco, the CODEX standard of 1997 is itself based on an originating EU standard constructed in 1995. So, in a nutshell, what we have before us is a vast matrix of organisations engaged in a complex interlocking of rulemaking. Often, global forums will take the nucleus of a domestic standard, often from the power responsible for the science and research which went into forming it, and transpose it into a global one. A two-way street, so to speak.

Both Remainers and Leavers have something to learn from all this. The globalisation of standard setting undermines two key arguments on both sides of the referendum debate. It rubbishes the claim that the add-on Single Market states (Norway, Iceland and Liechtenstein) have no say in EEA rulemaking, and it demolishes the argument that Brexit will bestow upon us newfound regulatory sovereignty. I have been at pains to point these things out, with almost no success given how little attention is paid to the issue of regulation by anybody in Westminster or the legacy media.

If we build on Davis' important admission we may be able to enjoy a more balanced and grown-up debate about trade in the UK. I know the whole topic is dry and does not wet the appetite in quite the same way that zero tariff fanaticism does. But the detail is important. The work achieved at global level, whether it be setting a labelling standard or a standard on car tyres, facilitates enormous amounts of trade. International cooperation is the name of the game and Brexit Britain will need to recognise where its resources and diplomatic energies are best spent. Today was a welcome step in a positive direction.


  1. Hi Oliver, I would still appreciate your view on the question I asked a few days ago on your blog about Pakistan. I agree that EFTA is the least damage route to take (although remaining in the EU is far preferable). You worked for Vote Leave but support an EFTA Brexit. Do you feel betrayed now that your own side says that there was never any talk of staying in the customs union or single market, despite the fact that the Norway option was mentioned many times by leading Brexiteers. Were Vote Leave blatently lying to get the votes of EFTA supporters? This is important to understand as I believe many people voted Leave on the understanding that the EFTA route was being verey seriously considered. Many Thanks Alan Jones.

    1. Sorry. Will reply to the comment on that post a bit later

  2. Good to see some well-informed analysis...

    I have a question concerning this point though:

    "It rubbishes the claim that the add-on Single Market states (Norway, Iceland and Liechtenstein) have no say in EEA rulemaking, and it demolishes the argument that Brexit will bestow upon us newfound regulatory sovereignty."

    I can see how it is clear that regulatory sovereignty will not be possible given the thrust of the article, but I can't see the logical justification for why it implies that the "add-on" states have a say in EEA rule making.

    Is it just that any state that chooses to invest in the necessary R&D to come up with scientifically "optimal" regulations can contribute to forming those regulations through the interconnectedness of the regulatory environment?

    If so, doesn't that still imply, at best, only indirect influence, as opposed to direct influence via membership of the European Parliament? In the standard formulation of "pay-but-no-say", isn't it reasonable to consider that the "say" is interpreted as having democratic representation?

  3. Yes, it is fair to say that 'say' comes with democratic representation. But it's also fair to say that there is more than one means by which one can have say. What is accurate is to say that EFTA EEA states have limited say. Just like EU members have limited say - thanks to the excesses of the CCP and qualified majority voting.

    1. Thanks for the reply.

      Understood; thanks for the clarification.

      I'll readily admit that I'm not an expert in this area, but I'd suggest though that there is, perhaps, a bit of conflation of levels when using the term "limited" in both senses.

      To the extent that EFTA EEA states have a say, it is surely more limited if their influence is through solely being able to execute innovative strategies vs having democratic representatives involved in the process.

      I suppose if Norway suddenly becomes the center of innovation for an upcoming technology to the extent that it is able to both lead the way and achieve maturity before the rest of the world catches up, then it would be able to be a de facto standards leader. However, unless a technology is of minimal application, value or invention (in which case it's probably not something of enough economic worth to be building industrial policies on), it seems unlikely that such an extensive innovation leap could be commercialised and commoditised in a single country before other competitors will have begun building rival technologies.

      Let's imagine a company in Norway, supported by a government R&D scheme, develops a technology that sequesters carbon from the air at the equivalent rate of 1,000,000 trees, converted it into oil, is cheaply deployed and powered by solar. I'd imagine that the company which had created it would want to patent their technology to form a mandated monopoly.

      However, due to the critical nature of the technology and the fact that the underlying invention would have been exposed through the patent, it is almost implausible to think that there wouldn't very quickly be other companies seeking to develop a competitor technology based on a similar invention.

      Indeed, while the act of patenting the technology makes it more likely to maintain a lead, it makes it less likely for the Norwegian company, let alone Norway as a state, to have a say in the eventual regulations of the mature platform as there would need to be divergence from the original patent for the companies to develop a competitor.

      Let's now assume that one of the first companies to develop a competitor product is Spanish. Given the Spanish representation within the democratic institutions of the EU, isn't it reasonable to think that, despite the lag between when the technology was originally invented and the Spanish competitor came online, the Spanish state (and therefore the competitor) would be likely to have a greater influence over the eventual regulations associated with the industry than Norway (and therefore the originating inventor)?

      I suppose my point is that while, yes, I can appreciate your point that the idea of "pay-but-no-say" implies an inaccurate negative absolute, isn't it also the case that using "limited say" in both cases implies a false equivalence?

    2. Well, I'm not trying to bring about an equivalence. That's really the point. Say is hard to quantify. EFTA EEA states maintain a say and influence rulemaking through a few different mechanisms. Remember, for instance, that they are consulted at every level of the legislative process and leave comments and feedback on proposed legislation. Their expertise and track record ensures they are trusted to suggest legislative amendments and there are political processes which embellish the EEA framework, like joint councils and joint parliamentary procedures, which bring both sides together in constructive dialogue. There are also research elements, treaty provisions like safeguard measures and manouevring at global regulatory forums to consider.

    3. Fair enough; that makes more sense.

      Thanks for the clarification.

  4. The rubbishing by Tories and media of every EU move to promote exactly what you suggest is why There is such an unwillingness to confront the truth.