Brexit: mutually assured distraction

18/06/2019

For my Sunday post I did a treatment on the no-deal scenario, an issue which has featured prominently in the ongoing leadership contest.

But, although prominent, in terms of its impact on the debate, the thing we lack is any serious discussion about the consequences, while the "ultras" and their apologists purposefully gloss over the detail, making out that no-deal is a tolerable option for the UK.

A good place to start, though, would be the advice given by the Department for Business, Energy & Industrial Strategy, and in particular its recently amended guidance note entitled: "Placing manufactured goods on the EU internal market if there's no Brexit deal".

However, a crucial thing about the entire Brexit debate is that so many of the important details reside in arcane technical repositories of this nature, which are generally meaningless unless you already know what you're looking for, or can place the information in its broader context.

The section to watch in the BEIS guidance comes under the sub-heading "Non-harmonised goods", where we learn of the distinction between harmonised goods – where there are EU regulations setting common standards – and the non-harmonised goods, where there are no formal EU-wide standards.

In this latter event, free circulation of goods under the aegis of the Single Market relies on the "mutual recognition principle", through which means any goods which can be legally sold in the producing country can be freely sold anywhere else in the EU, without having to apply local standards.

We should remind ourselves, however, that this principle was not initially part of Community law and was not part of the original Treaty of Rome. It emerged from a ruling from the much-maligned ECJ, in the now famous Cassis de Dijon case of 1979, cemented in by Case 113/80 of 1981.

And, while people like snake oil salesman Shanker Singham have been pushing this as the answer to all our woes when we leave the EU, anyone who thinks that this is an answer has been cruelly misled.

In fact, those UK businesses which currently rely on mutual recognition are going to be in for a very hard time. Simply put by BEIS, "after the UK leaves the EU the mutual recognition principle will not apply to UK non-harmonised goods placed on the EU internal market".

Thus, companies which currently produce goods in accordance with UK law and can – in theory - export them anywhere in the EU without the need to deal with any other regulatory system, will no longer be able to do so.

Post Brexit, UK companies will have to ensure that their goods not only comply with UK law, but also with the separate regulatory systems of the countries to which they export. This can only increase costs and can make export to some markets uneconomic.

Optimistically, BEIS suggests that they will have to meet the requirements of the first EU country to which they are exported but, in practice, they will have to conform with the rules of the Member States in which they are sold.

The products most affected are items such as childcare articles, clothing, textile and footwear, furniture, jewellery, sports accessories and firearms. But mutual recognition also applies to EU-regulated products, where elements are not covered by specific measures. Examples are foodstuffs (and especially manufactured foods) and food supplements, food contact materials, fertilising and construction products.

What makes this a big issue is the scale of the trade involved. The Commission estimates that non-harmonised sectors represent around 20 percent of the total value of market sales of manufacturing sectors (€1,158 billion out of €5,690 billion). Furthermore, around 87 percent of the enterprises operating within the sectors are micro enterprises (i.e. with less than 9 employees). Around 11 percent are small and medium enterprises (i.e., with a number of employees between 50 and 250).

In cash terms, for the period 2008–15, the average annual value of intra EU exports of non (or partially) harmonised products has been equal to €335 billion, which represents 18 percent of the value of intra-EU exports.

Unfortunately, the Commission does not break down the figures by nation, but if we assume that the UK roughly parallels the rest of the EU, then Brexit puts at risk something like 18 percent of our exports of manufactured goods to EU Member States, affecting a high proportion of micro enterprises and SMEs.

Clearly, Brexit will not automatically cut off this trade, but it will make life much more difficult for UK traders. And things can only get worse. The Commission has long acknowledged that the mutual recognition system does not work as well as it might. Traditionally, the EU has relied on a 2008 regulation but, to improve matters, this will shortly be replaced by Regulation (EU) 2019/515, which takes effect from 19 April 2020.

This new regulation aims substantially to improve the functioning of the mutual recognition system. Of special interest is an innovative appeals process which allows individual enterprises to sidestep refusals of national authorities to recognise their products.

Once the UK leaves the EU (if it ever does), we will be totally outside that system and unable to benefit from any of the measures aimed at facilitating intra-EU trade. That this places us at a competitive disadvantage scarcely requires saying, but we should also note that the scale of the disadvantage will increase with time, as the new regulation bites.

The worst of it is that, even should we subsequently agree a free trade agreement with the EU, there is no guarantee that the mutual recognition principle will be applied universally – or at all.

When I wrote a piece in October 2016 on mutual recognition of standards, I pointed out that even the EU-Canada Agreement only allowed for cooperation in this area on a case-by-case basis. There was no question of any blanket application of the principle.

Looking at the bigger picture, this is just one small element of our trading relationship put at risk by a no-deal Brexit. Had we sought to remain with the EEA, it would have been retained, incorporated into the Agreement by virtue of Annex II Part II (page 214), following EEA Joint Committee Decision No 126/2012 - with the exception of food and animal products. It is one of the many things the government has thrown away in rejecting the Efta/EEA option.

Sadly, this does not prevent the likes of Alexander Boris de Pfeffel Johnson making crass assumptions about gliding through a no-deal Brexit without suffering serious consequences.

There are those, for instance, who suggest that preparation for a no-deal can somehow reduce the impact, but how does any amount of preparation reduce the impact of being excluded from the mutual recognition system? The fact is that many companies which have built businesses which utilise the principle will find trade that much harder.

And while mutual recognition is only one of the many facets of the EU trading system where we will be locked out, the way the detail is glossed over tends to obscure the handicaps we face. Not for nothing does one have to urge attention to detail, while it obviously suits vacuous politicians (and the media) to avoid detail for the same reason.

Distracting people from the detail will only go so far. This "mutually assured distraction" will succeed only until we are confronted by the practical consequences. Then the serious questions will be asked – and there won't be any easy answers.