UK Regulation after Brexit by Bruce Goodwin

 

UK regulation after Brexit     by Bruce Goodwin                                                  26^th Feb 2021

 

Firstly, I should declare that I was a Leave voter, but I have always tried to listen to all sides of the debate.

The question always posed by Remainers is ‘can someone tell me exactly what we have gained from Brexit?’

The first thing to address is the notion that Brexit was ‘all about immigration’ as often suggested.   I would certainly recognise that in certain areas of the country this might be true, and I would even go so far as to say it might have been a factor in the ‘swing’ vote, but for me immigration was merely a subset of sovereignty and just one of many reasons why Brexit occurred.   Britain has sat uneasily within the EU for some time & this has been increasingly so since Maastricht & Lisbon.

I think this is important to recognise, particularly for those that believe this is all going to go so badly that the UK will be begging to sign up again soon.

There is something in our history & psyche that does seem to make it more difficult to fit in with the idea of an ever more integrated Europe.   We could point to the stability of our parliamentary system over many centuries as opposed to the turmoil endured by countries such as Spain.   We could look to the more recent crises such as that of 2008 and the ‘left behind’ protest vote.   But I think there is something more fundamental in all of this: the difference in the legal systems.

Common Law starts from the premise that you can do anything you like until a law is passed (often by mandate of elected govt but often by legal precedent) that says you cannot. The ‘acquis communitaire’ inherited from the Napoleonic system upon which the EU functions is a rules-based system with incredibly complex rules that are codified and passed down rigidly from on high.   I think this explains to a large extent the resentment felt toward being ruled from Brussels.

Common Law systems tend to be more flexible & require a certain amount of common sense in enforcement.   I do not think it is by mistake that the world’s most successful financial & commercial centres use it, but I think it goes deeper than that, into the minds of how we see government & how society interacts.   Common Law allows us to have the highest standards but with fewer rules; exemplified by the financial markets but also present in agriculture & green policies.   Society tends to move the law along with it and it is this that I feel makes us more compliant and at ease with our laws.

I have a sense that some of the post-Brexit issues, particularly in respect of the NI protocol, come down to a different mindset now that the UK is free to express itself.   If seed potatoes are exported from GB-NI with vestiges of soil on them, the UK tends not see this as a big deal and that no one else should either so waive it through.   The EU on the other hand is intent on ticking every single rule before agreeing to allow anything to move.   There are other instances such as sandwiches for consumption in transit, or shellfish that we are all familiar with.

The next question becomes whether, in tying us up in rules, the EU is simply doing what the EU does best or whether it is being vindictive?   Is it so worried about the Single Market & an economy on its doorstep that it imposes different standards to elsewhere?   It is true that the UK is not entirely ready for the brave new world, but did anyone think that would be the case after 45 years of working within the bloc, both in terms of customs and statecraft?   I am sure we can point to several government missteps, but it is equally true that having signed a trade deal we might expect that both sides would work together for the common good to ensure no disruption while things bed down.

Here, I am afraid the EU is guilty of cutting off its nose to spite its face.   It seems to care more about ensuring the UK will not prosper outside the EU than doing everything in its power to ensure that its trade surplus and good relations with the UK remain intact.   This I believe is extremely short sighted, given the turmoil within the Eurozone and the difficulties of the current crisis.

It is true that we are going to have some headaches in the near term, but the world is a large place, and we are not working in a sealed tank: things can and will change.

By deliberately making life difficult, the UK, now able to act very quickly in terms of its own trade, will look elsewhere.   We have seen how rapidly so many trade deals have been agreed.   Yes, many are rollovers out of necessity but there is room to improve & broaden them, especially regarding services.   And this is key, given that our economy is far different to the remaining 27.   We have a service-based economy, unlike the EU which is export oriented and one would say mercantilist.   No longer can the EU use the UK’s imports of finished goods as a bargaining chip in trade deals, whereas the UK can now use this in trying to gain access for services in the trade deals that it writes for itself.   It is not by mistake that none of the EU trade deals we were involved in and we did not negotiate excluded services.

As we look further afield, new markets will open for our financial sector and the effects of Common Law will again come to the fore, giving companies flexibility to be creative.

There are early signs that we are already exporting more to the rest of the world, despite the high-profile problems with the EU in some areas.   And this is being followed by a slowdown in imports, although we need to see post-Covid confirmation of the extent of this. But it seems to me that in being obstructive rather than constructive the EU has indeed more to lose.   Much of what the EU exports to us can be sourced cheaply elsewhere now that tariff barriers are falling, or by import substitution helped by a competitive sterling.   This goes for services too….. increasingly sunseekers will flock to the welcoming arms of the Caribbean rather than the beaches of the Med.   So, making like difficult for travel reps is going to hurt the EU far more than the UK; our business is very mobile.

The other issues revolve around regulations for different markets and building “gold- standards.”   There are a few things to think about here, and I admit I am not an expert, although finance is my background.   We can see already that the extremely short-sighted move to block equivalence can be got around by firms opening offices in each other’s jurisdictions.   This will mostly deal with the retail market, but the bulk of City of London business is wholesale: the huge depth of the UK markets where much of the trading takes place off exchange, dwarfs that of the EU centres.   And it is difficult for derivative markets to flourish without deep underlying cash markets.

This means that the moving of trading to European exchanges is just a small scratch and the moving of funds to Europe matters little if those funds are still managed in the UK where the bulk of the fees are made.   This system already exists globally where most fund managers will have funds domiciled in all sorts of jurisdictions to cater for a diverse base of international clients, but they will all be managed by a team in the UK, US, Singapore etc. Denying EU companies access to UK markets is going to hurt them a great deal and push up costs.

I started my career at a time when London had become a major market for offshore Dollars (the Eurodollar market) partly due to US legislation.   The Eurobond market was a huge offshoot of this, and it will continue to exist for Euro-denominated debt using UK Law.   An offshore Euro market is all but nailed on.

I am less sure about things like chemicals, but industry exports to many different markets and finds solutions.   Multinationals have production facilities in many countries to cover this, regulatory standards may be a different animal, but agreements will no doubt (as part of trade deals) be reached in many parts of the world to recognise the high standards that I am sure the UK will maintain.   Then there is the development of UNICE which along with enhancements in WTO rules (most recently TFA) will move to greater frictionless trade and standards. The EU might just get left behind if it tries to play hard ball and becomes increasingly entrenched in its protectionist cocoon.

In short, putting up trade barriers has never been a successful strategy, whereas free markets have tended to bring wealth and lift countries out of poverty.   Just at a time when the Eurozone needs a shot in the arm it seems intent on building more walls to hide behind and its impending debt crisis will be more difficult to handle.   Some might see fiscal union/federalisation as the way out; this will certainly keep the bloc together, but it will not stop the EU becoming increasingly less significant.

As I said at the beginning, I voted Leave and much of the reason you will find in my comments above.   It is not a decision I made lightly, and I was aware at the time it would be a tough transition.   I might have thought, as many did, that the EU would be less obstructive, but I see nothing yet to make me change my mind.   Indeed, the growth that we need to emerge from this crisis will not be found across the Channel but in the high growth areas elsewhere in the world.

I cannot speak for others, but I suspect the upbringing they have had within a Common Law society will make them view much of what the EU is doing as ‘petty bureaucracy’ and that they simply do not wish to work with us.   As such, I think the mood resulting from things being more difficult than envisaged post Brexit, will be far from everyone screaming to ‘let us back in’!   (Particularly with the penal terms they will undoubtedly try to extract, and to join the Euro), and more one of ‘fine if that’s how you want it’.

More likely there will be a desire to go on holiday elsewhere; buy things from elsewhere and export to places that make it much easier.