Tag: UK Internal Market

UK Internal Market Legislation

The negotiations on a post-Brexit trade deal have been thrown into disarray as the UK has threatened to unilaterally override parts of the Withdrawal Treaty.  Boris Johnson’s Government proposes to use the Internal Market Bill currently progressing through Parliament to amend the implementation of the Northern Ireland (NI) Protocol.  This is despite the fact that the Treaty and Protocol were agreed by the Government less than a year ago, and that breaking Treaty obligations contravenes international law.

The EU was quick to react and told the UK that it must withdraw the relevant parts of the legislation before the end of the month.  The UK has, so far, declined to do this.  However, talks on a future Free Trade Agreement (FTA) will continue for now, although relations between the two sides have reached an all-time low.

The crisis began when the UK Government published its draft legislation on the UK Internal Market (UKIM) on the 9thg September.  This was subject to a consultation during July and August (click here for article summarising the Government’s initial proposals).  Whilst the draft legislation mainly deals with the functioning of the UKIM in a post-Brexit world, various elements impact on the implementation of the Northern Ireland Protocol.  The UK Government claims that this is largely an exercise in ‘clarification’ although a Minister had to admit in Parliament that the proposals were in breach of the Withdrawal Treaty obligations.  A senior UK Government legal adviser has resigned over the plans.

The UKIM legislation affects the NI Protocol in three main ways:

  1. Access from GB to NI: goods from GB entering into NI have to abide by EU standards based on the provisions of the Protocol. The UKIM legislation is not proposing to ignore that, however, in implementing the Protocol the UKIM legislation states that UK authorities have to show special regard for, and strengthen the integrity of the UK internal market. As things stand, this is not a controversial proposal and it is understandable that the UK would seek to uphold the integrity of its internal market. That said, it will be interesting to see how the UK defines goods that are ‘at risk’ of entering into the EU Single Market, which may be ineligible to do so if they are not covered by a Free Trade Deal or do not have the appropriate tariffs applied in a No Deal scenario. This is especially relevant for agri-food products and more detail on this is anticipated in the Finance Bill due to come before Parliament later in the year.
  2. Trade from NI to GB: here, the promise by the UK Government to give “unfettered access” for NI businesses to the GB market comes into play. The UKIM draft legislation gives the NI Secretary of State the powers to modify or disapply sections of the NI Protocol that requires NI businesses to complete additional EU paperwork (e.g. export summary declarations) for goods sold to the GB market. These intentions are causing concerns in EU circles as they are at odds with what the EU has understood to have been agreed under the Withdrawal Agreement. Exactly how the completion of this additional EU paperwork would operate in practice has still to be defined. Much of the information required will already be contained in commercial documentation. So, it should be possible to address this issue with information the NI businesses already compile, particularly as there is a Trader Support Service also available to NI businesses.
  3. State Aid Rules: this is perhaps the most controversial aspect as it continues to be a sticking point in the future relationship negotiations. Article 10 of the NI Protocol specifies that EU State Aid Rules apply to all trade relating to the Protocol. This includes GB companies with bases in NI and means that EU State Aid Rules reach into GB which the UK Government objects to.  The UKIM legislation would again give powers to the NI Secretary of State to modify or disapply these powers, despite the UK Government’s own admission that these powers would contravene international law, as the Withdrawal Agreement is now legally binding. This has caused the most alarm on the EU side and the negotiations are very much at a make-or-break point.  

Moving away from the Brexit-related aspects of UKIM, this legislation will be important for agri-food businesses operating throughout the UK.  Goods produced in one part of the UK (e.g. Scotland) and meeting the required standards will be mutually recognised when placed on the market in another part of the UK (e.g. England).  That said, if products produced in England are subject to lower standards than those applying in Scotland, the non-discrimination principle would mean that these products cannot be prevented from being offered on sale in Scotland.  Accordingly, this gives the potential for products produced to a lower standard to be supplied across the UK and this has drawn sharp criticism from the devolved administrations as they believe it undermines any powers which might be repatriated to them (from Brussels) as a result of Brexit. 

The draft UKIM legislation is accessible via: https://publications.parliament.uk/pa/bills/cbill/58-01/0177/20177.pdf

The introduction of the UKIM was always going to be controversial but recent statements in Parliament by the NI Secretary of State has raised tensions to a new level, particularly concerning UKIM’s incompatibility with international law and its implications for the UK-EU negotiations. Given how controversial the Brexit negotiations have been, it was always likely that a flashpoint such as this would emerge, especially as we are reaching the climax of the talks. The prospects of a No Deal Brexit have increased. That said, the controversial points can still be ironed out in the remaining negotiations – if there is the will on both sides to achieve this. Also, it is worth pointing out that the UKIM legislation is likely to be modified significantly as it passes through Parliament and the House of Lords could potentially delay its passing by a year as it will have grave concerns about its current incompatibility with international law. What is clear is that even if an agreement is reached between the UK and the EU, significantly more time will be needed to implement any agreement. Whilst the Transition Period might end on 31st of December, a further Implementation Period is now necessary, such periods are common in other Free Trade Agreements. 

The UK Internal Market Post-Transition

The UK Government has published a White Paper on how the UK internal market (UKIM) will operate in the future.  Due to devolution, some policy areas (e.g. fiscal and monetary policy, State Aid) are ‘reserved’ for the UK Parliament whilst some 160 others, most notably agri-food and fisheries, environment and planning as well as product standards for agri-food products are devolved competences.  When the UK was a part of the EU Single Market, it provided the legal framework to enable goods and services to flow freely.  However, with Brexit, policy-setting powers will be ‘returned’ to the devolved administrations, leaving open the scope for greater divergence within the UK.  The UK Government’s White Paper seeks to address this and forms part of a four-week consultation period and the UK Government aims to fast-track legislation from September.  In developing the UKIM system the UK Government aims to:

  1. Continue frictionless trade between all parts of the UK
  2. Continue fair competition and prevent discrimination
  3. Continue to protect business, consumers and civil society by engaging them in the development of the market.

To achieve these aims, the white paper proposes a four main types of measures:

  1. Common UK Frameworks: designed to support the functioning of the UKIM, the management of common resources and the UK’s ability to negotiate, enter into and ratify trade and other international agreements. This includes setting a baseline of regulatory coherence across the UK.
  2. Market Access Commitment: would enshrine into law two key principles:  ‘mutual recognition’ and ‘non-discrimination’ which would enable UK companies to trade unhindered across the UK.  This could mean that products supplied in one part of the UK (e.g. England) which are produced to different standards than other parts of the UK, could still be offered for sale across the entire UK market.  This proposal has ignited tensions.  The SNP for instance fears that if English standards are lowered, it will erode Scottish standards.  Furthermore, as Northern Ireland will be applying EU regulations, products deemed not to be meeting the EU’s standards will not be permitted to enter.  The Paper acknowledges Northern Ireland’s commitments under the Irish Protocol but re-emphasises that Northern Ireland will have ‘unfettered access’ to the GB market.  Whilst the UK Government is seeking to make NI’s access to the GB market as frictionless as possible, the reality is that additional regulatory requirements will need to be adhered to (e.g. Summary Declarations).  Some business groups are seeking compensation or mitigation measures the impact of such friction but are awaiting further details from Government on how to do this.
  3. Uniform subsidy control regime: legislated for in the UK Parliament (as State Aid is a ‘reserved’ matter).  That said, EU State Aid regulations would continue to apply in Northern Ireland with respect to goods as a result of the Protocol.  Services would be applied based on the UK regime.
  4. Independent advisory group and intergovernmental responsibilities: whilst the evolution of the UKIM will be overseen by the UK Parliament, the White Paper stresses the scope for expanded intergovernmental arrangements.  These will help to monitor the health of the UKIM and will help to gather evidence for its future development.  There is also the possibility of an independent advisory body being set up to examine how the UKIM should evolve but these ideas are not fully developed yet.

Although the Paper emphasises the UK’s commitment to maintain its high standards, like a lot of Government publications, its language could be open to differing interpretations (e.g. “committed to promoting robust food standards nationally and internationally, to protect consumer interests”).  On the one hand, this could mean upholding the current standards inherited from the UK’s EU membership.  Alternatively, it could signify a move to evolve standards so that they are more aligned with those applicable elsewhere internationally if that is what (some) consumers want.  Whilst it acknowledges that any changes to food safety legislation would need to be brought before the UK and devolved Parliaments, the Market Access Commitment arguably leaves open the possibility the products deemed acceptable for import into England could be placed on the market in Scotland or Wales.

The White Paper cites a coherent UKIM system as being particularly important for future Free Trade Agreements (FTAs).  This is because it would make the UK as a whole more attractive for countries to do business with it and claims a coherent framework would ensure that the UK as a whole would benefit from such FTAs and would enable UK businesses to compete internationally.  

Finally, it must be emphasised that without the proper regulatory framework, the coherence of the UKIM could easily unravel.  From 2021, one part of the UK (i.e. Northern Ireland) will be applying a different regulatory framework.  The greater the divergence between the UK and the EU in the future, the more challenging it will be to maintain UKIM coherence.  This will present significant hurdles for many aspects of agri-food regulation such as food standards and GM.  Until the post Brexit regulatory framework has bedded in and a new ‘steady state’ emerges with respect to the UK-EU trading relationship, it would be sensible for the UK to choose to have ongoing regulatory co-alignment with the EU.  This could then be reviewed in a few years’ time if required.