The UK internal market: what is it, do we have one and do we need one?

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On 16 July 2020, the UK Government published a White Paper setting out proposals for a UK internal market.  A consultation period on these proposals has now started and will run to 13 August 2020.  Legislation is expected to follow in Autumn 2020, prior to the end of the transition phase on 31 December 2020. This is the first of three blogs SPICe will publish this week analysing some of the details set out in the White Paper.

What is an internal market?

An internal market is an agreement between different nations to allow unrestricted movement of goods and services between those nations.  That is, there are no tariffs between nations and no regulatory barriers to trade.  The exact parameters will be defined by the specific agreement. Internal markets typically feature common product standards and rules around monopoly powers and anti-competitive practices.

The EU single market is one of the largest examples of an internal market and has developed and evolved since it was formally launched in 1993 after a six-year period of negotiation.  After all this time, however, the EU single market still does not fully cover trade in services, where some barriers to cross-border trading still exist.

Other examples include CARICOM (made up of 12 Caribbean nations) and the ASEAN Economic Community (which comprises 10 South-East Asian nations).  There are also examples of internal markets operating within a single country, such as in Canada, Switzerland and the USA.  The Scottish Parliament’s Finance and Constitution Committee commissioned research into these single-country internal markets and the different ways in which they have evolved and operate.

Do we already have an internal market in the UK?

Opinions divide on the historical existence of an internal market in the UK.  The UK Government states in its White Paper that a UK internal market has existed since the Acts of Union of 1706 and 1707, and this view is supported by some commentators.  However, others disagree with this view.  Professor Michael Keating argues that to say that a UK internal market was created by the 18th Century Acts is “misleading and anachronistic”.  According to Professor Keating:

“The concept of a single or internal market only makes sense in the context of a modern, interventionist, regulatory state. It represents one of the advanced stages in economic union, which starts with free trade and progresses through a customs union towards monetary union.”

These issues are explored more fully in a House of Commons Library blog on the internal market.

What is less contentious is that the UK has effectively had an internal market by virtue of its membership of the much larger EU single market.

Devolution within the context of the EU single market

Since the creation of the EU single market in 1993, the UK and its constituent countries have been part of a much larger internal market – the EU single market.  This means that there has effectively been an internal market in the UK, but the legislation determining the operation of this market has been set at EU level, not UK level.  As devolution has taken place within the context of membership of the EU, there has never until now been a need to consider the rules surrounding the operation of a UK internal market.

Within an EU context, the Scottish Parliament has had responsibility for implementing EU regulations in areas of devolved competence, such as the environment, agriculture and food standards.  This has meant some policy divergence within the UK in areas that will no longer be covered by the EU single market.  For example, Scottish agricultural policy differs from that in England.  Up to a point, policy divergence can be accommodated within an internal market so long as minimum standards are met. 

What about Common Frameworks?

The UK Government and the devolved administrations agreed to the need for Common Frameworks “to enable the functioning of the UK internal market, while acknowledging policy divergence”.  These frameworks are intended to establish common policy and regulatory approaches in some areas that are currently governed by the European Union.  However, although the need for Common Frameworks was agreed, the negotiation of them has not proved straightforward and none have yet been finalised.  These will involve a combination of statutory and non-statutory frameworks and would support the functioning of an internal market. 

The Scottish Government has argued that Common Frameworks are sufficient to ensure the smooth functioning of the UK domestic market and do not need to be supplemented by legislation.

However, the UK Government argues in its White Paper that Common Frameworks alone are not enough:

“Frameworks on their own cannot guarantee the integrity of the entire Internal Market. As they tend to be sector-specific, they do not address the totality of economic regulation or the cumulative effects of divergence, i.e. the consequences of regulatory difference in one sector that affects other sectors. Finally, they do not fully address the question of how best to substitute the wider EU ecosystem of institutions and treaty rights had on the UK Internal Market.”

How important is the UK internal market to Scotland?

Latest data on intra-UK trade show that Scotland exported goods and services valued at £51.2 billion in 2018.  This represented 60% of all Scottish exports of goods and services in 2018.

Over half of the value of Scottish exports to the rest of the UK was accounted for by trade in services (£29.6 billion).  Of the trade in services, around a third (£10.5 billion) was financial and insurance activities.

The value of the UK internal market to Scotland has remained relatively stable in real terms over the last decade, with growth in international export markets outstripping growth in exports to the rest of the UK.  However, as highlighted above, despite the stronger growth in international export markets, the rest of the UK remains Scotland’s largest export market in value terms.

What do we know about the UK Government’s internal market proposals?

The UK Government’s White Paper does not provide detail in a number of areas.  For example, arrangements for independent bodies responsible for monitoring, oversight and dispute resolution are not defined.

However, the UK Government does make clear its intention to capture in legislation two broad principles: the principle of mutual recognition, and the principle of non-discrimination.  These are collectively referred to by the UK Government as the ‘Market Access Commitment’ and both principles feature in the EU single market.  The White Paper describes these as follows:

“Mutual recognition means that the rules governing the production and sale of goods and services in one part of the UK are recognised as being as good as the rules in any other part of the UK, and they should therefore present no barrier to the flow of goods and services between different regulatory systems. Non-discrimination is already relevant to our Internal Market and will in the future mean that it is not possible for one regulatory system to introduce rules specifically discriminating against goods or services from another.” (p11)

Do we need an internal market defined by legislation?

There are strong economic arguments for internal markets – and these arguments have previously been advanced in support of membership of the EU single market.  The absence of tariffs and barriers to trade reduces the costs of trade and encourages growth in trade between nations.  For these reasons, in its post-Brexit negotiations, the UK Government has been keen to retain some of the benefits of membership of the EU single market.

As well as supporting the smooth functioning of the domestic market, the UK Government also argues that having a UK internal market enshrined in legislation will be an important factor in facilitating future UK trade deals as partner countries will have the certainty of knowing that common principles apply across the UK.  

How has the Scottish Government responded?

The Scottish Government is not happy with the UK Government proposals, claiming that they “would dramatically undermine devolution and the democratic choices made by the Scottish Parliament”.  The Scottish Government has made it clear that it would not accept any plans for legislation to create a UK internal market, or co-operate with such plans.  These constitutional issues will be explored in a separate SPICe blog.

Nicola Hudson, Senior Analyst, Financial Scrutiny Unit

“HGVs at Forton Services” by William Starkey is licensed under CC BY-SA 2.0