The UK internal market proposals: a comparison with the EU approach

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Introduction

On 16 July 2020, the UK government published its white paper setting out its thinking on the nature of the UK internal market once the UK leaves the Brexit transition period at the end of this year.

The white paper sets out UK government proposals to enshrine in law two principles to protect the flow of goods and services in the UK’s Internal Market: the principle of mutual recognition, and the principle of non-discrimination.

As this is a white paper rather than legislative proposals, it is not clear exactly how the UK government plans to approach enshrining the internal market in legislation, instead it gives an indication of the UK government’s high-level thinking in this area.

This second of a series of SPICe blogs on the internal market white paper examines some of the proposals comparing them to the principles and structures which previously supported the functioning of the UK’s internal market as a result of EU membership.  The first blog examined what an internal market is and whether the UK needs one.

The role of the EU in providing a common approach

Whilst the UK was a member of the EU a definition of, and legislation for, the UK internal market was not needed even when devolution for Scotland, Wales and Northern Ireland was delivered in 1999.  EU membership meant membership of the Internal Market which is established under Article 26 of the Treaty on the Functioning of the European Union.  The EU’s Internal Market comprises “an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured”.  Under the EU treaties, the EU has the competence to establish the competition rules necessary for the functioning of the Internal Market.  This allows the EU to establish common rules and standards to facilitate the workings of the Internal Market in areas such as employment and social policy, environmental policy and common rules on competition.  As a result, EU membership means all member states adopt minimum common standards and rules to ensure goods produced in any member state can be sold freely throughout the EU. 

In addition, EU law prohibits discrimination on grounds of nationality. In terms of trade and the Internal Market this is underpinned by Articles 34 and 35 of the Treaty on the Functioning of the European Union which prohibit qualitative and quantitative restrictions on imports between member states. This means for example, goods produced in one-member state should not face unnecessary barriers to their sale in another member state.

The introduction of devolution across the UK nations in 1999 did not lead to significant divergences in rules and standards within the UK largely as a result of EU rules providing a framework for the UK within which the UK government along with the governments in Scotland, Wales and Northern Ireland worked.

What do the principles of mutual recognition and non-discrimination mean and how might they operate?

The UK government’s white paper proposes enshrining in legislation two key principles for a UK Internal Market – mutual recognition and non-discrimination.  These two principles could be seen to be a copy of the EU’s approach to its Internal Market.

Mutual recognition

The EU has a two-pronged approach to the sale of goods across the whole Internal Market.  Firstly, it ensures minimum common standards are met for harmonised goods such as chemicals and electric equipment.  This allow goods to be sold across all EU member states.  For non-harmonised goods such as foodstuffs and furniture the EU adopts a system of mutual recognition in that if a good meets the required standards of one-member state then it is deemed to be fit for sale across the EU. The UK government’s approach appears to mirror the EU approach for non-harmonised goods by proposing that any good which meets the rules and standards required in one of the UK’s nations should as a result be able to be sold in any of the four nations.  The white paper states:

“The fundamental aim of all mutual recognition systems is to ensure that compliance with regulation in one territory is recognised as compliance in another. This is useful to prevent discrimination against businesses from other parts of the UK, and to ease the burdens associated with complying with two sets of requirements.”

There is no requirement proposed to ensure minimum standards must be observed to allow these goods to be sold in another UK nation.  Instead the white paper suggests each administration will be able to continue to regulate domestic producers as they wish:

“A mutual recognition system does nevertheless protect the ability of administrations to regulate domestically produced goods, professionals and services originating from their territory, while ensuring that any differences in regulation that emerge between jurisdictions do not result in unnecessary barriers to trade.”

The Scottish Government has suggested that these proposals could mean that:

“a reduction in standards in one part of the UK would have the effect of pushing down standards elsewhere in the UK, in direct contradiction of the preferred approaches of stakeholders and decisions taken by the devolved parliaments”.

Giving evidence to the Finance and Constitution Committee in June 2019, Professor Michael Dougan from the University of Liverpool suggested that an approach like this might in effect force the other nations of the UK to follow the approach of England due to the size of the English market:

“The empirical challenge is just as important. The simple fact is that the English economy is vast compared with the Scottish, Welsh and Northern Irish economies, which really matters in an internal market. It matters because what England decides to do in regulatory terms could have an incredible empirical effect on the regulatory choices of the other territories. For example, if there were a ruling similar to the cassis de Dijon judgment—that if someone makes their goods lawfully somewhere in the UK, they can sell those goods everywhere in the UK—it would make it highly difficult for Scotland, for example, to have highly divergent regulatory standards from England, because production would just happen in England, the goods would flood into Scotland and there would be nothing that the Scottish Government could do about it.”

The inclusion of a mutual recognition principle may also have implications for future trade agreements which will be negotiated by the UK Government.  Professor Michael Keating has suggested that in terms of standards for England:

“Some of these standards will be set so as to conclude trade deals with other countries, meaning that these imports will be freely available across the UK, whatever standards are set in Scotland and Wales.”

Non-discrimination

The EU’s Internal Market ensures that member states should not discriminate against goods or services based on their geographic origin or place of residence. In addition discrimination based on the requirement of differential technical standards or rules is also prohibited.

The UK Government’s white paper also suggests that legislation should include a non-discrimination principle in the operation of the Internal Market.  According to the white paper:

“The non-discrimination principle will be a requirement not to discriminate between individuals or businesses based on residence or origin within the UK. Direct discrimination is where an individual or business is treated differently and unfavourably by another administration, in an explicit manner, compared with local operators when operating in another part of the UK, expressly on the grounds of residence or geographical origin. The non-discrimination principle will allow scope for such differential treatment where this is necessary, for example, to address a public, plant or animal health emergency.”

The UK Government is proposing that the principle of non-discrimination should cover three areas:

  • Goods
  • Professional qualifications
  • Services

The purpose of a non-discrimination principle was highlighted by Professor Nicola McEwen who wrote that:

“Non-discrimination prevents UK businesses or individuals trading across the UK’s internal borders from being treated differently from local traders, either directly on the grounds of residence or geographical origin.

Jess Sargeant at the Institute for Government has set out how a non-discrimination principle might work in practice:

“This will apply to both direct discrimination (for example, a ban on milk from England being given to Scottish schoolchildren) and “indirect discrimination”, where a rule had the effect of discriminating by for example, a ban on milk in Wales being transported more than a certain distance.”

Institutions to oversee the functioning of the Internal Market

Oversight and enforcement of the functioning of the European Union’s Internal Market is led by the European Commission with the European Court of Justice providing interpretations of EU law as it applies to the Internal Market and also ruling on disputes between member states and the Commission.

In the white paper, the UK government recognises that an independent non-political body is required to oversee the operation of the Internal Market:

“As the UK transitions from membership of the European Union and the close supervision that the European Commission applies to its own Single Market, it is not the Government’s intention to replicate that institution within the UK Internal Market. However, the Government does recognise that there remains an important role in relation to the Internal Market for independently-delivered functions removed from its own political influence and that of the devolved administrations.”

As a result, it is proposed that an independent body should carry out two functions in relation to the Internal Market:

  • Monitoring and advising on the health and evolution of the Internal Market
  • Capturing business and consumer insight into the development of the Internal Market

It is not clear from the white paper, how the role of an independent body would be developed but the UK Government has indicated its role may include providing expert advice to administrations and legislatures across the UK:

“  It is the Government’s position that independent expert advice should be available on the potential impact of a proposal on the Internal Market, including to legislatures, rather than being isolated to individual administrations. As well as shaping the policy-making process and encouraging stakeholder input from across the UK, these assessments will contribute to a stronger evidence base both within and between administrations. Such assessments will cover not only local and community effects, but also cumulative and cross-UK supply chain implications…

…Such advice will be vital in ensuring that different regulatory approaches can be accommodated across the UK whilst ensuring protection of the Internal Market and the free flow of goods across the nations.”

The white paper suggests that the independent body’s:

“monitoring and reporting will not generate any binding recommendations, though monitoring could nevertheless explicitly note particularly distortive or discriminatory actions by any administration.”

If possible distortions or discriminatory actions were highlighted it is not clear from the white paper what would happen next.  In addition, it is unclear how the independent body would be composed and whether, for example, there would be an opportunity for the devolved administrations to feed into either the membership or workings of such a body. 

What is next?

The white paper presents the UK government’s proposed approach to ensuring the operation of a unified internal market following the UK’s departure from the transition period at the end of 2020.  The white paper is expected to be followed by legislative proposals in the form of a Bill introduced in the UK parliament after the summer recess. 

The Scottish Government has indicated it sees the proposals as political rather than economic and has suggested that legislative consent from the Scottish Parliament for the Bill is “ very unlikely to be forthcoming as it would be impossible for the Scottish Government to recommend consent to any proposals that undermine devolution as these proposals will, fundamentally and profoundly”.

Iain McIver, SPICe Research