On 20 March 2024, the Office for the Internal Market (‘OIM’) published its second annual report on the operation of the internal market for 2023-24. See a previous SPICe blog for a summary of the OIM’s first annual report and background on its functions. The OIM also gave evidence to the Constitution, Europe, External Affairs and Culture Committee on its first annual report on 7 September 2023.
The OIM is part of the Competition and Markets Authority, which is a non-ministerial department of the UK Government. The OIM describes its objective as “to support the effective operation of the UK Internal Market. It assesses whether the Internal Market is operating effectively and provides expert and independent advice to UK government and devolved administrations.”
This blog gives an overview of the key themes from the Office for the Internal Market’s annual report for 2023-24. You can use the expandable headings below to navigate the blog.
What is the United Kingdom Internal Market Act 2020?
The United Kingdom Internal Market Act 2020 (‘UKIMA’) is UK-wide legislation. The explanatory notes to the Act state that:
The purpose of the United Kingdom Internal Market Act is to preserve the United Kingdom’s (UK’s) internal market as powers previously exercised at European Union (EU) level return to the UK, providing continued certainty for people and businesses that they can work and trade freely across the whole of the UK.
SPICe published a bill briefing when the legislation was being considered at the UK Parliament.
A key element of the Act is to establish two market access principles that govern the flow of goods and services in the UK’s internal market:
- the principle of mutual recognition
- the principle of non-discrimination.
The Constitution, Europe, External Affairs and Culture Committee reported on the UK internal market in February 2022, stating:
UKIMA creates two market access principles: the mutual recognition principle and the non-discrimination principle. All devolved policy areas are potentially impacted by the market access principles although some exemptions are provided in the Act. […] Both principles can be applied to relevant requirements in respect of the sale of goods or the provision of services. These principles serve to disapply relevant requirements in one part of the UK when goods or services are lawfully provided in another part of the UK. This means that goods and services which originate elsewhere in the UK (or are imported into another part of the UK) under different regulatory conditions will have access to the Scottish market while goods and services originating in Scotland would have to comply with Scottish standards.
The annual report 2023-34
The OIM published its annual report for 2023-24 on 20 March. It was also laid in the UK Parliament, Scottish Parliament, Senedd Cymru, and the Northern Ireland Assembly.
The report notes that the UK’s internal market regime post EU-exit, governed by the UKIMA, is still at an early stage. Consequently, the report states that:
Against this backdrop, we have not attempted to draw firm conclusions about the future direction of travel for the UK internal market. Notwithstanding this, the regulatory developments over the last year, combined with businesses’ initial responses to those developments, provides some insights into some of the dimensions of future change for the internal market.
The report provides information on the operation of the UK internal market, including:
- intra-UK trade
- developments in the regulatory landscape
- four case studies on business strategies in response to changes in regulations.
Intra-UK trade
The report provides analysis of intra-UK trade flows, which is trade between England, Wales, Scotland, and Northern Ireland. It provides information on both intra-UK sales and purchases.
Based on data from the Office for National Statistics Business Insights and Conditions Survey, the report finds that more than half of businesses that sold goods and services to customers in other UK nations state that they did not face any challenges when doing so. The biggest issue cited by businesses was a lack of demand (17%).
As shown in the chart below, the report indicates that in 2015 (the most recently available data), intra-UK sales are estimated to have comprised 34% of Scottish GDP. This compares to 54% for Wales, 26% for Northern Ireland, and 6% for England.
Across the UK, the report finds that in 2021 businesses in manufacturing and wholesale were more likely to trade with other UK nations than other sectors. However, as illustrated in the chart below, the report notes that ‘business and other services’ are estimated to account for the largest values in sales to the rest of the UK in Scotland, a finding consistent with the OIM’s 2022-23 report. In particular, this sector includes financial and insurance activities which are estimated to comprise 19% of Scotland’s sales. Purchase data by sector for 2021 is not available for Scotland.
It should be noted that this intra-UK trade analysis is primarily based on 2015 and 2021 data (UKIMA came into force on 31 December 2020). The report states that data on intra-UK trade is limited, and comparability is affected by differing methodologies, publication timelines, and a lack of data for England. The OIM published a Data Strategy Roadmap in March 2023 and the annual report indicates that projects undertaken by the Office for National Statistics, the UK and devolved governments, academics, and the OIM are anticipated to provide additional data by autumn 2024.
Developments in the regulatory landscape
The report finds:
Over the last year, there has been a significant increase in the number of proposed differences in regulations within the scope of UKIMA.
Most of these proposals relate to goods, particular within the food and drink sector. The report provides overviews of four regulatory developments that are affecting, or have the potential to affect, the UK internal market:
- single-use plastic
- deposit return schemes
- high fat, salt or sugar food and drink restrictions
- precision breeding.
The report provides case studies on how businesses within the relevant sectors are responding to the changes. This is discussed in more detail in the next section of this blog.
The OIM has also published appendices to the report. Appendix A provides an overview of wider developments in the regulatory regime including changes to the Windsor Framework, the impact of the Retained EU Law Act 2023, and the operation of common frameworks. These include a summary of views from stakeholders on how these different components are operating and affecting them. Appendix C provides a list of current and upcoming regulatory changes in relation to goods, services, and professional qualifications in the following areas that have the potential to affect the UK internal market:
- fireworks
- rodent glue traps and animal snares
- vapes
- alcohol advertising
- further single-use plastics measures
- minimum unit pricing of alcohol
- net zero policies (phasing out of gas boilers, and petrol/diesel cars)
- plasticated wet wipes
- reforms to assimilated law relating to wine
- XL Bully dogs
- regulation of cosmetic procedures
- national standards for taxi and private hire vehicles
- licensing of activities involving animals
- tourism measures (licensing of short-term lets and visitor levies)
- certification of electricians in Scotland
- licensing of individuals involved in waste transportation in England
- licensing of building inspectors in England
- licensing of acupuncture, body piercing, electrolysis, and tattooing procedures
- regulation of pharmacy technicians in Northern Ireland.
In terms of an overall assessment of regulatory developments, the OIM concluded:
Drawing on the available data we find little evidence that, over the last year, there has been a substantial change in the functioning of the internal market across the UK. Notwithstanding this, certain sectors, especially food and drink, have seen a more significant build-up of proposed and actual regulatory difference than other sectors.
Business strategies
The report provides case studies on strategies employed by businesses to manage regulatory differences, focussing on:
- single-use plastic
- deposit return schemes
- high fat, salt or sugar food and drink restrictions
- precision breeding.
The case studies cover both actual and anticipated business strategies and are based on a series of interviews with businesses operating in industries affected by the regulations. The strategies given by businesses varied across sector and types of regulatory changes, but there were some commonalities which are considered below.
Use of market access principles
The report finds that the case studies on single-use plastics, precision breeding, and deposit return schemes indicated:
a clear view, particularly among the larger businesses in those sectors with significant operations in the devolved nations, that the Market Access Principles are unlikely to be used as the preferred approach to address regulatory differences.
This refers to the possibility that businesses could, in the absence of an exclusion to the market access principles, sell goods on, for example, the Scottish market which are lawfully produced in or first imported into other parts of the UK (even where such goods do not comply with Scottish regulations). The report notes:
Clearly, if this view is widespread, it will have significant implications for the internal market regime but, on the basis of the research we have undertaken to date, it is difficult to say with confidence how widespread this effect may be.
Simple supply chains
Another finding was that businesses indicated a desire to reduce supply chain complexity, typically by adopting a ‘highest common denominator approach’. The OIM states:
We consider this a particularly significant finding – it suggests that larger businesses, with more complex UK-wide supply chains are likely to play a role in establishing ‘UK-wide norms’ that transcend individual policy making by each of the governments.
If this approach was not feasible, businesses indicated that they may consider reducing the range of products offered in the nation with different regulations or focussing their business on one nation or a subset of nations.
Global considerations
A further finding was that for many businesses, the UK’s internal market is part of a wider global marketplace. Given that, factors such as the views of customers and regulations in import/export markets are a significant factor in their decision-making. For example, the case study on precision breeding highlighted the significance of EU policy and European consumer sentiment for strategies adopted by businesses whose supply of a product or input is imported or who have a significant customer base in the EU. More generally, the importance of customer preferences was repeatedly noted by businesses as a core factor in their decision to adopt a highest common denominator approach or take advantage of opportunities arising from regulatory differences.
Policy design
One additional finding by the OIM was that reactions by businesses are sensitive to the policy design behind regulatory divergence, such as:
- whether they permit a ‘highest common denominator approach’ (or prevent it by instituting incompatible requirements e.g., a product has to be labelled in blue if produced in one part of the UK and green if produced in another.)
- at which point in the supply chain the regulation has its effects (with evidence suggesting that regulations that have their effects at the end of the supply chain are less disruptive to businesses)
- whether the effects of regulations arise in or outside the nation where it has been introduced.
As an overall assessment of the operation of the UK’s internal market, the report states:
The emerging picture of the internal market is that on the one hand, regulatory differences are starting to build up, albeit slowly and with goods affected more considerably than services, especially in food and drink. On the other hand, businesses are adapting creatively to the new regulatory realities in ways that often preserve existing trade flows and supply chains. The relative strength of these forces is yet to become clear and policy makers can make choices that, even if they pursue differing regulations, may assist businesses in keeping existing trade flows open.
Annie Bosse, SPICe Research