Brexit and the Brussels effect
21 Dec 2020|

In its negotiations with the European Union over post-Brexit trade relations, the British government has become entrenched in its demands for full sovereignty. In the future, it wants to determine all of the rules about safety, the environment, health, workers’ rights and subsidies to British companies without any interference from the European Commission.

That’s fine—insisting on the right to diverge from the EU’s internal market rules is fully in keeping with the meaning of sovereignty. The problem is that the British government is also trying to maintain the United Kingdom’s access to that internal market under its own rules. For example, it wants the right both to apply its own sanitation rules to the production of chicken (allowing for the use of chlorine) and then to sell those chickens in the EU, where different rules apply. Never mind that the EU also is a sovereign entity with the right to decide and enforce its own standards, and to impose tariffs on imports that violate its rules.

How can a trade deal be made to work when both parties claim full sovereignty? This claim has two overarching implications for negotiations like the one between the UK and the EU. First, it means that each party decides independently which laws will apply in its jurisdiction. Thus, all firms (including EU-based firms) selling in the UK must comply with UK laws, and all firms (including UK-based firms) selling in the EU must comply with EU law.

The second implication is that each party decides independently how it will control compliance within its own borders. Firms that don’t comply are sanctioned, and each party is free to decide on the nature of those sanctions (barring sales, imposing tariffs, and so forth). Thus, UK firms selling goods in the EU that don’t comply with EU law will face whatever sanctions the EU has decided, and the same holds for EU firms selling in the UK.

A trade deal based on full sovereignty could be reached quickly and implemented easily. There would be no need for joint committees tasked with negotiating the specifics of how rules and regulations in both jurisdictions will be allowed to diverge, or for complicated procedures to settle disputes when new divergences are observed. Decision-making by such committees tends to take a long time, and there will always be hot-button issues that trigger a chronic or quasi-permanent conflict between the trading partners.

By contrast, a full-sovereignty model would be relatively easy to govern, because each side would retain its power to identify rule divergences and sanction them as it sees fit. Of course, once such a deal was concluded, it would be difficult if not impossible to avoid asymmetric developments in the future, since the EU internal market is the biggest in the world.

This asymmetry would almost invariably lead to what is known as the ‘Brussels effect’. UK firms would eagerly comply with EU rules of their own accord, in order to benefit from access to the European market. Not doing so would result in large losses, either from sanctions for noncompliance or from forfeiting that share of the market to competitors. By contrast, the UK market is relatively small. From the perspective of EU firms, abandoning it might lead to some losses; but these would pale in comparison to those suffered by UK firms losing access to the EU market.

There would also be significant pressure on future UK governments to align their laws with those of the EU—not just in the near term but indefinitely. Though the current UK government is determined to resist this pressure, its position will increasingly put UK firms at a competitive disadvantage. Required to produce for the UK market under UK rules, and for the (much larger) EU market under EU rules, their production costs would rise. Sooner or later, the UK government would be forced to acknowledge reality.

Although the EU–UK negotiations have often been ill-tempered and are now poised to run past the deadline, it would still be easy to come to a trade agreement based on a strict interpretation of sovereignty. Over time, the Brussels effect will bring UK laws into line with EU laws anyway. There’s no need to try to force the matter today. The whip of the market will do that.