The EU insists on a ‘level playing field’ in any free trade agreement with the UK, concerned as it is about the risk of unfair competition; the UK says this is unreasonable. How might it be possible to reconcile both sides’ demands? Totis Kotsonis (Pinsent Masons LLP) proposes a possible way forward that would neither compromise the UK’s desire for sovereignty, nor the EU’s concerns about unfair competition.

While the EU-UK trade negotiations have barely started, one thing is already quite clear: the two sides are poles apart on the key issue of level playing field (LPF) provisions, and the extent to which these should feature in a future EU-UK free trade agreement. The aim of these provisions, as originally set out in the Political Declaration which the two sides agreed in October 2019, would be to ensure open and fair competition between the UK and the EU essentially by providing for the maintenance of regulatory convergence in areas such as state aid, competition, social and environmental standards.

The UK government has since made it clear that it does not consider such obligations as either necessary or reasonable given that it is seeking a trade deal that is no more ambitious than that which Canada has agreed with the EU. Equally, it opposes such commitments on the basis that any trade agreement with the EU should respect the UK’s regulatory autonomy. For its part, the EU considers that robust LPF provisions would be necessary in relation to any trade deal with the UK, given the latter’s geographic proximity and the interconnectedness of the UK and EU economies.

Unfortunately, this issue risks becoming a deal breaker, and finding a compromise would be challenging given how entrenched the two sides seem to be. However, it should not be impossible to come to an arrangement which recognises each side’s regulatory autonomy but also facilitates regulatory alignment.

A possible way of doing this is considered below. However, first, it is important to understand each side’s position and room for manoeuvre on this issue.

Context matters

According to the Political Declaration, a future EU-UK trade relationship should be underpinned by robust LPF commitments in the form of “common high standards applicable in the [EU and the UK] at the end of the transition period.” No doubt one side would be keen to stress that this document is not legally binding, and in any event provides for the precise nature of these commitments to be “commensurate with the scope and depth of a future relationship”. Equally, the other would be quick to point out that the Political Declaration was agreed in good faith and recognises the need for “robust” LPF commitments so as to “prevent distortions of trade and unfair competitive advantages”.

Ultimately, arguments of this kind will not prove particularly helpful in advancing negotiations on this issue. Instead, it is important for each side to recognise that the other’s position is legitimate. It is legitimate for the UK to choose regulatory autonomy over a deeper trade relationship with the EU, as it is legitimate for the EU to insist that any privileged access to its market (that is, beyond WTO terms) should be conditional on robust LPF commitments.

At the same time, both sides must recognise that there is room for them to shift their respective positions on this issue without compromising their respective interests. For example, while the EU might be rightfully concerned that, absent appropriate LPF commitments, granting any privileged market access to a major and geographically proximate trade partner would lead to unfair competition, it should be possible to address these concerns without the UK having to adopt EU rules and regulations in its domestic legal order. In fact, the EU has already modified somewhat its initial position on this issue.

As to the substance of the UK’s concerns, there are arguably two subtly distinct issues here. First, as a matter of principle, a future free trade agreement with the EU should not constrain the UK’s right as a sovereign state to regulate domestically as it sees fit. Second, the UK does not accept that LPF commitments should, in any event, involve the UK having to adopt the rules and standards of the EU – a separate sovereign entity.

In line with my comments above, the UK’s stance would seem stronger on the second issue. At the same time, its position on the principle of regulatory autonomy merits review and reassessment.

A matter of principle, a matter of interest

First, it is important to acknowledge that international treaties, freely entered by sovereign states, involve the creation of both rights and obligations. Compliance with those obligations constrains their ability to act domestically.

For example, the ability of the UK Parliament to legislate so as to limit the award of public contracts to UK suppliers only, is limited by the UK’s obligation under the plurilateral Agreement on Government Procurement (GPA) to allow suppliers from 47 other countries, including all EU member states, to compete for important UK public contracts above a certain value. Similarly, the UK parliament cannot legislate so as to raise unilaterally the contract values which trigger this obligation, as these are set at a GPA level. However, by accepting these obligations, the UK has secured the important benefit of access to the public procurement markets of 47 other countries for its own domestic suppliers.

If the principle of rights in exchange for commitments is valid and relevant, then the focus moves to the question of whether the type of commitments which the other side is seeking – in this case, the EU – are fair and proportionate. However, in the context of negotiations between two sovereign parties this issue is ultimately irrelevant. Each party is negotiating with a view to advancing its own interests to the best of its abilities. Each has the option of walking away from the negotiations. Ultimately, the distinction between commitments which are acceptable and those which are not would normally depend on what is at stake and what a party stands to lose.

In this regard, the principle that both the UK and the EU should commit to a set of “common high standards” aimed at ensuring open and fair competition between them should not be as controversial as it might first appear – not least in view of the UK’s role in shaping many of these standards over the years, and the country’s excellent record in terms of compliance. Indeed, in recent pronouncements, the UK government has tried to dispel concerns that in seeking to retain regulatory autonomy it intends to relinquish high standards in areas such as state aid, labour and environmental laws.

The issue of subsidies is instructive. There is no obvious interest for the UK government to abandon its traditionally strict subsidies discipline. Indeed, it has constituted an indispensable part of the UK’s world-class competition regulatory regime, which has deservedly led to the UK’s reputation as a place which is “open for business” and where enterprises can compete on the basis of a level playing field. A more permissive subsidies regime would ultimately damage the competitiveness of the UK economy by discouraging enterprises from becoming more efficient and innovative. It could also lead to a domestic subsidies race to the bottom, with devolved administrations competing with each other to attract investment or support local industries.

These issues would not have escaped the UK government. At the same time, there are a number of advantages in enshrining strict anti-subsidy obligations in an international treaty. For example, this would make it more difficult for future governments, which might perhaps be inclined to adopt a more dirigiste approach, to change domestic laws so as to make it easier to grant subsidies. Equally, enshrining these obligations in an international treaty would enable the government to defuse pressure from specific industry groups or other lobbies for the state to intervene, using taxpayers’ money, so as to support uncompetitive businesses or failing industries.

At the same time, it would seem very unlikely that the UK would agree to LPF provisions which require it to apply domestically EU rules and regulations. The EU has already softened its stance on this issue in certain respects. More specifically, while the EU is asking that the UK should apply EU state aid rules domestically in relation to other areas, it is proposing that in upholding “common” high standards and “corresponding” high standards “over time”, EU standards should constitute “a” reference point. Although not entirely unambiguous, this position is less maximalist than it could have been and it is helpful as a starting point from which to try and reach a compromise.

A possible way forward

A possible way forward might lie in the two sides agreeing to maintain common (or corresponding) high standards in certain regulatory areas, but without this involving an obligation to maintain the same legislation. The principle underlying this commitment would be that the effect of their respective policies should be equivalent, with a view to ensuring that trade between the parties is carried out under conditions of open and fair competition.

In the event of a dispute, the two sides could also agree that evidence should be required to show that the policy’s effects are harmful to open and fair competition between them. This is distinct from an approach where harmful effects, and therefore breach of the LPF commitments, could be assumed purely on the basis of identifying non-equivalence in the laws of the two sides.

As a counterweight to this less stringent approach, the parties could agree to more effective trade defence provisions, including the ability to take unilateral interim measures. It is true that this approach would go beyond the UK’s position that any commitments on subsidies, labour and the environment, for example, should be outside a trade agreement’s dispute resolution mechanism. However, this would seem a reasonable compromise to make, given that the mechanism could be designed in a way so as to not impinge on regulatory autonomy.

An effective dispute resolution mechanism could be modelled partly on the provisions of Articles 13 and 14 of Annex 4 to the Ireland/Northern Ireland Protocol in the non-ratified Withdrawal Act of November 2018, but with such a mechanism being actionable by either side. On that basis, if either party considers that the other has relaxed relevant domestic rules and regulations in a way which breaches their obligation, that party may request a consultation within a Joint Committee with a view to finding a commonly acceptable solution.

If the Joint Committee fails to resolve the dispute, the party asserting a breach of the commitment to maintain the LPF commitments could then adopt unilaterally “appropriate remedial measures” pending resolution of the dispute via arbitration.

The panel’s rulings would ordinarily be expected to be binding (but see further below). That would mean that, where the panel finds that a party has breached the LPF commitments, that party would be required to take measures to comply with the ruling. On the other hand, where the panel finds against the complainant party, the latter would be obliged to cease any unilateral remedial measures it might have taken. At the same time, the other party could be permitted to take appropriate and time-limited remedial measures itself to address any harmful effects already suffered as a result of the complainant’s unilateral interim measures.

Although it would render the system more complex, consideration could also be given to the possibility of the arbitration panel rulings being advisory rather than binding, in cases where the panel finds in favour of the complainant party. If the party which is found to have breached the LPF commitments chooses to disregard the panel’s advisory ruling, the other party can continue to apply appropriate countervailing measures – such as tariffs or restrictions on access to markets. The regulatory autonomy of the parties would not be affected as they would have the option of disregarding the panel’s ruling in these circumstances, and accepting the consequences. At the same time, the Joint Committee – or, failing that, an arbitration panel – could rule on the appropriateness of the other side’s retaliatory countervailing measures before these are fully put into effect.

The question of harmful effects and other relevant considerations

Equally crucial in this context would be the question of how to establish that a new measure or policy change by one side constitutes a breach of the commitment to maintain common high standards, in that it is harmful to open and fair competition. For example, it would seem reasonable that this should involve not only consideration of the harmful effects on competition that have already accumulated but also the harmful effects that are likely to accrue if the measure or policy were to remain in place.

Ultimately, this question should be determined primarily by reference to economic rather than legal considerations. Given the UK would no longer be part of the Single Market, demonstrating distortions of competition, or the threat of such distortions, could merit a higher evidential threshold than the question of whether a measure distorts or threatens to distort competition within the Single Market under EU law.

Similarly, EU Court of Justice rulings should not be relevant in the context of a dispute resolution system which would not be concerned with the interpretation of EU law, but the effects of a particular policy on open and fair competition between two parties in the context of a free trade agreement.

Finally, the two sides would need to agree on how to deal with circumstances where one side amends its existing rules so as to adopt a stricter approach that would affect LPF commitments. For example, the two sides could agree that, in principle, this should give rise to an automatic obligation for the other to ensure the same effects (but subject to the option of accepting countervailing measures instead). Alternatively, LPF commitments could be limited only to non-regression from certain rules and standards as these might apply at the end of the transition period.

A matter of importance

Devising a system which respects the regulatory autonomy of each side, whilst also ensuring access to each other’s market on terms which provide for open and fair competition, would be complex and might require novel approaches. Ultimately, the wider benefits that would ensue for both sides from a comprehensive free trade agreement justify the careful consideration of possible ways to bridge the gap between them.

This post represents the views of the author and not those of the Brexit blog, nor LSE. This is an abridged version of an article first published on the Kluwer Competition Law Blog on 3 March 2020.