European Scrutiny Committee
Oral evidence: Regulating after Brexit, HC 125
Wednesday 11 January 2023
Ordered by the House of Commons to be published on 11 January 2023.
Members present: Sir William Cash (Chair); Margaret Ferrier; Mr Marcus Fysh; Mr David Jones; Craig Mackinlay; Greg Smith.
Questions 94 - 105
Witnesses
I: Professor Lorand Bartels MBE, Professor of International Law, University of Cambridge, and Counsel, Freshfields; Sam Lowe, Partner, Flint Global; and Mr Shanker Singham, CEO, Competere Ltd.
Witnesses: Professor Bartels, Sam Lowe and Shanker Singham.
Q94 Chair: Good afternoon, gentlemen, and thank you for appearing before the Committee to give evidence this afternoon. Today’s session is the continuation of our adjourned session just before Christmas. We tried to arrange a renewal of the session for the last week of December, but unfortunately, for a variety of reasons, that was not possible, so thank you very much indeed for your patience and your willingness to appear. It is very kind of you. Today, we are going to pick up where we left off. We are looking at the constraints that the TCA and the UK’s new trade agreements place on us and our ability to regulate differently after Brexit. We will start where we left off—with the level playing field under the TCA. But before we do so, I would be grateful if you would be kind enough to briefly introduce yourselves. I am conscious that you are appearing remotely. I am not sure where Shanker is, because last time he was in Japan. Maybe he’s in London now; I’m not sure. Anyway, thank you very much. I will start with Shanker. Maybe you can answer my question and then introduce yourself.
Shanker Singham: Thank you, Chair. I am Shanker Singham and I am in London today. I am the CEO of Competere, which is an economic policy and trade law consultancy. My background is in international trade, and I have been practising international trade for over 30 years.
Chair: Good. Thank you very much. Professor Bartels, please.
Professor Bartels: Thank you; it’s nice to be here again. I am Lorand Bartels. I am professor of international law at the University of Cambridge and also counsel at Freshfields, where I practise trade law. Also, relevantly for what we will be speaking about today, I am chair of the Trade and Agriculture Commission. I need to add again that Shanker is a co-commissioner on the Trade and Agriculture Commission. I think this may come up. And I am one of the UK’s nominated arbitrators under the TCA.
Chair: May I congratulate you? I think that was announced yesterday—is that right? It was very recently, anyway.
Professor Bartels: Recently.
Chair: Thank you. Samuel Lowe, please.
Sam Lowe: Thank you, Chair. I am Sam Lowe. I’m a partner at Flint Global, a business advisory firm, where I lead the trade and market access practice. I am also a senior visiting fellow at King’s College London.
Q95 Chair: Thank you very much indeed. We are going to start with a question to pick up on where we left off when there was a Division that was going to take us about an hour and a half to get through and so we thought it best to adjourn. Re-engaging with you—thank you for coming again—on the question of the level playing field, are you aware of any disagreements between the UK and the EU over the TCA’s level playing field commitments, perhaps consequent on proposed new laws or policies that either side is pursuing, and can you think of any UK proposals that could be problematic?
I also want to ask you a more general question, which is the extent to which you believe that there is a genuine playing field, or ever has been a genuine playing field, in Europe. I would be interested to know what you think. When I say “Europe”, of course, I mean the European Union.
Shanker Singham: Just to address your initial question, or rather your general question first, I think that with regard to regulation and the impact of trade agreements on regulation, we have to be clear. First of all, historically, trade agreements have not tended to deal too closely with matters of domestic regulation. That is starting to change: more and more, trade agreements are starting to look at non-tariff barriers to trade and particularly domestic regulations on the basis that they may damage national treatment, or be discriminatory.
What is interesting about the level playing field obligations of the UK-EU TCA is that it goes a little bit further than that in terms of impact on regulation, but does so by focusing on whether the regulatory system or the regulatory change is damaging to trade, or is distortive of trade or investment—in other words, focusing on market distortions, which is very much what the modern trading system is grappling with now anyway. I do not think there is an intention in any trade agreement to intervene in a country’s domestic regulatory choices, except where those choices—in the case of the EU-UK TCA—are distortive, and in other agreements where they confer a trade or competition advantage. We need to look at that regulation and say, “Is it distortive? Is it damaging to competition?”
I would imagine that, going forward, most UK regulatory choices would seek to be the least trade-restrictive and the least damaging to competition, consistent with a clear and publicly stated regulatory goal, so I would imagine that UK regulation that is not damaging to competition and trade would pass muster under the TCA provisions. Now, the two parties may take different views on this, and it will be interesting to see the cases that Professor Bartels, among others, will be adjudicating on this, because one view—which may be the view that the EU takes—is that any regulatory difference is automatically distortive in that sense. I think the UK would take a very different view of that, focusing more on the distortionary and economic effects of that regulation. We cannot say for certain how this will be interpreted in terms of the impact on UK regulation, but I think the intention of the level playing field obligations is to focus on the impact on trade and investment competition, essentially.
Professor Bartels: Shankar sets out the field and the issues very well. I suppose what I would add to this is that level playing field obligations are essentially about trying to ensure that such competition as one has—import competition from trade liberalisation in an FTA; in the TCA, to begin with—is fair.
A distinction is drawn between fair competition and unfair competition in the thinking of level playing field obligations. What they do is try to come up with rules, which are difficult to operationalise, in which you say, “Well, look, we have these imports coming in, but they are unfair because they are made too cheaply.” They can be made too cheaply for two main reasons. One is that money—financial contributions in a broader sense—is given to the producers of those products. To some extent, that can also be done with services. The second is that there is a failure to regulate, and the reason that can be seen as unfair is that regulation is expensive. For instance, if a country should be enforcing environmental laws but decides not to, that may save businesses money, and as a result of that, those businesses may produce products more cheaply. If those products come into the importing country, it is going to say, “There is something unfair about your failure to regulate your production processes.”
What is difficult in both those cases is that you have to do two things. First, you need to work out when a subsidy or a failure to regulate is unfair, so you need some sort of benchmark for what is fair and unfair, in terms of domestic regulation or domestic subsidisation. Secondly, you need to show that there is a connection between that and the imports coming in and causing damage to the importing country. Those are all very difficult issues.
We probably know most about subsidisation and when that is fair and not fair. We know very little about what you might consider to be regulatory subsidisation—a failure to regulate. For instance, in the TCA, one of the ways that is done—because you need to find a benchmark for what is okay and not okay—is in the non-regression provisions. The benchmark is whatever the regulations of the UK and the EU—not the member states, but just the EU—were on exit day. Anything that regresses from that is deemed to be prima facie a bit of a problem.
That is the non-regression part, and then of course we have the second part of regulatory divergence, which is a bit vaguer. It is about divergence in the future. Trying to work out what is okay divergence and what is not okay divergence is a bit of struggle. There is a lot of unclarity, which—who knows?—maybe will turn up in a case. That is just to set the scene. These are not particularly easy questions, but hopefully I have given some sense of what these provisions are trying to grapple with.
Q96 Chair: Thank you very much. I put in my last question about whether there has really been any genuinely level playing field over the time of the European Union, and I want to ask a further question relating to that. Professor Roland Vaubel, of whom I think you may have heard—he was at Frankfurt, he was at Cambridge, and he was involved in many think-tanks—wrote a paper on regulatory collusion, which was about the arrangements for the manner in which legislation and regulations were made. This is for those who are interested in the concepts of Adam Smith and that sort of line of economists, on which many people believe the western system is more or less based—the notions of free trade being more of an economic philosophy. None the less, when invaded by regulatory arrangements, there is obviously a difference between what happens in certain parts of the world and what happens in others.
The question I am posing, I suppose, is this: how and to what extent do you believe the principles of free trade—if you believe they are beneficial as a matter of economic philosophy—are affected by the regulatory arrangements in relation to the relationship between the EU and the UK? Now we have left the EU, we are on the brink, subject to what happens on the Retained EU Law (Revocation and Reform) Bill and things like that, of finding ourselves in a situation where we have freer trade opportunities and more divergence. The question I am putting to you, Professor Bartels, with your enormous experience and knowledge of these matters, is: to what extent do you think the arrangements that are currently in place will have an impact on our ability to trade more freely?
Professor Bartels: I think one can distinguish two things. I will introduce that a bit and then answer your question more directly. There is no such thing as pure free trade in the sense that there is no regulation—not in the modern world. One can hypothesise, even idealise, a purely liberal scenario where products are made without any regulatory framework whatever, except maybe the basics of property law and contract law, but that is not the real world. In the real world, modern social democracies, which include all of the western world to slightly varying degrees, are regulatory markets. So when it comes to the level playing field, what we are really talking about is matching different regulatory systems, and there is no bright line where you can say that one regulatory system is fair and another regulatory system is unfair, or one is better and one is worse, from an ideal and certainly not from a legal point of view.
When it comes to trade agreements and the TCA in particular, what is negotiated there—one can have different views on whether this is the right thing to do or not, but this is the outcome of the negotiation—is some compromise by which both sides agree that they should not diverge too far from each other in regulation and subsidisation rules, which can have an impact on the cost of production. You do not see that in all FTAs, as we will come on to in a moment. It is not as tight as within the European Union, where this is very tightly organised, but it is a little bit tighter than one sees in most FTAs. That is the outcome of the negotiation, but it is difficult to know what benchmark to apply to that to work out whether or not it is good or bad for trade. It is simply saying that to a certain degree the UK and the EU have agreed that their production processes, and the rules on their production processes, including subsidisation, should not diverge from each other to too great a degree.
Chair: Excellent. Thank you very much for that.
Shanker Singham: I just want to come in on one thing that Professor Bartels said in terms of how we look at the benchmark. Typically, the trade tools that we have used in the past for subsidies and countervailing duty legislation have been focused on cases where you have a Government that gives money to an undertaking. For example, the EU gives money to Airbus or the US gives money to Boeing, and this is the way the subsidies law, which has to be very specific, is applied.
The challenge with regulation is that it is often very general, and it is beyond the framework of the agreement on subsidies and countervailing measures, so we are looking for a different kind of benchmark. I should say to the Committee that my second book on this subject of trade competition and domestic regulation is coming out in March. The first one was in 2007, so I can make that available to the Committee.
The benchmark that I think makes sense, based on the normative frameworks that are used for regulatory promulgation, is a competition framework. We already know that all of the OECD countries and major economies—in fact, probably over 100 economies—have committed in the OECD and the international competition network to regulate in ways that are the least damaging to competition, consistent with regulatory goals.
The idea of competition advocacy to promote pro-competitive regulation—in other words, regulation that does not unduly distort markets—is largely accepted across all major economies, and therefore any benchmark relating to regulatory issues in trade agreements ought to be directed towards the overall goal of: is the import competition that the trade liberalisation generates coming from a distortion—from a competition standpoint with regard to regulation—or is it simply coming from products that are more efficiently produced, for example? We need to differentiate between the two of those. I just wanted to point that out.
Sam Lowe: Can I also come in? I just wanted to reinforce a couple of points made by Shanker and Lorand, and also maybe address some parts of the question that the other two haven’t.
On the first point, I think Shanker’s observation that the interpretation of what consists of unfair divergence will differ between the two parties is very astute. I think that last time I raised the potential example of the use of neonicotinoids in crop growth, where the UK may argue that it has adopted a new system that is equally protective of the environment, or the like, and that doesn’t give any unfair competitive advantage to UK producers, whereas the EU might say, “Well, actually, that’s not the case”. You end up having a disagreement that potentially could go to arbitration and that would have to be decided on by adjudicators such as Lorand.
However, the broader point that it is important to understand is that this agreement—the Trade and Co-operation Agreement—comes with conditionality, but that conditionality is solely linked to the market access offered within the agreement. In terms of the constraints it places on the UK’s own ability to regulate, the consequences of breaching the terms of the agreement—be it the subsidy controls, the level playing field provisions or non-regression—are solely that the UK or the EU, as the case might be, will lose some of the benefits of this agreement. So, yes, both parties have the right to regulate as they see fit. However, in certain instances, it could lead to some of the benefits of this specific agreement being lost, and that’s what you have to take into account.
In terms of your question, Chair, about possible disagreements, we did discuss this last time. It is interesting that the main area of disagreement so far was not dealt with by the Trade and Co-operation Agreement, and that was EU concerns over UK grant funding for renewable energy and over local content provisions. That was dealt with via the WTO route, where discussion was had formally but the issue was resolved.
However, it is also useful to think about issues that could cause problems in the future, and I will pick one on both sides of the channel. In terms of issues that the EU might be concerned about from a UK perspective, the freeport issue has been raised by the EU—specifically concerns about the investment zone-type provisions, such as the tax breaks and the like, and the idea that they could give unfair advantage. It hasn’t progressed more than murmurings; it has been raised in committee discussions, but it hasn’t got anywhere near a dispute yet. But that is something that they are looking at.
In terms of the UK looking at what the EU is doing, if we think about the global context and the US’s Inflation Reduction Act, which is going to throw lots of subsidies at electric vehicles and other green manufacturing, and condition that on local content provisions, that will presumably elicit a reaction from the European Union. There have been suggestions that they could follow a similar route—subsidies with conditionality, local content requirements and the like. Is that something that the UK can look at and say it causes some problems under the Trade and Co-operation Agreement? Hypothetically, yes.
I am raising these not as examples of things that are going to happen, but just as examples of possible areas of consideration going forward.
Q97 Chair: Just before Marcus comes in, what you said just now reminded me of the arrangements that were proposed when covid first started up. The six companies involved were put into a regulation, and an explicit ban—a prohibition—was proposed on the movement of medicines. That was AstraZeneca, Johnsons and so on and so forth—there were six of them all together.
That was dropped, admittedly within a matter of 48 hours, but it just demonstrates the sensitivity of the idea that somebody should seek advantages over others by producing product. It was incredibly important at the time, in terms of mitigating or dealing with the covid issue, but the European Commission immediately brought out a regulation, with a very severe prohibition contained in it.
That seems to be the kind of thing you are thinking about when you are referring to potentiality for serious disagreements.
Sam Lowe: It is subject to interpretation, as ever. But my general view, if I am going to take a step back, is that in terms of disputes, a lot of that is actually driven by the politics. If the UK and the EU are generally getting along at a given time, issues will arise, but they will be dealt with via discussion. If we are in a more hostile diplomatic environment, the possibility of these issues feeding through into actual disputes that are adjudicated by law under the Trade and Co-operation Agreement has a greater likelihood.
Q98 Mr Fysh: You have touched on it a little already, but would the panel consider the TCA to be a restraint on the UK’s regulatory autonomy, in terms of needing to be mindful of the level playing field commitments when pursuing domestic reforms? Can you think of any particular examples where that might be happening at the moment?
Shanker Singham: It depends on what the UK is intending to do. We also have to bear in mind that there are regulatory co-operation provisions, and one would hope that, in any regulatory discussion or regulatory change, there will have been some discussion between the parties about the specific regulatory choices each one is making that would allow a more negotiated solution to any problems that arise. I do not see anything in the level playing field obligations that limits the UK’s regulatory choices; the UK can do what it likes, just as the EU can do what it likes. As in all trade agreements, the penalty for damaging your trading partner is a loss of trade concessions, and tariffs will potentially go up in potentially unrelated areas.
It very much depends on what the UK is intending to do. If the UK and the EU have the same regulatory objective and they are merely choosing a slightly different regulatory path, there may be disagreements and issues around that, but I do not think that will be sufficient—assuming there is no significant distortionary effect—to ground any type of case. On the other hand, if the UK or the EU deliberately does something that is damaging to competition—for example, Sam has raised the Inflation Reduction Act in the US—such as a very big subsidy or a regulatory action or inaction that has a profound effect on reducing the cost of a particular entity, and as a result that entity has much better market access opportunities, that would potentially ground an issue under the level playing field obligations. If, on the other hand, the direction of travel of the UK’s regulation is along the lines of the OECD’s regulatory toolkit or the OECD’s competition assessment, which is to regulate in ways that, broadly speaking, increase and improve competition in markets, they will be more protected from any kind of challenge. I think it does depend on the direction of travel.
Q99 Chair: Just to make a comment, there is potentially a vote coming up in the debate taking place on the Floor of the House at the moment, and we will also have to finish at 3.45 pm. We have six more questions, so I am going to ask you, if you will be kind enough, to be fairly concise in your answers. I think that Professor Bartels is the only other person left on this particular question. Professor Bartels, what is your view about the question from Marcus Fysh? Then we will move on to Greg Smith.
Professor Bartels: To be brief, I think the TCA does impose a constraint on regulation. There are provisions to which the UK would have to have regard. That is not to say that this will make any difference in practice, but there is a rule that says that the UK—and the EU, of course, for that matter—should not fail to enforce the labour and environmental regulations that were in place on exit day. Now, that may be a theoretical constraint, but it is a constraint. Of course, the penalty for breaching that rule is a trade sanction. It is not as though the police will march in and order the UK to actually do what it should have done. We can survive by just putting up with the penalty—that is just the way that trade law is—but it is definitely an obligation.
In terms of the other part of non-regression, which is the future, it is much looser and there, the rebalancing mechanism is a little bit more flexible. Frankly, we don’t really know what that is going to look like—that strikes me as even more theoretical. But those are the two rules.
The short answer is: yes, these are obligations. If there is a regression in the UK’s regulatory system—if it reduces protections as set out in the TCA—it is almost certain that that will have some effect on trade and investment with the EU. Whether or not that reaches the level of materiality that is required depends very much on the affected sectors. But, yes, this is a rule in a treaty that the UK should definitely have regard to.
Again, it comes down to a policy question: does this involve something the UK is going to want to do? Does it want to be a Singapore on Thames, for instance? I just don’t know, but these are the rules that would apply if there were to be those sorts of policy desires.
Q100 Greg Smith: I would like to move on to comparing the Australia and New Zealand free trade agreements with the TCA. As we discussed earlier and in the previous session, the TCA creates a complicated institutional framework. It includes detailed, actionable level playing field provisions. It is notable that the Australia and New Zealand deals do not. They don’t have any such provisions in them. Before some of my colleagues come in to talk particularly about agriculture and other factors in those deals, how would you characterise the Australia and New Zealand agreements versus the TCA?
Sam Lowe: One observation I would make is that, in the absence of the Trade and Co-operation Agreement, we would actually be talking about the UK-New Zealand and the UK-Australia agreement as a significant change in the UK’s approach to trade policy, in respect of level playing field provisions, in that both agreements adopt a model that imposes level playing field obligations—not to the same extent as the Trade and Co-operation Agreement, but with the commitment not to engage in deregulation in a way that materially affects trade and investment—and those provisions are subject to dispute settlement under the broader arbitration provisions of both agreements.
The reason I say that this is a change is that legacy UK trade agreements, by which I mean mainly the ones that we struck originally while we were EU members, do not have level playing field provisions that are subject to dispute settlement. They are largely there, but they are excluded from dispute settlement, which means that, ultimately, there is no real penalty if you do not comply.
UK-Australia and UK-New Zealand actually include those sorts of provisions. The reason they are in there is that that is the Australia and New Zealand model, as per CPTPP. I think Lorand discussed last time that enforceable level playing field provisions originate from the US. EU trade agreements have not historically had these in place. The Trade and Co-operation Agreement was a change for them, and they are now changing their model to have enforceable provisions in this space too.
So UK-Australia and UK-New Zealand do include enforceable level playing field provisions, albeit not with the same level of detail or the same intensity—for example, on non-regression or rebalancing—as the Trade and Co-operation Agreement.
Shanker Singham: The innovation in the Australia and New Zealand agreements is the dispute settlement that applies to the labour and environmental chapters, in particular. They are not the only agreements. The USMCA, which is the revised NAFTA, also has full dispute settlement for labour and environment, so there is a trajectory to all trade agreements: originally, labour and environmental provisions were introduced, and then side letters to NAFTA in the ’90s became actually part of the agreement in the US-Jordan agreement, and so forth. For the past 25 to 30 years, there has been a steady increase in the scope of coverage of labour and environmental provisions, and of the dispute settlements that would be used for them. The CPTPP, for example, provides for a sort of dispute settlement mechanism—a sort of litigation—if you don’t enforce your own law.
The Australia and New Zealand agreements just build on what has historically been achieved in trade agreements generally. It was slightly different in the TCA—this was very much a European ask—with fairly robust level playing field provisions to deal with distortion. However, I would say that distortion itself is also being considered now in international trade theory in general.
Professor Bartels: I agree with what Sam and Shanker have said. The US did begin with enforceable provisions. Every US agreement since 2007 has had enforceable provisions that basically look the same as those in the Australia and New Zealand agreements. CPTPP, which is essentially a US model agreement, is exactly the same. The TCA is also the same, but with some differences: the benchmark of non-regression, as Sam said, is a bit tighter, because it links to existing legislation on a particular date; there is a new provision on divergence in future; and, as Sam said, the EU—having had level playing field obligations for a long time—has adopted a new policy of enforcing them. From that point of view, what we have in the New Zealand and Australia agreements is very bog standard.
Q101 Mr Jones: I would like to talk about the Australia and New Zealand FTAs. You will be aware that concern has been expressed in certain quarters, most particularly by the farming unions, about the competitiveness of the domestic UK farming industry. These are liberalising trade measures. Do you believe that the FTAs will require us to look more closely at the competitiveness of our own agricultural sector? What do you make of arguments that the two FTAs limit the UK’s options to pursue its own regulatory agenda, because they place downward pressure on domestic standards and protections?
Professor Bartels: I am a little bit reluctant to answer the first question, which is essentially an economic one, so I might leave it to my colleagues. I am more than happy to say something about the second question, because that is essentially the question that was given the Trade and Agriculture Commission and we have written advice on it, which has no doubt come your way. We said, in essence, no. Even though we assumed that the agreements would lead to more import competition—how much, I don’t know, which is why I don’t want to give a detailed answer to the first question—we should not think that that will come in such a way that the response will be to lower domestic standards. The prime reason is that the agreements have sufficient exceptions, policy space and environmental obligations in them to enable the UK essentially to maintain the status quo in its ability to regulate to protect domestic standards and so on.
Shanker Singham: With the same caveat that Professor Bartels gave—we are members of the Trade and Agriculture Commission and we looked at this, and that advice is public—I would say, with regard to competitive pressure on UK farmers, that you have to look at the counterfactual. UK farmers are under competitive pressure anyway, because there are obviously significant imports of agricultural products, and particularly things like beef, from European member states—particularly Ireland, for example—without tariffs, quotas and barriers. I do not think the addition of the potential imports from Australia and New Zealand, particularly bearing in mind the transitional arrangements and the safeguard arrangements, significantly increases that above and beyond what they are currently under.
If your question is, “Should UK farmers be concerned about competitive pressures, and doing everything they can to lower their costs and increase their exports around the world?” then absolutely, yes—of course that is what they should be doing. Does the Australia-New Zealand agreement significantly increase that competitive pressure they are already under? I do not think it is significant. I do not think the volumes are such as to make it significant, but I do think that from a competition standpoint, there are opportunities for UK farmers to take advantage of some of the export opportunities. Certainly, those are some of the recommendations that we have already made to the Government.
Sam Lowe: I agree with both Shanker and Lorand. On the question of levels of import competition, it is difficult to be definitive, in so far as we do not know for certain whether on day one, New Zealand and Australia will fill their year one quotas or not. I work on the assumption that they will not, then there will be a gradual uptick over time, but it will not change the reality that the main market for both New Zealand and Australian exporters is closer to home, in Asia. Unless there is a major change in that relationship, it is unlikely that people will start pivoting towards the UK and selling everything here all at once overnight.
However, part of your question—which I thought was very astute—is around this idea that the import competition might lead to a change in the farming model in the United Kingdom, and result in farmers having to change their approach. While I do not think the New Zealand and Australian FTAs can do that in and of themselves, we have to take into account the broader context, which includes, for example, a reduction in subsidy post Brexit as part of the new regime and a reduction in market access in terms of the UK’s main export market for these products, which is the European Union. We have duty-free and quota-free trade, but there are new regulatory barriers to selling into that market, so I think it is fair to say that farmers in the UK are under pressure to change how they go about farming.
While I do not think the examples of the Australian and New Zealand FTAs change that dynamic too much in and of themselves—or at least, it is marginal—I think that taking a step back, we have to accept that farming is under pressure. As a result, I do think we are going to see the model change quite significantly over the coming 10 years.
Chair: We are coming to what looks like a vote, so Craig, could you proceed on that footing? Thank you.
Q102 Craig Mackinlay: I will. We have covered a lot of the ground I had in mind, but will Governments have to consider their own domestic policy? I do not actually think this Government will be muscular or strong enough to do anything very dramatic, but could future Governments be constrained by free trade deals, such as the TCA and Australia and New Zealand? Maybe we could draw on examples that are already in existence between CPTPP members. Has there been any restriction in what those various constituent countries have been able to do, or want to do, because of the CPTPP obligations?
In parallel with that, we obviously did not have the luxury of these discussions while we were part of the EU, but has the EU itself, with its vast array of regulations and directives, been restricted in any way over the years because of the FTAs that it had done with Japan, Canada and South Korea in particular? A lot has been floated as a fear factor in this country, not least by the farming community, but when we look at what happened in the past in similar examples of international arrangements, it really never came to pass at all. What would be your assessment? As you are on the screen, Sam, you might as well start us off.
Sam Lowe: We don’t even need to go as far as trade agreements; we can just talk about our obligations under the WTO, where we have certain obligations as a condition of our membership and, every so often, disputes arise and have to be dealt with. I am just trying to pull some out of the hat.
We can think about, for example, the dispute the EU had with Canada, the US and others over its restrictions on the use of growth hormones in beef. The US, Canada and others brought a case against the European Union because they deemed the EU’s prohibition, and the UK’s—I should just say we still have this prohibition—to be unscientific, and the EU lost the case. The EU didn’t change its rules; it accepted a compromise quota to sort of pay them for non-hormone beef—to sort of pay them for the inconvenience elsewhere.
There are other examples of cases being brought and countries changing their policies as a result, so as to be compliant. I am pretty sure Lorand could give you chapter and verse on most of them. You then have, in the investment space, the investment agreements and investor state dispute settlement cases, where investors—third parties—bring cases against countries because of a breach of their obligations, which may or may not lead to countries changing how they approach regulation, but can sometimes lead to financial penalties.
I suppose that my overriding point is that we have lots of constraints in this sense, but they don’t ultimately stop us doing anything. There just might be a cost attached to doing it, over and above if those agreements didn’t exist, either financial or in terms of market access—[Interruption.]
Chair: Sam, sorry to cut you short, but we now have a Division, so we have to go off and vote. We have one more question to ask after this, and I think Shanker may have to leave at 3.30 pm, so we shall have a short session immediately after the Division. We will come back in 10 minutes’ time, and I suspect we will finish very rapidly after that. Thank you very much.
Sitting suspended for a Division in the House.
On resuming—
Chair: Sam Lowe and Professor Bartels, we are now reconvening. We have just two questions: one to be completed, and then there is a last question. I believe Shanker Singham has had to leave, so we are left with Sam and Professor Bartels. Craig, would you like to pick up where you left off?
Q103 Craig Mackinlay: My question was about the restrictions, given the huffing and puffing by many that it restricts your ability to do things as an independent nation. Have the CPTPP constituent partners found restrictions and things they might want to do where the CPTPP obligations have restricted them from so doing? Also, does the EU find restrictions in its actions? I do not perceive that they do from where I am sitting, but do they take any note of obligations under, say, the Canada deal, that have restricted their ability to legislate in whatever they fancy doing?
Professor Bartels: I will pick up on what Sam was saying. First, the baseline has to be the WTO. I can put a figure on this. There have been almost 700 disputes since 1995. A large number have involved the EU and some have involved the UK through the EU. One, as Sam mentioned earlier, even involved the UK outside of the EU; that’s the one on wind farms and local content restrictions, which the UK then resolved. Yes, there are a lot of disputes, and they make a difference to states.
On the sorts of matters that the disputes involve, some involve domestic regulation, usually to do with science-based measures in the area of food safety. Many countries have had to change their regulatory systems because they lost these cases, including Canada, Australia, the United States, Japan, the EU and Korea. Many, many countries have been overly cautious when it comes to their regulatory systems and have not been able to justify that on grounds of science and so on.
Sam is right to say—this came up earlier—that although there is an obligation to comply, there is nothing much that happens to you if you don’t comply, other than that you might suffer sanctions. The question is whether that matters. If you are huge, like the EU or the US, and in particular if the country suing you and that has won is tiny, like Antigua or Ecuador, you don’t care. But if the country that is suing you is big, you might care. If you are not as big as the EU or the US, you might also care because the effect of the sanctions might actually be significant for you. I wouldn’t go so far as to say that it doesn’t matter; I think it does matter. Sanctions are there to make sure countries comply with their obligations.
I would like to address a more specific part of your question, which is on level playing fields. The level playing field provisions that we have been talking about are not found in WTO law. We are talking about new types of obligations. Subsidies law does exist in WTO law, so that is pretty much an overlap with the subsidies aspects of the TCA—there aren’t really any in any other FTAs. What is new in FTAs and the TCA is the regulatory level playing field obligations—in other words, as I was saying before, the rules that say that you can’t fail to regulate if that is going to give you an economic advantage over the other side, either in your market or in theirs.
There have been a few disputes on that involving those provisions in FTAs. The EU sued Korea and won because Korea had failed to implement some International Labour Organisation obligations. The US sued Guatemala for various quite serious labour rights obligations—it lost that case, actually. Those are pretty much the only examples of litigation involving those types of provisions, and they are fairly unusual, and I think almost extreme, examples. Both cases involve behaviour that we would not expect the UK to be in trouble for. It doesn’t really match UK policy to do those sorts of things.
The obligations are real and are enforceable in the agreements that we have been speaking about, but I don’t think there is a high risk that the UK would be doing the sorts of things that would trigger them. Of course, one never really knows, but just based on those examples, they seem to be about fact scenarios that are quite different from the sort of things that the UK usually does.
Q104 Craig Mackinlay: On the ranking of the various FTAs that the UK has currently got itself involved in and the WTO obligations, would it be fair to say that the WTO ranking is there, there are obligations, and there is an abstract possibility of being taken to arbitration? The Australia and New Zealand one is probably similar in ranking. The obligations are not highly enforceable, but they are there. But the TCA is in a class of its own because, as you said, we have already had the first infraction on something as abstract as windfarms and local content. Do you think the TCA has caused this lawfare, which is likely to hit us in the future, because it is a free trade agreement of a different type, scale and complexity from the others?
Professor Bartels: That is an interesting question. The answer is no. There has not been a lot of litigation under FTAs, but the reason for that is that FTAs mostly replicate what happens in the WTO. There is a lot of litigation in the WTO involving WTO obligations. Of that litigation, a significant part could have been litigated under FTAs. Canada and the US keep suing each other in the WTO, but they could quite happily do that under USMCA or NAFTA.
There are good reasons why the WTO is the preferred forum, and they are largely to do with it having a very competent legal secretariat, whereas with litigation under FTAs you have to create your secretariat out of nothing. There are also reputational reasons for doing that, and so on. If one did not have the WTO—to some extent one doesn’t, because dispute settlement there is not in a healthy state now—one would expect to have all that litigation happening under FTAs. I think that is what we are going to see. There is going to be more litigation under FTAs.
With regards to the UK-Australia FTAs and the TCA, I would not put a hierarchy between them. It really just depends on the issues that are at stake. In terms of the way the rules are drafted, they are basically the same. They all follow a WTO model; there is nothing particularly special about them. Maybe there will be a dispute under those agreements—who knows. There has actually been a dispute already under CPTPP involving Canada and dairy quotas, and there has been a parallel dispute under USMCA involving the same Canadian dairy quotas. It is issue dependent; there is nothing particular in the dispute settlement rules that one can point at to distinguish between the different agreements—or the WTO, for that matter.
Q105 Margaret Ferrier: We agree standards in international bodies, such as the United Nations Economic Commission for Europe and the International Civil Aviation Organization. How important are those bodies for the UK after Brexit, and do you think they will become more important in the future?
Sam Lowe: They are important. Think about the numerous different international standards organisations—for example, the European standards organisations CEN and CENELEC. Post Brexit the UK remained a member of those. They actually had to change their constitution to ensure that the UK could remain a member of the same standing. Quite a lot of the standards that we have in the UK are developed in those forums. For the UK to be engaged in those conversations is important.
It also means that the underlying standards in the UK and European Union for most manufactured products will probably remain consistent into the future because they were developed at the international level first. That is not always the case; there are links to the European Commission, European regulations and European agendas, but you can differentiate.
It is very important for the UK to be engaged in these conversations if it wants to ensure that, at a global and regional level, it continues to be able to influence and shape some of the rules and standards that apply here.
Professor Bartels: These standards have legal bite under WTO law, and also under the law of free trade agreements. There is an obligation in trade agreements of all types to implement standards that are agreed by these standardising bodies, unless you have a good reason not to. The default position is that if there is an international standard out there, you should be abiding by it. There have been cases where WTO members have failed to do that, have adopted their own domestic standards that deviate from international standards, and have lost the case.
They are certainly important in a day-to-day, pragmatic way, because they are good for business and trade—that is why we have them. They are also important to abide by once they have been agreed, because otherwise you are at risk of violating an international obligation.
Sam Lowe: They also make their way into FTAs. If you think about UNECE, and all vehicle-type approvals for automobiles, that mutual recognition of conformity with these international standards has found its way into EU-Japan agreements and the like. What happens at the international level can become binding via bilateral agreements and, as Lorand mentioned, are often reference points in WTO disputes.
Chair: Thank you very much indeed. That brings our proceedings to a conclusion. I thank Sam Lowe and Professor Bartels for being patient with the problems we have had with votes and having to suspend. Thank you also to Shanker Singham, who had to leave the session about 10 minutes ago. I will now bring the meeting to a conclusion.