Trade or Deregulation: You Can’t Have Your Cake and Eat it Too

In March of this year, the Telegraph newspaper launched a campaign — backed by MP and leading Brexiteer, Ian Duncan Smith, as well as the Foreign Secretary, Boris Johnson — to “cut EU red tape.” Lord Lawson, the former Chancellor, also said the Conservatives must swiftly seize the chance to “transform the British economy” by cutting “massive” numbers of EU regulations.

But cutting EU red tape really means diverging from the EU’s regulatory regime — a big problem for a government seeking a close trading relationship with the EU. Since the mid-nineties, regulatory harmonization has become an increasingly important feature of trade — often involving the adoption of global standards. And in the latest issue of The Medicine Maker, we looked at global regulatory harmonization in the pharma industry.

We described the EU and Israel’s Agreement on Conformity Assessment and Acceptance of Industrial Products (ACAA), in which Israel agreed to adopt and implement relevant EU law to “extend certain benefits of the internal market.” Simply put, in return for adopting EU standards, Israel benefits from the EU recognizing its industrial standards as equivalent — with Good Manufacturing Practice (GMP) Certificates, manufacturing and import authorizations, and certification of conformity of each batch, issued by either party being mutually recognized.

This means pharmaceutical products attested as compliant with Israeli procedures can be placed on the EU market without any further approvals, and vice versa — reducing the administrative burden for drugmakers.

Israel is an EU “third country,” which means it is outside of the single market. Each production batch of medicinal products imported from third countries must undergo “qualitative analysis, a quantitative analysis of at least all the active substances and all the other tests or checks necessary to ensure the quality of medicinal products in accordance with the requirements of the marketing authorisation.” ACAA means the certification of conformity of each batch is mutually recognized, reducing the cost and time required for batch clearance. This is a clear example of common standards reducing “non-tariff barriers” to trade.

There’s a lesson to be learned for Britain here. When Britain leaves the single market, assuming it will, it will also become a “third country,” and unless it makes a series of similar agreements, covering pharmaceuticals, chemicals, phytosanitary products, and so on, UK-based companies will face significant barriers to trade with the EU.

Is this a choice between “EU red tape” and trade? Sort of. Oftentimes, EU red tape isn’t really EU red tape — it’s World Trade Organization (WTO), International Standards Organization (ISO), International Council for Harmonization (ICH), or Codex Alimentarius “red tape.” By agreeing to adopt EU standards, in many cases, Israel is actually converging on international standards.

In the area of GMP, for example, the WHO’s guidelines are “almost identical” (according to Dirk Feldmann and Hans-Jörg Müller) to those set by the EU. In any case, before the ACAA was signed, around 80 percent of Israeli standards were already international — the deal with the EU is a continuation of the same process. And by aligning itself with international standards, Israel also makes negotiating trade deals with other countries more straightforward.

Almost every country in the world is obliged by the World Trade Organization’s Technical Barriers to Trade Agreement to use relevant international standards “as a basis for their technical regulations.” And glancing through various EU trade agreements, you will find references to international standards bodies. In our feature, we looked at the EU-South Korea deal, Annex 2-D, Chapter Two of which reads, “The Parties will take into account, as appropriate, international provisions, practices and guidelines for pharmaceutical products or medical devices, including those developed by the WHO, the OECD, the ICH, the GHTF and PIC/S” — the same paragraph also appears, nearly word for word, in the EU-Singapore Free Trade Agreement. And Japanhas also agreed to “refer to the ICH as the international standard-setting body and use ICH guidelines as [the] basis for its legislation” as part of an EU trade deal.

The point is that modern trade means regulatory harmonization, but getting rid of red tape means regulatory divergence. This creates a dilemma for the British government. The more the UK diverges from the EU’s regulatory regime, the more friction companies will face when trading with the EU. This isn’t something the EU will do to the UK — it is obliged by World Trade Organization rules not to give any one country special treatment. When the UK becomes a third country, third country rules will apply — if the UK insists on diverging from EU standards, in order to protect the integrity of its internal market, the EU will only be able to grant limited access with any trade deal. And if the EU is moving with the rest of the world towards common standards, by diverging from the EU, Britain would also be swimming against the global current — reducing her ability to sign new trade deals with countries elsewhere. It seems cutting red tape is the new protectionism.

The key question for British politicians is: will the UK align itself closely with the EU, adopt common standards, and use its newfound freedom to sign new free trade deals around the world? Or will the UK diverge from the EU, swim against the international current, and use that same freedom to legislate in what it sees as its best interests, without as much thought to the wider world?

In other words, will Britain have its cake, or eat it?