Finance and Constitution Committee

Meeting date: Wednesday, September 23, 2020

Official Report 715KB pdf

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United Kingdom Internal Market Bill

The next item on our agenda is to take evidence on the UK internal market from Professor Michael Dougan, who is professor of European law and Jean Monnet chair of European Union law at the University of Liverpool, and Dr Emily Lydgate, who is a senior lecturer at the University of Sussex law school. I warmly welcome both our witnesses.

I remind members to direct their questions to a named witness. If either of our witnesses wants to add something to the other’s response, they should please request to speak using the chat function.

We will go straight to questions from the committee, and I will start. The Public Administration and Constitutional Affairs Committee at Westminster has said that the proposals in the internal market white paper to set in law the principles of mutual recognition and non-discrimination

“will effectively create new reservations in areas of devolved competence.”

Professor Dougan, in your written submission, you state that, although

“on paper, devolution might continue to look the same”,

and

“might even look more extensive ... in practice, the operation of the UKIM has real potential to limit the capacity of the devolved institutions to pursue different economic or social choices from those made in London.”

I ask both witnesses to explain why devolution can simultaneously appear to look more extensive and more constrained. What is the reality?

Thank you for the invitation to participate.

It is helpful to explain the distinction between the situation on paper and that in practice by pointing out that that is how many internal market rules operate. That is most certainly true in the EU context, which is the internal market with which we are most familiar.

On paper, the devolution competences will not particularly change as a result of the United Kingdom Internal Market Bill. Obviously, there is a new addition to the list of reserved competences, in that the act will be added to the list of provisions that cannot be modified by the devolved Parliaments. However, it looks as though the other devolved competences will remain the same. In addition, the UK Government has repeatedly promised that, after the transition period ends and the full effects of Brexit become clear, there will be an increase in competence for the devolved institutions, because many of the issues that might previously have been subject to regulatory intervention by the EU will become more fully subject to the competence of those devolved institutions.

In practice, of course, internal market principles operate by imposing restrictions and limitations on competence exercises, and that is universal. All internal markets work by establishing a set of horizontal principles that seek to at least influence and in most cases restrain and restrict the way that the competences are exercised in practice. That is definitely true of the United Kingdom Internal Market Bill. By imposing widespread obligations of non-discrimination and, more important, mutual recognition, the bill seeks to restrict the way that devolved competences operate in practice.

It is fair to say that there are two main factors that are particularly striking under the United Kingdom Internal Market Bill. The first is that it is in effect a cassis de Dijon on steroids. It takes the idea of mutual recognition, multiplies and magnifies it, and makes it a far stronger principle of mutual recognition than EU lawyers would recognise in the context of the single market. Secondly, it does not acknowledge the simple empirical fact that the UK internal market is unique in the world, due to the size of the English economy and population relative to the size of the other participating territories. That means that a principle such as mutual recognition, which might operate in a relatively neutral manner in the context of a large organisation such as the EU, will not operate in a relatively neutral manner in the context of a relatively small number of territories, such as the UK, where one territory is not only relatively but absolutely dominant over the others.

When you put those two factors together—the cassis de Dijon on steroids and the simple, inescapable, empirical fact of the size of the English economy and population—it means that principles such as mutual recognition will, in practice, have an impact on devolved competences that makes a real distinction between what exists on paper and what might actually happen in practice.

Thank you. Dr Lydgate, would you like to add anything?

In terms of new reservations of powers, specific concerns arise with respect to subsidies in the provision of public funds.

I can probably best illustrate the question of the seemingly paradoxical nature of both giving and taking powers using the example of post-Brexit secondary legislation on the free movement of goods. As Professor Dougan said, the basic approach of the EU is that, where harmonisation is necessary to achieve free movement, product regulation is harmonised and that is managed at EU level. In the absence of that, a lot of the post-Brexit legislation devolves powers that were previously harmonised. Issues such as the maximum residue levels for pesticides, or new genetically modified organism authorisations, were managed at the EU level and were harmonised, but they are now devolved in secondary legislation. That seems to give greater powers to devolved Administrations but, perversely, I think that you could say that in practice it might do just the opposite, due to, as Professor Dougan said, the asymmetry in the size and market power of the devolved nations. For example, England might authorise a new active substance for pesticides, or a new GMO, and would then be able to freely export those products to devolved nations, even if they had controls domestically. In so doing, England could competitively undercut producers and in effect undermine permitted divergence.

The Scottish Government’s view is that the UK internal market proposals are completely unnecessary, as common frameworks provide arrangements to manage the intersection of EU law and devolved competence in areas of policy and regulation that are relevant to UK internal trade. Do the witnesses agree with that view?

The core of any approach to an internal market that is as integrated as the UK’s has to be harmonised rules that have a strong joint consultative process underlying them. The rules cannot be set by one of the countries. The EU provides quite a formalised approach that involves EU bodies—the Council, the Commission and the Parliament—setting regulations that apply to all member states. The UK is trying to replicate that approach with a non-statutory process of setting out common frameworks. If those frameworks are agreed, the scope of the market access principles will be dramatically reduced.

I have a lot of questions about how the common frameworks process sits in the United Kingdom Internal Market Bill, because there would be a statutory basis for the market access principles, but not for the common frameworks. There is probably a role for both.

There is, of course, a balance between harmonisation and devolution, and that might involve hard choices in respect of erecting new market access barriers or allowing products that would not be the regulatory choice of one nation for the good of free trade. However, as in the EU, that should be a process that happens around the margins of a broadly harmonised framework.

I would raise specific concerns about how legislation might undercut common frameworks with respect to trade agreements and trade negotiations. I think that the UK Withdrawal from the European Union (Continuity) (Scotland) Bill also raises issues in that respect. Perhaps we will come to that later.

I certainly would not describe the proposals as completely unnecessary. I mentioned in my written submission to the committee why, historically, an internal market has not been much of an issue for the UK. When the UK joined the EU and began to participate in the EU internal market, there was no devolution, so it was not really an issue pre EU membership. Devolution happened within the context of EU membership and the EU internal market rules in effect provided a framework to regulate not just the EU single market but, in many respects, internal trade within the UK. The problem is therefore a direct consequence of Brexit.

We will have a UK with devolved settlements in Scotland, Wales and Northern Ireland, but in which the EU framework that previously helped to regulate trade relations, not just within the EU but within the UK, has been taken away. It is a genuine problem.

I suppose that the main issue is not so much the common frameworks that are being discussed or negotiated, but how the economy and society will evolve in the future. In the EU context, for example, every time that a member state changes its product requirements or introduces new restrictions on alcohol or cigarette consumption, every time new scientific developments, changes in technology or changes in consumer preferences occur, and every time a regulatory regime changes, trade implications are automatically created for all the other member states that want to do business with that country. It is useful to bear it in mind that internal markets are not static. A set of common frameworks is not established and then left for time immemorial. Internal markets involve constantly managing developments in local and national regulation and their impacts on trade relations with the other territories that are being worked with.

As I said, there is a genuine problem, and it needs some sort of solution. It is fair to say that the solution is not the one that I would have picked if I had a free hand in designing it. My complaints about the bill are not to do with the fact that there is a problem that genuinely needs some sort of solution to address it; my problem with the bill is that the solution is not necessarily a very desirable one within the context of the UK’s particular situation.

Professor Dougan, I will follow up the convener’s line of questioning and look at the impact of the bill’s provisions on devolved powers and your concerns about how the ability of devolved Administrations to act might be constrained. How could the bill be amended to try to address those concerns? Would, for example, the introduction of a provision on proportionality be part of the solution?

If we take the fundamentals of the bill as a given and I were seeking to amend it, my amendments would go much further than simply tinkering with the bill. Let us take the fundamentals of the bill as they are and the idea that we will have some system of mutual recognition and non-discrimination that applies across broad sectors of the economy and goods and services. If we wanted to make that a more attractive proposition from the point of view of Scotland and Wales in particular, the first thing that I would do would be to drastically expand the system of potential justifications and derogations from the principles of mutual recognition, in particular.

09:15  

In the EU context, mutual recognition in the absence of harmonisation is only a presumption, and a member state can rebut the presumption of mutual recognition because it has higher or better standards than its peers on any legitimate public interest ground. The main grounds are usually public health, environmental protection and the protection of consumers, but there are potentially an infinite number of public interest grounds on which mutual recognition can be derogated from under EU law, including the protection of workers, the protection of particularly vulnerable children, the protection of the reputation of national institutions—there is a huge variety of such grounds. The first thing that I would do, therefore, would be to significantly broaden the range of legitimate public interests that were capable of rebutting a presumption of mutual recognition.

The second thing that I would probably do, particularly from Scotland’s point of view, would be to argue for a principle of functional equivalence. In other words, as long as standards are basically the same as each other, and they are not particularly higher or appreciably lower, they should be treated as functionally equivalent, so that the mere technical differences—the simple differences in the way that particular requirements are phrased or have to be met—do not become barriers to trade in themselves. That is a familiar principle in the EU context, but we do not see it in the internal market bill.

If the first two things that I would introduce were wider justifications for derogation and the principle of functional equivalence, the third would probably be more difficult to achieve other than by my describing it fairly loosely. It is probably to be taken for granted that Scotland is not looking to lower standards significantly below those that exist. Fears have been expressed that, in due course, Westminster might well go down regulatory diversions from existing standards in a way that Scotland feels less comfortable with. In that case, I would argue for a right to free movement for Scottish, Welsh and Northern Irish goods within England, based on their compliance with existing minimum standards. In effect, Scotland and Wales would have free access to the English market as long as they meet the minimum standards that have been agreed by everybody.

That is obviously a much broader proposition, because it would require processes of legislative dialogue, and, if not harmonisation, then at least an understanding of what the minimum standard should be. In effect, however, I do not think that Scotland wants Scottish goods and services to be excluded from the English market because the English market has decided to go down a technically different route and the Scottish standards remain higher in substance. That would probably be an undesirable outcome for Scotland.

I would like to ask Dr Lydgate the same question.

That was a very complete answer and I underscore Professor Dougan’s points.

I will propose one additional amendment to the bill, which would be about the scope of delegated powers. In the bill’s current formulation, the Secretary of State can change a number of things through secondary legislation, including the types of regulations that are covered by the non-discrimination principle, the list of exemptions from findings of indirect discrimination, and the overall schedule 1 exemptions for market access principles. That all seems to consolidate quite a lot of power at the UK level.

I have separate questions for each of the witnesses, but I have no doubt that the convener will keep me right about time.

I will start with Professor Dougan. In your submission, you say that the problem is not that Scotland or Wales want to do things differently; it is the risk of magnifying the economic and “constitutional dominance” of England. Can you say first how the bill will, in practice, limit the opportunities for devolved Administrations to enforce their own laws and, secondly, how it will limit their capacity to pursue different economic and social choices?

I will answer your question in two stages. First, I will highlight a straightforward practical example that clearly illustrates the potential risks, then I will draw out some of the key lessons that we can see in that example.

An example that I give in my written submission is about what would happen if the Scottish Government were to be minded to introduce a ban on single-use plastics. To be frank, it could be almost any measure to protect the environment, or any consumer driver, but that is the example that I gave. When we work that measure through the scheme of the bill, we find that the Scottish authorities could introduce such a ban and enforce it against Scottish producers, but could not enforce it against imported goods from England or Wales.

In the reality of the UK market, the simple fact is that England has 80 or 85 per cent of the population and the economy, and has a huge manufacturing base. If Scotland could enforce such a rule only against its domestic producers and not against imports from England, it might as well not have the rule at all. In practice, it would have no means of preventing non-recyclable plastic from flooding its market and being fully and freely available for sale. All that it would be doing is imposing on its own producers an extra compliance cost that they would have to satisfy, which would put them at a competitive disadvantage. That example shows that the bill’s provisions would operate so that Scottish producers would be disadvantaged and Scotland could not deliver on the public interest objective that the regulation was intended to achieve.

We learn from that example that it is not just the detailed principles that are potentially problematic; the bill’s underlying assumptions strike a balance between trade and local democracy, or local autonomy, that many of us who are discussing the bill in academic circles find quite problematic.

The starting assumption for the bill seems to be that regulatory divergence by Scotland and Wales is a problem; it is not an expression of local democracy or a valid search for different solutions to societal problems in Scotland and Wales, but a problem that needs to be managed. That starting assumption runs throughout the bill’s provisions on non-discrimination, and especially on mutual recognition.

We see it in another way, subtly, when it comes to the legal effects of the principles of mutual recognition and non-discrimination. The assumption is clearly that those principles could be directly enforced before the courts, but primarily against Scotland and Wales. The bill makes no provision to deal with disapplication of an act of Parliament; it appears that it simply did not enter the consideration of the drafters of the bill that Westminster might create barriers to trade for Scottish and Welsh goods. The assumption is clearly that Scotland and Wales will create barriers to trade for English goods.

We can talk about the problem in relation to the details of the bill, and of course we should do that, but it is also important to recognise the underlying assumption that characterises the bill. The expression of divergent preferences by Scotland and Wales is the problem that the bill seeks to address.

Thank you for that, professor. So we are not even starting on an even playing field.

Do you have views on whether the United Kingdom Internal Market Bill discourages regulatory innovation? Is there any scope in the bill for Scotland to refuse mutual recognition for the sake of broad public interest objectives? For example, the EU single market rules currently recognise public objectives including public health considerations, alongside pure market considerations.

I will first answer your question about whether the bill discourages regulatory innovation. You should bear in mind everything that I have just said about the fact that the bill’s impacts, in practice, on many proposed exercises of devolved competence, in relation to trade in goods or trade in services, would be to penalise domestic producers or traders and to remove the ability to enforce the same standards against imported goods or service providers. That means that you would not achieve your public interest objectives and would only end up penalising your own domestic producers. The natural consequence of that is that the exercise of devolved competences will be discouraged. For example, what is the use of Scotland banning single-use plastics if the Scottish authorities know that the ban will be totally ineffective in practice and will only penalise Scottish producers of packaging?

It is worth pointing out that the bill offers a limited protection for existing restrictions or provisions that might cause barriers to trade, but it does not apply to any new exercises of devolved competence that introduce novel regulatory requirements, or to existing requirements that are substantively—not “substantially”—changed. In my written evidence, I give the example of a change in the calculation of the minimum unit price for alcohol. At the moment, if that rule were to change, it would be protected. However, if Scottish authorities in the future were to decide to change the rules on minimum unit pricing, that would be caught by the bill and would be subject to its provisions.

On your question about whether there is any scope for refusing mutual recognition on broad public interest grounds, that comes back to the question that Murdo Fraser asked. In a way, the bill is cassis de Dijon on steroids. It takes the idea of mutual recognition—the very strong principle that if something is good enough for the English it should be good enough for the Scots, and they should have it, too—but it strips away almost all of the public interest justifications that would be familiar under EU law for restricting the sale of imported goods unless they comply with its domestic standards.

In relation to goods, pretty much the only exception to mutual recognition involves stopping the spread of pests, diseases or unsafe foodstuffs. General public health interests are not a valid justification, and neither are issues around environmental protection, consumer protection or children’s rights.

Similarly, in respect of services, when it comes to mutual recognition for authorisation requirements, the only derogation involves dealing with a public health emergency that poses an extraordinary threat to human health. Again, there are no derogations for environmental concerns, consumer issues, general health concerns, children’s rights or anything else. There is an extremely limited set of public interest justifications.

Although there is a lot in the bill for politicians like me to complain about—big sweeping powers for UK ministers, reservation of state aid and difficulties around mutual recognition that have been discussed already—could the bill be repaired? You have spoken about what some of the solutions might be. Does the UK Government need to go back to the drawing board? To me, the bill seems to be a fundamental attack on devolution as we know it.

In response to Murdo Fraser’s question, I identified some reforms that I suggest should be made if we are to try to work with what we have been given and to make it better than it is at the moment. I also agree with Emily Lydgate’s observations about the scope of delegated powers for UK ministers to change the terms of the game virtually at will.

09:30  

I also said to Murdo Fraser that if I were sitting down to design a UK internal market, I would probably have done it very differently. Principles such as mutual recognition and non-discrimination would certainly have a role, but my preference would have been to have had a system of pre-legislative dialogue between the four territories, which would involve them sitting down as equals to discuss the potential impact of regulatory changes on trade in the UK, and seeking to find the best solution for that particular situation, based on a range of what I call in my briefing paper the “toolbox of trade law”. We have a range of principles, from harmonisation through to mutual recognition, and all sorts of ways to nuance and qualify them.

My solution would have been to find pre-legislative understandings of how to manage the potential trade barriers that might arise from the exercise of competences across the UK. If a solution can be found that satisfies everybody, everyone can proceed on the bases of that solution and exercise of their respective competences. However, that means that everyone just has to live with whatever solution comes out of the process. If it were to mean that there were barriers to trade for certain English manufacturers, they would just have to put up with them. That is true in virtually every other internal market in the world; in virtually every other system, there are trade barriers and people just have to live with and adapt to them.

If I were redrafting the bill, I would keep bits of it—some of the underlying principles and tools—but I would probably take a radically different approach to how the tools should be employed, the institutional ways in which that is done, the processes and the legal effects.

Do I have time to ask Dr Lydgate a question?

I would prefer to let others in at the moment, but I can come back to you, if that is okay.

Dr Lydgate—perhaps you could give an overview in response to what Professor Dougan has just said. I know that that is a big ask, but is there anything particular that you would like to add that would differ from what we just heard?

I will just make a supplementary comment. In a sense, the process problems with the bill are the substantive problems. Previous witnesses have questioned why the bill was presented with such urgency, given that it does not apply to existing legislation, and that legislative changes in the immediate aftermath of Brexit are likely to be small.

I have a slightly different perspective on why the UK Government might be feeling some urgency. At the end of the transition period, on 1 January, a raft of Brexit legislation will come into force. The broad understanding is that those pieces of legislation will simply transpose EU law, but in fact they present some dramatic changes with respect to the internal market. I gave an example of that with respect to food safety and food standards, which is now devolved rather than harmonised. In that context, even though the new powers might not be used, I expect that the UK Government wants the legislation to be in place before those statutory instruments come into force, in case the common frameworks fall apart.

What we are seeing is the UK Government responding to a threat by trying to centralise power or create a system that will function in case there is a problem. However, in a sense, that exemplifies the issues that are at play here, which involve the lack of a strong consultative process.

Dr Lydgate, you make the point that the United States would look at trade negotiations with the UK differently from the way in which the EU would. Could you expand on that a little? There is a lot of variation between he different states in America, so I would have thought that that would be a factor.

Is your question about how the United States, as opposed to the EU, manages internal divergence?

Yes, in terms of how that will feed into a new negotiation with the UK.

The US has a lot of internal divergence, and that is an issue for internal trade. However, its objectives for the UK negotiation are centralised. In fact, they are set out in legislation—Congress has said in law what the US negotiating objectives will be. Therefore, those are not contingent on a Trump Administration or a Biden Administration. Some of the phrasing of the objectives and their strongly unilateral orientation is definitely a reflection of Trump, but the objectives are centralised.

Would those be different from the EU’s, in that the EU is trying to push up standards and the US is trying to push them down?

On the substantive issues of what the two parties are looking for from the UK, those are definitely in contrast. The EU has, essentially, accepted that we will have a fairly basic free trade agreement that does not have very much in the way of regulatory alignment. We do not have a demand to continue any single market, or quasi-single-market-style arrangement with the EU, so it is really down to the UK to decide what concessions it wants to make to achieve a trade agreement. However, if it wants to achieve a trade agreement with the US, that implies some changes to its domestic regulation, particularly on agriculture.

Thank you very much.

I now switch my questioning to Professor Dougan. You have already touched on the question of minimum unit pricing for alcohol, which has been a major issue in Scotland. In paragraph 15 of your paper, you talk about action being allowed in the bill only against serious health threats. Will you expand on that? Am I right in saying that, in the European Union, action against general threats to public health is allowed?

I will double-check my notes. In the field of goods, we are dealing with the principle of mutual recognition. In my analysis, I suggest, and most of my colleagues would agree—a few other people might suggest otherwise—that a change in the mandatory minimum price for a good is a product specification that would be governed by the principle of mutual recognition under the bill. In that case, the only justification that would be available to, for example, the Scottish Government to enforce its minimum prices against English imports of alcohol would be to prevent the spread of a pest, a disease or an unsafe foodstuff. That clearly does not apply in the case of minimum unit pricing for alcohol. In effect, you would be left with no potential justification whereby the Scottish Government might enforce a change in minimum unit pricing against imported English alcoholic goods.

There is no general public health justification that would allow any part of the UK to reject mutual recognition in the fields in which it applies. By contrast, under EU law, general public health considerations are a valid public interest requirement. We know that from, for example, the Scotch Whisky Association case, in which the Scottish Government relied on public health grounds to justify its policy on minimum unit pricing for alcohol.

There was quite a lot in that. Could you explain to me, as a layperson, the idea of product requirement? When I read those words, I think that that means that a product must have in it a certain amount of water or whatever it may be. However, you are saying that the product requirement could include the price.

The bill includes an indicative list of what will be covered by mutual recognition. I should point out that I am using the term “product requirement” because that is the shorthand that we use in EU law. That terminology is not used in the bill. The bill refers to an indicative list of rules relating to mutual recognition, which cover physical characteristics, packaging and labelling, production, plant requirements, identification and tracing of animals, and so on.

The bill identifies a second set of rules relating to trading goods that will not be subject to mutual recognition but will be subject to the principle of non-discrimination, which is obviously a lower trade threshold than mutual recognition. Again, it gives an indicative list, including

“the circumstances or manner in which goods are sold”

and requirements relating to transportation and storage.

The problem is that the bill creates a clear distinction between the two categories of rules. One set of rules comes under mutual recognition and another comes under non-discrimination, but there is not an exhaustive list to show which rules fall into which category. We have to decide which category those rules that are not listed as illustrative examples fall into.

Minimum price controls are not explicitly listed, so we have to figure out the underlying philosophy that distinguishes one group of rules from another and justifies the very different statutory treatments under the bill. The assumption that we would make, using our inherited EU law head, is that mutual recognition applies to any rule that would prevent the sale of a good unless changes were made to its innate or inherent characteristics, or any rule that would prevent the lawful sale of the good if the requirement was not complied with. It is not about the advertising or the shop premises; it is about the good itself.

It would be completely orthodox, in trade law terms, to say that insisting that a good must have a minimum price before it can be placed in the market lawfully is no different from saying that it must have recycled packaging or that it cannot contain dangerous chemicals. Price is such an inherent part of the good that you can align minimum price controls with inherent product requirements, such as those relating to packaging, labelling or composition. It is an open question, but in trade law terms it would be completely orthodox to make that distinction.

If a bottle of English beer was being sold at the same price as a bottle of Scottish beer of the same strength, could that be counted as discrimination?

We are talking about mutual recognition.

Right.

If the English beer, having been lawfully produced, marketed and sold in England, would have a significantly lower price than the Scottish equivalent, changing its price would mean that you were reregulating a product that had already been lawfully placed on the market in England. That is what mutual recognition is all about.

The underlying idea of mutual recognition is that, if a product has been lawfully placed on the market in one territory, it should be free for sale in every other territory without any further regulatory requirements that limit access to the market. By taking that bottle of English beer, which might have been on sale for £1, and insisting that in Scotland it has to be on sale for at least £1.50, you are reregulating the beer and imposing an extra regulatory requirement that has to be complied with before the beer can be lawfully placed on the Scottish market. That type of situation is what mutual recognition is all about.

It is unfortunate that the bill does not give us a more definitive list of which rules fall into which category, but in trade law terms that analysis would be seen as completely orthodox.

Before you continue, John, I see that Emily Lydgate would like to make a comment on that area.

I would like to put a final question of Professor Dougan, if I may, and then we can come back to Emily Lydgate.

From what you said, Professor Dougan, if a beer can be sold for £1 in England and we want it to be sold for £1.50 here, that is okay at the moment, because that is an existing rule, but if we want to put it up to £2, we might be challenged in the courts.

Yes.

Okay—that is a simple answer. Dr Lydgate, do you want to come in?

I wanted to raise a question that I have about the bill, which is about how these market access principles would apply in situations of divergence in labelling. That is explicitly identified in the internal market white paper as an area of concern. I understand that there is an agreement on a harmonised approach. Let us say that a divergence in labelling occurred. It is confusing to sort out the areas in which the mutual recognition provisions apply from the areas in which non-discrimination applies but, in this case, I argue that mutual recognition would apply, because the issue is to do with how the product is produced rather than how it is sold. However, I flag that question.

09:45  

The principle of mutual recognition simply requires that the product be sold and not that it be standardised. For example, there could be a situation in which England decided to change the threshold at which genetically modified organisms need to be labelled. I believe that the current figure is 1 per cent, but England could decide to change it to 5 per cent. The relevant labels would then disappear from some goods. I presume that those goods would be imported and would be exempt from the labelling requirement, or there could be something more cosmetic, such as different labelling requirements. That is an example of where a harmonised approach is more effective than just having mutual recognition, which would allow the proliferation of different approaches.

I want to come back to the question of how and when the internal market legislation might apply in practice. The UK and Scottish Governments have both committed to common frameworks which, as we have heard, will cover the vast majority of the trade in the internal market. Those common frameworks will set out common standards, areas of divergence for devolved regulation and areas where it is competent for the devolved Administrations to diverge.

Evidence that has been given to the committee previously has suggested that, in reality, the internal market proposals will potentially apply only to a relatively small area of trade that falls outside the common frameworks. In effect, the proposals will act as an insurance policy or sweep-up mechanism for trade that is not dealt with in the common frameworks. Do you agree that, if and when the common frameworks are in place, the internal market legislation will in reality apply to a relatively small element of trade in the internal market?

That would be the ideal landing ground, but there are a lot of questions about how the common frameworks are constituted and integrated into the United Kingdom Internal Market Bill.

I will give an example that picks up on what Professor Dougan said about the dynamic nature of common frameworks. You cannot have a static agreement about what regulations will be, because they change. Scotland has the UK Withdrawal from the European Union (Continuity) (Scotland) Bill, which proposes continued alignment with EU rules, although it does not specify which rules. That is of course significant.

For example, let us say that the EU decides to expand its restrictions on endocrine disruptors—that has been in the pipeline for a while and would entail new product restrictions on a whole host of sectors, such as toys, cosmetics and food contact materials—and then the UK decided not to introduce those restrictions. That would put Scotland in an interesting position vis-à-vis common frameworks. Would it integrate or diverge? If it diverged, it would be in the unfortunate situation of imposing stricter requirements on its manufacturing sector than those being imposed in the rest of the UK, and Scotland would also be required to import those non-complying products.

Common frameworks are definitely the way forward, but there are still a lot of questions about how they operate.

Professor Dougan, what are your views on that?

I am glad that you came to me second, as I have had the chance to jot down four quick points—he said, holding up five fingers. It is four quick points, though. First, I endorse what Emily Lydgate said. Yes, of course this is an insurance policy, but that makes it sound like something that might be used only as a last resort or in rare circumstances. It is an insurance policy in the sense that it is a default position, but that position need not necessarily be rare or unusual; it just means that, as trade develops, regulatory preferences change, science and consumer demand throw up new challenges that regulators have to address and new barriers to trade will arise that fall outside the scope of the existing common frameworks. The whole point of internal market principles such as non-discrimination and mutual recognition is that they provide the default solution, which is a better phrase than “insurance policy”.

My second point is that the UK Government has promised that Brexit will lead to a significant increase in the devolved competences of Scotland and Wales. If that promise is true, it means that the default insurance policy will have a more significant role to play. You cannot have it both ways: you cannot say that Brexit will lead to a significant increase in the powers of the devolved institutions but then deny that the United Kingdom Internal Market Bill will be more than a marginal phenomenon. The more devolved powers you have and the more trade barriers you are capable of creating, the more you will need this bill to address them. If Brexit leads to a significant increase in devolved powers, the bill will have a commensurately greater role to play in regulating the way in which those devolved powers operate in practice.

The third point is that we are still in the process of negotiating and finalising the common frameworks. Obviously, if that process falls apart, begins to break down or does not produce the results that are required, the bill’s scope of application will be commensurately greater. I am not by nature a cynical person, but if I were being cynical, I would suggest that, in a way, the bill is the insurance policy against the need for common frameworks. In trade law terms, we would ordinarily pitch two absolutes in competition with each other; we would say that, if you want to solve barriers to cross-border trade, you can harmonise them, which is common frameworks, or you can use a strong principle of mutual recognition. However, you do not need both, because one or the other will do the job. If the harmonisation—or common frameworks—process fails, then a strong principle of mutual recognition will, in effect, do the job for you. You do not need harmonised frameworks any more if goods are simply free to be produced wherever they are produced and sold wherever you want them to be sold.

In a way, we can describe the bill as an insurance policy but, in a very different way, it is an insurance policy that almost removes the need for common frameworks for harmonisation if that process does not deliver the desired results.

I thank you both for your responses. I want to follow up on the issue of the dynamic nature of common frameworks. Once they are agreed, significant areas of regulatory divergence will be recognised. It will involve not just existing static areas in which regulations are divergent across the UK but whole areas of devolved competence in which future changes in devolved regulation can be made. Does the panel recognise that the common frameworks will build in future flexibility for the devolved Administrations to change regulations in those areas and decide whether to harmonise or diverge within those areas of devolved competence?

It is a bit like the distinction between things on paper and things in practice that I mentioned at the start. Yes, on paper the common frameworks can leave scope for the exercise of devolved competences and divergent choices, but nothing in the bill prevents those divergent choices or exercises of devolved competence, even within the scope of common frameworks, from being subject to the principles of mutual recognition and non-discrimination in the field of goods, for example.

In a way, then, what you are saying is completely true, in that, on paper, the common frameworks are not some monolithic harmonisation that imposes uniform rules across all the territories; they leave room for devolved competence. However, the bill will subject the exercise of those devolved competences to the principles of non-discrimination and mutual recognition. Ultimately, therefore, common frameworks are not the answer to the problem that we have highlighted; they are simply the application of those problems in a slightly different regulatory context.

Dr Lydgate, you mentioned the potential impact of the UK Withdrawal from the European Union (Continuity) (Scotland) Bill and Scotland keeping pace with EU law in future. What impact could the keeping pace powers have on the objective of common frameworks and harmonisation in the UK internal market?

That will depend entirely on what the UK does with its regulation in future, which is a question that interests many of us.

The approach opens up wide scope for potential market access barriers between Scotland and the rest of the UK. Of course, those would be addressed under the internal market bill—meaning that if EU regulations led to product-related restrictions or bans, Scotland would still need to import the products from the rest of the UK and not discriminate against them on the basis of how they were labelled or presented. There is certainly scope for direct conflict there.

Convener, I appreciate that I have taken up a bit of time, so I will stop there.

Thank you.

I will follow up on the notion of the bill providing either a default position or an insurance policy, as Professor Dougan described it, in the context of the negotiation of common frameworks. I suggest that the situation is even worse than that, because if this is a default, surely it weakens any incentive for the UK Government to sit down, negotiate and compromise in order to reach a common framework by mutual agreement.

If there is no incentive to do that, because the UK Government can always fall back on the default expectation of centralising power, surely we are less likely to reach agreement by negotiation and compromise. We will get that only if all parties and Governments in these islands recognise that reaching agreement is a way of solving or avoiding a problem that they all find disagreeable. Surely the bill makes it less likely that we will agree a negotiated, mutual resolution to some of the issues.

When I suggested, in answer to Dean Lockhart, that the cynical bit of me might suppose that the bill is, effectively, a way of not having to worry too much about common frameworks or future needs of harmonisation, I might have been expressing the same point in a more diplomatic way. I agree. The bill cuts across the whole debate about not just common frameworks right now but the framework for future common frameworks or harmonisation—or whatever term we want to use.

If we accept that internal markets are dynamic phenomena that need to be constantly managed, and that the process of managing the internal market is just as important as the substantive outcomes that are reached, the question that we have to address is this: what is the right balance in having principles of mutual recognition and non-discrimination, whereby different territories can go their own way but we find a method of managing the trade implications of that divergence, and how far we decide to harmonise and establish common frameworks and somehow come up with the same or similar solutions to comparable problems?

Many systems, including the EU system, are engaged in constantly striking a balance between those two things: when should the EU harmonise and when should it leave it to cassis de Dijon and the operation of market forces through the control of the principle of mutual recognition?

10:00  

In a way, what Patrick Harvie says is completely right. A very strong principle of mutual recognition, or cassis de Dijon on steroids, weakens the need for common frameworks and harmonisation because the same result can effectively be achieved through the operation of market forces rather than centralised regulatory intervention. A default solution weakens the incentive to engage in the more complicated process of negotiation and compromise. Maybe I have just made the point in a more diplomatic way, but I agree with what was said.

It sounds as though it will leave us in a similar position to the legislative consent mechanism, in which the Scottish Government or the Scottish Parliament is asked, “Please consent to this, or we will do it anyway.” That is the kind of power imbalance that we will have.

The witnesses have recognised that there is a bit of an assumption that any kind of regulatory divergence or difference is an unacceptable trade barrier, and that internal markets do have differences and divergences. Surely there is a strong case for working to the principle that it is only when the rules or standards are incompatible that we have a problem that cannot be resolved in the normal democratic way.

For example, one of the first policy areas that was mentioned in the internal market white paper that preceded the bill was building regulations. They have been fully devolved for more than 20 years and were separately administered even before devolution. If two jurisdictions within the UK have different standards about how efficient insulation products need to be, a manufacturer can decide whether to meet one standard or both. Manufacturers are free to decide whether they will comply with both standards. We only really have a problem if one jurisdiction says that the insulation has to be made from a minimum of 60 per cent organic material and the other jurisdiction says that it has to be made from a minimum of 60 per cent synthetic material, because a manufacturer is incapable of meeting both standards.

Is there not a case for saying that that is the principle that we should be identifying, and that there is a problem only when it is impossible to comply with both sets of standards?

The EU’s approach has been to allow divergence where possible but, when harmonisation is necessary for free movement, it will be required. Within that, there is scope for divergence as long as countries are willing to put up with the market access barriers that you have identified.

That is where market power comes in. If you have a much larger economy with much more construction going on, it makes more sense for manufacturers to produce products to that standard than have a separate supply chain. An example of that would be in the trade agreement between the EU and Canada. Canada got increased low-tariff access for beef, but it has not used that and it has not exported to meet anywhere near its quota, because its supply chains are all set up to feed into the US market. It is just simply not economical for those farms to set up a separate supply chain just for the EU market. That is where the logic of market size comes in.

This is a useful point at which to draw a direct contrast between EU practice and the proposals in the bill. Everything depends on our starting assumption. Trade law gives us a toolbox. It provides us with a range of ways that we can manage markets, but it does not tell us what the best combination of those tools should be. We still have to make a value judgment when we start about which tools we want to use.

In the EU context, the basic assumption is that we want a well-regulated market that is left to the member states, unless the barriers to trade that are created are of such a nature and scale that they require centralised formalisation. The EU system works by member states, by default, regulating their marketplaces as they see fit, subject to the principle of mutual recognition. However, mutual recognition provides a broad range of exceptions and derogations, through which member states can justifiably maintain trade barriers for all manner of legitimate public interest reasons.

When a member state does that, it effectively flags up to the European Commission that there is a trade barrier, that it is a legitimate trade barrier, and that maybe the Commission should think about harmonisation. In that way, the emergence of legitimate trade barriers acts as a kickstart to the process of political dialogue, whereby the member states and the other EU institutions begin to think about just how serious a problem it is, what the best solution is to adopt in relation to it, and so on. We can almost say that mutual recognition in the EU context is a problem-identifying principle. It basically says, “Here is a problem. How are we going to solve it?”

The problem with the bill is that mutual recognition is not being used as a way of identifying problems so as to help find a political solution for their resolution. In effect, the bill is saying, “We have identified a problem, and we are going to sweep it aside through the operation of market forces.” We can think about the bill as effectively subjecting the exercise of devolved competence to market forces, in a market where England makes up 80 or 85 per cent of market share.

That answers your question in a roundabout way. The starting assumption of the bill is not that the exercise of divergent regulatory preferences is an issue that we need to redress through political dialogue in order to identify legitimate public interests and decide when barriers to trade are justified or unjustified and how best to address them. The underlying starting point of the bill is that the exercise of devolved competence creates problems that we need to sweep away, and the tool that we will use to sweep them away is market forces, through the sheer size of the English economy. In practice, it is the English choice which will prevail, not the Scottish or the Welsh choice. That is a very different starting assumption from that of the EU.

That is quite powerfully put. The last question that I want to explore with you both leads on from that. I have a concern that this process is about sweeping away not just devolved competences but democratic accountability. The judgment about whether a form of divergence or a potential market barrier is acceptable should be a democratically accountable judgment. Whether we see decisions being taken into the courts, being centralised to the UK Government or otherwise being taken away from parliamentary accountability, we have a problem.

It seems to me that, even if we had system of derogations and justifications added to the bill, it would still be unacceptable in terms of democratic accountability, because the devolved Government would have to apply for a derogation before it was able to make a regulatory proposal to Parliament. There has been only one session since devolution began in which a single political party had a majority in the Scottish Parliament. If we accept the principle that ministers do not represent a majority until Parliament has voted, surely the existence of derogations for which ministers have to apply are an inadequate democratic lock on the kind of legitimate choices that the Scottish Parliament or other Parliaments ought to be able to make.

In response to a couple of earlier questions, I indicated that, taking the bill as it stands and seeing how it could be readily amended, my bare minimum baseline for improving the bill would be to widen the system of derogations and justifications.

One of the problems with the bill is that it tries to replace the processes of dialogue and negotiation to find political solutions to how we address the problem of barriers to trade, not only with the starting assumption that that is a problem that needs to be swept aside, but in the way that it proposes using automatic, legally enforceable principles, applicable before the courts, to do the job for it.

That is why I suggested that my preference would be that the trade issues that are created by the UK internal market are managed through a system of pre-legislative dialogue. It is not for me to speculate on whether that is best done by governments or parliamentary committees but, to me, a system of pre-legislative dialogue that tries to encourage an accountable political debate about whether a problem exists, its nature and scale, and the most appropriate solution to that problem, would be far preferable to an automatic legal rule—it is not even an assumption—that regulatory divergence is a problem that needs to be swept aside in practice.

I will call attention to the fact that that brings up the question of who is deciding and who gets to determine whether a derogation is legitimate. The courts have quite a lot of power.

The complexity in the drafting of the bill struck me when I was reading it. Many terms, such as “relevant connection”, “relevant requirement”, “direct and indirect discrimination”, need to be interpreted. I therefore agree that the bill replaces a political process with a judicial process and that there should be some other way of resolving those issues on an intergovernmental level.

The Competition and Markets Authority has been empowered with an advisory oversight role, which strikes me as being beyond the type of competences that it has now. Not to malign that body, but it seems to me that it would be appropriate to make sure that the CMA has representation from devolved nations so that it has a range of competence to be able to oversee some of the issues, which can be technical and specific to certain sectors.

I presume that that would require expertise in environmental governance, public health and so on, which are not factors in the appointment of the CMA’s board?

Exactly.

Patrick Harvie’s questions lead neatly on to the area that I will explore.

Both our witnesses have talked about the need for new governance structures, dialogue and negotiation and the complexity of that. What do you think the institutional architecture needs to be to make that work?

I will bring up the question of transparency. I have no idea what is going on in the common frameworks discussion. A lot of us are interested in how robust those discussions are and how they are progressing. The role of the devolved nations in trade negotiations is an analogous problem. We know that there is some discussion about a concordat on international trade, but I do not think that that has appeared and I do not have a sense of what that could look like, in contrast to the Internal Market Bill, which sets out procedures and competences.

There is some asymmetry and simply putting some of the devolved nations’ inputs into legislative form would be useful in the context of a lack of trust, as would developing dialogues that have a formal role in the end result. I am not sure how exactly that would happen because devolution is not my area—I am a trade lawyer—so I am a little bit hampered in spelling it out, but that is the gist of it.

10:15  

Professor Dougan talked earlier about pre-legislative dialogue. However, I am conscious that the European Union has the European Commission, which has a neutral, independent governance architecture that appears to be missing from this bill. It is almost a dispute resolution mechanism. Do you think that there is a need for that?

Yes, and the question is not only about having a body like that; it is about defining the powers of devolved nations, in essence, to steer the discussion. I am again not sure what would be the best way to do that, so I will refer to Professor Dougan.

Like Emily, I am not a devolution specialist. Therefore, I will use the EU system—which I know very well—as an example, and I will then draw out the features that distinguish it from the situation in this bill.

The starting point is the fairly essential proposition that the principle of mutual recognition depends on trust. Indeed, most trade principles do, but that one does in particular: the two go completely hand in hand. It is very difficult to have a situation in which a territory is simply expected to let imported goods and services be freely available to its citizens and consumers without any further or additional regulation and without those goods and services having to comply with the territory’s own local legislation unless there is a high level of mutual trust between all of the participating territories that they will all respect certain common values and standards, and that the rules will apply fairly between them.

A huge amount of the EU’s institutional and governance effort goes into creating the underlying mutual trust that makes the system of mutual recognition and harmonisation work. It is why, for example, there is a very complicated legislated process at EU level that tries to balance the interests of the large member states and the small ones. It is why the independent Commission, which is meant to oversee the operation of the single market without any influence from any given member state, exists.

There is an independent dispute settlement mechanism through the European Court of Justice so that there is a judicial body that is independent of any of the participating territories. Even then, we can see what happens when mutual trust breaks down. We have seen it in fields like criminal law co-operation and, more recently, in the field of medical supplies when the pandemic hit the EU. When mutual trust breaks down, mutual recognition breaks down as well.

Therefore, the key challenge that the UK has to think about is how it maintains a system of mutual trust that will justify and make operational the core principle of mutual recognition, which underlines this bill. The problem is that the bill does nothing about that. It simply assumes that the principle of mutual recognition can be transposed on to the UK’s existing empirical and constitutional structures and that it will operate automatically as a set of rules to deal with trade problems. I am not sure that that is a sustainable political or constitutional proposition.

I mentioned having a pre-legislative dialogue whereby the four territories would sit down and think about potential trade barriers and how best to resolve them through an agreed political solution. However, even that pre-supposes a level of mutual trust and cooperation between the political actors that are involved to make that system work. I suppose that one of the concerns that has been raised about the UK internal market as a phenomenon is that, at present, there does not appear to be that mutual trust between the Administrations that currently govern different parts of the UK. To a private citizen such as me, it certainly appears that way.

My answer is that mutual recognition requires mutual trust, and one of the big lacunae in the bill is that it does nothing to create the institutional framework that would generate the mutual trust that could possibly justify a market system as strong as the one that the bill proposes.

Thank you, Professor Dougan. That is very helpful indeed.

I thank Professor Dougan and Dr Lydgate for their very helpful evidence.

I will suspend the meeting to allow our next panel of witnesses to join us. We will recommence at 10.30.

10:20 Meeting suspended.  

10:30 On resuming—