Talking Trade blog
Regulatory divergence: A business nightmare
Published 10 January 2020
Brexit and trade discussions between the UK and the EU are likely to involve significant amounts of time and energy spent on the issue of regulations—how far can/is the UK able to diverge from existing EU regulations?
While this may seem a topic of interest to only trade nerds and lawyers, it matters a lot to businesses of all sizes. The question of regulatory convergence or divergence is a problem everywhere.
The UK and EU are currently unwinding decades of increasingly close regulatory patterns that encompass all manner of topics—from agriculture to services to health. Most other countries and regions are less tightly intertwined, but the basic issues remain similar.
Regulations are typically put in place to ensure the health and safety of domestic consumers or to protect plant and animal life and health. There are often other reasons for imposing trade-related regulations, but these are the primary objectives.
To understand why regulations matter to firms in trade, it is easiest to start with a simple example—a company that makes tables and then sells them into Europe.
Currently, companies that make and ship tables to the EU must comply with a variety of specific regulations.
The EU has two sets of regulatory policies in place for the timber or wood used in the crafting of the table. The first, the European Union Timber Regulation (EUTR), helps to ensure that timber is legally harvested. The second, Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), is used to keep out wood products from endangered species.
The finished table must be manufactured in a way that is not harmful to consumers. Companies must comply with the General Product Safety Directive. A basic coffee or dining table has fewer specific product safety rules than some wood products like baby cribs or cots, but the final product must not harm consumers. The table firm must also ensure that the chemicals used in the manufacturing process, including paints, glues and varnishes, are not damaging to consumer health by following the European ‘Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH)’ regulations. The most important elements for tables may be the prohibitions on lead and mercury.
If the tables are shipped in wooden boxes, cases or pallets, these items also need to comply with International Standards for Phytosanitary Measures 15 (ISPM) packaging. The rules help ensure that specific pests are not present in packaging materials.
There are also likely to be a variety of standards or regulations that the EU buyer might demand, such as specific labeling requirements, sustainable harvesting of wood, or the use particular packaging, but these are not government rules that must be followed.
In short, a table manufacturer inside the UK (or anywhere else in the world) has to ensure that the finished product meets EU standards to be allowed into the EU.
After Brexit, the UK is currently suggesting that it no longer wants to follow EU regulations in whole or in part.
What might this mean for the table manufacturer? While the company may assume less stringent rules are ahead, it is not automatically the case.
For instance, the EUTR requirements allow voluntary certification. The UK might decide to tighten these rules on timber harvesting and demand that all wood imported into the UK (and potentially used by the table company) undergo mandatory certification of sourcing. If so, it may be the case that existing timber can no longer be used and new suppliers will be needed. The costs to the table company could increase.
On product safety and chemical usage, it is highly unlikely that the UK would opt to allow lead paints or be significantly less concerned with other safety issues. But, like with the sourcing of timber, these regulations could be tightened for the UK.
The UK might opt to add in additional layers of regulations to ensure, for instance, sustainability criteria or carbon footprint labeling.
With every change, the UK company will face increasing regulatory divergence—the rules needed to make a table in the UK will differ from the rules allowed in the EU.
As long as the divergence stays within a magnitude of degree, firms can typically cope. The UK could adjust a rule like this: “painted articles shall not be placed on the market if the concentration of cadmium is equal to or greater than 0.1% by weight of the paint on the painted article” to allow a greater weight of cadmium in paint at 0.2%.
Firms could decide to manufacture for the domestic UK market with a table that contains 0.2% cadmium or, if they intend to send tables to the EU at some point, ensure that cadmium levels remain at or below 0.1%.
The differing degree of regulation for cadmium is still not ideal, as the firm in the UK might start manufacturing to 0.2% and suddenly discover that they cannot send their products into the larger, more lucrative EU market.
Worse, however, for firms, is when regulations are completely different. If the UK has no requirements on cadmium at all in a post-Brexit world, manufacturers might slop on the chemical onto tables in the future, only to realize that their tables will have to be completely recrafted to send to EU customers.
If the testing regimes in the markets are different, this is also a nightmare for firms. Tables that get certified for sale in the UK, even if they meet the EU requirements, may need to be retested in the EU prior to entry. Duplicative testing is a particular challenge for smaller firms that cannot afford the process.
Governments may like the idea of specific regulations that can be matched to the specific conditions in each country. But for firms, overlapping, contradictory or confusing regulatory regimes can stop trade completely.
[Of course, government sometimes use regulatory powers precisely for this reason—to keep out foreign goods from the domestic market. This is not allowed under World Trade Organization (WTO) rules, which generally calls for the same treatment of foreign and domestic products and has conditions that are meant to apply to the use of regulatory regimes to ensure they do not become unfair trade barriers.]
After Brexit, the UK has argued that regulations need to change to allow firms maximum opportunity to thrive. But for most companies, regulatory convergence—not divergence—has been a critical to their success. Making products that meet the widest possible marketplace allows firms maximum opportunities to succeed.
© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).