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02 Feb 2023

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Joël Reland analyses the findings of UK in a Changing Europe’s sixth UK-EU regulatory divergence tracker, highlighting a shift towards a more cautious and business-friendly approach under Rishi Sunak.

At UK in a Changing Europe, we have for the past eighteen months been tracking where and how the UK has, post-Brexit, moved away from the EU rulebook.

Across that time, there has been a relatively consistent split between cases of ‘active’ divergence (where the UK scraps or updates rules it inherited from the EU) and ‘passive’ divergence (where the EU creates or updates legislation which the UK does not follow).

Yet our latest tracker, covering Rishi Sunak’s first few months in power, shows a marked reduction in active divergence, and even some notable cases of alignment with EU rule changes.

So, does this mean Sunak has given up on the ‘Brexit opportunities’ agenda – of remaking supposedly sub-optimal EU legislation – which Johnson and Truss prized so dearly?

In one sense it is too early to say, given how much political disruption there has been of late. Sunak has barely got his feet under the table in Number 10, and his government’s immediate focus has been dealing with the growing economic crisis which is  far more of a priority for voters than Brexit.

Yet, in another sense, Sunak’s mandate is implicitly opposed to radical reform, focused on calming markets and restoring economic credibility. This stands in contrast to his two predecessors, who saw economic disruption as a price worth paying for doing things differently outside the EU. Johnson saw immigration control and new state aid and procurement regimes (only possible outside the EU single market) as key to ‘levelling up’ the country, while for Truss deregulation of the financial services sector was essential to boosting growth.

Sunak’s more cautious philosophy is evidenced by a clear early tendency to delay significant divergence. The mandatory use of the new ‘UKCA’ manufacturing mark for products (replacing the EU’s CE mark) has been set back to 2025, while new veterinary certification requirements for meat exporters and registration deadlines for the new UK chemicals regime have also been delayed.

This approach could be interpreted as merely a product of short-term need in an economic crisis. Yet there are signs of a more fundamental commitment to putting the concerns of businesses before the symbolic Brexit wins.

Businesses lobbied hard for all of the above delays, as they feared being administratively hamstrung, and in delaying the UKCA introduction Business Secretary Grant Shapps explicitly noted it would ‘remove barriers to businesses so they can get on with their top priorities’. Johnson and Truss, by contrast, repeatedly ignored business concerns about disruptive reforms.

Sunak also appears less inclined to portray the EU as the bogeyman, instead seeking to improve the wider trading relationship. The renewed effort to find a deal on the Northern Ireland Protocol attests to this, as does Jeremy Hunt speaking of his aim to minimise trade barriers with the EU.

In arguing Sunak is more pro-business, however, the elephant in the room is the Retained EU Law (REUL) Bill. This will see thousands of laws inherited from the EU expire at the end of 2023, unless actively retained. The very short window is a recipe for legislative chaos, and businesses are deeply concerned about the uncertainty and potential trade disruption it creates.

This is perhaps where Sunak’s economic instincts clash with political reality. The REUL Bill is the totemic piece of Brexiteer legislation – a ritual purging of EU legislation from British statutes – and thus any move to scrap or even delay it risks major backbench hostility.

Yet even here there are signs that government is slowly laying the groundwork for a retreat. A government source suggests opposition in the Lords (an obvious potential scapegoat) makes delays ‘inevitable’, alongside briefing that heavily affected departments might extend the deadline to 2026. We may well end up with a scenario where a subset of laws are ‘targeted’ for reform before 2023, while the majority of decisions are delayed until beyond the next general election (after which the Bill could well be junked).

This all suggests the search for Brexit opportunities is being downscaled. And it is certainly the case that, if Sunak primarily assesses the case for divergence in terms of economic impact, there are relatively few obvious areas for reform.

The blunt reality is that the EU is the UK’s largest trading market and diverging from its rulebook creates greater barriers to trade. Moreover, companies worldwide want access to the EU single market and thus align to its regulations, meaning there is limited extra global trade to be gained from divergence.

Yet Jeremy Hunt has nonetheless outlined ‘five growth industries’ – digital technology, life sciences, green industries, financial services and advanced manufacturing – where regulatory changes will be brought forward by the end of 2023.

What these have in common is that they are emerging or rapidly developing sectors – and there is a stronger case for divergence here. Because many of the global regulatory norms are yet to be set, the UK could in theory have an important shaping effect on those norms if it manages to legislate faster than a 27-member bloc. Moreover, because there are fewer existing EU rules to diverge from, there are fewer adaption costs for business.

This approach appears more focused on the UK’s relative strengths and less disruptive to business. It remains an open question as to whether these opportunities will be realised – so far, the EU has legislated faster than the UK in relevant areas, for example on online safety, digital markets, cyber resilience, cryptocurrency and pursuing a data-sharing agreement with the US.

This in part reflects the fact that the UK is still learning how to regulate independently, while the EU’s processes have been refined over decades. A narrower and more clearly-defined UK divergence agenda – allowing regulators and businesses to focus adaptation efforts on a few key areas – might help it to start catching up.

Sunak’s business-focused approach will likely give him fewer obvious Brexit ‘dividends’ to talk about at the next election. Yet it should create a stabler and more predictable regulatory horizon, which businesses would certainly welcome.

By Joël Reland, Research Associate at UK in a Changing Europe.

The sixth edition of the UK-EU regulatory divergence tracker can be found here.

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