UK-EU Trade Negotiations: The Level Playing Field

Luis González García is a trade lawyer at Matrix Chambers. Here he explains what the ‘level playing field’ means and why it is going to seriously complicate the Brexit trade negotiations.

The UK has left the EU. Now negotiators from both sides need to reconcile their diverging interests. The UK wants to have the ability to change its regulations in order to compete in the world economy and negotiate meaningful trade agreements. The EU wants to maintain a level playing field between the UK and the EU27 and safeguard the stability of the Single Market. Recent events on both sides of the Channel have signalled how challenging this reconciliation might be.

Recently, the EU has published a series of slides that suggest the “only” model available to the UK will be an integrationist model which guarantees a “level playing field”. In order to prevent unfair competitive advantages, the EU seeks to ensure convergence in areas such as competition and state aid, taxation, labour, environmental and intellectual property. In other words, a Canada-style FTA is effectively off the table. However, UK Chancellor Sajid Javid recently confirmed that “there will not be alignment, [the UK] will not be a ruletaker”. Boris Johnson similarly said that “We [the UK] have made our choice: we want a comprehensive free trade agreement, similar to Canada’s”.

These statements tell us three things about what to expect from the negotiations. First, the EU is not posturing. Second, the UK is not posturing either. As a result, the UK-EU trade negotiations are about to get bad – before they get really bad.

The EU is not posturing

By insisting that level playing field provisions should be the basis of negotiation, the EU is not simply seeking to increase its leverage. In fact, it shows consistency in its approach to trade with countries within its periphery where it follows an integrationist model. Under this model, the EU applies the concept of dynamic regulatory approximation in trade-related areas such as technical regulations, consumer protection, competition law (including state aid), state-owned companies, taxation, or social policies. This is done mostly through the harmonisation of rules. According to the EU, the harmonisation of rules leads to an ecosystem of regulations which ensures a level playing field with the Member States. Through the harmonisation of rules or alignment, unfair competition is avoided, and the regulatory and supervisory regime of the EU is safeguarded. The downside of this model for third countries is that it is not a relationship between equals. The burden of convergence and harmonisation of rules and standards (i.e. EU standards) is always on the third country.

The UK is not posturing either

Unsurprisingly, the UK rejects this approach. It is therefore not posturing either when it announces that it will pursue the liberalisation or Canada model which the EU applies to most third countries outside the EU’s sphere of influence. This model is mainly aimed at the elimination of barriers to trade and cooperation on matters of economic and social policies. The trading relationship is, at least on paper, between equals and reciprocal. Although the Canada-style model also requires the maintainence of a certain level in some sectors, there is no obligation on third countries to approximate their legislation to that of the EU and the enforcement mechanisms are rather weak.

Understanding “level playing field” in international trade

We need to understand three things about the level playing field.

First, there is nothing extravagant about the concept in trade law. It is an established principle of international trade, also known as “fair competition” or “equality of conditions”, to ensure that businesses can compete on equal footing. For example, lax environmental laws may reduce compliance costs. This can incentivise a company to relocate its operations. As a result, it may enjoy a competitive advantage over the company (i.e. the competitor) located in a jurisdiction with stringent environmental standards and effective enforcement mechanisms. By extension, it may restrict the market access negotiated in the FTA.

Second, a reduction on the level of environmental and labour laws and enforcing mechanisms, or the granting of more government supports to domestic businesses, does not automatically constitute a breach of the level playing field. For there to be a breach of the principle, a state must establish that a particular practice may affect trade between the trading partners. In other words, in traditional FTAs the lowering of standards, the failure to enforce laws, or deregulation may constitute an unfair competitive advantage only if such practices affect trade between the relevant parties.

Third, harmonisation of rules is not the only way the level playing field can be guaranteed. Other techniques include the so-called “non-regression” clause, the “high standards” provisions (both found in the EU-Japan FTA), or weaker provisions such as the so-called “good governance” principle.

The crux of the problem and possible solutions

The key question in the UK-EU negotiations will be whether the level playing field commitments are based on EU law and how they are enforced. If based on EU law, this would likely involve the concept of dynamic regulatory approximation, monitored and regulated by EU institutions. The EU argues that the UK’s geographic proximity, the depth and breadth of the EU-UK economic integration and the size of the UK economy make it a close and strong competitor, thus requiring “special measures”.

The problem with this approach is that the regulatory approximation model was designed and applied to countries within its sphere of influence; it was meant to apply only to countries which were transitioning towards membership. As such, it is mainly found in association agreements with accession candidates like Ukraine. Outside the sphere of EU influence the provisions for level playing field are less demanding on the third country.

The UK’s basis of the negotiation is that it will not negotiate under the assumption that it must be treated as belonging to the “sphere of influence” of the EU. It argues the EU approach is not viable when negotiating with a former member state that first and foremost wishes to no longer follow the EU rules-system.

There is some middle ground, but it requires compromise. The commitment not to reduce, derogate or relax currently existing levels of protection in order to encourage investment and trade should not be controversial. The challenge will lie in the degree of future convergence with EU law, and monitoring and enforcement provisions. For example,

If a sanctions-based approach is followed, would the EU agree to losing jurisdictional autonomy over environmental standards, state aid or competition matters to an arbitration panel? It has never done this in an FTA so far.
Would the UK follow a Canada model that exempts state aid, competition and environmental protection from the agreement’s dispute settlement mechanism?
Would either side allow their nationals to bring level playing field claims in the jurisdiction of the other side – e.g. an EU national located in the EU claiming standing in the UK courts (or before a UK-EU FTA Joint Committee) on the basis that it is competitively disadvantaged by the UK’s failure to maintain a level playing field?

Any outcome will have significant ramifications on broader issues of the negotiation such as potential alignment, or not, of Technical Barriers to Trade (TBT), Sanitary and Phytosanitary Measures (SPS), and anti-dumping duties. Technical challenges also arise – a soft level playing field provision may encourage foreign investment but foster less-environmentally friendly industries, a stringent one may enhance environmental and social protections but can constrain the state’s capacity to be internationally competitive. Negotiations are likely to become very interesting indeed.

Luis González García is a trade lawyer at Matrix Chambers, London.

Note: The views expressed in this post are those of the author, and not of the UCL European Institute, nor of UCL.