The EU is exploring the inclusion of a “punishment clause” in any future trade deal with the UK to allow Brussels to slap tariffs on key British exports to the bloc if the UK government seeks to gain a commercial advantage by lowering regulatory standards.
In a move that would torpedo the post-Brexit plans of the British cabinet’s key Brexiters, any significant attempts by Whitehall to lower regulatory costs to British businesses in one part of the economy could be met by tariffs from Brussels on another.
An attempt to grab a larger share of the world market in aluminium, for example, by loosening regulation and reducing production costs in the UK could provoke a punitive tariff on British beef sales to the EU, a sector on which thousands of jobs rely.
In a leaked letter to the prime minister last month, key pro-Brexit ministers Michael Gove and Boris Johnson suggested that the UK could overhaul regulations in some sectors after leaving the bloc “to give the UK big advantages over EU members”.
A senior Conservative said: “Brexiters within the cabinet, and within the party, are pushing for divergence, and see it as a priority for the end state.”
But the Guardian understands that the EU intends to ensure there are heavy constraints on any attempt by the British government to diverge from the current regulatory system in any free trade deal.
The shadow trade secretary, Barry Gardiner, said: “Clearly the EU does not trust the assurances that UK ministers have given about maintaining social, environmental and workplace rights and standards. They think the UK is likely to pursue a deregulatory race to the bottom.
“Such a punishment clause as the EU appears to be contemplating would be hard to reconcile with the rules based system of the World Trade Organization (WTO) to which both we and the EU are committed.”
The revelation exposes how difficult the coming discussions are likely to be should the negotiations widen this month to take in trade. While keen to develop a wide-ranging free trade agreement with the UK, the EU is determined to protect its economic interests and ensure regulatory standards are maintained.
According to multiple EU sources, a range of options have been examined in order to ensure Britain stays aligned with the rest of Europe, but the imposition of tariffs to make key British exports more expensive for EU consumers is featuring prominently in the minds of its officials.
The tariffs would not necessarily be imposed on the sector where the UK has lightened its regulatory demands. To make the punitive tariffs work, they would need to be put on the key exports from the UK into the EU.
A senior EU official told the Guardian: “There have been threats, and so there will be safeguards. This is not a case of two equal blocs that will have to accommodate with one another and will have to find ways to manage divergence. If they want access to single market, they will have to comply with EU laws.”
The UK’s biggest exporting sectors to the EU beyond telecoms and financial services are transport and food, which account for 1m and 373,000 jobs respectively.
The EU’s deputy chief negotiator, Sabine Weyand, a trade expert and key problem solver in the European commission, is understood to have been working on the details of the clause.
Even by April, it was clear in the EU’s guidelines on how it would pursue the negotiations with Westminster that Brussels was determined to maintain a level playing field with the UK and there would be protective measures devised against unfair competitive advantages.
The extent to which Brussels is intending to constrain regulatory divergence will come as a blow to May’s government, however.
Mujtaba Rahman, a former Treasury and commission official, and now head of Europe for the Eurasia Group risk consultancy, said: “There’s been a lot of serious thinking in Brussels about future UK-EU trade relations. The most important concern for negotiators is how to protect EU markets against competitive advantages the UK may acquire from even minor regulatory divergences. It’s bad news for the Brexiters, but tariffs are likely to play a significant role in the EU’s trade defence.
“Negotiating a free trade agreement with a partner where there is significant trade overlap, geographical proximity and no ability to enforce regulatory convergence has never been done before; the EU is starting from a blank sheet of paper. This presents lots of risk for EU markets and negotiators are going to equip themselves to ensure they can respond, and forcefully, if needed.”
The level of the tariffs would be limited by the WTO rules, but they could still be highly punitive. Applicable tariffs could include 13% on salmon, 14% on wine, 40% on cheese and 59% on beef.
Andrew Lang, a law professor at Edinburgh University who is studying the implications of Brexit on trade, said: “A trade agreement which includes obligations to adopt specific regulatory rules governing the production of certain products is rare, if not unheard of. But the circumstances of a potential UK-EU free trade agreement are unique, so it is impossible to rule it out.”
The British negotiating team, led by Olly Robbins, the chief Downing Street Brexit adviser, was informed privately by key EU officials right at the start of the negotiations that safeguards would be necessary, given the talk of regulatory divergence coming from senior government figures.
However, direct engagement between the negotiating teams over a future relationship will not commence until the EU member states have judged that “sufficient progress” has been made on the opening issues – citizens’ rights, the financial settlement and the avoidance of a hard border between the Republic of Ireland and Northern Ireland – which have been beset by nine months of wrangling.
May and the president of the European commission, Jean-Claude Juncker, are due to have a working lunch on Monday to “take stock” of the situation in the hope that talks can widen after the European council summit of leaders on 14 and 15 December.
Sources in the Department for Exiting the European Union pointed out that the government had made clear it would seek a new “dispute resolution” mechanism to cover disagreements over “regulatory divergence” after Brexit – and would expect that to encompass remedies in the case of undercutting.
A spokesman for the European commission declined to comment.
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