Brexit aftermath confronts firms with regulatory conundrum

Dr. Deborah Elms, executive director of the Asian Trade Centre in Singapore

The UK and the EU are about to untangle 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, as well as to protect animals, plants, and more. There are often other reasons for imposing trade-related regulations, but these are the primary objectives.

To understand why regulations matter to businesses in trade, it is easiest to start with a simple example. Take a company that makes tables and then sells them in Europe, they must currently 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, called the Convention on International Trade in Endangered Species of Wild Fauna and Flora, is used to ensure wood products do not involve endangered species.

Furthermore, the finished table must be manufactured in a way that is not harmful, so 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 company must also ensure that the chemicals used in the manufacturing process, including paints, glues, and varnishes, are not damaging to consumer health by following Europe’s Registration, Evaluation, Authorisation and Restriction of Chemicals 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 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 labelling requirements, sustainable harvesting of wood, or the use of 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 government is currently suggesting that it no longer wants to follow EU regulations in whole, or even 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) undergoes 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 may opt to add in additional layers of regulations to ensure, for instance, sustainability criteria or carbon footprint labelling.

With every change, the UK business will face increasing regulatory divergence, as 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, businesses 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 (a soft metal similar to zinc or mercury) is equal to or greater than 0.1 per cent by weight of the paint on the painted article” to allow a greater weight of cadmium in paint at 0.2 per cent.

Businesses could decide to manufacture for the domestic British market with a table that contains 0.2 per cent cadmium or, if they intend to send tables to the EU at some point, ensure that cadmium levels remain at or below 0.1 per cent.

The differing degree of regulation for cadmium is still not ideal, as the business in the UK might start manufacturing to 0.2 per cent and suddenly discover that they cannot send their products into the larger, more lucrative EU market.

Worse for businesses, however, 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 realise that their tables will have to be completely redesigned 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 businesses 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 businesses, overlapping and contradictory or confusing regulatory regimes can halt trade completely.

Of course, governments 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 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 businesses opportunities to thrive. But for most companies, regulatory convergence, has been critical to their success. Making products that meet the widest possible marketplace allows businesses maximum opportunities to succeed.