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Better Regulation for Regulators

Martin Stanley introduces his new ‘Understanding Regulation’ website

There can nowadays be very few policy makers whose work does not involve regulating something.  Indeed, delegation of policy making to regulators must rank alongside devolution and joining the EU as one of the three major constitutional changes over recent years.  Trading standards regulation can be traced back to the Romans, but the modern ‘regulatory state’ took off when economic regulators were tasked with controlling the newly privatised industries.  The subsequent creation of Ofsted, Ofcom, the Care Quality Commission, NICE and the rest have forced both Ministers and departmental officials to become intelligent customers of their regulatory arms length bodies.

Or has it? Where are the training materials and courses?  I vividly remember being asked to set up the postal regulator and finding little to guide me other than the experience of staff that I managed to poach from previously established bodies.  (Sorry Ofgem!)  We were sensibly sceptical about the motivation of large organisations and their executives, but I was personally unfamiliar with concepts such as principal-agent theory, group-think, cognitive dissonance, or the MacWhirr Syndrome – an understanding of which would certainly have helped us understand the organisations that we were regulating – nor was relevant educational material and training easily available.  And how exactly were price controls put together?

I was later asked to lead the Competition Commission but again found that there was no easily accessible material which could help departmental officials, as well as stakeholders such as journalists and politicians, understand our work. Lawyers and economists understood concepts such as market definition and abuse of dominance very well, but it was very hard for others to understand competition decisions – despite their sometimes enormous impact. Our inquiries included, for instance, those into Sky’s acquisition of shares in ITV, BAA’s ownership of Heathrow, Gatwick & Stansted, the London Stock Exchange, and Supermarkets.

And then came a series of regulatory disasters. Regulators failed to stop the 2008 financial crisis, the Deepwater Horizon disaster in the Gulf of Mexico, and the appalling neglect of patients at a Stafford hospital. How could this be? More importantly, what lessons could be learned and passed on to the next generation who are struggling to react to self-driving vehicles, or the ominous power of the internet giants – seemingly unconstrained in their willingness to broadcast murder, suicide and bomb-making instructions?

My answer was to collect together a wide range of comment, advice and information about effective and well-balanced regulation and deregulation on the ‘Understanding Regulation’ website ( www.regulation.org.uk ).  I hope that its publication will help all those who wish to understand a complex area, as well as those embarking on a regulatory career for the first time.

[This blog was first published in Civil Service World.]

 

Cyber Warfare, Espionage, Metadata, Hacking – Want to Know More?

I don’t often recommend books but …

I realised recently that I had only a superficial understanding of what lay behind stories such as the Russian hacking of Western databases, and the Stuxnet attack on Iranian nuclear industry centrifuges.

In particular, I had no real feel for the importance of metadata such as call signs, traffic patterns, and ‘who talks to whom?’ – all of which are nowadays subject to amazingly sophisticated analysis by GCHQ and others.

Nor did I realise quite how much key infrastructure is remotely monitored by engineers using laptops which are otherwise open to the internet, and so susceptible to phishing.

And there is an interesting regulatory issue. Much infrastructure is nowadays in private hands, so whose responsibility is it to defend it? Government is understandably reluctant to take on such a massive task, but industry is understandably unwilling to foot the bill. The answer, in the UK at least, is that the owners of designated Critical National Infrastructure have a legal duty to safeguard it, advised and monitored by the Centre for the Protection of National Infrastructure or the National Cyber Security Centre.

If you feel similarly uneducated in this important area, I recommend Gordon Corera’s ‘Intercept – The Secret History of Computers and Spies’.  It’s readable and – as far as I can tell – authoritative.

Martin Stanley

www.regulation.org.uk

Regulation:- Conservative Manifesto

My Understanding Regulation website contains a brief history of key developments in deregulation, and the regulation of specific industries.  I have according added the following Conservative manifesto commitments, together with brief commentaries:-

The energy price cap:-

http://www.regulation.org.uk/specifics-energy-history4.html

The abandonment of ‘Leveson’:-

http://www.regulation.org.uk/specifics-newspapers.html 

Further deregulation:-

http://www.regulation.org.uk/deregulation-from_2015.html

Increased state involvement in telecoms, defence and energy mergers:-

http://www.regulation.org.uk/competition-public_interest_cases.html

 

Martin Stanley

 

 

 

Q. Why Streatham Hill, Telford Avenue? A. The Brixton Cable Tramway

South Londoners are well used to hearing that their bus is going to ‘Streatham Hill, Telford Avenue’. Few know that this site was originally the terminus of the Brixton Cable Tramway which linked Kennington, Brixton and Streatham Hill. Brixton Hill had previously been found too steep for all but the lightest of horse-drawn trams

Kennington Changing PlaceThe cable tramway connected with three horse-drawn tramways at Kennington Gate – presumably near the Oval at the junction of Kennington Road and Kennington Park Road. The horse cars were initially uncoupled from their horses and coupled to a gripper car which drew them all up the hill to Streatham.   The Board of Trade objected to the gripper cars carrying passengers until after the line had been in operation for some time.  But the American inventor of the system was not impressed:-

Gripper CarMR. HIRAM S. MAXIM, the inventor, is contributing to the Engineering Magazine a series of articles on various differences in industrial conditions between England and the United States. He has been especially impressed by what he terms an ignorant prejudice in England against American products. This he illustrates with an amusing bit of personal experience: 

“A short time ago an American cable line was established in Brixton, a suburb of London. Upon first visiting Brixton I failed completely to recognize the system, as each car was provided with a small and extremely ugly locomotive. Upon closer inspection, however, I found that the locomotive carried simply the clamping device. Upon asking the ‘driver,’ or the man at the clamp, the object of the apparatus, he said: 

“‘ Oh, this is the locomotive. This draws the car.’

“‘ Oh,’ I said, ‘how nice! Please explain it.’

“‘Well, underground here is a wire rope; this ‘ere thing goes down through this ‘ere slot and clamps the rope, and the rope pulls the locomotive, and the locomotive pulls the carriage, don’t you see?’ 

“‘What is the object of the locomotive?’

“‘Why, to draw the car, of course.’

“‘But why not put the clamp on the car and dispense with the locomotive altogether?’

“After he had thought the matter over a short time, I asked again:

“‘What is the use of the locomotive?’

“His reply was:

“I’ll be hanged if I know.’

“Now, if this system had been introduced into a country like Germany, France, or Spain the natives would have had sufficient respect and confidence in American engineers and systems to have put it up in the exact manner that it was imported; but as the English engineers were used to a locomotive and wished to make some change in the American model, they added the ‘locomotive,’ which certainly looks very awkward, and is, without question, superfluous.”’

The tramway was opened around 1891 during a period when London was expanding rapidly to the south.  Streatham Hill Railway Station had been opened in 1856 and Brixton Railway Station in 1862.  The cable tramway was replaced by regular trams around 1905.

Brixton Road tram shedThe cable system was driven by steam powered winding gear at Streatham Hill. Its maximum speed was 8mph (14kph).  There was a tram shed near the Oval – The building is now a church at 20 Brixton Road – photo opposite.

It is perhaps slightly odd that the tramway began as far north as Kennington, but this may have been to help the trams get up the sharp hill outside St Marks Church, further along  which the Effra River originally tumbled on its way to Bermondsey.

The Streatham Hill tram shed was eventually renamed Brixton Bus Garage, a name that caused much confusion. Lang Rabbie explains that ‘For years, people heading out of Brixton heading for Streatham Hill were confused by this, and stood at the bus stops by the tube while buses to Streatham Hill sailed past with misleading destination boards saying Brixton Garage.’  London Buses eventually relented around 2000 and renamed the bus stop (and terminating point for bus routes) as Telford Avenue.

Further information is on the Cable-Car-Guy and Brixton Society blogs/websites.

If you found this interesting then you may also like to explore my websites which provide accessible information about:

as well as

 

Martin Stanley

The UK is already a Member of the EEA – But will it be Forced to Leave?

The UK is already a member of the European Economic Area. But will it be forced to leave the EEA when it leaves the EU?

The 1992 EEA agreement is here:-

http://www.efta.int/media/documents/legal-texts/eea/the-eea-agreement/Main%20Text%20of%20the%20Agreement/EEAagreement.pdf

The UK was (and still is) a contracting party, as well as (what is now) the EU.

Adding territories:- Further countries have been added since 1992 – such as Croatia – but their membership only comes into force once it is ratified under the law of that country – which has not yet happened in the case of Croatia.

Withdrawal from the EEA:- Countries can withdraw from the EEA – although the EU treaties require EU member states to join the EEA, as Croatia is now doing. This has the interesting consequence that the UK cannot leave the EEA before it leave the EU, but it can linger in the EEA after leaving the EU. (But see the debate about the meaning of Article 126 – below.)

The EEA withdrawal legislation is in Article 127:-

article-127

Article 2(c) governs the interpretation of the EEA agreement if and when there is any doubt about whether obligations fall upon the EU (as one of the contracting parties) or upon individual contracting parties such as the UK.:-

article-2c

But this Article does not appear to be relevant to the question of whether the UK remains in the EEA once it has left the EU. A more detailed explanation is in Annex A below.

Article 126:- On the above analysis, it seems that the UK will remain a member of the EEA even if we leave the EU, unless we deliberately withdraw by giving notice under Article 127. However, Article 126 defines the territories to which the agreement applies as follows:-

article-126

But the meaning of this Article is not entirely clear. Does it apply ‘only’ to those territories? If so then the UK will be compelled to leave the EEA after Brexit. But Professor Yarrow thinks not; his paper is here:-

http://www.rpieurope.org/Publications/Yarrow_Brexit_and_the_single_market.pdf

I reproduce the key part of his paper below, at Annex B.

If Professor Yarrow is right then the UK will remain in the EEA post-Brexit unless we give notice to leave under Article 127 of the EEA agreement.

Postscript:  A QC agrees – see comment attached to this blog, reproduced here for convenience:-
“Isn’t the short answer that, given Article 127 provides an express mechanism for withdrawal, it implicitly excludes other implied mechanisms for withdrawal such as ceasing to be a member of the EU? Moreover, the notion that withdrawal from the EU automatically delivers a withdrawal from the EEA is weakened by the fact of other, non-EU, EEA members?”

And several more interesting comments have since been added and are well worth reading. You will find them at the end of this blog.  

Martin Stanley

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

Annex A: Article 2(c)

The position is that there is a set of Contracting Parties (the UK is one:  it signed as the UK, and the Agreement was ratified in the usual (UK) constitutional way).  Another (one of 32) Contracting Party is the “EU”.

Any agreement obviously places obligations on the parties – e.g. there will be provisions that say “a Contracting Party is expected to do X”.  The EU however, operates with shared competences – on some things the “EU” has competence, on other things the competence lies with the “Member State”, in yet others there is a joint competence.  The question is then as follows:  When text in the Agreement says “Contracting Parties are expected to do X”, where does the responsibility to do X lie?  The “EU” is, in fact, a distinct Contracting Party precisely because, on some things, it has a responsibility to do X.

The question – where does the competence lie – only arises for the EU and its member states.  For Liechtenstein, Iceland and Norway (and for the UK post Brexit) there is no ambiguity about who should do X.  The responsibility lies with the Contracting Party concerned.  That is why Article 2(c) only addresses the Community and its Member States.  It simply says “If, within the EU set up, you want to know who is responsible for doing X, look at what the relevant provision in the Agreement is about and then look to see where, within that set up, the relevant competence lies.

Art 2(c) has nothing to do Contracting Party status, its acquisition or its abandonment.  The list of Contracting Parties is set out at the outset.  It is as it is.  As for leaving, there is only one provision, Article 127, which can only be invoked by the Contracting Party wishing to withdraw (in our case, the UK).

Annex B: Professor Yarrow on Article 126

Article 126 of the EEA Agreement may look like a small matter, but it has very large potential consequences for the Brexit negotiations and their outcome. It therefore merits some careful thought.

In discussions of the proposition that UK exit from the EU does not imply UK exit from the EEA – and hence that it does not imply that the UK, should it wish to remain part of the Single Market, will have to apply for and negotiate “access” – the most frequent objection elicited from lawyers is that this is to ignore Article 126 of the Agreement. Their argument is a simple one and goes as follows.

The text of Article 126(1) is:

“The Agreement shall apply to the territories to which the Treaty establishing the European Economic Community is applied and under the conditions laid down in that Treaty, and to the territories of Iceland, the Principality of Liechtenstein and the Kingdom of Norway.”

Post-Brexit, the UK will not be a member of the European Economic Community (now the EU) and the UK obviously isn’t Iceland, Liechtenstein or Norway. Ergo the Agreement shall not apply.

Response

An error of logic

The first point to note is the logical error. The deduction would be correct if the Article opened with the words The Agreement shall only apply … . Without the word ‘only’ there is nothing to indicate that the Agreement cannot also apply to countries that do not satisfy the conditions set out in Article 126(1). A fortiori there is nothing to indicate that the Agreement ceases to apply to one of its own Contracting Parties which, by dint of circumstances, no longer satisfies one of the conditions specified.

A possible counter-response is that the word ‘only’ can reasonably be inferred from the surrounding text, the economic and political context in which the Agreement was made, the original intentions of the Contracting Parties to the Agreement, and so on. If that point is made, it goes without saying that there is a burden of proof to be discharged by those who would argue for it, and in this case I think the burden is a heavy one, because this particular flap of a butterfly’s wings would have obvious, very major consequences: it would compel UK exit from the Agreement.

In fact, the arguments for the wing-flap are weak. There is nothing in the rest of the Agreement’s text that provides a clear pointer to an intention that membership of either the EU or EFTA was an essential characteristic for Contracting Parties, and the EU’s broad policy goals in the period 1989-1992 were to bring countries together, not to create new barriers to participation in the Single Market.

De facto the Contracting Parties were, and to date have been, members of the EU or of EFTA, but it is hard to see that this reflects anything other the fact that, in the period 1989-1992, this was an Agreement that would not only contribute in and of itself to the EU’s wider policy goals of the time, but also was feasible within a relatively short time period and could serve as a first, significant step in a more comprehensive programme of economic co-operation.

Another argument for the inclusion of ‘only’ is that without it Article 126(1) is simply descriptive, conveys no information, and therefore would not have appeared in the Agreement at all, but this too is unconvincing. The ‘therefore’ is itself questionable, relying on implicit, auxiliary assumptions to the effect that re-statement, or stating the same thing in a different way, can have no value and that drafters will never ever be inclined to state the obvious. However, the main reason that this argument can be discounted is that Article 126(1) is not informationally redundant: it serves a specific, additive function, and its interpretation and implications should be assessed on the basis of this function.

Inconsistency with principles of international law

Next, consider the argument that an ‘only’ can reasonably be inferred from an interpretative maxim such as expressio unius est exclusio alterius (to express one thing is to exclude another, alternative thing).

The difficulty then is inconsistency with the general intent of the Vienna Convention to protect and preserve as much as is feasible of international co-operation in the face of extraneous political events, illustrated for example by the discrepancy between this maxim and the Convention’s own guidance on interpretation.

To illustrate, if the EU were a fully-fledged political union and had entered into a multilateral agreement with Iceland, Liechtenstein and Norway, Brexit would have the effect of creating two successor states, the UK and the EU minus the UK. The Vienna Convention on Succession of States says, in Article 34, that: “1. When a part or parts of the territory of a State separate to form one or more States, whether or not the predecessor State continues to exist: (a) any treaty in force at the date of the succession of States in respect of the entire territory of the predecessor State continues in force in respect of each successor State so formed; …” In the hypothetical circumstances, therefore, the multilateral agreement would still apply to the UK.

These are not, of course, the actual circumstances. The UK is a Contracting Party to the EEA Agreement in its own right, having signed it and ratified it, factors that serve only to strengthen the case against any forced exclusion. The point is simply that, given the Convention’s approach to successor states, it would be extraordinary to over-ride its purposes and intent via recourse to an interpretative maxim such as expressio unius est exclusio alterius.

Oddities as signifiers

To elaborate further, consider the situation if the word ‘only’ were somehow conjured into the text. There would then be a number of oddities.

First, the question of who can and cannot be a Contracting Party is an important one. Why then is it not set out much earlier in the Agreement where most of the Articles, in the final part, Part IX, of the Agreement which is entitled GENERAL AND FINAL CONDITIONS and which can reasonably be said to be focused on tidying up a number of loose ends.

Second, why do the words “under the conditions laid down in that Treaty” appear in Article 126(1)? What do they mean? Could they not be omitted?

Third, most of the text of Article 126 comes in its second paragraph, which is its only other paragraph. Article 126(2) states that:

Notwithstanding paragraph 1, this Agreement shall not apply to the Åland Islands. The Government of Finland may, however, give notice, by a declaration deposited when ratifying this Agreement with the Depositary, which shall transmit a certified copy thereof to the Contracting Parties, that the Agreement shall apply to those Islands under the same conditions as it applies to other parts of Finland subject to the following provisions:

(a) The provisions of this Agreement shall not preclude the application of the provisions in force at any given time on the Åland Islands on:

(i) restrictions on the right for natural persons who do not enjoy regional citizenship in Åland, and for legal persons, to acquire and hold real property on the Åland Islands without permission by the competent authorities of the Islands;

(ii) restrictions on the right of establishment and the right to provide services by natural persons who do not enjoy regional citizenship in Åland, or by any legal person, without permission by the competent authorities of the Åland Islands.

(b) The rights enjoyed by Ålanders in Finland shall not be affected by this Agreement.

(c) The authorities of the Åland Islands shall apply the same treatment to all natural and legal persons of the Contracting Parties.

The Åland Islands lie in the Baltic Sea between Finland and Sweden. The inhabitants, who number around 28,000, are Swedish speakers, but the islands are part of the territory of Finland. The islanders enjoy a significant degree of autonomy.

The question is: why should these provisions relating to the Åland Islands be bundled together, in the same Article, as a proposition that can, so it is argued, be determinative on such an important matter as entitlement to participation in the EEA Agreement?

Examination of such oddities can often be informative, and in this case it certainly is.

States and territories

The EEA Agreement is an agreement among governments, who are the Contracting parties and of which the UK is one. However, membership of the EU does not require that the whole territory of a State be subject to the EU Treaties. In relation to the Kingdom of Denmark, for example, Greenland and the Faroe Islands are ‘contracted out’.

Similarly, what can be termed ‘special member state territories’ may be ‘contracted in’ to the EU, but with certain conditions applied. For example, the Spanish enclaves of Ceuta and Melilla are part of the EU, but they are excluded from the common agriculture and fisheries policies.

The EEA Agreement necessarily has to address issues arising from these special territories, of which there are a significant number, including overseas territories that became attached to Europe in the age of empires: they are a kind of fossil record of European history. UK examples are the Channel Islands, the Isle of Man and Gibraltar. The reason for this necessity is Article 29 of the Vienna Convention on the Law of Treaties, which states that: “Unless a different intention appears from the treaty or is otherwise established, the treaty is binding on each party in respect of its entire Territory”.

The issues are therefore addressed in Article 126, which expresses the intention of the Agreement in respect of the territories to which it is to apply. It takes the set of Contracting Parties as a given and then, in effect, defines the parts of their territories (generally all or the great bulk of the territories) that are to be covered by the Agreement, applied either in its entirety or subject to special provisions. The relative policy significance of the matter, which reflects the small, relative economic sizes of the special territories, explains its late occurrence in the text of the Agreement.

The potentially complicated exercise of ‘geographic market definition’ for EEA purposes is simplified by the fact that the EU had already gone through this exercise for those of the Contracting Parties who were its own members at the time. The Agreement therefore simply adopts the outcomes of that earlier process – “The Agreement shall apply to the territories to which the Treaty establishing the European Economic Community is applied …”. Further, as noted, certain territories may be ‘contracted in’ to the EU Treaties, but subject to certain conditions. This explains the words “… and under the conditions laid down in that Treaty”. Any conditions in the EU Treaty that are relevant to the operation of the Agreement are simply mapped from the EU Treaty into the EEA Agreement, and a potentially time consuming, administrative exercise is avoided.

The same, administratively expedient option was not available for those Contracting Parties who were not members of the EU, and hence these had to be dealt with separately, country by country. Fortunately, these countries, which originally included Austria, Finland and Sweden as well as Iceland, Liechtenstein and Norway, do not have appeared to have raised ‘special territories’ issues, save in the case of Finland.

Finland was the only country with a special territories issue that was a Contracting Party of the EEA before joining the EU. This explains why the matter of the Åland Islands, uniquely among special territories, needed be addressed in the EEA Agreement, and it is so addressed in Article 126(2).

Brexit would imply that that there would need to be “necessary modifications” to the Agreement, but this doesn’t mean that the special territories issue needs to be re-opened in a way that would lead to significant administrative burdens. For example, the text of Article 126(1) could be adjusted to read: “The Agreement shall apply to the territories to which the Treaty establishing the European Economic Community is or has been applied …”. That would map the UK arrangements at the time of Brexit into the EEA Agreement without further ado.

Conclusion

The perceived oddities exist only as a result of misinterpretation and the conclusion from all this is simple: there is no case for conjuring the word ‘only’ into the text of Article 126(1). Article 126 was not intended to be, and as it stands is not, determinative of the ability of a country to participate in the Agreement. It is not exclusionary, either by intent or by effect. The purpose of the Article is, starting with the territories of the Contracting Parties, to make negotiated, generally marginal adjustments that take account of the interests of the inhabitants of a number of special territories.

END

Post-Brexit Bureaucracy: Rules of Origin

It took many years of patient negotiation, led by the UK, to transform the EU’s tariff-free zone into a genuine Single Market free of regulatory barriers. This blog explains why the post-Brexit reintroduction of Rules of Origin for UK imports and exports might cause problems, even if we achieve a zero-tariff agreement with the EU27.

Why are rules of origin needed? The short answer is that (assuming we leave the single market) such rules will be needed to show that the UK is not being used by third countries to gain low tariff access to the single market. Let’s assume that the EU27 want to impose higher tariffs on imports from China than on imports from the UK – which will post-Brexit hopefully be tariff-free.   The EU27 are clearly not going to allow the UK to import Chinese goods, pack them in a different box, and sell them on to the EU as if they originate here. All UK exporters will therefore need to comply with the EU’s ‘Rules of Origin’ bureaucracy – and the EU will have to comply with ours.

(I am told that the rules go back at least as far as to a case involving Singer typewriters which were made in Japan, assembled in the UK & described as British.)

Here are the main potential problems if rules of origin need to be enforced in future in respect of trade between the UK and the EU:

Paperwork: Every exporter – however small – will have to work out whether their goods originate in the UK or abroad. They will therefore need to understand important concepts such as preferential and non-preferential origin, percentage rules, diagonal and full cumulation, and minimal processing. These are explained in the annex to this blog.

There are unlikely to be any SME exemptions – even if you are selling only via Etsy or eBay. UK origin may often be obvious, but what if you are a small scale exporter of handmade chocolates, say, or handicrafts?  The cocoa or raw materials will most likely originate outside the UK – so do you have to declare non-UK origin and pay EU customs duties?

Customs delays could be much more serious. Many manufacturers work on a ‘just in time’ basis so as to avoid holding stocks which need to be stored and financed. Modern customs processes are pretty efficient but even spot checks to ensure compliance with rules of origin could devastate a production schedule. And who in Germany is going to buy a Christmas present from the UK if it not going to arrive quickly, especially when customs checks delay an already stressed Christmas postal system?

It must also be of some concern that a very large percentage of UK exports to the EU will go via Dover, Calais and other Channel ports which don’t currently have the infrastructure to process or spot-check a large number of lorries per day.  So – if the UK exits the Single Market before the French authorities have either had the time or the inclination to upgrade the facilities at the French ports – do we end up with a queue of lorries half-way back to Birmingham within a week? There will presumably also be queues back towards Brussels if we don’t start building new facilities at Dover (or Calais?) pretty soon now – unless HMG is absolutely confident that we will not need them, maybe because our external tariffs are very low.

And what happens at the Irish/Northern Irish border? Somebody will need to build and operate customs facilities either here or at the Irish, French and Spanish ports.

This in turn leads to possible underhand non-tariff barriers. Protectionist pressure can lead to Customs authorities inspecting imports in considerable detail, opening random boxes and taking products apart to inspect components, as the French did in their famous use of Poitiers as a border port some years ago. We clearly hope to achieve an amicable divorce from the EU27, but who is to tell whether this friendship will last forever?

I wonder, too, whether there could be pressure to remove UK components from EU27 products so as to avoid those products being reclassified as non-EU because they contain UK components? An Airbus without British wings is unlikely, I guess, but less prominent examples might start to appear. Angela Merkel has already started encouraging German owned manufacturers to consider investing in Eastern Europe rather than the UK.

Notes

What does originating and non-originating mean? As the purpose of this blog is to draw attention to the consequences of leaving the Single Market, it might be helpful if I stress the importance of understanding the voluminous HMRC guidance in this area. This is summarised here. I do not expect many to read it – but you might like to draw it to the attention of anyone who is currently exporting or importing within the EU, but not outside it. They have around two years to get their heads around this stuff!

OECD studies of trade costs have indicated that trade facilitation measures such as simplified documentary requirements, automation of customs procedures, availability of advance customs rulings, and risk based clearance can deliver significant cost savings to businesses engaged in trade. I have seen estimates that the absence of such trade formalities can increase the average cost to trade by the equivalent of 10%+ of the value of the traded goods, although this figure seems high and has been challenged – see the first comment below. It is to be hoped, of course, that our eventual agreement with the EU will eventually enable our businesses to avoid some of these costs, but it will be impressive if we have negotiated many of them away by March 2019 … or perhaps for a good time after that.

This note should be read in conjunction with my previous blog on non-tariff barriers. As with that blog, I do not claim specific expertise in this area and would be glad to be corrected if I have misunderstood or exaggerated anything. Any corrections will be incorporated in this blog, and significant changes will be notified via Twitter.

Martin Stanley

 

The UK, led by Margaret Thatcher, drove the creation of the Single Market. Here’s how we could lose if we now leave it.

The creation of the European Single Market was driven by Prime Minister Margaret Thatcher and her appointee as a European Commissioner, Lord Cockfield. They recognised that a genuinely open market had to be free of all regulatory obstacles (aka non-tariff barriers) to the free movement of goods and services. The Single Market was essentially completed by 1992 and exporters can now call on the European Commission and European courts to remove any new obstacles.

The downside, of course, was that individual member states could no longer develop regulations to suit their own cultures and economies – and so we see a certain Europe-wide homogeneity. Indeed, much standard setting is now worldwide: Ford’s Mondeo being the first of many vehicles designed for a worldwide market.

But the growth of ‘just in time’ manufacturing means that many firms are still very concerned that their businesses on both sides of the UK/EU border might experience significant post-Brexit impediments and delays in ports and at customs posts.  I understand that one major bank has estimated that – if the UK were to lose unfettered access to the Single Market – the consequential non-tariff barriers could impose a cost on exporters equivalent to a tariff of 10-15%.

The rest of this post contains examples of the various non-tariff barriers that might appear post-Brexit, without seeking to draw conclusions about the likely impact of those barriers, which is for others, more expert than me, to assess.

The most quoted example was the Germans attempt to impede the import of Cassis de Dijon, a blackcurrant liqueur which has an alcohol content of only 15-20%. German law used to require all fruit liqueurs to have an alcohol content of at least 25%. While this may have pleased the producers of German spirits, the rule was bad news for the French producer and denied German consumers the delights of French crème de cassis. The EU court said that the German rule interfered with free movement of goods: it stopped French cassis (which had been lawfully produced in France) from being sold in Germany. The Germans sought to justify their rule on the grounds of public health, as they wanted to avoid the proliferation of alcoholic beverages with low (<25%) alcohol content since these might be a stepping stone to indulging in stronger concoctions. The court wasn’t convinced. The German rule was found to be against EU law and so had to be removed.

More recently, Bulmers Cider used the European Courts to ensure that it could sell its product in 0.33l bottles despite a Belgian Royal Decree that such bottle sizes were banned. This led to importers into the UK being able to ignore UK ‘prescribed quantities’ whilst domestic packers had to comply – so the UK, too, then had to abandon  prescribed quantities. A neat bit of deregulation courtesy of Europe!

It might be helpful if we look at seven different types of non-tariff barrier:

1. Innovation: There could be problems if the EU were to develop regulations affecting the sale of UK products elsewhere in the EU without input from the UK. Vehicle regulations, for instance, are frequently amended to permit the introduction of new technologies, to improve cyclist safety, to reduce emissions and so on. This isn’t a problem as long as

  • UK officials (briefed by UK companies) are on the committees that present the changes to Ministers for approval, and
  • we have plenty of notice of the date on which the changes come into force.

However, if we leave the Single Market, there will no longer be any UK officials at EU meetings, so we may no longer know what changes are being proposed, nor when they are likely to be introduced, and we can be pretty certain that our competitors will encourage their governments to promote changes that will disadvantage those products in which UK manufacturers have strengths not shared by EU competitors.

This problem is mitigated in the case of established products by a complex set of international agreements which facilitate the international marketing of vehicles and many other products – see Andrew Chapman’s first very helpful comment below for more detail.

But the problem will be greatly magnified if we are interested in selling new technology, such as bio-engineered products or the control systems that will permit driverless cars. It will be very difficult quickly to take such products to market if we are not able to influence the regulations that will allow such products to be sold throughout the EU.

Vehicle emissions rules are a good example of the sort of problem that can arise.  A German backed proposal would have allowed manufacturers to work to an average of their emissions across their whole fleet – so BMW could produce luxury cars that produce more emissions than the average but offset those with smaller, less polluting models.  This was a big problem for Jaguar Land Rover, who only make top-end luxury cars.  The UK eventually gained a derogation to protect JLR in the emissions rules.  But this would not have been possible if we had not been involved in the design of the regulations.

James Dyson (inventor of bag-less vacuum cleaners) hit a similar problem when he was surprised by new EU energy-saving rules which meant that competitors’ machines were only tested when they were empty of dust which therefore under-recorded the environmental impact of the vacuum cleaners that used bags. The result was that he is no longer allowed to make vacuum cleaners with a motor that exceeds 1,600 watts. (This rule change had been mistakenly approved by Department of Energy officials and Ministers who had not realised the implications for Dyson.)

It is, however, only fair to point out that Eurosceptics complain that the need to achieve harmonisation can significantly delay the innovative process. It would be much better, in their view, if we could innovate as fast and as often as we wish, and leave the rest of the world clamouring to buy UK products.

2. Intellectual Property Rights (IPR), and Manufacturing Regulations and Standards: Trade will be disrupted if there develop two separate systems of IPR protection, and of the certification of safety etc. standards in fields such as chemicals, medicines, IT, and communications. These are, for instance, currently harmonised in the form of CE Marks, the Restriction of Hazardous Substances (i.e. lead/mercury-free) Directive, the REACH (chemicals) Regulations and the Good Manufacturing Practice Guidelines. Maybe we can safely assume that the UK will continue to impose such European regulation on UK business, in order to help exporters and importers? But UK Ministers and officials may not be able to influence the future development of such regulations, and may come under pressure to develop our own regulations maybe leaving us in a weaker (and more regulated) situation than now.

3. Food health scares (whether justified or not) almost inevitably lead to import restrictions which usually continue far longer than necessary following lobbying by domestic farmers and other producers. The United States, for instance, will begin to allow the import of British beef and lamb from January 2017, nearly 20 years after they were deemed unfit for consumption during the UK’s vCJD (mad cow disease) scandal. This is worth £35 million a year. But the EU was persuaded by the UK to lift its import ban (which had anyway applied to beef only) much more quickly – around ten years ago.

4. Services:- Mutual Recognition: UK professional qualifications are currently widely accepted through the EU. But architects, lawyers, nurses, accountants, hairdressers and many others will not be able to practise outside the UK if there is no reciprocal freedom of movement, and they could anyway well find that they meet ‘interesting’ local barriers if they were to seek to offer their services in the EU after Brexit.

There is a related issue in the financial services sector where the ‘single passport’ system allows e.g. Japanese banks to base themselves in London but offer finance (for instance for vehicle sales) throughout the EU. But continuing to subscribe to this system would mean accepting continued convergence between UK and EU regulations, so limiting the extent to which the UK would be free to go its own way.

The debate about whether EU membership encourages or stifles innovation is very relevant, of course – see above.

5. Packaging and Labeling: This is an easy one. Text TOO BIG, too small, wrong colour? More information needed? Change the regulation and the UK will either have to fall into line or else UK exporters will need to cope with two sets of regulations – one UK, one EU – if they are to avoid having their products stuck in Customs warehouses.

This leads nicely to …

6. Customs Formalities: There are currently almost no customs documentation, checks and delays when products cross the Channel. This will have to change, and this will add delay, and hence cost, to all export businesses – and importers as well. Rules of Origin may well be a huge problem as the other 27 Customs authorities will need to be sure that products being imported from the UK – at UK/EU tariff rates – did not in fact originate elsewhere.

It will also become very easy for an unfriendly bureaucracy to hold products for many days or weeks whilst they laboriously double check that the products comply with all the necessary product, labelling, rules of origin, and other regulations. “It’s such a shame that the appropriate expert is on holiday just at the moment and, no, I am not too sure when he will be back. And there is unfortunately such a backlog …”

The classic example was in 1982, well before the creation of the Single Market. The French Government, determined to protect the video cassette recording (VCR) market from the invading Japanese, selected Poitiers to be the customs bottleneck. Poitiers was chosen for two reasons: First, symbolically, because it was the town where the medieval Franks had turned back the Muslim hordes in 732 AD. Second, because Poitiers is right in the middle of France, so maximizing the journey the VCRs would have to take from any French sea-port. The New York Times reported that “tens of thousands of video tape recorders built in Japan and avidly sought by French customers are currently stacking up in warehouses. A handful of customs inspectors, hand-picked for slowness, has cut the clearances from 100,000 per month down to 8,000.”

7. Subsidies: Not really a barrier – but European rules currently prohibit much inter-member state competition to ‘buy’ inward investment, and these ‘state aid’ rules are policed pretty firmly, especially when one member state complains that another member state is being over-generous. But there is likely to be much less concern when the loser is the UK, and the grateful recipient of new investment – and jobs – is within the EU.

We, of course, will be equally free to start subsidising industries that are losing out to EU competition. You will have your own view about whether this will be a good thing.

So ….

What about Inward Investment? Imagine yourself sitting in Tokyo or Mumbai deciding whether to put down a new production line either in the UK or in an EU member state, both of which are vying for your attention and appear to offer similar costs and benefits – except for the threat of new non-tariff barriers, and the inability to influence European manufacturing policies. Did anyone ever get fired for choosing to invest in a market of 450 million people?

There is no short-term economic damage but slowly, year on year, the UK would begin to fall behind.

But, but, but … surely all these behaviours will reduce competition, raise prices, lower member state economic growth rates and harm EU consumers? Their imposition would surely damage EU GDP, maybe as much as the UK. Yes – but that applies to all trade barriers, including tariffs. Often, however, it makes political and social sense to impose tariffs and non-tariff barriers if they protect jobs in regions of high unemployment and/or in sectors that are under economic pressure. And large companies can be very persuasive when encouraging politicians to protect their business models against ‘unfair’ competition from those awful Anglo-Saxons.

Notes

Exports of goods and services to the EU in 2015 totaled £134bn and £89bn respectively. The equivalent figures for exports to non-EU countries were goods £149bn, services £136bn.

“Access to the single market” is a meaningless phrase. The key question is: “Can we trade without hitting tariff and non-tariff barriers”.

This is the fourth version of a blog originally published on 1 October 2016. I am very grateful to those who have commented – including those who commented below – and so helped me correct and improve the text. Further corrections and additional arguments would be very welcome – to 68rtsw8@gmail.com please.

 

Martin Stanley

www.regulation.org.uk  &  @ukregulation

And also  www.civilservant.org.uk  &  @ukcivilservant

Here’s a Simple Trade Agreement – 34 Pages on Fish!

 

Following its exit from the EU, the Greenland Government needed to be sure that fish caught in its waters could be sold in the EU.   The EU is the largest single fisheries market in the world and more than a quarter of the fish caught by European fishing boats are taken outside EU waters.

These are the three principal documents establishing the current EU/Greenland Fisheries Agreement. Note in particular that the agreement requires Greenland to ‘uphold fundamental rights as guaranteed by the European Convention for the Protection of Human Rights and Fundamental Freedoms, including work-related rights’.

Regulation 753/2007 and

2007 Fisheries Partnership Agreement (c. 8 pages)

http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1461587826387&uri=CELEX:32007R0753

The 2015 Protocol (replaces 2007 version) (c.26 pages)

http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:22015A1121(01)&from=EN

 

Martin Stanley

68rtsw8@gmail.com

 

 

 

Chilcot’s Criticisms of the Civil Service

 

This note summarises the criticisms of senior civil servants implicit in the Chilcot Report.

(I do not include the detailed criticisms of the failure to plan effectively, nor the failures of intelligence community. Text in italics is quoted directly from the report.)

There appear to be seven principal criticisms:

  1. No-one challenged the Prime Ministers’ habit of drafting vital inter-governmental communications without consulting his Cabinet colleagues

Mr Blair … drafted many or most of his Notes to the President himself, showing the drafts to his close advisers in No.10 but not (ahead of despatch) to the relevant Cabinet Ministers.

  1. No-one sought to record the reasons why the Prime Minster concluded that Iraq was in breach of resolution 1441, although this was an essential ingredient of the legal basis for the war.

In the letter of 14 March 2003 from Lord Goldsmith’s office to No.10 … Mr Blair was told that an essential ingredient of the legal basis was that he, himself, should be satisfied of the fact that Iraq was in breach of resolution 1441. In accordance with that advice, it was Mr Blair who decided that, so far as the UK was concerned, Iraq was and remained in breach of resolution 1441. Apart from No.10s response to the letter of 14 March, sent the following day, in terms that can only be described as perfunctory, no formal record was made of that decision and the precise grounds on which it was made remain unclear.

  1. No-one ensured that Cabinet Minsters were provided with proper legal advice

… the Inquiry concludes that [the Attorney-General] Lord Goldsmith should have been asked to provide written advice which fully reflected the position on 17 March and explained the legal basis on which the UK could take military action and set out the risks of legal challenge.

  1. No-one challenged the Prime Minister’s failure to discuss Iraq policy in Defence and Overseas Policy Committee (DOP).

In April 2002, the MOD clearly expected consideration of military options to be addressed through DOP. Mr Simon Webb, the MOD Policy Director, advised Mr Hoon that: “Even these preparatory steps would properly need a Cabinet Committee decision, based on a minute from the Defence Secretary …” The last meeting of DOP on Iraq before the 2003 conflict, however, took place in March 1999.

There was no substantive discussion of the military options, despite promises by Mr Blair, before the meeting on 17 March.

  1. No-one ensured that decisions were properly recorded and explained.

Most decisions on Iraq pre-conflict were taken either bilaterally between Mr Blair and the relevant Secretary of State or in meetings between Mr Blair, Mr Straw and Mr Hoon, with No.10 officials and, as appropriate, Mr John Scarlett (Chairman of the JIC), Sir Richard Dearlove and Admiral Boyce. Some of those meetings were minuted; some were not. As the guidance for the Cabinet Secretariat makes clear, the purpose of the minute of a meeting is to set out the conclusions reached so that those who have to take action know precisely what to do; the second purpose is to “give the reasons why the conclusions were reached”.

  1. No-one challenged the failure to organise adequate Cabinet discussion of the Iraq strategy.

Cabinet was certainly given updates on diplomatic developments and had opportunities to discuss the general issues. The number of occasions on which there was a substantive discussion of the policy was very much more limited.

  1. No-one challenged the Chancellor’s determination deliberately to keep the Cabinet Secretariat short of resources.

Sir David had found it quite hard to staff the Cabinet Office at the level he would have wanted and it had been necessary to prioritise. The Treasury had kept [the secretariat], he expected “deliberately”, on “a very tight leash in order to restrain the growth of Downing Street”.

Chilcot’s conclusion, therefore, was as follows:-

The Inquiry considers that there should have been collective discussion by a Cabinet Committee or small group of Ministers on the basis of inter-departmental advice agreed at a senior level between officials at a number of decision points which had a major impact on the development of UK policy before the invasion of Iraq. 

 In addition to providing a mechanism to probe and challenge the implications of proposals before decisions were taken, a Cabinet Committee or a more structured process might have identified some of the wider implications and risks associated with the deployment of military forces to Iraq. It might also have offered the opportunity to remedy some of the deficiencies in planning which are identified in Section 6 of the Report.

No Permanent Secretaries or other senior colleagues are criticised by name, although, in seeking to explain the behaviour of the Cabinet Secretary, the Inquiry noted Sir David Omand’s evidence that “… the Cabinet Secretary was not as present as previous Cabinet Secretaries … would have been … the Cabinet Secretary could have “made a fuss” about that: “But it would have been at the direct expense of not being able to devote the time to sorting out reform and delivery across the government’s agenda.”

The then Cabinet Secretary – Andrew, later Lord, Turnbull – told the inquiry that Mr Blair …

“… wanted a step change in the work on delivery and reform, which I hope I managed to give him. … You have to make choices as to where you make your effort, and I think the policy I followed was not to take an issue over from someone to whom it was delegated simply because it was big and important, but you have to make a judgement as to whether it is being handled competently, whether that particular part is, in a sense, under pressure, whether you think they are getting it wrong in some sense, or they are missing certain important things.”

Chilcot noted, however, that:

“The responsibility of the Cabinet Secretary to ensure that members of Cabinet are fully engaged in ways that allow them to accept collective responsibility and to meet their departmental obligations nevertheless remains.”

 

Martin Stanley

14 September 2016

www.civilservant.org.uk

@ukcivilservant

Why do politicians sometimes ignore scientific advice?

This blog was first published in March 2015 by Manchester University’s Whitehall Watch

Respected scientist Sir Paul Nurse recently expressed his distress that politicians sometimes “ignore” scientific evidence. Here is a slightly different take on the issue from the perspective of a recent senior civil servant.

At one level, of course, I agree with Sir Paul. I can’t prove it but I suspect that many if not most Ministers would (if they could) legalise cannabis and ecstasy, and sharply increase the cost of all alcoholic drinks. Many would also be tempted to ban dangerous sports – especially for children – including horse-riding, rugby and boxing. The fact that they do not do so upsets Sir Paul who feels “distressed” when scientists find clear evidence that contributes to a particular issue – such as drugs policy – only for politicians to ignore it “because they don’t think it will play well with the public”. “It indicates a total lack of leadership on the politicians’ part,” he told BBC Newsnight’s Evan Davis. “They have the evidence in front of them but they sometimes are cowardly about using their intelligence and using our evidence to come to a leadership decision.”

There are two problems with this analysis. The first is that leaders cannot lead unless their followers remain willing to follow them, and it is far from clear that the great British public would willingly accept many of the decisions that seem so obviously correct to Sir Paul. Sir William Harcourt’s comment that “The Minister exists to tell the Civil Servant what the Public will not stand” remains as true as it ever was.

The second problem is that the public’s risk appetite depends very much on the non-scientific context within which the risk is taken. We all dread dying in an airplane accident much more than we fear dying in a car accident, which is why apparently disproportionate resource is devoted to aviation safety. We more readily accept risks that we can control (horse-riding. rock-climbing) than risks imposed on us by others (polluters). And we certainly don’t like risks that might damage our children and future generations, which is one reason why nuclear power is so much more closely regulated than coal mining. (See http://www.regulation.org.uk/library/risk.pdf for a longer discussion of this subject.)

Sir Paul’s comments bring to mind those of Professor David Nutt, Chairman of the Advisory Council on the Misuse of Drugs, who said that taking ecstasy was no worse than the risks associated with “Equine Addiction Syndrome”, a term he invented to describe people’s addiction to horse-riding which causes 10 deaths and more than 100 road traffic accidents a year. This caused a fuss that was tolerated by Ministers. But then, in October 2009, the Centre for Crime and Justice Studies published a lecture by Professor Nutt and quoted the Centre’s Director as saying that “Professor Nutt’s briefing gives us an insight into what drugs policy might look like if it was based on the research evidence, rather than political posturing and moralistic positioning”. This was a step too far for the Home Secretary who promptly sacked the professor, believing that Professor Nutt had gone beyond giving advice and had begun to campaign on an essentially political issue. In a letter to The Guardian he noted that “There are not many kids in my constituency in danger of falling off a horse – there are thousands at risk of being sucked into a world of hopeless despair through drug addiction”.

Sir Paul should not therefore have accused Ministers of ‘ignoring’ science or of cowardice or lacking leadership. This is bound to make them defensive. A much more positive approach would have been to recognise that Ministers and scientists are on the same side in wanting the public (and in particular the media) to understand the science underlying these difficult policy areas, so that attitude-changing discussion can take place. It is interesting, for instance, to note that three government departments have come together with industry to prepare an Agri-Tech strategy which implicitly (though not very explicitly) involves support for GM food, another supposed hazard which has diminished under scientific scrutiny. The main obstacle to the development of GM technology now lies outside the UK, and elsewhere in the EU. But that is another story …

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