On March 29, 2019, the United Kingdom is due to exit the European Union. This process—known as “Brexit”—was meant to be a carefully engineered exercise of unraveling the nearly 50-year old economic and political partnership that the UK has with the EU. Yet the UK is moving dangerously close to a chaotic exit as Prime Minister Teresa May has, once again, failed to secure parliamentary approval for the exit deal that she negotiated with the EU. It seems that the most vocal “Brexiters” are willing to endure the initial economic shock caused by an unmanaged Brexit in order to obtain the freedom that is, presumably, awaiting the UK on the other side of its EU membership.
But the presumed regulatory freedom for the UK post-Brexit is a false promise of the Brexit campaign. The Eurosceptic forces that campaigned for Brexit argued that departure from the EU would reinstate the UK’s regulatory sovereignty. Compared to other EU member states, the UK has always been more skeptical of regulation and has emphasized the virtues of markets and the need to preserve the competitiveness of European firms. It has fiercely fought against many regulations in the European Council only to be outvoted by other member states. This has nurtured resentment and contributed to critics’ narrative that the EU has overreached, encroaching on the UK’s sovereignty in the process.
In truth, Brexit will not liberate the UK from the EU’s regulatory leash. Instead, UK companies will continue to follow EU rules long after Brexit due to a phenomenon known as “the Brussels Effect,” which refers to the EU’s unilateral power to regulate global markets. The EU today sets the rules and standards for how products are built and how business is conducted in Europe and beyond. The EU can set the global standards in regulatory fields as diverse as food safety, chemicals, antitrust, environment, data protection and online hate speech. While the EU regulates only its internal market, multinational corporations often have a strong incentive to standardize their production globally rather than customize their production to each individual market. To ensure compliance everywhere, these companies often choose the most stringent rule of a major market to govern their global conduct—which is typically the EU rule. This phenomenon will apply to UK companies post-Brexit.
The UK’s economy is highly intertwined with that of the EU. Roughly half of the UK’s exports are destined for the EU, with little expectation of change. UK companies are expected to continue to rely on access to the EU’s large consumer market even after Brexit. And while these companies could, in principle, adopt one set of standards for the European market and multiple other sets of standards for the rest of the world post-Brexit, economies of scale and other benefits of uniform production make this unlikely. This high degree of dependence on the EU market means that UK companies will continue to adhere to EU rules in the future, as the Brussels Effect suggests.
Several key policy areas illustrate this effect. Consider data protection: Services account for 55% of the UK’s total global exports, and about half of all trade in services is enabled by digital technologies and associated data flows. Further, three quarters of the UK’s cross-border data flows are with EU countries. It is therefore unsurprising that the UK’s information commissioner, Elizabeth Denham, stated in 2016 that, “I don’t think Brexit should mean Brexit when it comes to standards of data protection.” In the same vein, the UK’s digital minister, Matt Hancock, indicated in 2017 that UK data protection laws needed to mirror EU data protection laws post-Brexit because “the government wants to ensure unhindered data flows.” The only way to guarantee this, according to Hancock, was to “put GDPR [the EU’s General Directive of Privacy Regulation] into UK law in full.”
Chemical regulation offers another example. The EU’s REACH regulation standardizes not just trade in chemicals but also trade in downstream industries that use chemicals within their products, including paints, cosmetics, detergents, textiles, furniture, toys, and electrical appliances. REACH sets the most burdensome regulatory standards on chemicals safety in the world, impacting the global business practices of almost all multinational companies. The UK chemical industry is the country’s second largest manufacturing industry, and the second largest exporter to the EU after the country’s automotive industry. The REACH regulation has long been derided by some in the UK as “symbolic of onerous EU regulation,” and was voted the most burdensome piece of legislation by the UK’s small and medium sized enterprises in 2013. Echoing these concerns, Prime Minister David Cameron’s “Cut EU Red Tape” campaign included making the implementation of REACH more business friendly.
However, given the Brussels Effect, Brexit will not free UK companies from the regulatory burdens of REACH. These companies will continue to produce products that are REACH-compliant in order to retain access to the EU market. They will further apply REACH across their worldwide production given the business practicality of adhering to a single global standard. For example, the CEO of UK Chemical Business Association, Peter Newport, made this clear, noting in 2019 that “the overwhelming majority of our members want to stay in REACH,” to guarantee access to the single market. The UK’s political leadership has also recognized the costs involved in moving to a fully stand-alone system of chemical regulation. The House of Commons Environmental Audit Committee urged that the UK should negotiate to remain a participant in the REACH registration system, even paying for access if necessary.
In addition to data protection and the chemical industry,the Brussels Effect will penetrate many other areas of the UK economy, including the regulation of pharmaceuticals, pesticides, vehicle safety standards, renewable energy standards, and the financial services industry. The lingering presence of EU regulations is likely to unsettle proponents of Brexit who are forced to concede that the promises of regulatory sovereignty were unfounded.
But what may be even more disconcerting for Brexiteers is the realization that the UK’s departure may lead to an even stronger Brussels Effect. The departure of the UK will remove the biggest internal constraint on the EU’s regulatory rule making, opening the door for more interventionist standards as the UK’s exit allows Germany and France to gain more influence. While in the EU, the UK has been a voice for moderation in the EU’s regulatory pursuits, calling for restraint and the need to balance regulation with considerations of competitiveness. After Brexit, that pro-market voice will be gone, opening a door for pro-regulation states to push through an increasingly ambitious regulatory agenda. In short, Brexit may not only fail to counteract the Brussels Effect—it may amplify it. Given this reality, the UK government is slowly forced to admit that the Brexit is easier to deliver as a slogan than in practice. The UK’s departure from the EU will not liberate the country from the EU’s regulatory leash. Instead, the UK will be ceding its role as a rule maker in return for becoming a rule taker in an even more tightly regulated Europe. This realization is expected to leave the pro-Brexit voices in the UK even more dismayed and the anti-Brexit voices questioning the rationale of leaving the EU even more.