How will Brexit impact UK and EU influence over international economic regulation?

15 January 2018

Jurisdictions: United Kingdom

By Rachel Brandenburger* and Andrew Eaton

With the EU and the UK having made "sufficient progress" on the terms of the UK's withdrawal from the EU during phase one of the Brexit negotiations, attention has shifted to the framework for the future relationship between the UK and the EU post-Brexit and the necessary transitional arrangements.  These issues will no doubt come to dominate discussions about Brexit in the coming months.  However, a wider and equally important consequence of Brexit also needs consideration: the effect of Brexit on the UK's and the EU's respective relationships with the rest of the world through the exercise of "soft power".

The ability of nations to further their strategic objectives by persuading others to adopt international rules and standards advantageous to their own interests is an important way in which States exercise their "soft power".  In today's globalised economy, with a proliferation of businesses operating multi-nationally and common rules and standards increasingly being devised and agreed at a global level, the ability to exercise soft power effectively to influence economic regulation is more important than ever.

In this article we consider the potential impact of Brexit on the soft power of the UK and the EU in respect of influencing global economic regulation and standards.

The UK's place in the world post-Brexit

The UK's success as a wielder of soft power in international relations is undeniable.  It has powerful advantages in its favour, including English being the global language of business, strong and highly-respected UK economic and social institutions and deep historical and cultural ties with a large number of countries around the world.  As a result, the UK has traditionally played an active role in global standard setting forums in a wide range of industries and policy areas, both in its own right, for example via the United Nations, the G8 or the OECD, and through its membership of the EU. 

Since joining the precursor to the EU, the European Economic Community, in 1973, the UK has also been successful in influencing many of the EU's regulatory standard setting initiatives.  There are countless examples of this influence bearing fruit, ranging from the fundamental nature of the EU through to the minutiae.  For example:

  •  The UK Government – and the UK's appointed European Commissioner at the time, Lord Cockfield – were a key driving force behind the integration of the European economy through the establishment of the Single Market in the 1980s, considered by some the greatest achievement of the EU to date.
  • Similarly, in the context of competition law, Lord Brittan, again the UK's relevant European Commissioner at the time, played a key role in the introduction of the "one-stop-shop" merger control regime in Europe in the late 1980s and early 1990s.  More recently, the UK has been instrumental in the adoption of a common framework for bringing antitrust damages claims across Europe.
  • Many of the recent developments in financial services law have also been heavily influenced by the UK.  Some elements of the EU's recent reform of financial markets, known as "MiFiD II", which came into effect on 3 January 2018, implemented on an EU-wide basis changes that had already been introduced in UK domestic law – such as a ban on commission being paid to firms which advise on certain types of financial products.

Brexit looks likely to end direct UK involvement in EU policy and rule-making and, with it, the UK's ability to influence through the EU the positions taken by the EU27 in respect of their negotiations with third countries and international organisations. 

In exchange for that loss of influence within the EU, the UK will regain control of its ability to represent its own interests independently after Brexit.  This could return to the UK Parliament and/or UK Government control over the substance of UK rules and standards.  That said, in practice, the UK may find that it is still in its interests to continue to adopt the same standards that are applied internationally, even where it is not legally required to do so. As a result, the UK will still have an incentive to influence those standards post-Brexit, albeit no longer through the EU.

This tension between national control and international influence highlights a key difference in opinion underlying the continuing Brexit debate within the UK about whether Brexit will (or can, if successfully executed) be beneficial for the UK in terms of its global influence.  Some believe the UK will be able to retain (or even increase) its global influence post-Brexit, by virtue of its history and institutional excellence.  They see a post-Brexit UK as a "global free trading nation" "unshackled" from the "stifling" need for the EU to move by consensus (or at least a qualified majority) and able to lead the way in regulatory innovation.  Others believe that Brexit will result in the UK's "demotion" from a major nation in the EU leveraging its influence to drive global regulatory change to a "taker" of other countries' rules and standards.  Either way, the UK will have to work hard diplomatically to retain its current level of influence in relation to international rules and standards once outside the EU, which certainly appears to be the intention of the UK Government.

The EU as a participant in the international economic community

The impact of Brexit on soft power may not be limited to the UK.

The EU is a unique example of an international organisation that gives rise to a body of law which is made by the EU's own institutions and directly effective in its Member States.  The logic of the Single Market – as a unitary body of rules uniformly applicable across all EU Member States and devised, imposed and enforced by the EU Institutions (including the European Commission, the Council of the EU, the European Parliament and the European Court of Justice) – has led over time to the EU taking an increasingly prominent role in global economic regulation. 

One of the basic functions of the EU Treaties is to establish whether the competence to make rules in a given policy area rests exclusively with the EU, remains with the EU Member States or is shared by both.  In certain areas of exclusive EU competence, such as trade negotiations in the WTO, it is the EU that represents the interests of its Member States to the rest of the world, rather than the individual States themselves.  This has the effect of both magnifying Member States' collective impact in trade negotiations and restricting them from taking a different stance.  However, even where the competence to make rules in respect of a given policy area does not exclusively rest with the EU, EU Member States must not enter into any international agreements that would adversely affect common rules agreed at an EU level.

The EU will undoubtedly continue to exert considerable influence over the formation of international standards as a result of the sheer size of its economy.  Some have referred to this as the EU's "soft power with a hard edge", as many companies based outside the EU choose voluntarily to adopt EU rules and standards for their products in order facilitate their export into the EU market.  Whatever the outcome of the negotiations between the UK and the EU, many UK businesses may still decide to continue to comply with EU rules and standards, either for expedience or by necessity.  For example, UK businesses will need to continue to comply with EU law in order to continue to have a presence in the EU or to continue to export products into the EU that are tightly regulated under EU law, such as medicines and medical appliances.

Will that influence be increased or lessened after Brexit?  The EU is ultimately a group of States that have pooled their economies to facilitate internal trade and maximise outward bargaining power.  As such, the withdrawal of a key Member State is likely to affect the balance of power within the EU and the EU's own influence and strategic direction on the world stage.  The UK has often been a major voice speaking out in favour of free markets and against protectionism within the EU, with smaller Member States relying on the UK to stand up for their similar points of view.

Without the UK at the table, will the EU begin to change course in terms of its trade and regulatory policy?  That seems likely, at least in some areas.  For example, within days of the referendum result, it was suggested by the then French President that EU competition policy could shift away from a market-oriented approach to a focus on non-competition goals such as employment and growth, although there have been no signs of this to date.

Brexit and its global effects

Whatever happens, Brexit is not an exclusively European matter.  The changing relationship between the UK and the EU and its 27 Member States will have implications for global economic institutions and governance. 

It will be in the UK's interest to ensure that its ability to continue to influence global rules and standards outside the EU is maintained, including through its membership of international organisations such as the United Nations, WTO and OECD.  It is possible that the UK will seek to boost the importance of such organisations and forums so that it can continue to exercise its soft power post-Brexit.  Such organisations already exist in a number of contexts and there is precedent for such bodies playing a role in the development of international rules, standards and principles in policy areas as varied as international trade (WTO trade rules), financial services (Basel Committee on Banking Supervision), health standards (WHO framework convention on tobacco control), labour standards (International Labour Organisation conventions on labour standards), pharmaceuticals (the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH)), taxation (OECD Inclusive Framework on Base Erosion and Profit Shifting) and civil aviation (ICAO Principles).

Whether or not such efforts are successful, Brexit is likely to affect the balance of power between nations around the world.  The EU will be without the guaranteed support of the world's sixth largest economy and, to the extent that UK and EU interests may no longer be aligned, the UK will need to persuade other nations (and groups of nations), some considerably larger than itself, of the attractiveness of its arguments.  Also, any future divergence between the UK and the EU over time could increase the prominence of other parts of the world, including the US and China, in the global rule-making landscape 

The EU has been a key architect of the global economic system that has developed over the course of the latter half of the 20th Century and early 21st Century.  Brexit raises questions not just about the UK's role in the global economic system, but also about the changing nature and influence of a post-Brexit EU and the resultant re-balancing of influence around the world.  It is too early to predict if or how this rebalancing will impact the formation of global regulatory standards.  But it can safely be assumed that the impact will not be limited to a change solely in the soft power of either the EU or the UK.

*Rachel Brandenburger, Senior Advisor & Foreign Legal Consultant (admitted in England & Wales) to Hogan Lovells US LLP.