How to trade when countries insist on sovereignty

 The UK government has become entrenched in its demand for full sovereignty.  Rules about safety, the environment, health, workers’ rights, and state subsidies shall be made in Westminster without any interference from Brussels. The UK government insists on the right to diverge from the rules that exist in the internal market. No doubt, that is what sovereignty means. At the same time, however, the UK government also wants to maintain access to the EU internal market under these UK made rules. To use the chicken example: The UK government wants to have the right to decide what the sanitary rules will be for their chickens (for example, they can be washed in chlorine) and at the same time the right to sell those chickens in the EU. 

The problem with this view is that the EU also is sovereign and therefore has the right to impose tariffs on the import of unwelcome chicken. How can trade be made to work when two partners in a trade deal claim full sovereignty?  

Here is how a full sovereignty model could work. Full sovereignty has two implications. First, it means that each of the two countries decide independently about the laws that will apply in their lands. Thus, all firms (including EU firms) selling in the UK comply to UK laws. Similarly, all firms (including UK firms) selling in the EU comply to EU law.

A second implication of full sovereignty is that each of these two countries decide independently how they will control compliance within their own borders. Firms that do not comply are sanctioned and each country is free to decide about the nature of these sanctions (barring sales, tariffs, etc.). Thus, UK firms selling goods in the EU that do not comply to EU law face these sanctions decided by the EU. The same holds for EU firms selling in the UK. 

Such a trade deal based on full sovereignty would actually be easy to reach quickly. In a full sovereignty model there is no need for complicated joint committees that after long negotiations will have to identify the degree to which rules and regulations in both countries diverge. No need for setting up complicated procedures for settling disputes when divergence is observed. Such committees take a long time to come to decisions. They are time bombs leading to permanent conflicts between the trading partners. Thus, a trade deal based on full sovereignty would be easy to arrive at; it would also be relatively easy to govern in the future, as each country keeps its sovereign power to identify rule divergence and to sanction it.  

Once such a deal is agreed upon, it would be difficult if not impossible, to avoid an asymmetric future development. This asymmetry follows from the fact that the EU internal market is the biggest in the world and much bigger than the UK market. This will lead to what is known as the “Brussels effect”. UK firms will eagerly comply to the EU rules so as to be able to sell in the largest single market in the world. Not doing so, would be punished by the EU and would lead to large losses for many UK firms. For EU-firms the UK market is small and, therefore, being excluded from that market would not be a loss comparable to what UK firms loose when excluded from  the EU internal market. 

This asymmetry will put great pressure on future UK governments to align their laws on EU laws.  Of course, the UK government could initially resist this. This, however, would put UK firms at a competitive disadvantage. They would have to produce for the UK market under UK rules and for the EU market under EU rules. This would raise their production costs. Over time pressure from the UK business sector on the UK government would very likely lead the latter to align its legislation to the EU one. There is no need to try to impose this today. It will come about automatically. 

The previous discussion makes clear that the trade model based on full sovereignty is an evolutionary one. It may ultimately lead to free trade. This will happen when one of the two trading partners, in this case the UK, will recognize that it is futile to continue to pursue full sovereignty. It also shows that free trade can only be achieved if one of the two partners recognizes this. Note that the other partner, in this case the EU, can continue to enjoy full sovereignty and free trade. This “exorbitant privilege” comes from the fact that the EU is by far the larger partner, and thus becomes the rule-maker. This happens as a result of system competition. Firms realize that it is in their interest to take over the rules prevailing in the EU, and then pressure their governments to do likewise. At the end of that tunnel free trade emerges.