CityAM: The Tory government has fallen for the EU’s nonsensical demands on social and employment laws

Amid Brexiteer fury about the government’s Chequers negotiation proposal, one important aspect seems to be getting little attention. The UK government has capitulated to an EU demand on social and employment laws, and the detail of this concession will need to be scrutinised very closely.

The Conservatives pledged for a decade to reverse the British adoption of the EU’s “Social Chapter”, largely on the basis that social and employment regulation has nothing, per se, to do with liberalising trade.

The 2005 and 2010 election manifestos promised to repatriate these powers. The Fresh Start project, headed up by the now cabinet minister Andrea Leadsom, argued in 2012 that David Cameron’s renegotiation should demand the return of these competences to all member states, with a second-best outcome of a simple UK opt-out.

Now, on the cusp of Brexit, the UK government has apparently ceded to the EU’s call for a “non-regression” clause in these areas in any future trading agreement. According to the Chequers statement, this would bind the UK against letting social and employment standards fall below their current levels.

As the white paper itself acknowledges, these areas are unrelated to ensuring open and fair markets.

The UK government has capitulated to an EU demand on social and employment laws, and the detail of this concession will need to be scrutinized very closely.

Many trade agreements include provisions that countries meet simpler core International Labor Organisation standards. Others, such as the US-Australia deal, commit very loosely to not watering down laws, but do so using non-committal language.

However, given that the UK has been harmonised to EU rules for so long, one worries how tough a “non-regression” clause the EU would desire — and what enforcement would entail.

Setting robust restrictions on policy freedoms concerning agency worker rights, maximum working times, parental leave, and collective redundancies within a trade agreement would be unprecedented.

By relating these issues to trade, the UK government has implicitly endorsed the faulty continental “race to the bottom” worldview.

French politicians, notably, seem to believe a level playing field is desirable. In this view, labour market regulatory harmonisation helps to protect countries with high standards from a “competitive disadvantage” from those with low standards, preventing the desire for footloose capital to flee to low-regulation regions, and creating competitive pressure for all countries to lower standards over time.

The fundamental problem with this argument has always been that it is completely evidence-free.

At a global level, it is clearly not the case that capital flows to the most deregulated nations. The economist Richard Stern, summarising the empirical literature, argues that trade patterns appear little affected by labour standards, while foreign direct investment is inversely correlated with it.

The reason is simple: countries that are open to trade and have good policies and effective governance institutions see higher levels of productivity. It is these higher levels of prosperity generated that in turn create the demands for higher labour standards.

The idea that free trade requires all regulations pertaining to inputs of production to be harmonised across countries is just bizarre.

International trade takes place largely because certain goods can be produced better or more cheaply in one place than in another. Requiring the exact same employment standards between countries before any trade begins is akin to saying that any relative advantages beyond technological differences should be outlawed — a recipe for both countries being poorer, not richer.

The extent to which this harmonisation is damaging in practice depends on whether the regulation “binds”. The UK government seems to believe that this is a meaningless concession: if there is little domestic political desire for deregulation today, why not just concede this for better market access for goods?

As Len Shackleton has outlined for the Institute of Economic Affairs, domestic labour market regulation is more significant than EU labour market regulation in terms of its economic impact.

Yet it is grossly irresponsible to effectively rule out making regulations less onerous in future, given both the rapidly changing labour market and the potential for new evidence to show that that the laws adversely affect employment or compensation levels.

Presumably, the Conservatives previously desired repatriation of employment law precisely because they understood this. Beyond any broader effects on prosperity and employment levels, worker and social regulation too can have distributive effects, reducing opportunities of some workers or groups for the benefit of others.

Committing to tie employment and social regulation to a minimum “level” through a trade deal is not just unnecessary and arbitrary, but would hamper our economic flexibility. Let us hope the non-regression clause is a meaningless assurance and not a binding and legally enforceable promise.

Read Ryan Bourne’s article for CityAM in full here.

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