Internal Market Act 2020: position paper

The Act compared with the European Single Market

15. The previous UK Government's position was that the Act replaced EU rules with similar rules for the UK upon exit from the EU Single Market (ESM).^[5]

16. However, this claim fails to take account of the fact that the process through which EU rules are developed is fundamentally different from those now in place through the Act. EU processes seek to find agreement between member states, whereas the Act unilaterally imposes regulation on the devolved institutions. The EU rules aim for a balance between economic interests and other policy goals (the principle of proportionality), as well as valuing and protecting the principle that decisions should be made as locally to people as possible (the principle of subsidiarity). The Act has no such balance or protection.^[6]

17. Devolution in the UK was established in the context of EU membership. EU rules governed not only the UK's external trade relationships with other EU member states but also questions of trade and regulatory coherence across the UK's nations.

18. The previous UK Government's view was that EU exit could lead to differences emerging between the UK and devolved governments in regulation governing the access of goods and services to their respective domestic markets, and that this will be to the detriment of internal UK trade flows.

19. It argued that the Act is necessary because of the UK exiting the ESM, where the implementation of mutual recognition and non-discrimination principles are key tools preventing impediments to the smooth operation of the EU single market.^[7]

20. In the Scottish Government's view, this does not adequately reflect the way in which the EU manages the single market and draws an inaccurate equivalence between the EU regime and that which the Act imposes. Although non-discrimination and mutual recognition are foundational principles of the ESM, so too is an approach whereby all member states jointly and collectively agree on the broad regulatory framework – including the basic or minimum standards with which goods and services must comply. This ensures all EU member states are represented when minimum EU-wide standards for goods and services are decided.

21. This also ensures mutual recognition – the principle that a good or service that meets the regulatory standards in one part of the single market can be sold in any other part of that market – does not involve a race to the bottom.

22. Even so, EU law allows for exceptions to both principles of non-discrimination and mutual recognition (and therefore to free movement of goods and services) for specified non-economic reasons, as long as such exceptions can be justified as necessary and proportionate to the outcome that is obtained and cannot be achieved by other means.

23. Article 36 of the Treaty on the Functioning of the European Union (TFEU) provides that prohibitions or restrictions on imports or exports may be permitted if justified on a number of grounds, including the protection of:

"…public morality, public policy or public security; the protection of health and life of humans, animals or plants…"^[8]

24. Member states, and indeed sub-state governments, may legally impose measures that restrict the free movement of goods within EU internal market in pursuit of one of the objectives specified in Article 36 TFEU or of some other overriding public interest requirement. The grounds in Article 36 include protecting public health, protecting animals, plants or sites of national importance provided that any such measures serve the public interest and are proportionate. Furthermore, the European Court of Justice has held that the protection of the environment is a mandatory requirement which may be invoked to justify restrictions on free trade.^[9]

25. The provisions of Article 36, and the manner in which it has been applied, demonstrate that EU law respects the subsidiarity principle: that there will be instances where local responses to local problems are justified, even though this might involve prohibiting imports and thereby contravening the underlying principles of the EU single market and restricting free movement of goods.

26. The contrast between the cohesion and flexibility in the EU single market and the rigid Internal Market Act definitions of non-discrimination and mutual recognition is stark. In the UK legislation, the principles of non-discrimination and mutual recognition are almost absolute - even if this will be to the detriment of the social, environmental and health goals; and legislation of a particular UK nation. There are only very limited provisions that permit the prohibition of the sale of goods or services in one UK nation that are legally sold in other parts of the UK.

27. The development of the European Single Market, over decades, has been based on principles of trust, equality, co-operation, co-decision, proportionality, subsidiarity^[10] and consent, and setting a baseline of minimum agreed standards for member states' own rules. In contrast, the Act is based on unilateral decision-making and imposition, with no minimum standards or guarantees. The Act also creates a power for UK Ministers to alter what is in or out of the scope of the Act unilaterally (for example, health services are currently excluded), without the consent of devolved administrations.

28. Some recent commentary has suggested that low growth in the EU has been exacerbated by regulatory divergence between member states.^[11] However, even if this premise was to be accepted, it would not follow that the UK adopting an approach more like the European Single Market would have similar consequences. Our starting point in the UK is a highly integrated market; there are also far fewer regulatory levers at the disposal of the devolved legislatures to introduce significant non-tariff barriers to trade.

Recommendation 3: The IMA is demonstrably more restrictive, arbitrary and unpredictable than the system of market oversight which was in place when the UK was an EU member state. The principles of proportionality and subsidiarity, central to the operation of the European Single Market, are entirely absent from the Act. It should be replaced with a more balanced system which acknowledges and protects the ability to make divergent policy, while ensuring overall market coherence and guarding against regulatory friction that may inhibit growth.