Brexit

Difficult trade-offs: the ins and outs of the level playing field

BY George Yarrow | tweet george_yarrow   /  15 December 2020

The level playing field (LPF) negotiations between the UK and the EU seem to have been bedevilled by a lack of clarity about fundamental issues to do with the nature of markets and of market competition, and also about the concept of sovereignty.

Markets are economic institutions and the Single Market is, like all markets, defined by its institutional rule-book. The function or purpose of markets is to facilitate exchange transactions and a well-functioning market will do precisely that. The shared rule-book (institution) makes it easier for buyers and sellers to find one another and to effect mutually beneficial transactions.

As a side-effect of performing their primary function, markets can also tend to promote competition, although that effect is not a necessary consequence.

These things are generally all for the good, but there are trade-offs to be addressed. Economies are in constant flux as new technologies, products and services are developed. In some cases these will be highly novel developments, requiring completely new sets of rules – think of the arrival of Facebook, Google, et al, or maybe driverless cars – in other cases they may require more modest adaptations to an existing rule-book.

This naturally promotes competition in the development of rule-books (institutional adaptations) and hence to inter-jurisdictional differentiation in those rule-books.  We can think of it as inter-market competition (between competing rule-books), in contrast with competition within a market designed to facilitate exchanges of goods and services. Thus, for example, the structure of financial regulation and its enforcement in London ‘competes’ with that in New York to attract business.

There are therefore two levels of competition to examine, two playing fields on which competition takes place, and each is important for the wealth of nations. There is competition in the supply of goods and services, and then there is competition in what might be called ‘market governance’.

Recognising this, the principal trade-off should be obvious. The possibility of differentiation among rule-books for trading goods and services has positive effects on competition for the discovery of new and better rule-systems in the face of changes in economic environments.

On the other hand, by eroding more widely shared rules for trading, it tends to degrade the functioning of rule-books (markets) that are well-developed to facilitate trade in an established set of products and services. This is the LPF problem, although the notion of the field of being ‘level’ can be misleading. It is more that different market participants are subject to different sets of rules that may be significantly more burdensome for some than for others.

Almost by definition, the Single Market seeks to suppress inter-market competition among its Member States in the sense just defined, in the name of more effectively facilitating exchange transactions in goods and services among the producers and consumers of those States. It presses for rule harmonisation and dampens (though doesn’t eliminate) regulatory divergences among its Member States.

There is great logic in that: a shared set of rules is what defines a market and we know from long historical experience that this type of institution (a market) tends to work well for those with things to buy and sell. Mrs Thatcher’s support for the development of a Single Market rule-book was therefore highly consistent with her pro-market philosophy, even though she may have objected to certain parts of the rules that were, in the event, established.

But there is also merit in the UK’s pursuit of differentiation in market rules, particularly in contexts where major, adaptive developments in trading rules are required. A system in which a large set of jurisdictions have to move together, in lock-step, on reforms to market rules can be slow and cumbersome, and jurisdictions characterised by persistence over extended periods of time of institutions that have not adapted to changes in economic environments will suffer in economic performance on that count.

The question is how best to resolve the trade-offs between these two ‘modes of competition’ and their conflicting effects.  The suggestions and counter suggestions between the two sides in the Brexit negotiations have been attempts at finding an agreed resolution, an agreed set of rules about how the rules/regulations of market governance might themselves be changed.

The issues are complex, time is short, and it is clearly proving difficult to find such a resolution.  One obstacle here seems to be a lack of clarity on the British side about the entailments of its desire for greater scope for regulatory divergence, which is another way of saying that there has been lack of clarity about the trade-offs between the two modes of competition.

Competition (rivalry) is akin to a raw source of energy. Its effects depend on how it is directed, and that depends upon the rules of competition itself. Two sides of eleven each can compete with each other, but until we know whether they will compete under the rules of soccer, cricket, tug-of-war, gang warfare or whatever, not much can be said about what competition implies for conduct/behaviours.

The bottom line is that the desired inter-market competition (competition between rule-books) itself benefits greatly from a shared rule-book setting out how that second mode of competition will be governed. On the British side, recognition of that appears to me to have been impeded by unduly limited notions of sovereignty. To freely choose to make commitments to abide by an agreed set of rules – in this case relating to market governance – is surely an act involving the exercise of sovereignty, not a renunciation of it.

It might, of course, be said to be a surrender of sovereignty in a narrow sense: all commitments do constrain some of our future choices to some extent or other.  But the reason we make them is to open up other possibilities and choices that would not otherwise exist, and therein lie the trade-offs to be addressed. The acceptance of some ‘loss of control’ on one front may increase the degree of control on other fronts. Like competition, in practice sovereignty is a multi-dimensional concept.

In the limit the UK can walk away from any prospective agreement about market governance with the EU, just as it could walk away from WTO rules, but does anyone advocate the latter in the name of restoring sovereignty? In the presence of trade-offs, balancing judgments are always required.

George Yarrow is the former chairman of the Regulatory Policy Institute. 


     Email

     linkedin      Email