Due diligence rules show the path forward

A prime benefit of Brexit – for those of us who believe in  free trade and less State interference, perhaps the prime benefit – is regulatory divergence. In other words, the ability for the UK to set its own regulatory path – less prescriptive, less bureaucratic, less costly for our innovators and our importers, and less protectionist.

This matters because over recent decades the EU has assumed an enormous amount regulatory power over how we all live our lives, and it has frequently (and often despite British objections) erred on the side of more onerous and restrictive regulation, rather than letting consumers and market forces determine the best approach.

As a result, economic growth across Western Europe has lagged far behind the U.S., Australia and other developed nations. The Brussels-imposed regulatory superstate has harmed domestic innovation across the continent, added costs for businesses and entrepreneurs, distorted the market by imposing trade barriers on imports (souring relations with trading partners at the same time), and – most importantly – it has raised prices for consumers while reducing choice.

Brexit gives the opportunity to change this calculation. The UK can, if the government chooses, free itself from the EU’s red tape tangle in a whole range of areas – from arcane renewable energy rules, to restrictions on digital innovation, to bans on medical and agricultural technologies.

To do this, requires political will from Westminster and a genuine commitment at every opportunity to lesson the burden on UK businesses and consumers, it also requires a cultural change away from the historical zeal for gold-plating EU directives that still lingers in significant parts of Westminster.

An early test of this was the recent Environment Bill, passed into law in November 2021, where the Government introduced a ‘Due Diligence’ requirement for importers to prove that their products had not been sourced from illegally deforested land. The Ministers responsible, primarily Secretary of State George Eustice and Environment Minister Zac Goldsmith, have demonstrated exactly what successful regulatory divergence should look like.

The Due Diligence example is so prominent because at the same time as the UK was introducing its new rules, the EU was also preparing its own Due Diligence regulations focused on illegal deforestation. The two regulations took markedly different paths, allowing a direct comparison on how post-Brexit regulatory divergence can work.

The UK government chose what is known as a ‘legality standard’ – in other words, the goods entering the UK must be compliant with all the anti-deforestation laws where they are produced, and importers must be able to prove that the products are legally-produced from an environmental perspective.

The legality standard has multiple benefits: first, it achieves the core aim of removing illegal deforestation from the supply chain. It is also simple and easy to understand for producers, importers and consumers, placing lower burdens and costs on UK businesses.

An additional benefit is that the legality standard of Due Diligence encourages cooperation and closer relations with our trading partners. Countries around the world have welcomed the UK’s Due Diligence approach – including many of the world’s fastest-growing economies such as Brazil and India. The approach shows a commitment to, and confidence in, our friends and partners around the world. This is contrast to the sadly rather common sight of EU leaders lecturing the rest of the world and trying to impose their own preferences on everybody else.

True to this form, the EU’s Due Diligence plans are significantly more restrictive, prescriptive and burdensome than the UK’s legality standard. The EU plans for arbitrary rules that categorise different countries as ‘high risk’, forcing importers to abide by a ratchet of ever-more bureaucratic requirements simply to bring their products to market. Not only is this a terrible idea in principle, it will also probably have real-world consequences for European businesses and consumers. Products may well become more expensive, poorer-quality domestic alternatives will benefit to the detriment of consumers, and the EU’s trading partners have already expressed their annoyance at the rules. Previous EU protectionism has led to WTO challenges and also to bans and restrictions on EU exports. The sensible and less-burdensome approach taken by the UK Government will avoid these negative consequences for British firms. Critical is that DEFRA does not backslide on this commitment during the Secondary Legislation process: the legality standard is successful and should not be changed.

The Due Diligence legislation is far from the biggest test of post-Brexit regulation: many more high-profile issues will be faced in the coming months and years, especially in the fields of digital media and new technologies. It is, however, a positive marker that the UK Government stands ready, where it can, to diverge from the EU’s obsession with over-regulation. Long may it continue.