Adam Smith said “a necessary condition for the highest opulence is a tolerable administration of justice.” However, our Prime Minister has made clear that the UK is no longer prepared to tolerate the European Court of Justice (ECJ)—effectively the UK’s highest court on economic and commercial matters—having supremacy over UK law.
Smith’s point was that making the most out of mutually beneficial trade requires a judicial authority to resolve inevitable disputes. In a global economy, where we are dependent on international trade and investment, some of those disputes will inevitably cross national boundaries. The trade-off between an effective shared judicial authority and, at the same time, respecting the sovereignty of citizens will be key to our post Brexit prosperity.
At present, we share responsibility for making EU law with our European partners. We have recourse to the European Court of Justice (ECJ), which is the ultimate judicial authority on the interpretation of EU law. So if France blocks free movement of British beef, the European Commission brings France to the ECJ to enforce free movement rights.
Similarly, when a British small business faces a battalion of minor German regulations before it can provide a service there, it can start proceedings in a German court alleging breach of EU law on free movement of services. If the court is uncertain as to what EU law means on this point, it can simply refer the case to the ECJ to ask for an interpretation of EU law. Quicker and cheaper still would be for the small business to use the web-based “Solvit,” the EU’s informal mechanism which aims to resolve citizen and company disputes in less than ten weeks.
These are judicial mechanisms to resolve cross border disputes while we are in the EU. But what will be the judicial mechanism after Brexit and how will this affect businesses and citizen’s democratic rights?
Something similar: EFTA court
One option is that the UK continues its membership of the European Economic Area (EEA) after leaving the EU, sometimes referred to as “doing a Norway.” Claimants would have access to the European Free Trade Area (EFTA) Court on a similar basis to their current access to the ECJ (and “Solvit”). The EFTA Surveillance Authority plays a similar role to the European Commission in ensuring compliance with EEA law, in effect all legislation relating to the Single Market, namely the rules on goods, persons, services and capital.
However, the UK will no longer have a formal role in the legislative process. Moreover, the EFTA Court relies to a significant degree on ECJ precedent. We would be swapping the jurisdiction of a supranational court that enforces rules into which we have had a significant input, for the jurisdiction of a foreign court that enforces rules on which, at best, we’ve been “consulted.” Hardly taking back control.
And there is one final but important point to note: the more the UK applies EU rules—on financial services, air transport, mutual recognition of qualifications—the more it will need to submit itself to, and comply with, some form of EU dispute resolution mechanism. The EU rules have been drafted with the EU’s system of remedies in mind. As Norway and Switzerland have discovered, compliance with EU law includes compliance with EU remedies.
Something different: WTO
Another possibility is that the UK falls back on the rules of the World Trade Organisation (WTO). but the breadth of protection under WTO law is far narrower than under EU law. For example, there is only limited protection for free movement of services yet eight out of ten British jobs are in the service sector. Moreover, the enforcement mechanisms are significantly weaker for anyone but the biggest businesses. WTO rules are an international agreement between sovereign states, so it is a state which must bring a claim to a WTO panel.
So for small businesses it is probably easier just to accept the rules in the foreign market or not trade in the first place. The ineffectiveness of this remedy is also revealed by the figures. The WTO dispute mechanism has dealt with 488 cases over the last 20 years—less than 25 cases a year from across the 160 or so members. Last year, more than 1,700 cases were brought before the ECJ; including the famous judgment over the location of clearing houses, much to the benefit of the UK.
Relying on the WTO would mean taking back control in the sense that we wouldn’t have a supranational court making judgements that impact British citizens and business. But it would mean losing control in the sense that British citizens and businesses would no longer have any meaningful recourse when others broke the rules they’d signed up to. This would amount to at best a questionably increase in “sovereignty,” but a certain sacrifice of economic efficiency.
The alternative: Free Trade Agreements
Current betting is that we eventually strike free trade agreements (FTA) with the EU and other partners. Again, the efficiency versus sovereignty issue cannot be avoided. FTAs between advanced economies are increasingly reliant on an investor-state dispute settlement (ISDS). For example, ISDSs are in the North America Free Trade Agreement (NAFTA), the problematic Canadian Free Trade Agreement with the EU (CETA) and the infamous Transatlantic Trade and Investment Partnership (TTIP).
Where an ISDS exists, if the host state breaches the terms of the FTA then an overseas company or investor, usually a foreign affiliate providing services, can sue the state for damages. The award can be enforceable against the host state’s foreign assets. The state cannot sue a company for damages. Critics argue that ISDS stifles the capacity for host states to adopt legitimate regulations on matters of public interest. Others argue that the process and outcomes violate the principles of democratic accountability and sovereignty.
Even the number of ISDS cases suggests that this is not a particularly effective enforcement mechanism. The independent fact checking charity, FullFact, shows using UN data that 608 cases were launched between 1987 and the end of 2014. The highest number of new claims in a single year was 59 in 2013; a drop in the ocean compared to the cases disposed of by the ECJ.
Our prosperity is more reliant than ever on our integration with the rest of the world. This is no longer simply packing goods on ships, but accepting foreign investors and investing overseas to sell services. Such integration requires a legal mechanism to enforce contracts between parties in different countries. This means some sharing of sovereignty. Outside the EU there is a trade-off between more effective enforcement mechanisms and a greater loss of sovereignty. This should be considered as we decide upon the preferred outcome from the Article 50 process.
On the 17th of November, Prospect will launch “Brexit Britain: the trade challenge.” A publication designed to act as a guide for parliamentarians, officials and businesses with a stake in the UK’s changing relationship with the world following Brexit. For more information and to register your interest in the report please click here.