Devolution: UK internal market

What is the UK internal market?

The UK internal market refers to the rules that underpin free trade across England, Scotland, Wales and Northern Ireland. While the UK was a member of the EU, some of these rules were set by the EU. But at the end of the Brexit transition period, powers over key areas of market regulation will return to the UK government and devolved administrations.

The UK government believes that new rules are needed to prevent the emergence of new barriers to trade between England, Wales, Scotland and Northern Ireland within the UK and to enable the UK to agree trade deals with other countries. The UK government published proposals on how to manage the UK internal market after the Brexit transition ends and brought forward legislation, the UK Internal Market Bill 2019-21, on 9 September.

How does Brexit affect the UK internal market?

Membership of the EU – and the EU single market – set a framework within which businesses traded across the UK and the whole of the EU’s single market. The devolution of powers to Scotland, Wales and Northern Ireland in the late 1990s took place within the context of EU membership, meaning that although powers in certain policy areas – such as agriculture, food standards, environmental policy and procurement – were devolved, there were EU policy frameworks that applied to the whole UK. The devolution statutes prevented the legislatures from contravening EU law.

Once the transition period ends, the relevant clauses in the devolution statutes will be repealed. This means that – unless action is taken – there will be no constraints on the devolved legislatures using the powers they already possess to set their own rules on things like food or environmental standards. If standards vary across the UK, then this risks the creation of barriers in the UK internal market. Without common rules that apply across the entire UK, it could become more difficult for producers or service providers in one part of the UK to sell their products in the other parts of the UK and it could involve additional costs to do so.There is also a risk that divergence could create market distortion. With different standards come different levels of compliance costs; if one part of the UK has higher standards, businesses may have to spend more money to ensure they adhere to them. These could interfere with market competition, as the same goods could become more expensive to produce in one part of the UK than another. 

The management of the powers that will return from Brussels has been the subject of a long-running dispute between the UK government and the devolved administrations. It first surfaced during the passage of the EU Withdrawal Act 2018, when the UK government initially proposed that it would retain returned powers and devolve them as appropriate. A compromise with the Welsh government gave the powers to the devolved legislatures – but UK ministers retained a power to ‘freeze’ these powers from going to the devolved legislatures if they deemed it necessary. The legislation was passed against the wishes of the Scottish government and without the consent of the Scottish parliament.

What work is underway to protect the UK internal market?

In October 2017, the four governments agreed to work together to establish a common approach in key policy areas of returned EU law – referred to as common frameworks. Frameworks could consist of “common goals, minimum or maximum standards, harmonisation, limits on action, or mutual recognition, depending on the policy area and the objectives being pursued”. ¹³ Cabinet Office, Joint Ministerial Committee (EU Negotiations) Communique, 16 October 2017, assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/652285/Joint_Ministerial_Committee_communique.pdf

It was agreed that frameworks would be established where necessary to “enable the functioning of the UK internal market”, to ensure compliance with the UK’s international obligations, allow the UK government to sign and implement new trade deals, to manage common resources and, ensure cross-border justice can operate and safeguard the security of the UK.

UK government analysis identified 160 policy areas where EU and devolved competence intersect. Of these, 78 were considered to require non-legislative frameworks, 21 required legislative frameworks, and 63 required no further action. ¹⁴ Two policy areas appeared twice in the different categories in Cabinet Office, Revised Frameworks Analysis: Breakdown of areas of EU law that intersect with devolved competence in Scotland, Wales and Northern Ireland, April 2019, assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/792738/20190404-FrameworksAnalysis.pd  Work on the development of frameworks is taking place between officials in each policy area. While there has been good progress, no final frameworks have been agreed by the four governments.

Over the last three years, the context has changed. The Johnson government has highlighted the importance of being able to diverge from EU regulation on goods in order to meet the UK government’s objectives and sign new trade agreements with non-EU countries, whereas Theresa May had proposed that the UK would stay aligned with EU rules through a common rulebook. 

What are the UK government’s latest proposals?

Alongside work on common frameworks, the UK government chose to develop proposals for a cross-cutting approach to the UK internal market, rather than relying on individual frameworks in specific policy areas. The Scottish government has refused to participate in this programme of work.

The government published a white paper in July 2020, and the UK Internal Market Bill in September 2020, which will enshrine two principles:

• Mutual recognition – Anything that can lawfully be sold in one part of the UK can be lawfully sold in another part of the UK. However, there will be exceptions as a result of the Northern Ireland protocol: if goods produced in Great Britain do not meet EU standards, they will not be able to be sold in Northern Ireland. Mutual recognition would also cover services trade and professional qualifications across the whole UK.
• Non-discrimination – It would be unlawful for any government of the UK to introduce rules or regulations that would favour goods or services produced in one part of the UK over another. This will apply to both direct discrimination (for example, a ban on milk from England being given to Scottish schoolchildren) and “indirect discrimination”, where a rule had the effect of discriminating by for example, a ban on milk in Wales being transported more than a certain distance.

The bill also proposes to establish an Office for the Internal Market within the Competition and Markets Authority to oversee the application of these principles and the functioning of the internal market.

For more details on the provisions of the bill, see our UK Internal Market Bill explainer.

What are the Scottish and Welsh governments’ positions?

In response to the white paper proposals, the Welsh government said that it supported common rules to regulate the internal market, but that these must be agreed by all four government, and any new system must have independent oversight and dispute resolution. However, it criticised the UK government for failing to share the paper in advance and said that, “any attempt to unilaterally impose a system will be deeply damaging”. ¹⁵ Honeycombe-Foster M, Ministers promise ‘power surge’ to devolved nations after Brexit amid bitter row with Scotland and Wales, Politics Home, 16 July 2020, www.politicshome.com/news/article/ministers-promise-power-surge-to-devolved-nations-after-brexit-amid-bitter-row-with-scotland-and-wales  However, it’s asks were not met and following the publication of the bill Welsh Government Counsel General called it “attack on democracy and an affront to the people of Wales, Scotland and Northern Ireland, who have voted in favor of devolution on numerous occasions”. ¹⁶ Masters A, UK Government could revive M4 relief road under new post-Brexit rules, ITV, 9 September 2020, www.itv.com/news/wales/2020-09-08/uk-government-could-push-through-m4-relief-road-under-new-post-brexit-rules

The Scottish government has said that it will continue to refuse to accept or cooperate with the UK government’s proposals. In a letter to the cancellor of the Duchy of Lancaster, Michael Gove, Scottish government constitution minister Mike Russell argued that the introduction of ‘mutual recognition’ could force one part of the UK to accept lower standards, in areas like food standards, than were deemed acceptable by local politicians and stakeholders. He argued that common frameworks were sufficient to manage divergence within the UK, and that additional proposals were unnecessary.

Why does preserving the UK internal market matter for trade deals?

International trade is a reserved power, which means the UK government has exclusive responsibility for signing new trade deals and that any new trade deals will bind the whole of the UK. Many aspects of trade deals can also be implemented by the UK government – including, perhaps most notably, cuts to tariffs.

The UK government may, however, wish to make commitments in trade deals to change domestic regulation to remove barriers to imports. But responsibility for setting many of these sorts of regulations is devolved, for example food standards. The UK’s trading partners will want to know that they will have access to the entire UK market (more accurately the GB market), so they will want to know that the devolved administrations will implement the agreements in areas where they are responsible.

How does the Northern Ireland protocol affect the UK internal market?

The Northern Ireland protocol requires goods produced or sold in Northern Ireland to align with certain EU rules and regulations in order to allow goods to move freely across the island of Ireland. This means that any goods entering Northern Ireland must be compliant with EU laws in those areas. Under the protocol, the UK government is responsible for ensuring that checks take place on goods entering Northern Ireland from Great Britain to ensure they are compliant, creating barriers to intra-UK trade.

These regulatory barriers only apply to goods moving from Great Britain to Northern Ireland. The bill legislates to ensure ‘unfettered access’ for Northern Ireland businesses to the UK internal market, meaning goods produced in NI will not face any barriers. In doing so it also gives ministers powers to disapply specific provisions of the protocol.

This asymmetry means mutual recognition cannot apply in Northern Ireland in areas covered by the protocol. Goods lawfully sold in Northern Ireland will be acceptable everywhere else in Great Britain, but the reverse may not be true.