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FINANCE AND CONSTITUTION COMMITTEE

AGENDA

14th Meeting, 2020 (Session 5)

Wednesday 12 August 2020 The Committee will meet at 10.00 am in a virtual meeting and will be broadcast on www.scottishparliament.tv. 1. Decision on taking business in private: The Committee will decide whether

to take item 3 in private. 2. UK Internal Market: The Committee will take evidence on the UK

Government's UK Internal Market White Paper from—

Michael Russell, Cabinet Secretary for the Constitution, Europe and External Affairs, and Euan Page, Head of UK Frameworks Unit, Scottish Government.

3. Consideration of evidence heard: The Committee will consider the evidence heard at item 2.

Jim Johnston Clerk to the Finance and Constitution Committee

Room T3.60 The Scottish Parliament

Edinburgh Tel: 0131 348 5215

Email: James.Johnston@parliament.scot

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The papers for this meeting are as follows— Agenda item 1

Cover paper

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Finance and Constitution Committee

14th Meeting, 2020 (Session 5), Wednesday 12 August 2020

UK Internal Market

Introduction 1. At this meeting, the Committee will take evidence from Michael Russell MSP, Cabinet Secretary for Constitution, Europe and External Affairs on the UK Government’s UK Internal Market White Paper. 2. The Committee has invited the Secretary of State for Business, Energy and Industrial Strategy to give evidence on the white paper to help inform the Committee’s response to the consultation and is awaiting a response to the invitation.

Evidence on the UK Internal Market 3. The Committee held an initial discussion to explore aspects of the UK internal market on 19 June 2019. Written submissions from witnesses, along with the official report of the meeting and a summary of key issues arising are available on the Committee’s website. 4. The Committee also commissioned comparative academic research papers exploring how the internal market works in Canada, Switzerland and the USA. The research papers are available on the Committee’s website and a summary by the clerks is attached at Annexe A. 5. The Committee issued a call for evidence at the start of 2020 in response to which eleven responses were received. All submissions are available on the Committee’s website and a summary by the clerks is attached at Annexe B.

6. An additional submission has since been received from Professor Michael Keating and this is attached at Annexe C.

7. In addition to work undertaken by the Committee, SPICe has produced the following blogs in relation to the white paper—

• The UK internal market: what is it, do we have one and do we need

one? https://spice-spotlight.scot/2020/07/28/the-uk-internal-market-what-is-it-do-we-have-one-and-do-we-need-one/

• The UK internal market proposals: a comparison with the EU approach https://spice-spotlight.scot/2020/07/29/the-uk-internal-market-proposals-a-comparison-with-the-eu-approach/

• The UK internal market proposals: intergovernmental relations https://spice-spotlight.scot/2020/07/30/the-uk-internal-market-proposals-intergovernmental-relations/

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Consultation response 8. The deadline for responses to the UK Government consultation is 13 August 2020. Following evidence from the Cabinet Secretary, the Committee will consider the evidence heard with a view to submitting a response to the consultation.

Committee Clerks August 2020

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ANNEXE A

Summary of Comparative Research

Constitutional Arrangements, Historical Context and Scope for Divergence

The research papers make it clear that an internal market is seen as necessary for all three countries. In all three cases the internal market evolved over time with moves towards formalising it happening to varying degrees, at different times in their histories (often relatively recently) and as a result of differing factors. There is also a sense of respecting the powers of different levels of government and providing for divergence in each example – facilitation of inter-state trade has been a key driving factor whilst allowing for exceptions to be made as a result of local preferences. It is clear that all three examples provide for a high degree of regulatory difference between central and local/subnational governments although attempts have been made to minimise any resulting barriers in all three cases.

Canada Canada is a decentralized federation in which the two main levels of government—federal and provincial—enjoy exclusive legislative authority is areas specified by the constitution. The operation of the internal market is largely the outcome of individual federal and provincial legislative decisions. It was not formally set out in legislation until relatively recently. Following the signing of NAFTA in 1994, “governments saw the need to further develop the internal market, having recognized that many barriers to the free movement of products, labour and capital existed, most of them due to government actions.” The Agreement on Internal Trade (AIT) was signed by federal and provincial governments in the same year. The AIT created a framework for the internal market including the free movement of goods and services, mutual recognition of regulations and open procurement policies. It included a dispute resolution mechanism and created a Committee on Internal Trade (CIT) with responsibility for overseeing the AIT although this proved ineffective. This was superseded when the Canada Free Trade Agreement (CFTA) was agreed in 2017. The CFTA is intended to promote free trade in goods, services, labour and capital markets. It establishes processes for provinces to agree to either common regulations or mutual recognition and is intended to establish fair and open procurement policies. Federal and provincial governments are allowed to specify a list of exemptions to which the CFTA will not apply. This list can be reduced but not added to in the future. The CFTA was agreed on a voluntary, cooperative basis and there “was no sense that the federal government was imposing its will on the provinces.” Canadian provinces have powers to regulate labour, capital and product markets within their jurisdictions and all do so independently. This can facilitate policy choices that reflect the legitimate preferences and needs of residents but can result in “inefficiencies in the allocation of persons and businesses across Canada” along with “barriers to cross-border transactions.” The federal government can encourage provinces to abide by broad national

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standards via fiscal equalization transfers and conditional block transfers (intended to enable provinces to be able to provide comparable expenditure programs at comparable tax rates, while leaving them free to deviate) but “cannot force or induce provinces to harmonize their fiscal or regulatory policies to facilitate efficiency in the internal market.” The CFTA recognizes the right of provinces to legislate in areas of provincial jurisdiction provided inter-provincial transactions are not unduly limited and non-residents are not discriminated against. More specifically, it protects the ability of provincial governments to legislate and regulate to achieve legitimate public policy objectives, such as protection of public health, social services, safety, consumer protection, cultural diversity, the environment and workers’ rights. Language regulations and public services are exempt from the agreement. Provinces also have limited powers to exempt certain goods from the Harmonised Sales Tax which combines a single federal tax rate with provincial rates on the sale of goods. In Canada, trade agreements must be ratified by the federal Parliament. The provinces are not required to ratify them but are responsible for making amendments to their laws and regulations as necessary for implementation (bearing in mind that the provinces have been heavily involved in and consulted with during negotiations). Of the 24 separate agreements between two or more provinces since 1989, none involved the federal government and “those requiring action were ratified by provincial legislatures.” Federal and provincial acceptance of the terms of the CFTA is ratified by legislation and the agreement could be overturned by subsequent legislation. It could also be updated by provinces agreeing to eliminate some of the exclusions they have previously declared.

Switzerland The Swiss Confederation has powers to enact “any federal law necessary to create a unified Swiss economic area” but has not used them. In the absence of such, private economic activities are regulated by cantonal law or municipal legislation. The federal government cannot undermine federal arrangements so attempts to provide for an internal market must leave space for different legislation at a local level. The internal market has been created through inter-cantonal agreements, promotion of mutual recognition of market access rights and top-down federal harmonisation in specific sectors. Cantons must comply with inter-cantonal agreements or federal laws which override contradictory cantonal or municipal law. The Constitution states that the Confederation must allow cantons “all possible discretion to organise their own affairs and shall take account of cantonal particularities” However, following the revision of the Federal Constitution of 1999, the Confederation was given an explicit constitutional basis to create an internal market. It provides the Confederation with the authority to adopt any federal law or federal ordinance essential to create a united Swiss economic area. However, in the absence of specific federal legislation which takes precedence, cantonal law remains in force. The federal government is also obliged to respect the principle of subsidiarity and “there is

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a widely accepted understanding that the federal legislator should only become involved in situations in which divergent cantonal laws so severely impair the internal market that its proper functioning is no longer guaranteed.” Whenever the Confederation exercises its legislative competences, the cantons have a constitutionally guaranteed right to participation; they must be informed and consulted whenever their interests are affected. When Switzerland rejected EEA membership in 1992, it was seen as crucial that the internal market complied with EU single market requirements and the 1995 Internal Market Act (IMA) removed obstacles to competition arising from cantonal law and provided for free and equal market access across the country for Swiss registered businesses. The IMA operates on the basis of two fundamental principles; 1) non-discrimination against market participants from different cantons and 2) mutual recognition of the equivalence of cantonal market access regulations. The unified economic area is therefore achieved by providing for the free circulation of goods and capital, the free movement of workers and the freedom to provide services throughout the entire country. In most cases, it is up to the cantons to implement federal law and to adopt any cantonal legislation needed to do so. The IMA had a limited impact initially and was revised in 2005 to explicitly provide for businesses and professionals establishing themselves permanently in another Canton and to legislate against protectionist policies which restricted market access. The overseeing Competition Commission had previously only been able to make non-binding recommendations but was strengthened so that it could induce court decisions where cantons were restricting market access. The revised IMA continues to primarily rely on the mutual recognition approach and continues to allow cantons and municipalities to make and apply their own subnational rules and mechanisms to regulate the same economic activity. In addition, the Act operates with an exception regime that provides the cantons with considerable regulatory space to restrict market access in areas they consider as being of overriding public interest. Tensions remain between the plethora of different cantonal rules and regulations and the federal mandate to seek to create a unified Swiss economic market and this continues to generate controversy. The constitutional mandate to create an internal market is based on the principle of economic freedom and the Confederation and cantons are expected to abide by the principle. However, the constitution does permit the Confederation to deviate from market-based principles in economic policy such as banking, transport, telecommunications, energy, transport and foreign economic policy. The briefing sums this up as follows—

“The internal market therefore does not cover all sectors of the economy. It is limited, on the one hand, to the regulation of professional activities in the private sector, and, on the other hand, to economic sectors which are not already exempted from the principle of economic freedom.”

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Given the emphasis on mutual recognition and harmonisation via inter-governmental agreements, progress towards an efficient internal market can be “slow and rigid.” The approach is also criticized for strengthening the role of the cantonal executive and limiting the role of cantonal parliaments to approving whatever resulted from inter-government negotiations. USA US federalism is based on “dual sovereignty” whereby the US constitution and each state constitution is supreme law within its sphere of influence. The Federal government has no power to order states to enact a law or to forbid them from doing so. However, federal courts can strike down a state or local law deemed as violating the constitution or a treaty and Congress can pre-empt a state or local law that duplicates with Congress’ constitutional authority. State and local governments therefore regulate whatever they have the political will to regulate so long as they do not violate their own state constitution or violate the U.S. Constitution, a treaty, or a federal law whereas the Federal government can only do what is explicitly permitted by the constitution. States and their local governments exercise a wide range of powers governing most human activities from birth to death and beyond and have authority to legislate for the health, safety, welfare, and morals of their residents. The US internal market “evolved mostly pragmatically and politically over 230 years through federal and state legislative and judicial actions.” For the first 145 years of U.S. history, the internal market was regulated mostly by state and local laws, with the U.S. Supreme Court striking down state and local laws that interfered with interstate commerce. State and local laws were usually deemed valid as long as they did not discriminate against out-of-state persons or enterprises. The federal government did not become broadly active until Congress created the Interstate Commerce Commission in 1887. Federal regulation increased slowly thereafter until the Great Depression (1929-38) when the federal government vastly expanded regulation. Nonetheless, state and local governments still play significant roles in respect of the internal market. Since 1937, the Supreme Court has held that state regulations affecting interstate commerce will ordinarily be upheld if the state law “regulates evenhandedly to effectuate a legitimate local public interest…its effects on interstate commerce are only incidental” and “the burden imposed on” interstate commerce is not “clearly excessive in relation to the putative local benefits. If a legitimate local purpose is found, then the question becomes one of degree” Many states give their local governments fiscal and regulatory powers that often intersect with internal-market matters. County, municipal, and township governments issue permits, licenses, and so on for all businesses that operate within their jurisdiction. They handle such matters as health and safety regulation. Local governments establish and administer building codes, fire codes, electrical codes, plumbing codes, and the like. Most localities base their codes on model codes developed voluntarily by professionals in each field, while some states require their local governments to implement model

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codes. Some states permit municipalities to set a higher minimum wage than the state’s minimum wage. Counties, municipalities, and townships may affect internal-market flows by, for example, banning the use of certain products such as plastic bags or by taxing certain goods, such as carbonated beverages.

Regulatory Harmonisation, Convergence and Mutual Recognition of Standards

All three case studies provide examples of moves towards regulatory harmonisation and mutual recognition of standards, either through “top-down” processes, by encouraging more local moves towards mutual recognition or a combination of both. However, all three papers also provide examples of how exceptions are made to protect the powers of sub-national government to legislate in ways that are best suited to local needs and preferences. Canada The CFTA establishes a regulatory reconciliation process that is intended to address regulatory differences across provinces that might act as a barrier to cross-border trade, possibly unintentionally. It provides for mutual recognition such that products or factors of production that conform with standards in one province be deemed to conform in another along with the harmonization of regulations except where regulations are needed to meet clear public policy objectives rather than constituting barriers to trade.

Switzerland The Swiss approach “promotes the mutual recognition of market access rights.” In order to create an internal market in the context of different cantonal market access regulations, the federal legislator has enacted framework legislation promoting and enforcing the mutual recognition of rules for cantonal market access. The revised IMA “continues to rely dominantly on the mutual recognition approach” and “operates with an exception regime that provides the cantons with considerable regulatory space to restrict market access in areas they consider as being of overriding public interest.” This approach “guarantees inter-cantonal trade while preserving the legislative autonomy of the cantons.” Cantons are free to enter into agreements to establish common organisations and institutions. If the cantons have concluded an inter-cantonal agreement or if the Confederation has enacted a law, which regulates a specific private economic activity, the cantons must comply with these harmonised rules and cannot continue to regulate the activity. The principle of subsidiarity generally obliges the federal government to refrain from extensive regulation and opt for a federal framework legislation, which leaves the cantons considerable scope for implementation. Inter-cantonal agreements rarely lead to a comprehensive unification of a particular economic activity, but have a harmonising effect, as the participating cantons agree on minimum standards. Recognition of certain professional qualifications such as those of legal or medical practitioners is governed by the Federal Act. The IMA facilitates professional mobility and commercial trade within Switzerland, supports the efforts of the cantons to harmonise the conditions for market authorisation and thereby strengthens both the

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competitiveness and the economic cohesion of Switzerland. The IMA constitutes a framework law, which does not aim at undermining cantonal competences or unifying cantonal (and municipal) laws but rather lays down minimum standards the cantons have to comply with.

USA The U.S. Constitution provides that “full faith and credit shall be given in each state to the public acts, records, and judicial proceedings of every other state” (e.g., accepting the validity of another state’s court order). The U.S. Supreme Court employs this clause to (1) require states, in most cases, to accept and enforce judgments rendered by sister-state courts, (2) decide when a state must assume jurisdiction for a claim originating in another state, and (3) limit the application of one state’s law over other states’ laws in multistate disputes. States sometimes engage in voluntary mutual recognition, as with driver’s licenses. States license many occupations and each state decides which occupations to license, and each determines its own licensing standards for each occupation. The recent trend has been for states to move slowly toward reciprocity and some federal agencies are encouraging greater mutual recognition. Convergence has occurred where states must comply with federal law, where states adopt a uniform law, and where states adopt a model law or a new law as pioneered by another state. However, there continues to be considerable interstate policy and regulatory divergence as demonstrated by widely divergent gun laws. Divergence is increasing with growing polarization between Democratic and Republican states. Top-down convergence has been driven mainly by the federal government since the 1930s, although the federal government ordinarily allows states to tailor and adapt federal rules to local circumstances, which means some divergence. Interest groups and public opinion can also drive convergence bottom up via lobbying, campaigning and awareness raising. Business, professional, environmental, health, and education interests usually lobby for the same kinds of regulations in every state. Divergence remains, though, because they have only mixed success. International agreements have not played much of a role in convergence. Economic competition drives some convergence among states, especially in fields such as education, job training, infrastructure, and public amenities. Conversely, such economic competition can also drive divergence, as has been the case with labour laws. Size asymmetries also create opportunities for big states to affect smaller states. California has a population of over 40 million and the world’s fifth biggest GDP. Policies promulgated by California sometimes compel firms to ensure the products they sell nationwide meet its standards, as this is easier and more cost-effective than adapting products to meet different standards in different states.

Monitoring, Enforcement and Dispute Resolution

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The papers describe different models for monitoring, enforcement and dispute resolution with varying degrees of reliance on recourse to the courts in comparison to less formalised reliance on expert panels/commissions. In the latter case, such bodies have been created relatively recently so it is difficult to assess their efficacy. Canada Canada does not have an equivalent of the EU internal market treaty so the courts “play a very limited role” in enforcement. Since the federal government enacts initiatives to improve the internal market through legislation, it settles most disputes. It decides whether the provinces have satisfied the conditions required for the receipt of health and social welfare transfers and decides how much to withhold if they have not. Such sanctions have been imposed on several provinces for violating health program conditions. The CFTA created a dispute resolution process which emphasizes cooperation and conciliation between a province or person that makes a complaint and the government against whom it is directed. If disputes cannot be settled by agreement, the CFTA allows for the establishment of three-member panels, with each side to the dispute allowed to nominate one person from a standing list of potential panelists. The panel has pseudo-judicial status and makes a finding as to whether a province’s policies have contravened the agreement. If so, it can recommend remedies, including awarding costs. Either party has the right to appeal. If, after a finding of non-compliance, the offending province continues not to comply, significant monetary penalties may be imposed. Since the CFTA only recently came into effect and its institutions are still being developed, there has been no experience with the dispute settlement mechanism on which to judge its efficacy.

Switzerland The Competition Commission is responsible for preventing cantonal restrictions on competition and distortions of inter-cantonal trade. Its task is to monitor compliance with the IMA by the Confederation, the cantons and the municipalities. The Commission has no decision-making powers and prior to the 2005 revision of the IMA, “the non-binding recommendations and expert opinions of the Commission received little attention in the cantons” and “the enforcement of the internal market therefore depended primarily on individual market participants, as they were the only one with a right to appeal” to the courts. The revision established a right to for the Commission to appeal to induce a court decision where it considers that a cantonal or municipal regulation restricts market access in an inadmissible manner. Since the partial revision of the Act, aspects of the internal market have gained importance in the jurisprudence of the Federal Supreme Court. Given that the Commission cannot make legally binding decisions, it relies heavily on “soft enforcement” such as informal advice, recommendations or expert opinions. Despite these not being binding, they carry considerable weight. If the commissioners find that certain regulations restrict market access or inter-cantonal trade, cantons will soon be confronted with judicial

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proceedings – something they wish to avoid so they generally act accordingly and comply. The Commission's recommendations therefore operate as a preventive, non-binding review of cantonal or communal statues or as “a red flag”. In order to enable private actors to assert their rights effectively and speedily, the IMA obliged cantonal or communal authorising bodies to provide for a simple, rapid and cost-free market-access procedure. In addition, the IMA required that cantonal laws provide for at least one appeal to an authority that is independent of the administration. However, individuals were deterred by the costs and delays associated with legal action and complaints were few, limiting jurisprudence and case law. As noted above, the Commission was given the right to appeal to the courts post-2005, although “it is too early to make a final judgement as to whether the effects hoped for by the legislator will be sustainable and widespread.”

USA The U.S. Constitution gives the high court jurisdiction over, among other things, all matters arising under the Constitution and in which the United States is a party, as well as “Controversies between two or more States.” States that join an interstate compact generally stay in compliance. If not, they exit or find themselves shunned by the other compact members. Compliance is a matter of mutual monitoring so a non-compliant state is ordinarily spotted quickly. If non-compliance can be treated as a breach of contract, a federal court can enforce compliance. Each state has its own court system. Local counties ordinarily operate the state courts of original jurisdiction; judges on those courts are elected or appointed from within each county. Given that more than 98 percent of all litigation occurs in the state courts, these courts hear many internal market matters. Also, given that the U.S. Supreme Court usually hears less than 80 cases per year from about 9,000 appeals annually, the state high courts are the final word on most litigation. However, the U.S. Constitution requires state judges to apply and uphold federal laws when necessary in cases before them. State courts cannot hear lawsuits against the United States and cases involving some specific federal criminal, antitrust, bankruptcy, patent, and copyright laws and some maritime cases. However, most states have their own laws in some of these fields. Litigation on internal-market matters in state courts can take anything from one to several years. Those who wish to take legal action against a local government can usually do so with little difficulty. Lawsuits involving possible monetary settlements attract lawyers willing to litigate on a “no-win no-fee” basis. Non-monetary lawsuits are also filed regularly by businesses, interest groups, citizen groups and others. States generally rely on local officials to certify they are in compliance with state rules. For the most part, local officials comply with state laws and many cities retain a municipal-law specialist to advise the city council and mayor.

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Otherwise, citizens do their own monitoring, which they can enforce by filing lawsuits against their local government in state court. The state courts are major actors in settling matters of local compliance with state law and also cases involving questions of whether a local government has exceeded its charter powers and/or encroached upon state powers. On matters involving civil rights and federal law (e.g., federal grants received by a local government), citizens can (and do) sue their local government in federal court.

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ANNEXE B

UK Internal Market – Summary of Written Evidence The Committee issued a call for evidence seeking responses to the following questions—

1. What is the UK internal market? 2. How will international treaties, including trade deals, impact on the UK

internal market? 3. What are the priorities and challenges for Scottish businesses and

organisations in operating within a UK internal market? 4. What institutional structures will be required to administer and enforce

the UK internal market? 5. What mechanisms should be available to challenge ‘unfair’ internal

market practices? 6. What will be the impact of the UK internal market on devolved powers? 7. What should be the role of the Scottish Parliament in relation to

scrutinising the UK internal market? 11 responses were received, and their key points are summarised below.

1. What is the UK internal market?

For some the UK Internal Market could be defined by its relationship to the EU. Anthony Salamone stated that the UK internal market could be defined as the UK’s economic space which had existed for as long as the modern UK had. In his view, EU membership along with devolution had helped shape its governance arrangements with EU membership broadly encouraging convergence whereas devolution was intended to facilitate appropriate divergence under the umbrella of EU membership. Mr Salamone suggested that regulatory divergence had resulted in a “Scottish internal market.” Dr Lydgate and Chloe Anthony stated that “until Brexit, the UK internal market could be understood in terms of the rules and principles of the EU internal market which underpinned it.” Tariff-free trade and regulatory harmonisation or mutual recognition safeguarded the free movement of goods, but they point out that some post-Brexit legislation diverges from this model in ways which “have the potential to undermine unfettered trade between UK nations.” In their view, the new UK regulatory framework “poses a risk of fragmentation and resultant intra-UK trade barriers.” This risk could be mitigated by mutual recognition of standards or in relation to goods, a reliance on labelling requirements in areas of divergence. Others explained that, after Brexit, the definition of the UK Internal Market was contested. The RSE stated that the UK single market “is a contested term with no single agreed definition.” This stands in stark contrast to the EU’s well-defined single market and the RSE suggested that the EU principles of subsidiarity and proportionality should be adopted within the UK internal market.

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Professor Keating noted that there was broad consensus about the idea of a UK internal market in principle “but much less on exactly what it is and what it entails.” He explained that the idea of an internal market is broader than specific sectoral arrangements but “what it does cover is by no means given.” For Professor Keating, “the concept of a single or internal market only makes sense in the context of a modern, interventionist, regulatory state. It represents one of the advanced stages in economic union, which starts with free trade and progresses through a customs union towards monetary union.” Whilst free trade eliminates tariff barriers, it does not address non-tariff barriers such as regulations or subsidies. In his view, a single market is “complex and contested concept” which raises socially and politically sensitive questions. Professor Keating explained that modern states are based on a mixed economy with some aspects being dependent on private providers, others such as policing being a state monopoly and others such as healthcare being mixed. For him, this raised contentious questions including whether private contractors should be permitted to tender to provide public services. In the event that the UK Government does not make sweeping internal market provision, Professor Keating stated that “we may never know just what the UK internal market actually means.” Others viewed it through its impact on the economy highlighting that the internal market is a process. FDF Scotland noted the importance of the food and drink sector to the UK economy and noted that “many businesses within the Food and Drink manufacturing industry view the UK (and the Republic of Ireland) as an internal single market.” However, FDF Scotland agreed “that the internal market should be seen as a process and a set of institutions rather than a definition of policy.” FDF Scotland also suggested that a UK internal market “would have common regulatory standards and a common trade policy across the devolved nations.” The SRC noted that “Scottish consumers and our economy as a whole benefit enormously from the UK’s largely unfettered internal single market” through, for example, economies of scale. “When that is allied to regulatory consistency retailers are able to reduce their costs and increase productivity, which in turn keeps down shop prices and provides more choice for customers.” NFUS highlighted the success of the “Scottish brand” along with those from other parts of the UK and stated that “The UK internal market should therefore be under no threat by the development of distinct regional brands in overseas markets, so long as governments and industry continue to work with one another pan-UK.” Scottish Environment LINK stated that it was “not aware of any formal or legal definition” but would look forward to the Committee’s conclusions. It pointed out that even before devolution, there were differences between the UK’s constituent parts in terms of planning and conservation, with these differences widening since devolution (albeit within the auspices of the EU single market).

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2. How will international treaties, including trade deals, impact on the

UK internal market? Most we heard from considered that international treaties would shape the UK internal market and in particular the extent to which Scotland could diverge from the rest of the UK. Dr Lydgate and Chloe Anthony noted that trade negotiations drive changes to UK legislation so could provide a catalyst for internal market disruption given Scotland’s intent to maintain alignment with EU regulations. The UK Government could either allow divergence to occur or attempt to impose an outcome on Scotland, something that would be politically “toxic.” In their view, such an outcome could be avoided by allowing devolved nations a meaningful role in trade negotiations Anthony Salamone noted that, whilst seemingly unlikely, it was still possible that the UK may wish to forge a close future relationship with the EU single market. However, if this is not the case, the degree of alignment could impact on UK internal market arrangements. He stated that “substantial divergence from EU rules and standards could be challenging and costly” given the current depth of integration. Mr Salamone noted that future international agreements would impact on the internal market but suggested that non-EU trade negotiations would be difficult until arrangements for the UK’s future interaction with the single market becomes clear. Given the UK economy’s relative size and bargaining power, he raised the prospect of it having to “provide greater market access and accept less favourable sectoral trade-offs in order to secure trade deals.” Mr Salamone noted that the extent to which the UK Government would incorporate devolved policies and preferences in trade negotiations was not yet clear although he pointed out that other federal or multi-level states had found ways of successfully achieving this. Some noted the potential for trade deals or agreements to impact on the UK internal market by potentially undermining previously agreed standards. NFUS stated that commonly agreed frameworks via minimum common standards would “ensure that the UK is best placed to enter into and implement new trade deals that are to the benefit of the agricultural industry.” It noted foreign demand for Scottish premium produce and suggested that the UK Government “must proactively facilitate trade flows and the expansion of brands overseas by significantly scaling up capacity to deal with export certification and documentation to allow the free-flow of products.” NFUS also voiced concerns about potential “trade-offs” in negotiations allowing domestic producers to be undercut by cheap imports produced to lower standards. Scottish Environment LINK stated that “the clear need for higher environmental standards…should be a key consideration in discussions around the UK internal market.” In their view, any undermining of environmental protections for

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short-term competitive advantage must be avoided. They observe that “it is the international agreement (and the UK Government consent to that agreement) that provides the constraint and not the internal market”. The importance of a consensual approach between the UK and devolved governments in relation to negotiating and implementing international treaties was also highlighted. FDF Scotland highlighted the example of Canada where both the national and provincial governments had powers over trade policies and regulations and suggested that, for the UK, structures would need to be in place for national and devolved governments. For FDF Scotland, “a lack of common standards and policies across the UK risks devolved legislation in England, Scotland, Wales or Northern Ireland negatively affecting companies – either those from the affected nation or those selling into it.” FDF Scotland went on to note the disproportionate impact of high tariffs on premium products such as whisky and salmon and stated that “The UK’s trade mandate must be fully cognisant of the significant regional differences in food production and manufacturing.” The RSE stated that the impact of international treaties on the UK internal market remains to be seen. Given the role of the devolved administrations in applying future agreements, the RSE stated that “only truly looking to build consensus across governments, and eschewing a top-down approach, will prove successful.” Coordinating and agreeing negotiating positions would be vital in this scenario and the RSE envisaged a role for an independent secretariat in achieving this. COSLA has agreed to lobby “to seek to ensure that the Devolution settlement, Local Government powers and existing employment, state aid, procurement, and trading standards legislation are not undermined or traded off in the Phase 2 negotiations and future Free Trade Agreements with the US or other countries.” COSLA also highlighted the Institute for Government’s recommendation that a “formal structure for ongoing stakeholder engagement is necessary to negotiate trade deals” and called for the maintenance of safeguards for local public services as provided for in EU treaties.

3. What are the priorities and challenges for Scottish businesses and organisations in operating within a UK internal market?

FDF Scotland referred to a paper it had co-authored which recommended priorities to ensure a UK trade policy that will “drive growth and promote efficient and sustainable food production. These were to—

• Support value addition and jobs across the UK and devolved nations; • Retain UK’s ability to deliver high standards at competitive consumer

prices; • Encourage sustainable food production, diminish environmental impact;

and • Encourage industry innovation and grow exports.

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For some, differing regulatory standards across the UK should be avoided particularly given supply chains were often UK wide. FDF Scotland also highlighted possible challenges that could arise including the potential for differing regulatory standards, to lead to “significant disruption to current food and supply chains.” Differing labelling requirements could add “significant costs” for businesses. FDF Scotland also advocated “trade defence” such as emergency tariffs to prevent the UK being flooded with cheap goods. The SRC stated that retailers’ focus is on “removing frictions for customers” and making it as simple as possible for them to make transactions. Similarly, Oil and Gas UK stated that “divergence would not be conducive to business where we are frequently moving people, goods and services throughout the UK.” Its priority was “a stable financial and regulatory regime” via “broad legal consistency and alignment across the countries in key areas such as employment, company law and future environmental and energy requirements.” NFU Scotland highlighted the importance of the rUK market for Scottish produce, particularly for processing and manufacturing due to a lack of capacity in Scotland. In its view, common regulations were vital for the effective flow of produce within the UK. To this end it called for “commonly agreed” frameworks to “avoid regulatory divergence, preserve the integrity of UK internal market and enable frictionless trade with the EU27 and third countries” in order to mitigate the “potential risks to intra-UK trade by unconstrained policy divergence.” Others highlighted that regulatory divergence was already present in the UK so it should not pose challenges, post Brexit. Scottish Environment LINK pointed out that businesses and organisations are already accustomed to different regulatory regimes in different parts of the UK in some areas, with UK-wide regulations in reserved areas. Its priorities included continued compliance with and improvement on EU environmental protections and ensuring there is no lowering of standards as a result of future international agreements. The RSE stated that the overriding priority for businesses would be access to markets (both within and beyond the UK) with as little friction as possible. However, homogenous regulation was not necessary and some level of divergence should not present any major challenges. They cite the example of judicial decisions which apply across the UK irrespective of different legal systems.

4. What institutional structures will be required to administer and enforce the UK internal market?

A common theme across the evidence was that, in order for the UK Internal market to operate effectively, there need to be strong, trusted intergovernmental structures which enable disputes to be resolved between

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governments but which also to support collaborative decisions regarding the operation of the UK Internal Market. In FDF Scotland’s view, the following key principles were necessary—

• Clear guidelines on what would be considered market distortion caused by legislation;

• Incorporation of regulatory impact assessment on market distortion; • Clear and cheap mechanisms for businesses to appeal against

distortion; • A resolution mechanism between the four administrations to consider

upcoming legislation and lessons learned from important cases. NFUS called for Ministers and agricultural departments from across the UK to “establish and maintain regular, formal and cooperative arrangements to manage policy, legislation and delivery of regulation across the UK economic area.” In its view “a guiding principle should be that no single country determines or curtail UK policy in the rest of the UK.” NFUS went on to endorse the conclusions and recommendations set out in the Institute for Government’s 2018 report, “Devolution after Brexit: Managing the environment, agriculture and fisheries.” Professor Keating pointed out that the UK does not have a neutral body equivalent to the European Commission to make proposals and monitor compliance and that the UK courts do not have the same role and expertise as the EU Court of Justice. The fact that the UK Government was engaging in intergovernmental discussions on the matter implied, in Professor Keating’s view, that it recognised that there was a gap in provision. Dr Lydgate and Chloe Anthony also highlighted the lack of a “neutral” adjudicating body in the UK (similar to the European Commission) and suggested that Brexit makes clear the need for new institutional structures to govern the UK internal market and for greater powers for the devolved nations “through a federalist structure.” They suggested that the slow pace of progress on agreeing common frameworks “underscores the need for respect of the principle of legislative consent and genuine and intense efforts to collaborate on developing new institutional structures.” They state that the current arrangements for decisions making between the four UK nations are ineffective and underdeveloped. The RSE endorsed the findings of a 2018 PACAC report which lamented “the absence of formal and effective inter-governmental relations mechanisms” in the UK and highlighted the inadequacy of JMC structures. For the RSE, there was an urgent need to develop new formal mechanisms to facilitate effective and strong intergovernmental relations necessary for a UK internal market. The RSE recommended the establishment of a new independent secretariat to facilitate the agreement, development and maintenance of common frameworks. It is vital that such a secretariat should be (and be seen as being) impartial, transparent and accountable. The Secretariat should also play a role in coordinating the UK’s negotiating position when it comes to future trade talks.

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The independence of monitoring and enforcements roles (from each other) was identified as being beneficial. COSLA noted that the Competition and Markets Authority (CMA) will have oversight of state aid issues, something that “can easily be perceived as Whitehall acting as both judge and jury on state aid issues.” COSLA urged the CMA to develop a consultation structure similar to what is in place at an EU level to ensure effective engagement with local government. COSLA also noted that procurement was devolved but falls within the ambit of international trade which is reserved and spoke of the risk that matters might be overlooked without detailed Scottish input. It considered there may be merit in a new UK-wide body. In regulatory terms such a body should have the ownership of all governments (including local government) to develop joint approaches whilst in terms of enforcement any new body “must be truly independent from all concerned governments.” Scottish Environment LINK highlighted the importance of environmental “watchdogs” at both the UK and devolved levels to monitor and enforce compliance.

5. What mechanisms should be available to challenge ‘unfair’ internal market practices?

FDF Scotland recommended that the devolved administrations work with the UK Government to create an arbiter for the internal market. This could include a panel of judges from all four jurisdictions or a commissioner. Scottish Environment LINK recommended that environmental “watchdogs” should operate systems to handle complaints about any failure to meet standards. Such bodies could also advise and adjudicate in the event of any suggestions that environmental regulations were unfair. The RSE also suggested that an independent secretariat with analytical capabilities could have a role in addressing concerns over unfair market practices.

6. What will be the impact of the UK internal market on devolved powers?

For some a key issue was how to ensure that any impact on devolved powers was managed such that it didn’t create barriers to trading across the UK and to consumer choice. The SRC stated that, as an industry, “we don’t always take a strong view on where powers reside.” Its priority is “to ensure that the powers repatriated from Brussels which affect our industry are implemented in a sensible and cost-effective manner, in order to minimise administrative complexity, compliance and cost and to maintain the widest possible choice for consumers.” To this end it called for “the fullest possible alignment and co-ordination between the devolved and UK administrations with them working

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together on a shared approach to regulation, enforcement and compliance, in order to minimise duplication and discrepancy for retailers and their supplier.” FDF Scotland suggested that the Scottish Parliament “would need to consider how devolved powers interact with UK powers to avoid creating a less competitive business environment in Scotland.” For some the extent to which the devolved nations could diverge in devolved areas without a UK wide approach being imposed was unclear. Dr Lydgate and Chloe Anthony stated that the prospect of an internal market developed and enforced through Westminster “has rightly made devolved nations nervous” and pointed out that the principle of legislative consent was not legally binding. However, they also noted that certain powers previously exercised at an EU level had been passed to the devolved nations so concluded that the impact of the internal market in devolved areas was “unclear.” They explain that as efforts to agree common frameworks have stalled the impact of the UK internal market on devolved nations is unclear. Professor Reid pointed out that legislation was already being considered at Westminster which was “based primarily on conferring powers to UK Ministers to act, even in areas of devolved competence” despite ongoing discussions to agree common frameworks. He noted that the UK Agriculture Bill allowed UK ministers to make regulations on organic certification without consulting devolved administrations. The Fisheries Bill contains no provision on what would happen should a common position not be agreed. In his view “There is little evidence of a clear, consistent and widely agreed plan for dealing with the regulation of the internal market, the interaction between devolved and reserved powers and the arrangements for common frameworks.” Professor Keating also raised the question of the extent to which devolved administrations should be permitted to diverge to reflect local circumstances and priorities. He went on to note that the UK devolution settlement does not explicitly provide for the principles of subsidiarity and proportionality which are integral to the operation of the EU single market and highlighted the example of minimum pricing for alcohol which was found to be justifiable after a lengthy judicial process at the EU level. Professor Keating went on to highlight the risk of a broadly drawn internal market provision which “could impinge severely on devolved competences,” especially “if it were entrusted to Westminster and not accompanied by strong rules about subsidiarity and proportionality.” He also highlighted the risk of the courts becoming involved in matters of public policy and of economic competitiveness taking precedence over other priorities such as social inclusion, equalities and the environment. In his view, this raised the prospect of intergovernmental conflict. However, Professor Keating noted that the UK Government appeared to be conscious of the potential for political dispute and may “prefer instead to try to muddle through.” Others highlighted the relationship between maintaining common standards whilst enabling local flexibility. Whilst calling for minimum common standards,

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NFUS was clear that “there must be clear flexibility to develop and implement appropriate agricultural and rural policy measures within each devolved administration.” NFUS highlighted parallel Agriculture Bills passing through the UK and Scottish parliaments and described the devolved approach as “completely sound.” However, NFUS stated that “it is essential that application and operation is consistent and always co-ordinated with the other UK legislatures.” In the NFUS’ view, it would be “untenable” for one legislature to override the other in the event of specific policy divergence and this demonstrated the importance of agreeing common frameworks. It was “essential that powers are not overlapping” but that different, rather than parallel, powers should allow differentiated approaches where appropriate. Scottish Environment LINK took the view that “standards should allow for flexibility to local circumstances and minimum standards should not constrain any of the four countries from delivering higher standards in areas of devolved competence where they should choose to do so.” It noted that the potential for divergence had increased as a result of Brexit removing EU regulatory constraints and welcomed the Scottish Government’s commitment to “maintain or exceed” EU environmental standards and looked forward to this being underpinned in the forthcoming Continuity Bill. Given that there already are regulatory differences between different parts of the UK, Scottish Environment LINK suggested that the internal market need not impact on devolved powers. However, it noted that future international agreements had the potential to impose constraints (both positive and negative) on the devolved administrations. Anthony Salamone suggested that should Scotland seek to pursue continued alignment with the EU whilst the UK pursues divergence, “the Scottish internal market may become uniquely differentiated compared to the wider UK.” For him, the future governance of the UK internal market was difficult to envisage until there is clarity on the future EU-UK relationship. The RSE stated that any outcome where stalemate between governments resulted in Sewel being overridden should be considered a failure of intergovernmental relations. It also called for the principles of subsidiarity and proportionality to be adhered to with the presumption of consent from the devolved governments being sought and required.

7. What should be the role of the Scottish Parliament in relation to scrutinising the UK internal market?

In FDF Scotland’s view, the Parliament’s role would be “fundamentally concerned” with consideration of the impact of scots law on the internal market through scrutiny of impact assessments, regulatory monitoring and evaluation. It would also provide a forum for stakeholders to make representations and raise concerns.

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FDF Scotland also suggested that the Committee may wish to give thought to the need to monitor legislation in other nations where it might impact on the internal market and to make representations to any arbiter when appropriate. In its view, all Bills should be accompanied by an internal market impact assessment. A common theme was that the Scottish Parliament’s scrutiny role would need to broaden to include consideration of developments such as legislation and trade deals in the other UK nations. Dr Lydgate and Chloe Anthony spoke of the need for a review of the UK constitutional settlement and suggested that “further power for the devolved administrations and UK parliaments would provide for democratic legitimacy in contrast to the current UK Government strategy of consolidating power to the executive.” The RSE stated that “sharp focus” would be needed from all UK legislatures, as the internal market will require continued attention. Parliaments should be seen to look past polarised constitutional positions to act in the best interests of all they represent given that all sides have an interest in ensuring an effective and well-functioning market. The RSE also proposed the creation of a distinct Constitution and Intergovernmental Relations Committee to scrutinise this important brief. COSLA highlighted the work of the Interparliamentary Forum on Brexit and called for such interparliamentary cooperation to be developed further. In the SRC’s view, the devolved and UK legislatures and governments should “work together on economic issues in order to minimise administrative complexity, frictions and cost from this next chapter of devolution” in order to provide “the consistency in approach that retailers and other firms crave.” Scottish Environment LINK suggested that the Scottish Parliament should “seek a role in scrutinising any proposed international agreement that has the effect of constraining its exercise of devolved powers, such as those on the environment.” They suggest the Parliament may wish to have sight of and comment on international agreement prior to their ratification, where they might impose obligations in devolved areas. Some highlighted the challenges for the Scottish Parliament of not currently having any scrutiny locus over some aspects of the internal market. Professor Reid stated that “there seems no direct route for intervention by the Scottish Parliament” where UK measures can be adopted with no requirement to consult or seek the agreement of Scottish ministers. Where Scottish Ministers do have some involvement, there may be scope for indirect scrutiny although he pointed out that their views may be overridden by the UK Government. However, he noted that “much of this” was not new given the “very wide powers” enjoyed by UK Ministers in relation to reserved matters including consumer protection and international relations. This was a challenge which Professor Reid considered may “become more pointed in future.” He noted that the “clear power of the UK Parliament to legislate in both reserved and devolved matters” has offered a

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simple way of avoiding the need to identify the reserved/devolved elements of any proposal. Anthony Salamone suggested that “the UK’s current procedure for making international agreements, which affords a limited role to the UK Parliament and no formal role to Scotland’s political institutions, would be unsuitable given modern expectations of greater political participation in trade negotiations and the multi-level character of government in the UK.” He called for “a new internal trade agreement process…which moves away from the Royal Prerogative to a codified system founded on incorporating the UK Parliament and political institutions of Scotland, Wales and Northern Ireland” In his view “this system should include internal approval mechanisms for negotiation mandates and major decisions throughout trade negotiations, and a positive treaty ratification procedure.” Mr Salamone noted that the Scottish Parliament and Government would be responsible for implementing obligations arising from trade deals, regardless of the level of input they had into them. He thought it “eminently sensible” for Scotland’s political institutions to be substantially involved in negotiations on a consistent and detailed manner and suggested that a “Treaty Consent Motion” could be introduced analogous to existing Legislative Consent procedures. Mr Salamone also suggested that the Scottish Parliament may wish to create a Trade Committee or give formal responsibility for scrutiny to an existing committee.

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ANNEXE C

Additional Submission from Professor Michael Keating on UK Internal Market White Paper

The UK Government’s White Paper on the Internal Market addresses what is widely agreed to be a real issue after the UK leaves the EU Internal Market at the end of the year. A range of matters, including the environment, agriculture, food standards and aid to industry, are both devolved to Scotland, Wales and Northern Ireland and governed by European laws and regulations. There are no UK frameworks so that, as from January, there will be no common frameworks at all. It is for this reason that the UK and devolved governments have been working through a series of matters that may need to be subject to agreed common frameworks. The White Paper, however, addresses a much wider issue, of the ‘internal market’. It has been produced by the UK Government, not negotiated with the devolved administrations. The internal market is a broad principle in EU law that provides for the removal of obstacles to free movement of goods, services and people wherever they may arise. Most of these arise from government regulations or subsidies. Potentially they could come up in any policy field. So minimum pricing of alcohol in Scotland, introduced as a public health measure, was challenged on internal market grounds, although it was ultimately upheld. The application of this principle to the devolution settlement is problematic in a number of ways. The White Paper asserts that it was part of the Acts of Union of England with Scotland in 1707 but this is doubtful. The term is not used and the concept of an internal market only really arises in a modern, regulatory state. In any case, the Acts of Union abolished the Scottish Parliament, the opposite of the devolution which occurred in 1999. The Court of Session has already ruled (in the minimum pricing case) that the Union legislation cannot be used to over-rule the devolution settlement on internal market grounds. Another claim in the White Paper is that, from January, the devolved territories will gain new powers. In fact, Scotland, Wales and Northern Ireland have all powers except those expressly reserved to Westminster. The powers in question are not reserved and, in the absence of a change in the devolution statutes, would automatically come back to the devolved level. Within the EU, Scotland, Wales and Northern Ireland had the same degree of discretion in interpreting EU regulations as do Member States, which is quite considerable and has increased in recent years. So Scottish agriculture policy has diverged significantly from that in England. The test for the new arrangement will be how much discretion is still available. The Frameworks that are still being negotiated would govern that. The new internal market principle could go much further in curtailing devolved powers. There is a suggestion in the White Paper that the discretion available to the German Länder is problematic although that is smaller than the devolved UK nations had.

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There is a big difference between how the EU Internal Market works and what is being suggested here, although there is a lack of detail. EU laws and regulations are initiated by the European Commission, which is independent of Member States. They are agreed in the Council of the European Union, representing Member States and approved by the European Parliament. They are subject to a test of subsidiarity and proportionality, meaning that they must be applied at the lowest level possible and be no more detailed than necessary. Breaches of these principles can be appealed to the Court of Justice of the EU. Even sub-state governments can appeal via the Committee of the Regions. The key principles in the White Paper are mutual recognition and non-discrimination. The principle of mutual recognition is taken directly from EU practice. This means that an item that meets the regulatory standards in one part of the UK can be sold anywhere else in the UK. Yet, again, the context is different. The EU is a union of 27 countries, in which no country predominates. In the UK, England has 85 per cent of the population so that it will be English standards, set by the UK Government, that prevail. Some of these standards will be set so as to conclude trade deals with other countries, meaning that these imports will be freely available across the UK, whatever standards are set in Scotland and Wales. Northern Ireland raises further issues, given that it will remain part of the EU regulatory regime in many respects. The White Paper gives an assurance that ‘key decisions will be put to the UK Parliament for approval, rather than resting exclusively with the UK Government.’ It does not say that the devolved parliaments and assembly will have to approve. There will, doubtless, be consultation but this is not the same as co-decision as happens in the EU. The internal market principle in the EU has often proved contentious as the minimum pricing case showed. The question is about which matters should be left to market competition and which matters might be subject to regulation on social or environmental grounds. This is, essentially, a political rather than a purely technical matter. The White Paper does suggest that the internal market will not cover some important matters but, again, the detail is missing. There may be a monitoring body but its status is unclear. In the EU, some of these matters end up in the courts. Internal market mechanisms in other devolved or federal states have been based on intergovernmental agreements and mechanisms and constrained by constitutional rules. So a mutual recognition clause in the Spanish law was struck down by the Spanish Constitutional Court on the grounds that it represented extraterritorial jurisdiction, that is one region legislating for what happens in another one. The White Paper includes a detailed analysis of the costs of not having an internal market across the UK and there are repeated claims about its benefits. There is no accompanying analysis of why leaving the EU internal market, which is even larger, should be a positive move.