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Pro-European ministers are pushing for Britain to remain in line with EU regulations, a stance they believe would make a generous free-trade agreement more likely.
But others in the cabinet, led by Boris Johnson and Liam Fox, believe that Britain should start with a “bottom-up” approach, assuming that there will be divergence in all areas except where Britain opts in to EU rules.
Nicole Sykes, head of EU negotiations at the CBI, said businesses want trade to be as “frictionless” as possible between Britain and the bloc, and most of the lobby group’s members were prepared to accept regulatory alignment if that facilitated such an outcome.
“There is no sector which has come to us, where a majority of companies wants regulatory divergence,” she said. “Where [regulatory] alignment means frictionless trade, that is what business wants.”
Allie Renison, head of EU & trade policy at the Institute of Directors, said: “By more than two to one, IoD members would prefer the UK to maintain regulatory alignment with single market rules for goods and services rather than actively seek to diverge after Brexit.”
Ms Renison said that, while there were areas where businesses would like to see regulatory changes, a more common worry was that after Brexit the UK would have to sign up to future EU rules over which it would have no influence.
Changes that directors wanted to see included more flexibility around value added tax rules for reduced and zero rating, allowing exemptions for smaller companies under the Mifid II insurance rules, relaxing state aid restrictions for venture capital investment and amending the data protection rules that will be introduced this spring.
Some financial services companies, such as hedge funds, have argued strongly in favour of diverging from EU rules in future, saying that loosening the regulatory framework surrounding, for example, caps on bankers’ pay, would give the UK sector a competitive advantage post-Brexit.
Other sectors, such as shipping, obey international rules rather than EU-specific ones, so the debate is less relevant for them, according to the CBI.
Stephen Phipson, chief executive of the EEF manufacturers’ group, said companies tended to support “high alignment on the basis of market access”.
“The UK should seek a high level of alignment with the EU to protect current trading relationships after its transitional period following Brexit, with the UK continuing to offer its technical association with EU regulatory bodies,” he said.
“Going forward any future deal must include a mechanism to manage regulatory co-operation and an assessment of whether continued alignment with the EU in specific areas of regulation are in the national interest.”
Pro-Brexit business people, spanning sectors from agriculture to manufacturing, argued in the run-up to the referendum in 2016 that leaving the EU would allow companies to escape from an overwhelming regulatory burden imposed by the bloc.
Ms Sykes said that it made sense for exporters trading mainly with the EU to assume product standards that met those of their most important market. She added that many other markets were having to adopt EU-aligned regulations in order to facilitate trade with the bloc. [...]
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