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Why Brexit May Not Be Worth It: A Competition Law Perspective

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About The Author

Matt Bogdan (Former EU & International Law Editor)

Matt graduated with an LLB (2:1) from Durham University in July 2014. Most recently, he has been assisting with research on comparative company law at the Durham Law School. Matt is primarily interested in the TMT sector, but has also been involved in matters of public international law through Durham United Nations Society.

This article is part of the 'Brexit' series, edited by Matt Bogdan.

With the upcoming referendum on the UK's membership of the European Union, the Brexit series intends to explore key issues surrounding Brexit, particularly what effect EU law currently has on the UK, and what would be left with it gone.

Other articles from this series are listed at the end of this article.

Just a single brief look at Mr Cameron’s recent, vigorous diplomatic campaign across Europe, culminating with his rather anticlimactic appearance at the European Council, makes it plain obvious that the UK’s future will primarily hinge on its ability to negotiate a good deal. This holds true both for the negotiations currently held over a pre-referendum, ‘EU reform settlement’ and, in case Britain decides to leave the EU, for the negotiations over the post-Brexit relationship between the EU and UK.

Article 50 of the Treaty on European Union (TEU) allows the UK to withdraw from the EU two years after giving notice to the European Council of its intention to leave. The standard procedure prescribes negotiations between the European Commission and the withdrawing Member State on its future relationship with the EU. Practically speaking then, if we assume the Tories push the referendum up to Autumn 2016, we are currently looking at three years’ worth of negotiations before the UK formally exits the Union. This waiting period should allow the UK to determine its new position on the international arena and prepare its legal system for the changes inevitably associated with leaving a supranational organisation like the EU, but will also simultaneously put the UK business community, and the British people generally, in a perpetual state of uncertainty.

Fortunately for everyone, this article, in recognition of the antipathetic relationship between business and legal uncertainty, will attempt to shed some light on the likely post-Brexit status quo in relation to one of the fundamental areas of law underpinning the EU single market – competition law. Unfortunately for everyone, however, it will be shown that any possible implications of Brexit for UK competition law will be largely negative, and thus from a competition law perspective, Brexit is not exactly worth the effort. This is obviously save for the quite inconceivable scenario where the EU, weakened by the British (and possibly) Greek departures, decides to prostrate in front of the UK negotiators, allowing them to cherry-pick the most tasty bits of the EU system while staying away from all of the undeniably rotten parts. If anything, the history of the EU-Swiss relations shows us exactly how unlikely it is for Britain to smooth-ride through its negotiations with the EU like that.

To keep matters in order, this article will open with a brief explanation of why competition law is a particularly noteworthy component of the EU system, next the most plausible scenarios for post-Brexit UK will be outlined, before moving to consider the implications of these scenarios for the UK competition framework. For anyone interested in a broader, more fundamental read on how and why the UK joined the EU in the first place, and why it now wishes to leave, see my previous KCTL article on the practicalities of Brexit.

What Is Competition Law and Why Should You Care?

Competition law is an area of law that seeks to protect the process of competition in order to maximise the welfare of consumers and promote economic efficiency. The EU competition law framework is founded on Articles 101, 102 and 107 of the Treaty on the Functioning of the European Union (TFEU), which restrict an array of anti-competitive practices, including but not limited to, agreements disrupting competition (e.g. cartels), abuses by dominant market players (e.g. ‘bundling’, recently covered in my KCTL article on EU’s investigation into Google’s Android OS) and provisions of State aid that distort competition (see Helen Morse’s KCTL article on illegal State aid in relation to Luxembourg and Amazon).

The European Commission generally enforces EU competition laws on behalf of the public, however some workload is also delegated to national competition authorities (NCAs) of each Member State. Crucially, breaches of competition rules can be harmful to economies both on a macro level (e.g. disruption of a market) and on a micro level (e.g. financial losses suffered by individuals), which is why private individuals also have the capacity to bring proceedings against infringing market players themselves (see my previous KCTL article on private enforcement of competition law). Since the EU competition law underpins the entire single market and ensures healthy competition within it, any parties operating in the EU, whether they originate from the EU or not, can be challenged in both public and private enforcement actions.

Under Article 3 TFEU, the EU currently enjoys exclusive competence over the area of competition law, which generally means that Member States have very limited capacity in terms of legislating and adopting binding acts in this area, unless authorised to do so by the EU itself. The UK competition law system is based on the Competition Act 1998 and the Enterprise Act 2002, which fundamentally reflect the EU rules and prescribe the institutional structure of the domestic competition system. At the heart of the UK enforcement apparatus lies the Competition and Markets Authority (CMA), which last year underwent some significant structural reforms, resulting in an increase of its enforcement powers.

In general, the European Commission deals primarily with high profile, EU-wide enforcement actions, including proceedings against Microsoft, Google and Gazprom to name a few, whereas the CMA tends to focus on domestic cases. Contrary to what one would expect, however, over the last decade the Commission has actually handled four times more competition cases than the CMA and gave out thousands more merger clearance decisions. The rules for case management and allocation between the Commission and individual NCAs are laid out in Regulation 1/2003, but have generally caused little controversy in practice.

In short, EU competition law is an “EU-owned” and “EU Commission-centred” area of law that ensures healthy competition within the EU single market, which is conducive to economic progress both on a macro and micro level. Before moving to assess the impact of leaving the EU on the current UK competition framework, we must first however consider some possible scenarios under which a Brexit could take place.

Post-Brexit Scenarios: A Downhill Battle?

The post-referendum period of two years, if it comes to it, will be marked by intense negotiations between the UK and the EU. A range of possible scenarios exist for UK’s future involvement with the EU, each presenting the UK competition law with a prospect of a different future.

i) The Norwegian Defence

After leaving the EU, the UK could try to join the European Economic Area (EEA), which currently comprises 31 members: 28 EU Member States alongside Iceland, Lichtenstein and Norway. The EEA agreement grants its members access to the EU single market (membership in the EU is not required), but it also comes at a familiar price. It provides for the inclusion of EU legislation in all policy areas related to the EU single market, which naturally includes the EU competition law. Thus, leaving the EU but rejoining the EEA would not have any real implications for the UK in terms of the competition rules that it is currently bound by.

There would be, however, a major disadvantage. Without being an EU Member State, the UK would lose its power to influence the EU legislative process, which is particularly worrying in relation to the EU-based legal frameworks, such as competition law. Paradoxically then, while many Eurosceptics advocate for Brexit by quoting the vast scope of EU competences (something that, by the way, was deemed as adequately balanced based on the UK government’s very own, 3000 page-long Review of the Balance of EU Competences) and the diminished legislative power of the UK Parliament, leaving the EU while rejoining the EEA would render the UK completely unable to influence (through the EU Parliament) the very legislation it would find itself bound by.

Nonetheless, with animosity being usually focused on the EU Common Fisheries and Agricultural Policies (which are not part of the EEA), some many find the trade-off between losing legislative influence over EU policies and regaining control over fisheries and agricultural policies rather appealing. This is misguided – sacrificing legislative influence in the EU will not only represent a huge blow to the UK’s international reputation as a leading Western power, but will also leave it with little sway over more fundamental policies than fisheries or agriculture, such as the four Freedoms of the EU.

ii) The Swiss Gambit

Undeniably, the Swiss currently have a unique, bitter-sweet deal with the EU. Without being an EU or an EEA member, they have relatively good access to the single market, albeit not without occasional problems. The process that got them here began in 1950s and continues until now, with over 72 bilateral treaties having been concluded between the two. The amount of treaties and the rather strained history of negotiations, escalating in correlation with the gradual expansion of the EU, hint at the difficulty that the UK may encounter when trying to bargain for a similar arrangement. If the UK somehow succeeded in mimicking the Swiss, then, just like Switzerland, it could potentially opt out from the EU competition law regime (naturally, opting in should also be an option).

iii) The Ultimate Retreat

Withdrawing from the EU and the EEA all together would restore all sovereign powers to the UK and give it complete control over its legislation. Since all of the directly applicable EU legislation would no longer apply, the UK would have to fill in the legislative gaps. Similarly, the EU legislation already transposed into domestic law could either be retained or repealed by new domestic legislation. To avoid complete trade isolation in Europe, the UK could for instance apply to join the European Free Trade Association (comprising Norway, Switzerland, Lichtenstein and Iceland), which albeit beneficial, with its mere four members, it is hardly a viable alternative to the EEA.

Under this scenario, the UK would also have to negotiate separate trade deals, not only with the EU/EEA but also with other regions that it currently accesses ‘through’ the EU. Whilst feasible in theory, these major agreements usually take years to complete and the UK’s post-Brexit bargaining position would inevitably be weakened (access to the EU single market is more attractive than to the UK market alone), thus making it harder for Britain to secure good enough deals in reasonable time. Either way, the UK’s control over its competition policy would largely depend on the particulars of the deals it secures with Europe and the rest of the world.

In summary, for purposes of competition law, a UK exit from the EU will either involve a complete renunciation of the EU competition law framework all together or its acceptance without having any legislative influence over its continuing development. While the latter possibility represents a fairly straightforward diplomatic loss, the former is more nuanced because of the implications involved for the UK competition law system, as discussed below.

Going Your Own Way In A Globalised World

Contrary to what one may intuitively think, leaving the EU/EEA does not necessarily release UK businesses from the scrutiny of EU competition law. Owing to the EU’s assertion of extraterritorial competition jurisdiction through the ‘effects doctrine’, EU competition laws effectively apply to all entities operating in the EU single market. Thus, even post-Brexit, any UK businesses wishing to offer their goods or services in any EU Member States will find themselves automatically bound by EU competition law. In a globalised world where e-commerce and online distribution is the new order of the day, it will be difficult for UK businesses to avoid scrutiny under EU law. Accordingly, if the Britain decided to develop its own competition law regime, UK businesses would often find themselves having to comply with two, disparate legal frameworks, thus incurring additional costs. Further, it may be argued that this is actually inevitable post-Brexit since even if UK tried to develop its competition laws in accordance with the EU ones, the judicial interpretations are bound to be different between UK and EU judges, thereby effecting a discrepancy in the laws that can no longer be remedied by mechanisms such as the ‘preliminary reference’ (available only to EU members).

No More Perks For Us

The EU competition law currently prescribes a ‘one-stop-shop’ mechanism in relation to, among others, merger control, whereby complete EU-wide merger clearances can be obtained at a single NCA or the Commission, which generally reduces costs and bureaucracy. Following Brexit, some UK businesses would need to obtain clearances from both the UK competition authority and the Commission, which not only increases these costs but also introduces legal uncertainty associated with dealing with two separate institutions and two sets of laws. Further, the UK would also lose its entitlement to ‘call in’ (and potentially block) mergers where their effects are expected to be experienced in the UK.

With an independent competition law system, the UK would regain control over the legislative development and enforcement of competition rules, and the UK government would have greater liberty to aid its own businesses, in a traditional protectionist fashion. The flipside is that it will not be able to complain to the EU Commission about other European states abusing competition through similar state aid. In practice, however, that does not seem to pose a particular problem since if the EU continues on without Britain, then the EU state aid rules will still be binding on all remaining Member States.

Having said that, the general risk of competition enforcement becoming unnecessarily politicised in an independent UK is a serious one. Under the EU competition system, Member States have limited capacity to influence competition proceedings because public enforcement is generally controlled by the Commission, an institution bound by strict economic and legal enforcement standards relating to the protection of undistorted competition. In an independently developed, domestic UK competition system it will be more difficult to keep politicians away from trying to influence the legal processes. Undeniably however – and perhaps indirectly supporting the point above – even the well-safeguarded EU competition system has recently seen more political involvement than arguably acceptable, as argued in my previous KCTL article on the role of politics in public competition enforcement.

Finally, an administrative argument should not be underestimated. As shown above, even though the CMA is currently sharing its workload with the Commission, the latter institution is clearly putting in more hours. Once outside of the EU competition system, the UK will have to contribute substantial human and financial resources to making sure that the CMA is functioning properly without the Commission’s help.

Concluding Thoughts – Time To Move Away From Negatives

While the fear-centred, negative arguments in the Scottish referendum managed to hold enough sway to guarantee success for the pro-union ‘Better Together’ campaign, we should not take the risk of depending on such unreliable methods of argumentation in the EU referendum debate because the stakes for the future of Britain are much higher this time. Thus, while the analysis above shows that leaving the EU competition law system does not hold much merit for the UK, perhaps a more positive argument, showing that the current EU competition system is the reason why the UK should remain in the EU, is a better option.

The EU competition law is one of the strongest and most comprehensive competition legal frameworks in the world, which, through its proactive role in the International Competition Network (ICN), shapes and influences the development of new competition policies around the world. Its primary public enforcer, the European Commission, is a well-funded and knowledgeable institution with broad investigatory powers, which allow it deal with competition law infringements at the highest level and, accordingly, not shy away from handing out the highest levels of fines globally. The Commission is also considered to be an effective manager of the European Competition Network (a network consisting of all NCAs), which allows it to successfully coordinate the enforcement of a set of laws that simply work. Leaving the EU and risking being deprived of an active role in the EU competition system, or worse – being excluded from it completely – is just not worth it.

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Tagged: Brexit, Commercial Law, Competition, European Union

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