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Documents considered by the Committee on 9 May 2018 Contents

1Mutual recognition of goods

Committee’s assessment

Politically important

Committee’s decision

(a) Not cleared from scrutiny; further information requested; (b) and (c) cleared from scrutiny

Document details

(a) Proposal for a Regulation of the European Parliament and of the Council on the mutual recognition of goods lawfully marketed in another Member State; (b) Report from the Commission to the European Parliament, the Council and the European Economic and Social Committee on the Operation of Directive 2015/1535 from 2014 to 2015; (c) Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee: The Goods Package: Reinforcing trust in the single market

Legal base

(a) Article 114 TFEU; (b)—(c)—

Department

Business, Energy and Industrial Strategy

Document Numbers

(a) (39393), 15965/17 + ADDs 1–6, COM(17) 796; (b) (39405), 5107/18 + ADD 1, COM(17) 788; (c) (39398), 16016/17, COM(17) 787

Summary and Committee’s conclusions

1.1The principle of mutual recognition, derived from Articles 34–36 of the Treaty on the Functioning of the European Union (Measures of equivalent effect) and the Court of Justice’s landmark Cassis de Dijon ruling (Case 120/78) on the application of these articles, is a well-known element of the EU single market for goods. The principle provides that where harmonising EU-level product rules do not exist for a particular type of good—significant examples include shoes, furniture and tableware—then the Member States must accept the national technical standards of the Member State in which a good has been placed on the market as equivalent to their own, and cannot restrict its circulation within the single market by imposing additional technical requirements at national level.

1.2However, the principle of mutual recognition is not an absolute: Member States are permitted to derogate from the principle if they can demonstrate that a product is not safe or does not respect the public interest. The principle only applies to approximately 25%1 of products on the EU market for which harmonised standards do not exist; where harmonised EU product standards exist, there is no mutual recognition of national technical standards, as these have been approximated by EU law.

1.3A further limitation of the mutual recognition principle concerns its implementation. A 2015 Commission evaluation found that mutual recognition was not functioning as well as it should, with some Member States introducing additional requirements and duplication of testing. If Member States deny a product access to their market for illegitimate or disproportionate reasons, and the SOLVIT2 procedure does not resolve the issue, challenging national decisions through the courts can be costly and time-consuming, particularly for Small and Medium Businesses. The effect of this is that, in many cases, manufacturers end up adapting their product to comply with host country regulations at additional cost, or choosing not to enter a new market.

1.4In response to these concerns, as part of a wider Goods Package, the Commission has published a proposal for a regulation on the mutual recognition of goods which would replace the current piece of secondary legislation which seeks to improve the implementation of the mutual recognition principle, Regulation 764/2008. The principal changes proposed are:

1.5The Parliamentary Under Secretary of State at the Department for Business, Energy and Industrial Strategy (Lord Henley) informs the Committee in his Explanatory Memorandum that the Government supports the proposal’s objective of better implementing the mutual recognition principle and thereby facilitating the free movement of non-harmonised goods. The Minister is particularly supportive of the voluntary mutual recognition declaration, which he considers has the potential to address the lack of a common approach among Member States for demonstrating that a product should benefit from the MRP, and also supports the provisions to enhance the role of Member State Product Contact Points (PCPs) on the basis that the quality of online information they provide can vary. In his assessment, the proposal complies with the principles of proportionality and subsidiarity.

1.6Regarding EU exit, the Minister observes that businesses based outside the single market can still benefit from the free movement of non-harmonised goods under the mutual recognition principle once they have legally marketed a product in one Member State. As such, he concludes that improving the implementation of mutual recognition within the EU is in the interest of the UK because it will enable UK goods (as third country goods) to circulate freely once inside the EU.

1.7On a wider level, mutual recognition has become an important element of the Article 50 negotiations regarding the framework for the future economic partnership: the Prime Minister indicated in her speech at Mansion House that the Government seeks a “comprehensive system of mutual recognition”, which would exceed what is on offer either within the EU or to third countries outside the single market. Commission officials have suggested that this proposal is not compatible with the EU legal order, although the matter remains subject to negotiation.

1.8The background section of this report provides an overview of mutual recognition of goods within the single market, the EU’s existing mutual recognition arrangements with third countries, and the UK and the EU’s public positions on this issue in the Brexit negotiations.

1.9We have taken note of the Government’s support for the proposed regulation, which aims to improve implementation of the mutual recognition principle within the EU, and thus make it easier for manufacturers to export to other Member States without having to comply with additional technical rules in the country-of-destination. This proposal will benefit UK businesses as long as the UK remains a Member State, as well as during the proposed implementation period.

Brexit and EU mutual recognition of non-harmonised product standards

1.10We share the Minister’s view that, post-exit, UK businesses will “still benefit from the free movement of non-harmonised goods under the MRP, once they have legally marketed a product in one Member State”. However, the Minister’s analysis implicitly acknowledges that, post-exit, UK businesses would not benefit from the mutual recognition principle as they do at present.

1.11In the absence of any new arrangements, when the UK becomes a third country vis-à-vis the European Union:

1.12We conclude that, although the increased complexity of benefiting from the mutual recognition principle post-exit will increase the costs and bureaucracy incurred by some UK businesses, the fact that they will be able to continue to benefit from the principle to some extent, taken with its imperfect state of implementation and the fact that it only applies to approximately 25% of goods, means that we do not consider this added difficulty to be a major concern. The more salient issue concerns UK-EU trade in goods for which harmonised EU product rules exist.

Divergent conceptions of mutual recognition

1.13We note the Prime Minister’s preference for the future UK-EU economic partnership to contain a “comprehensive system of mutual recognition” under which some regulatory divergence would be permitted, but reciprocal market access would be maintained on the basis that both regulatory systems would seek to achieve the same outcomes: “UK law may not necessarily be identical to EU law, but it should achieve the same outcomes.” More fundamental divergence would result in reduced market access.

1.14To avoid confusion, it is important to differentiate this proposed UK-EU form of mutual recognition from (i) that which currently exists within the EU and (ii) existing EU mutual recognition arrangements with third countries.

1.15In terms of the EU’s current approach to mutual recognition of product standards within the internal market, we observe that:

1.16In terms of the EU’s current approach to mutual recognition of product standards vis-à-vis third countries, we observe that:

1.17The Commission’s public position on mutual recognition in the context of the UK’s withdrawal from the EU has been to emphasise that it is an intra-EU arrangement which is complemented by harmonised rules; that the EU’s mutual recognition agreements with third countries respect the regulatory autonomy of both parties’ legal orders and do not entail substantive mutual recognition of regulatory standards; and that mutual recognition within the EU is enabled by a pooling of sovereignty which involves the creation of a regulatory union as well as common institutions including the Court of Justice of the European Union (CJEU).

1.18In our assessment this final point is not overstated: the principle of mutual recognition within the EU was given effect by a ruling of the CJEU, the principle’s functioning continues to depend on the Court’s clarification of the scope of derogations from the principle that are permitted, and its operation is enabled by a notification mechanism which requires Member States to submit draft technical rules to scrutiny by the Commission and other Member States, and provides for sanctions in the event of non-compliance. The extensive nature of the regulatory environment which oversees the operation of the mutual recognition principle calls into question the extent to which the mutual recognition of the substantive product rules of third countries is compatible with the EU’s single market.

1.19A further difficulty is that a truly comprehensive system of substantive mutual recognition of regulatory standards, including those products for which harmonised EU rules exist, would go much further than what currently exists even within the single market, in which EU Member States must themselves comply with harmonised EU rules. One consequence of this would be that the UK would retain full market access while gaining some freedom to diverge, whereas EU Member States (and all other third countries) would remain obliged to conform with EU product rules when placing goods on the market.

1.20We conclude that the UK and the EU’s visions of the level of mutual recognition that is possible within the future economic partnership diverge so considerably that it may not be possible for the negotiators to find a middle ground. The Government may therefore eventually face a choice between two things: either a conventional Mutual Recognition Agreement which would enable UK conformity assessment bodies (CABs) to certify conformity with EU product rules and vice-versa, or a market integration agreement which would require de facto continued adherence to EU rules.

1.21We ask the Government to respond to the following questions:

1.22We ask that the Government respond to these questions by 13 June 2018. In the meantime, we retain the proposal under scrutiny and draw this report to the attention of the Committees for Business, Energy and Industrial Strategy and the Committee for Exiting the European Union.

1.23We are aware that rapid progress has been made on the proposed Regulation in Council Working Groups and expect an update from the Government imminently regarding a possible General Approach in Council, to which we will endeavour to respond promptly.

Full details of the documents

(a) Proposal for a Regulation of the European Parliament and of the Council on the mutual recognition of goods lawfully marketed in another Member State: (39393), 15965/17, COM(17) 796; (b) Report from the Commission to the European Parliament, the Council and the European Economic and Social Committee on the Operation of Directive 2015/1535 from 2014 to 2015: (39405), 5107/18, COM(17) 788; (c) (39398) 16016/17 COM(17) 787.

Background

1.24For a full account of the spectrum of mutual recognition arrangements globally, the OECD has published a working paper, The contribution of mutual recognition to international regulatory co-operation. The EU’s ‘Blue Guide’ on the implementation of EU products rules 2016 provides a comprehensive overview of the EU’s internal and external approaches to mutual recognition. Jacques Pelkmans’ Mutual recognition in goods and services: an economic perspective, provides an appraisal of the development of the principle within the EU.

The EU mutual recognition principle

1.25The mutual recognition principle (MRP) is a well-known element of the Single Market for goods. This principle, also known as the presumption of equivalence or mutual recognition, was established by the Court of Justice’s landmark Cassis de Dijon ruling (Case 120/78) which established that, for those products where the EU has not replaced national rules with harmonising EU-wide legislation, goods lawfully marketed in one Member State can be sold in another Member State without having to comply with technical rules at national level, as to do otherwise would constitute an unjustified restriction on trade (or ‘measure of equivalent effect’). In effect, each Member State must recognise other Member States’ standards as equivalent to their own.

1.26This regulatory approach effectively replaces a situation of dual regulation (in which manufacturers must comply with two different sets of national technical rules in order to operate in both markets) with one of ‘home country’ or ‘country-of-origin’ regulation, reducing the amount of red tape with which manufacturers must comply, and making it easier for manufacturers to export their goods to other Member States. The rationale of this regulatory approach is that it can effect deep market integration while respecting ‘diversity’ amongst the participating countries, and avoiding the need for exhaustive, prescriptive regulation where it is unnecessary.

1.27However, the mutual recognition principle is not an absolute within the EU, as certain exceptions to it are permitted. The EU’s ‘Blue Guide’ explains that products lawfully produced and/or marketed in another Member State do not enjoy the right of mutual recognition “if the Member State of destination can prove that it is essential to impose its own technical rule on the products concerned based on the reasons outlined in Article 36 TFEU (protection of public morality or public security, protection of the health and life of humans, animals or plants, etc.) or in the mandatory requirements developed in the Court’s jurisprudence and subject to the compliance with the principle of proportionality”. Despite this flexibility, the Court of Justice of the European Union has been active in defining what constitutes a justified derogation, and derogations from the principle must meet various requirements—i.e. they must be non-discriminatory on grounds of nationality, be justified by a detailed risk analysis, and that any intervention is necessary and proportionate.

1.28Furthermore, the mutual recognition principle does not apply to products for which harmonised EU requirements exist, which account for approximately 69% of goods on the EU market.3 In such cases, divergent national standards are replaced with a single EU standard with which manufacturers must comply. Although the regulatory approaches of harmonisation and mutual recognition are therefore mutually exclusive, they are also complementary: if Member States frequently apply derogations to a particular type of non-harmonised product, with the effect that mutual recognition does not work in practice for this product, then the Commission may consider introducing harmonised rules to facilitate the free movement of goods.

1.29Two pieces of secondary EU law are of particular relevance to the functioning of the principle of mutual recognition. Regulation 764/2008, the Mutual Recognition Regulation, seeks to ensure the effective implementation of the principle. This regulation defines the rights and obligations of national authorities and businesses where the former intend to refuse market access to a product lawfully marketed in another Member State, and covers administrative decisions based on a technical rule that lead to the prohibition of market placement or require additional testing of products before their placement or withdrawal.

1.30Key effects of the Mutual Recognition Regulation are:

1.31Also important to the functioning of the mutual recognition principle is the notification procedure laid down by Directive 2015/1535, the Single Market Transparency Directive. It requires the Member States to notify to the Commission draft national technical regulations at least three months in advance of their proposed adoption (the “standstill” period). Once a measure is notified, the Member States and the European Commission can examine the text and deliver a detailed opinion or comment, seeking clarification, modification or withdrawal of the draft legislation. The main purpose of the notification procedure is to prevent the creation of new barriers to the internal market before they have been put in place and have produced any negative effects. Any technical requirements must be proportionate and the minimum necessary to achieve the aim of protecting the public. All notifications are available to view on the Commission’s Technical Regulations lnformation System (TRIS), which is publicly available and so enables stakeholders to review proposals and submit their views via their Member State.

1.32A recent Commission report concluded that the notification procedure continues to demonstrate its value and to reduce likelihood of protectionist national technical legislation being put in place.

Mutual recognition in the context of EU exit

The Government’s vision for mutual recognition

1.33In her Mansion House speech on 2 March 2018 the Prime Minister said that, in order for UK-EU trade to remain frictionless, the Government wished to ensure that “as now, products only need to undergo one series of approvals, in one country, to show that they meet the required regulatory standards” and that, to achieve this, a “comprehensive system of mutual recognition” would be needed. The Prime Minister said that, for this arrangement to work, UK and EU regulatory standards would have to remain “substantially similar” in the future in terms of the outcomes that they sought to achieve, but that some regulatory divergence should be permitted within this: “Our default is that UK law may not necessarily be identical to EU law, but it should achieve the same outcomes.” The Prime Minister noted that, in some cases, Parliament might choose to pass an identical law to the EU; in others, it might choose to diverge more fundamentally, without aiming to achieve the same regulatory outcomes, which would have “consequences for our market access.”

1.34The Prime Minister accepted that there would need to be “an independent mechanism to oversee these arrangements”, which would therefore not fall within the direct jurisdiction of the Court of Justice of the European Union.

1.35As well as mutual recognition of regulatory standards of goods, the Prime Minister’s proposed comprehensive system would also encompass mutual recognition of regulatory standards in a range of service sectors. This report confines itself to consideration of mutual recognition of product standards.

The EU position on mutual recognition

1.36The European Commission’s Article 50 Task Force’s slides on regulatory issues constitute the clearest exposition of its position on the subject of mutual recognition in the context of negotiations with the UK.

1.37The slides emphasise that the EU’s internal market, which facilitates the operation of the four freedoms, including the free movement of goods, is an “ecosystem” of regulatory instruments and structures. Within the Single Market, sovereignty is pooled, meaning that there is deep regulatory integration—comprising full EU-level harmonisation of product rules and compliance methods, with mutual recognition of national rules where this is not the case—underpinned by an integrated regulatory, supervisory, judiciary and enforcement system.

1.38Subsequent slides differentiate the intra-EU regime from its agreements with third countries. In contrast to the EU regime, the Commission argues that its Free Trade Agreements with third countries do not entail any significant pooling of sovereignty, meaning that two separate regulatory spaces continue to exist. In this situation, there is “no harmonisation” of rules between the two parties to the agreement, and “no mutual recognition/equivalence of substantive rules”, only “limited mutual recognition of conformity assessment results with host rules”. Reciprocal recognition is confined to verifying compliance with host state rules: the opposite of mutual recognition.

1.39The remainder of the slides reiterate these points in relation to a variety of sectors, stating that:

1.40A more detailed account of the EU’s current “mutual recognition” arrangements with third countries is provided below.

EU ‘mutual recognition’ arrangements with third countries

(i) Mutual recognition agreements (MRAs)

1.41Traditional mutual recognition agreements, which can be found in standalone mutual recognition agreements (MRAs) or embedded in trade deals, acknowledge the differences between two regulatory regimes and permit the Conformity Assessment Bodies (CABs) of one party to locally test and certify that a product complies with the other party’s regulations.

1.42An Institute for Government paper explains that such conformity assessment agreements only deal with one aspect of regulatory barriers: those created by duplication of testing and certification at the border. Neither the regulatory objectives, nor the technical requirements, nor the conformity assessment procedures are the same or ‘equivalent’. They do not entail mutual recognition/equivalence of different regulatory standards, as occurs within the Internal Market.

1.43Such MRAs are also typically quite limited in their scope: the Commission web-page which summarises its MRAs with third countries shows that no EU MRA covers chemicals, while its MRA with the US covers only safety tests for electrical goods and radio equipment.

(ii) The EU-Swiss MRA

1.44As part of its wider arrangements with the EU, Switzerland and the EU have a unique “enhanced” MRA, which, according to an Institute for Government report provides Switzerland “near-complete” access to the Single Market for industrial goods in those sectors in which it is deemed equivalent. However, as outlined in the Blue Guide on implementation of EU product rules, this agreement involves the harmonisation of Swiss technical regulations with those of the EU:

“Switzerland has chosen to modify its legislation in the sectors covered by the agreement, in order to align it with that of the Union. Furthermore, it has committed to maintain its legislation aligned whenever amendments to it are introduced by the Union to the applicable EU legal framework.”

1.45As such, the enhanced MRA that forms part of the wider bilateral EU-Swiss relationship constitutes a market integration agreement, in which Switzerland applies EU regulatory product standards to its own market, rather than an agreement in which there is substantive mutual recognition of divergent regulatory standards.

(iii) Agreement on Conformity Assessment and Acceptance of Industrial Products (ACAA)

1.46As set out in the European Commission’s Blue Guide on the implementation of EU product rules, ACAAs are based on “mutual recognition of equivalence in technical regulation, standardisation and conformity assessment” and allow industrial products covered by the agreements and attested as compliant with the procedures in the European Union to be placed on the market of the partner country without having to undergo any further approval procedures, and vice versa.

1.47ACAAs consist of a framework agreement and one or more annexes, setting out the products covered, and the means adopted to extend the benefit of trade in that sector. The framework agreement provides for two mechanisms: (a) the recognition of equivalence in technical regulation, standardisation and conformity assessment for industrial products subject to equivalent regulation in Union law and the national law of the partner country, and (b) the mutual acceptance of industrial products that fulfil the requirements to be lawfully placed on the market in one of the Parties in cases where there is no European technical legislation applicable to relevant products.

1.48The Commission’s guidance states that an ACAA “requires the prior full alignment of the partner country’s legal framework with EU legislation and standards and the upgrading of the implementing infrastructure in line with the model of the EU system, in relation to standardisation, accreditation, conformity assessment, metrology and market surveillance.” The alignment required is described as similar to that of Candidate countries seeking to accede to the EU.

1.49The Institute for Government states that existing ACAAs, such as the EU-Israel ACAA which covers pharmaceutical products, have “required the third country to accept EU rules for certain products, in return for allowing these products to be sold in the EU market without checks required at the border.” As such, existing ACAAs constitute, like the Swiss enhanced MRA, a market integration agreement with the EU, rather than an agreement in which there is mutual recognition of substantially divergent regulatory standards.

(iv) Technical Barriers to Trade chapters in FTAs

1.50Chapters on Technical Barriers to Trade in Free Trade Agreements maintain the autonomy of the regulatory orders of both parties to the agreement, but provide for targeted mutual recognition of results of conformity assessment in line with host country rules. For example, under the CETA Protocol on Conformity Assessment, a designated conformity assessment body in the EU can test EU products for export to Canada according to Canadian rules and vice versa. In all cases these conformity assessments are checking compliance with host country rules, meaning that there is no substantive mutual recognition of divergent regulations.

1.51Products covered by the CETA Protocol on Conformity Assessment include:

1.52This list can be broadened to additional categories of goods in the future, subject to agreement by both parties.

The Trans-Tasmanian MRA

1.53Apart from the EU’s internal system of mutual recognition of non-harmonised goods, the only major mutual recognition arrangement is the Trans Tasmanian Mutual Recognition Agreement between Australia and New Zealand. This deal excludes vehicles and pharmaceuticals, and can be revoked by one side for up to a year. An OECD study on regulatory cooperation notes that both the EU and Trans-Tasman systems of mutual recognition are made possible through a “uniquely deep form of economic integration and common institutional frameworks”. The OECD report also notes that, as with the EU’s system of mutual recognition, the mutual recognition principal “is embedded in a more extensive system of mutual market access, which also makes use of harmonisation and selective centralisation”.

Previous Committee Reports

None.

1 European Commission, Evaluation of the Application of the mutual recognition principle in the field of goods, p31 (June 2015). A European Parliament briefing paper states that non-harmonised products represent 31% of the overall value of industrial products in the internal market.

2 SOLVIT is an informal dispute-resolution network which enables EU citizens and businesses are breached by public authorities in another EU country. The SOLVIT service is provided by the national administration in each EU country and in Iceland, Liechtenstein and Norway.

3 A European Parliament briefing paper suggests that non-harmonised products represent 69% of the overall value of industrial products in the internal market, implying that non-harmonised products account for the remaining 31%. As noted above, a European Commission evaluation report cites estimates that harmonised standards do not exist for 25% of products on the EU market.



Published: 15 May 2018