Research and analysis

Summary of the report

Published 22 March 2022

Introduction

The Office for the Internal Market (OIM) was launched in September 2021 to provide independent advice, monitoring and reporting in support of the effective operation of the UK internal market.

Since leaving the EU, significant powers returned to the UK Government and Devolved Administrations, increasing the possibility of regulatory differences between the nations. The UK Internal Market Act, which established the OIM within the Competition and Markets Authority (CMA), aims to ensure that the internal market continues to function as effectively as possible, allowing people and businesses to trade without additional barriers based on which nation they are in.

The OIM provides non-binding technical and economic advice to all 4 governments of the UK on the effect on the UK internal market of specific regulatory provisions that they introduce. Its work assists governments in understanding how effectively companies are able to sell their products and services across the 4 nations of the UK and the impact of regulatory provisions on this, for consideration alongside wider policy issues.

Purpose of this report

We are publishing this report to develop an understanding of current and future issues in the UK internal market ahead of the OIM’s first statutory reports in March 2023.

We have worked collaboratively with all 4 nations to review data on intra-UK trade and to identify scope to improve the data for the benefit of policymakers. We have surveyed businesses to understand their awareness of the UK internal market, trading patterns and any concerns about regulatory divergence. We have also reviewed the policy landscape and identified some areas in which regulatory divergence might be most likely to arise.

Regulatory environment

The OIM’s objective and role

The OIM’s objective is to support, through the application of economic and other technical expertise, the effective operation of the UK internal market. The UK Internal Market Act establishes 2 ‘market access principles’ (MAPs):

• mutual recognition, which ensures that a product or service which can be legally sold or provided in one part of the UK can be sold or provided in any other part of the UK

• non-discrimination, which ensures that goods or services coming from other parts of the UK are not directly or indirectly discriminated against in favour of local goods or services

The MAPs apply to goods and services. The Act also introduces a system for the recognition of professional qualifications across the UK.

Some regulatory provisions are excluded from the Act because they were in place before the end of the transition period following the UK’s exit from the EU on 31 December 2020. In addition, the OIM cannot undertake a review of the Northern Ireland Protocol or of measures necessary to give it effect.

The OIM can assist the 4 governments in their consideration of regulatory provisions where these might have implications for intra-UK trade. The OIM’s functions fall into 2 categories:

• providing advice on specific proposed or enacted regulatory provisions on the request of a relevant national authority
• monitoring and reporting on the operation of the UK internal market through discretionary reviews and annual and 5-yearly reports

Regulatory divergence within the UK

The exercise of devolved powers by the elected legislatures of Scotland, Wales and Northern Ireland can take many forms, but most relevant to the UK internal market is the power to adopt new regulations and change existing regulations in areas that have been devolved through the relevant devolution Acts. Regulatory divergence can occur where new or changed regulations in one or more of the 4 nations are not adopted in them all, or where the UK Government exercises its reserved powers but with different approaches or timescales in the devolved nations. Regulatory change may involve either a reduction or an increase in regulations.

Any decision by one or more of the 4 governments to diverge from previously aligned regulatory systems could affect the operation of the UK internal market. Whilst there may be democratic, policy and practical reasons for governments to adopt differing regulatory approaches, there may also be implications – both positive and negative – for intra-UK trade.

Regulatory changes may lead to frictions which make it harder to do business across borders. Differences in regulation can have the equivalent effect of a tax or tariff on products or services from other jurisdictions because they introduce an additional cost for producers. Ultimately, these costs could translate into higher prices, quality impacts and may reduce choice for consumers. The OIM therefore monitors the UK internal market to identify issues which might merit a more detailed review and advises governments, upon request, on the potential technical and economic effects of regulatory provisions.

Since 2017, the UK Government and Devolved Administrations have been working together to develop Common Frameworks. These are agreements between the UK Government and the Devolved Administrations to establish common approaches to policy areas where powers which have returned from the European Union intersect with areas of devolved competence. The OIM’s 5 yearly reports will include a review of the impact of Common Frameworks on the UK internal market.

Economic overview of the UK internal market

Understanding the economics of the UK internal market, including trade between the 4 nations, is essential to monitoring the health of the market and considering the effects of regulatory divergence. In undertaking this first analytical assessment of intra-UK trade, we have sought to examine the key sources of data on the economies of the 4 nations and intra-UK trade and identify the main themes emerging. This, together with our survey work, has enabled us to identify some key themes regarding the UK internal market and intra-UK trade. This gives the OIM a platform upon which further analysis can be conducted.

Economic data

The 4 nations vary significantly both in terms of their population and their economies. England accounts for the highest proportion of UK GDP (86.7%), followed by Scotland (7.6%), Wales (3.5%) and Northern Ireland (2.2%). While the main driver of the differences is population size, there are also important differences in GDP per capita. England has the highest GDP per capita followed by Scotland, Northern Ireland and Wales, with a 38% difference between the GDP per capita of England and Wales.

All 4 UK nations are heavily reliant on services, which make up at least 70% of their economies. However, there are some differences between nations. For example, manufacturing contributes relatively more to the economies of Wales and Northern Ireland while professional and technical activities and financial services contribute relatively more to the economies of England and Scotland.

Intra-UK trade data

Data on trade between UK nations has limitations. England does not publish data on intra-UK trade and there are differences in the methodologies used in the data published by Scotland, Wales and Northern Ireland. The data is also published with long lags, with the most recent intra-UK trade data being for 2019.

Notwithstanding these limitations, we have undertaken a comprehensive review of the available data. A number of themes emerge:

• Intra-UK exports are worth at least £190bn per year, representing over a quarter of all UK exports

• Scotland, Wales and Northern Ireland, in contrast to England, trade more with the rest of the UK than with the EU or the rest of the world. They are also net importers within the UK, purchasing more from other UK nations than they sell to them. In contrast, England is a net exporter to the other UK nations

• Of the devolved nations, Scotland has the greatest amount of trade with the rest of the UK (£66bn of imports and £52bn of exports) followed by Wales (£27bn of imports and £26bn of exports) and Northern Ireland (£13bn of imports and £11bn of exports)

• In relative terms, Scotland, Wales and Northern Ireland have broadly similar trade patterns with the rest of the UK. 66% of Scotland’s imports and 60% of exports are from and to other UK nations. For Northern Ireland and Wales, imports from the rest of the UK are 63% and 58% of total imports, respectively, with sales to the rest of the UK accounting for around half of their exports. Only a small proportion of England’s trade is with the other UK nations.

We have also examined intra-UK trade flows by sector which indicates that:

• service exports to the rest of the UK are higher for Scotland (60% of intra-UK exports) than Northern Ireland and Wales (40%) despite services accounting for 70-80% of all 3 economies

• almost 40% of Scotland’s sales to the rest of the UK are business services – over twice that for each of Northern Ireland and Wales – driven in part by Scotland’s financial services industry

• almost 40% of Northern Ireland’s and Wales’s sales to the rest of the UK were in manufactured goods, reflecting the importance of manufacturing to these economies

• 20% of Scotland’s and 15% of Wales’s sales to the rest of the UK were in primary sector goods and utilities, reflecting the importance of Scotland’s oil and gas industry and Wales’s agricultural sector

Collaborative work to improve intra-UK trade data

Developing comparable and robust statistics on intra-UK trade is important to policymakers, businesses and consumers across the UK. We are therefore working collaboratively with all 4 governments to identify the current data limitations and take forward plans to improve the data.

We have also appreciated comments and suggestions from analysts in all 4 nations which have been helpful in developing this report.

Surveys of the UK internal market

We commissioned a telephone survey of nearly 600 businesses across the UK in order to understand the economics of the UK internal market in more detail and to provide more recent data than the published statistics. Analysts in all 4 governments provided valuable input to this work.

We also worked with the Office for National Statistics to include 2 questions on intra-UK trade in the fortnightly Business Insights and Conditions Survey (BICS) which typically receives 8,000 to 9,000 responses in each wave.

The BICS results indicate that:

• 26% of businesses sold goods or services to customers in other UK nations in the last 12 months. A further 9% may have traded with other UK nations but could not estimate this as a proportion of their sales

• manufacturing (42%) and Wholesale/Retail trade (40%) were the 2 sectors which had the highest proportions of businesses with intra-UK trade

• larger firms were more likely to trade with other UK nations than smaller firms

• 10% of businesses which traded with customers in other UK nations said they were experiencing challenges in doing so, with accommodation and food service (21%), transportation and storage (16%) and manufacturing (16%) the most affected sectors

The OIM’s survey explored the UK internal market in more detail and found that:

• consistent with the BICS results, larger firms were more likely to trade with other UK nations than smaller firms

• many markets are local in nature, which limits the incentives and ability for firms, particularly smaller ones, to trade outside their region or nation

• of those firms who engaged in intra-UK trade, the majority who responded found it easy or very easy to trade across nations. However, some firms identified existing differences in regulations that may affect their sales of goods or services within the UK. A slightly smaller number of firms identified anticipated policy and regulatory differences that may affect the sales of their goods or services

• of those firms who engaged in intra-UK trade, the majority could identify the proportion of their sales that were traded across UK nations, and of those, most found it easy to do so. However, there were a sizable minority that were not able to do so, mainly either because they were unable to identify their final customers or because they lacked the information systems needed to generate the data

• most businesses who traded with other UK nations noted that trade had either stayed the same or increased in the past year

• there was low awareness of the OIM, although a higher proportion of firms answered questions on the MAPs correctly

In addition to providing a richer evidence base, the survey was also an opportunity to understand better how surveys can be designed to examine intra-UK trade and has enabled us to identify lessons for future survey work.

Future developments in the regulatory environment

Our analysis of trade data demonstrated the scale of the UK internal market and its importance to the 4 nations of the UK. Given the high level of integration in trade flows between UK nations, potential barriers to trade with the rest of the UK could have implications for economic growth and prosperity.

We have not identified evidence of substantial new policy divergence emerging between the 4 nations since 31 December 2020. Coupled with the findings from our survey of businesses, there is nothing in the evidence we have seen to date to suggest that regulatory divergence since December 2020 has affected the UK internal market.

This is not unexpected because any potential divergence of regulatory approaches within the UK might occur over time as the governments develop and implement their programmes. In particular, it reflects the transitional period which prevented any modification of EU retained law.

Our analysis suggests that the main policy areas where a degree of regulatory divergence may emerge over time are likely to be in sectors such as:

• environment
• energy use
• agriculture
• animal welfare
• food, drink and health
• safety-related matters

Many of these areas align or overlap to an extent with some of the provisional Common Frameworks.

In many cases, divergence may not ultimately emerge and regulatory approaches across the UK may even converge over time or be managed through Common Frameworks. However, identifying specific areas in which regulatory divergence is most likely to occur has provided valuable intelligence.

We have set out some example developments in these sectors – including in relation to single-use plastics, smart charging, gene-edited crops, live animal exports and nutrition labelling. These examples include regulations relating to the sale of goods, provision of services and recognition of professional qualifications – illustrating the potential range of regulatory divergence that may arise.

As part of our role to provide independent advice, monitoring and reporting in support of the effective operation of the UK internal market, we will continue to consider emerging policy developments – drawing on inputs by businesses and other stakeholders to our digital reporting service and our ongoing engagement with stakeholders and the 4 governments.

We are also ready to respond to requests from the governments for reports and advice on specific regulatory provisions and by March 2023 will produce our first statutory reports on developments relevant to the UK internal market and its effective operation.