There are strong business arguments for the rejection of the EU regulation, says thinktank

Britain should accept continued EU regulations in goods in return for retaining access to the EU single market, one of the thinktanks closest to Downing Street has proposed.

After consultations across business and politics, a report from Open Europe concludes: “There is no strong business case for immediate significant divergence from the EU’s regulatory regime.” It says adherence to EU standards would not restrict growth in the export of British goods outside the EU.

The report says the proposed “enhanced mutual recognition agreement would mean most goods manufactured by in one country would be considered pre-authorised for sale across others”.

The proposal will anger many Eurosceptic MPs, but Open Europe – a thinktank that in the past has provided some of Downing Street’s most senior policy European analysts – says the government has to shift position both to unlock the polarised political debate and to meet demands clearly expressed by British business.

The proposal will be taken as another sign that the tide of opinion is shifting away from a free trade deal in which the UK gains little access to EU markets in return for the right to full regulatory divergence.

The Open Europe compromise has strict limits since it suggests the UK should be free to regulate itself in services – the bulk of the UK economy – and should not accept a customs union or a common external tariff.

It also suggests the UK could be allowed to decide for itself whether it wishes to accept new EU regulations in goods, so long as it acknowledges that rejection of such new regulations would limit future UK market access.

The paper assumes that the UK will negotiate a standstill agreement until December 2020 in which the UK maintains all of its obligations and market access but plays no role in setting rules.

However, a long-term willingness to accept EU rules in the field of goods would require a greater role for the European court of justice, or at least a judicial dispute resolution mechanism informed by the ECJ rulings, and would also set limits on the UK’s ability to negotiate its own free trade deals.

The compromise will be seen as significant step forward by European business leaders, many of whom are due to meet Theresa May on Monday in Downing Street.

The proposal is largely endorsed by the Eurosceptic former chancellor Norman Lamont in a foreword to the pamphlet. “There is an argument that Britain could commit to preserving the existing body of EU rules and regulations on goods,” he writes. “Business has already adjusted their systems to make products to meet these requirements.”

The pamphlet’s authors say: “Giving up some control – or sovereignty – over goods regulation is a price worth paying for strong market access. Manufacturers in highly regulated industries often follow EU rules anyway, in some cases even in the US.

“The debate at the moment is polarised between hardline leavers who refuse to accept giving up any sovereignty whatever the economic costs, and extreme remainers who want to either reverse the referendum result or at least recreate the entire structures of the EU from the outside. This is not where business or the public are. A sensible compromise recognises that giving up a little sovereignty can deliver good economic benefits, but there are diminishing returns in asking for more.”

The detailed talks over a future trading relationship are due to be held at a June meeting of the EU council, but the run-up to the meeting has been overshadowed by the inability of the UK government to come up with an agreed proposal on the Northern Ireland border.

Open Europe claims its compromise should be welcomed in Brussels since the EU already allows countries such as Switzerland and Ukraine very high levels of access to the single market in goods, in return for their broadly following the EU rules.

The report says a twin-track trading strategy for goods and services is justified by the trade flow figures. In 2016 the EU accounted for around 48% of UK goods exports, with the EU representing by far the UK goods industries’ most important export market.

The bulk of this trade is in motor vehicles and parts, chemicals and pharmaceuticals, and computing, electronic and electrical products. All of this trade is already highly integrated with European supply chains. By contrast, only 32% of UK services are exported to the EU, and a system of regulatory equivalence would be sufficient in most areas.