Brexit and the mechanisms of EU trade

The UK’s International trade depends upon efficient electronic systems that avoid entry inspections and delays at border crossings. These systems depend upon various mutually-agreed standards on both sides of the border. Unfortunately, the recently-published Government Position Papers on Brexit chose to ignore such details – indeed, they amounted to little more than political aspirations. As Brexit day approaches, it would not be surprising for businesses in both the UK and EU member states to put pressure on their governments to address the steps needed to prevent a massive “Operation Stack” on both sides of the Channel once we leave the EU.

Businesses likely to be affected by Brexit will need to know about how the movement of goods, services, ships and aircraft will be controlled.  They cannot move freely after March 2019 unless they are the subject of new inter-government agreements. These agreements can be achieved by way of MRAs [Mutual Recognition Agreements], Memoranda of Understanding or Exchanges of Notes for example.

There is a great deal of interplay between Laws and Regulations, Standards, Inspections and Conformity Assessment, Government Market Surveillance by checks and Customs and Tariff requirements. It must  be pointed out that the so-called ”WTO model” post-Brexit advocated by some economists would deal only with tariffs and would not address in full the requirements of these other critical areas.

So what else would be needed? Firstly, Mutual Recognition of bilateral product regulations. Whether or not two trading countries’ standards rules are identical, either way they are deemed to be mutually acceptable by that MRA.

Then there are internationally agreed certificates recognising that a produce conforms to a given set of standards. These are vital before the goods can reach the marketplace. The most important body dealing with international  standards, the International Organisation for Standardization (ISO) is a non-government organisation although its membership does include 163 national standards bodies. It seeks to apply one international standard for a given product everywhere across the world.

In Europe there are three European standards organisations, ETS, CEN and CENELEC, and they have 34 members – all 28 current EU member states plus Iceland, Norway, Switzerland, Turkey, Serbia and the Former Yugoslav Republic of Macedonia. Every agreed standard is adopted by all 34 member countries’ standards bodies. In the UK, the British Standards Institution (BSI) is our national standards body. The UK Government therefore seeks to avoid making any other bilateral national agreements on standards for legal compliance purposes. In other words, only one standard per topic is permitted in these 34 countries.

There is a silence from the DExEU upon any progress in these areas. These standards organisations were not mentioned once in the Position Papers, even though they are going to play a hugely important role in facilitating trade with other European nations.  David Davis has perhaps unwisely accepted the Barnier sequencing agenda, which means that the concerns of Industry and Commerce over these issues cannot be addressed until the EU is satisfied with progress in other areas – and it is currently distinctly dissatisfied.

As Anthony Scholefield has pointed out in his research paper for the Futurus think tank, the Government’s “Plan A” – a bespoke trade agreement with the EU – is doomed to fail unless transitional arrangements are agreed.

There is also the question of non-EU trade. Approximately 80% of UK GDP is domestic. Of the remainder 13% is Entrepôt non-EU and 7% is with the EU. Will this Government prioritise the 13% or the 7%?

One of the much-trumpeted benefits of Brexit is the freedom to strike our own trade deals. Will the Government go for a “Plan B” and seek to negotiate some trade agreements with non-EU countries which will be conditional on Brexit taking place in March 2019?

At the moment, we have no idea. “Operation Stack” on the M20, with all the attendant  consequences are looking increasingly inevitable from April 2019. The only consolation is that the UK will at least have escaped from the EU political project of ever-closer union and will not be asked to prop up the failed Euro. As Lord Mervyn King says, ”In 30 years this will look like any old blip!” We can but hope he is right, but without a change of mindset among those entrusted with the Brexit negotiations, the blip could be rather bigger and longer than he anticipated.

 

 

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A Customs Union with the EU is a daft idea

The latest pronouncements from Michel Barnier, the EU’s Chief Negotiator, provide little comfort to those of us seeking reassurance that the Government knows how to fulfil its declared aim of leaving the EU in 18 months’ time while avoiding a “cliff edge” for business.

Essentially, the rather tired “having cake and eating it” analogy sums up what Barnier sees as the root of the problem. He talked of a “nostalgia” for the Single Market and made it clear that you cannot be outside the Single Market while continuing to enjoy its benefits.  “This is simply impossible”, he said.

There is a wide range of views among Brexit supporters regarding whether or not we should stay within the Single Market. If there is a non-single market option which could provide us with something as near as possible to the frictionless trade which Business is demanding, the Government is keeping very quiet about it. This in turn is resulting in a concern that our Brexit team – and perhaps the Government as a whole – still does not grasp what it means to be a “third country” for trade purposes.

When it comes to the EU’s Customs Union, however, there is no reason to support our continued membership. It is an open and shut issue. We certainly need a Customs arrangement with the EU or else a massive queue of lorries is going to build up on the M20 immediately after Midnight on March 29th 2019, but that is not the same as a Customs Union.

A Customs Union is an area within which goods can circulate without restriction but which imposes a common external tariff on goods from outside.  The first Customs Union was the German Zollverein, established in 1834 and which gradually included most German states. Significantly, the economic union was followed by political union.

The Treaty of Rome, which established what has become the European Union, proposed the establishment of a Customs Union. By the time the UK joined, it was up and running and we had to impose the common external tariffs on all goods from outside, including those from our Commonwealth friends such as Australia and New Zealand. In other words, we surrendered the freedom to negotiate our own trade deals.

Shortly after the Treaty of Rome, the UK which at the time was not keen on joining the European project instead became one of the founder members of EFTA, the European Free Trade Association, which was not a Customs Union. It thus allowed members to negotiate their own trade agreements if they so desired, although EFTA also has negotiated free trade deals on behalf of all its constituent countries. Significantly, EFTA has never sought to create any sort of political union among its members. It was and is purely about trade.

Why then should a non-EU member want to be associated with the EU’s Customs Union? If you are a micro-state like San Marino or Monaco, you are unlikely to have the resources to negotiate your own trade deals and thus piggybacking on your larger neighbours is the best way of keeping trade flowing smoothy across your borders. This is not the case with Turkey, the only large non-EU country which has a customs union with it.

During last year’s Referendum debate, the so-called “Turkish option” received very little coverage. Being in a similar customs union with the EU was occasionally mentioned as one possible post-Brexit scenario but then almost immediately dismissed as being unsatisfactory. The Turks themselves don’t like it, which is one very good reason for rejecting it.

For starters, being a member of the Customs Union requires accepting the jurisdiction of the European Court of Justice. Turkey also may not negotiate trade agreements with non-EU countries but does not benefit from the EU’s Free Trade agreements. Countries who have signed a free trade agreement with the EU can export their goods into Turkey tariff free while imposing tariffs on Turkish goods.

One reason for Turkey accepting this unsatisfactory arrangement was its aspiration to join the EU. We are going in the opposite direction, so there is even less reason for us to adopt it, even as a transitional arrangement.

If further proof were needed of this argument, this article on the Kapikule Border crossing between Turkey and EU member state Bulgaria,  shows that a Customs Union with the EU does not result in quick and easy movement of goods across borders.  A Turkish lorry driver is quoted as saying that a mere 14-hour wait at the customs post constitutes a “good day”!

The article goes on to describe how “each driver clutches a sheaf of several dozen documents — an export declaration, a carnet from Turkish customs officers, invoices for the products they are hauling, insurance certificates and, when lucky, a transport permit for each EU nation they will drive through.”

No one in their right minds should be suggesting that any future UK-EU trading relationship be conducted along these lines.  Like it or loathe it, re-joining EFTA as an interim arrangement and thus accessing the Single Market along the same lines as Norway and Iceland would spare us this chaos. Maybe the Government has some better alternative up its sleeve, although if this is the case, it is playing its cards very close to its chest, but we can’t stay in the EU’s Customs Union if we’re not an EU member; we can only make a Customs Union agreement on Turkish lines and evidence strongly suggests it’s not worth the bother.

 

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Going round in circles?

It’s now the third round of Brexit negotiations. Last week, we were given what amounted to an aspiration list – five “position papers” following on from two the previous week which went into very little detail as to how the UK negotiating team intended to go about achieving its desired objectives. The papers also made a number of assumptions about the EU’s negotiating position which do seem at first glance rather unrealistic. In short, it doesn’t seem very clear what the UK government actually wants. By contrast, the EU has made its position clear from the very start.

The EU’s Chief Negotiator, Michel Barnier, is understandably frustrated and warned about the clock ticking. He recently told the UK to “start negotiating seriously.” We are now less than 19 months to Brexit day; 14 have already elapsed with very little achieved except a foolish agreement to submit to the EU’s negotiating schedule whereby sufficient progress must be made on the divorce settlement, the rights of EU nationals and the Irish border before issues such as trade can be discussed. A helpful summary of the full areas of disagreement can be found in this article.

As far as the UK government is concerned, there has been a recognition that a long-term trade deal cannot be negotiated before March 2019 so some sort of interim arrangement will be needed. Even this is going to be a challenge as the rather nebulous statements from the government insist that the Single Market is not on the agenda, necessitating a bespoke deal (or a change of mind). Labour, however, seems to be moving round to supporting membership of the Single Market.  It now agrees with the Government that a transitional deal is necessary but disagrees with it not only on the Single Market but on the customs union too. As Dr Richard North points out, Keir Starmer, the shadow Brexit secretary, has advocated the Single Market without offering any hint of how we would access it – in other words, no mention of the European Economic Area or EFTA.

Professor George Yarrow from Oxford University, has argued that the default position for a newly-independent UK is that we would remain within the Single Market and would not need to rejoin EFTA to retain access. Not everyone is convinced by his arguments and if he is wrong, a bespoke deal allowing the UK to remain within the Single Market or the Customs Union would require a new treaty – a very challenging prospect within this increasingly tight timetable.

Of course, there are still some voices arguing against any sort of transitional agreement and claiming that a “hard” Brexit will bring economic benefit, such as Professor Patrick Minford of Cardiff Business School.  We have also highlighted the Bruges Group’s paper What will it look like? which claims that it is possible to agree a long-term trade deal within the Article 50 timeframe.  This paper has highlighted the key areas on which an agreement will be required, but if the Government is considering this route, the Position Papers offered us not the slightest hint that this is their preferred strategy.

So it looks like this week’s talks will be little more than going round in circles. We will, no doubt, be given a very upbeat assessment of the talks by David Davis, but little real progress will be made as the Government does not seem to be offering any sort of road map to arrive in the promised land of Brexit while Labour has little idea either. Meanwhile, as M. Barnier keeps reminding us, the clock is ticking away and the cliff edge is getting closer……

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Why the Brexit trade team has hired a New Zealander as lead negotiator

A week in which five somewhat underwhelming position papers were published by the Department for Exiting the European Union was rounded off by a piece of somewhat better news.

Next week, Crawford Falconer, a New Zealander, will take up his position as chief trade negotiation adviser at the Department for International Trade.

Mr Falconer brings with him some valuable expertise which our EU membership has more or less rendered extinct in the UK – 25 years of trade experience. He has represented New Zealand at the World Trade Organization (WTO) and held various posts in foreign and trade affairs in his home country.

As far back as 1973, we surrendered our right to negotiate our own trade deals and thus no longer had need of people with the necessary skills. Given that the freedom to strike our own trade deals was one of the most frequently-mentioned arguments in favour of Brexit, it is therefore encouraging that Liam Fox’s department has made this appointment.

For one thing, it shows that the UK Government is serious about developing an independent trade policy. More importantly, however, it shows  that a recognition has dawned at least in one Government department that trade deals are complex, requiring specialist skills. This is in contrast to some announcements – indeed, to some of the Position papers – which give the impression that obtaining a smooth Brexit will be a piece of cake.

It won’t be. For over 44 years, our country has been progressively denuded of many attributes if a fully-functioning sovereign nation. Many of us were profoundly unhappy about this and hence the energy and vigour of the Brexit campaign in last year’s referendum. We wanted our country back  – to take control once more and to end our subservience to foreign institutions.

The ramifications of that vote are beginning to reverberate through both Westminster and Whitehall. The buck will stop here – not in Brussels or Strasbourg! The EU can no longer be the scapegoat when something goes wrong.

Reclaiming our sovereignty requires not only a new mindset but a sharp learning curve for a new generation of civil servants. They are going to have to do things which have been sub-contracted out to Brussels for two generations. Not one UK Civil Servant still in employment has had any experience of negotiating a free trade deal on behalf of our country. Inevitably, therefore, expertise will have to be brought in from elsewhere to tide us over and the obvious places to look are those countries like New Zealand which share our Common Law legal system, our language and our outward-looking approach to trade. We can be grateful not only that there is an Anglophone world out there, but that our Commonwealth friends are prepared to renew and strengthen their ties with us after having been cast adrift so shamefully in 1973.

The more announcements we therefore hear of appointments like Mr Falconer, the more confident we can be that or government is really getting to grips with what it will mean to be a sovereign nation once more.

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Availability of goods: the latest government position paper

The third Government Brexit position paper was published on 21st August and covers the complex subject of the continuity in the availability of goods for the EU and the UK.

One of the main priorities of the Brexit negotiations is to ensure that trade between the UK and the EU continues with as little disruption as possible on Brexit day. The report identifies one particular issue which has hitherto received little attention:- what of goods that are in transit in some form or other when Independence Day dawns? To illustrate the point, suppose a customer in Germany or Poland orders an item from a UK company on 28th March 2019 and pays for it on line. On that day, we will still be an EU member state  and part of the Single Market. The UK-produced item will have been produced in compliance with EU standards. What will happen to this item if it arrives in Calais on 29th March 2019 or later? By this time, if there is no satisfactory deal, it could have to pass through an elaborate customs clearance process and if the item is to be used in the manufacture of something bigger, such as a component in a car or a washing machine, will it still be regarded as meeting the EU’s standards on compliance?

Unfortunately, having identified a very real problem, the position paper does not really go into any detail about how the government proposes to tackle it. No one could possibly argue with the first paragraph:-

Investors, businesses and citizens in the UK and across the EU need to be able to plan ahead with certainty. The UK wants to ensure a smooth and orderly exit that minimises disruption to citizens, consumers and businesses across Europe in terms of the availability of goods….

….but a first reading through of this paper left me none the wiser as to what the Government is proposing. The statistics about the volume of UK-EU trade in goods show why it is important to come to a deal on trade in goods. It is one thing to say, as per Paragraph 16 “The UK believes that all goods lawfully placed on the market before exit should continue to circulate freely, without additional requirements or restrictions, ” but quite another to explain what if anything, considering we become a Third Country as far as the EU is concerned on Brexit day,  will replace our Single Market access.

Essentially, we are faced with three options for trade with the EU in the immediate post-Brexit period:-

  • Change tack and seek to join EFTA so that the UK will remain within the European Economic Area – in other words, resurrect the Norway Option/Liechtenstein Compromise, albeit only as an interim position.
  • Revert to WTO rules, perhaps in conjunction with a zero tariff policy, as advocated recently in a paper by Professor Kevin Dowd, published by the Institute of Economic Affairs.
  • Seek a bespoke trade agreement. One paper published earlier this year by the Bruges Group has identified the main subjects on which agreement will need to be reached. The authors claim that if everything is handled competently on both sides, trade will continue to flow smoothly after Brexit.

While each of these three approaches have their supporters and detractors, the people whose opinions really matter are the Government ministers and Civil Servants who will be at the sharp end of negotiations. The biggest disappointment on reading this position paper is that it offered no clue as to which of these three options it is seeking to take. In particular, if it is the third, the EU will have to agree to a lot of things which so far it has shown little inclination towards.

Ireland – The Second Government Brexit position paper

No one wants to return to a hard border between Northern Ireland and the Irish Republic. Even less does anyone, bar a few fanatics, want to return to the days of “the Troubles”. This much is obvious.

Settling the issues relating to what will be the UK’s only land border with the EU has been given a high priority by the EU too. Only yesterday, in response to the first UK government position paper (on customs), the  EU’s chief negotiator, Michel Barnier,  named the Irish question as one of three important issues on which agreement would need to be reached before serious discussions on trade-related issues could begin.

So a mere 24 hours after the position paper on customs, another has appeared which offers us some insights into the Government’s thinking on Ireland.

The paper identifies four priorities:-

  1. Upholding the Belfast (‘Good Friday’) Agreement in all its parts
  2. Maintaining the Common Travel Area and associated rights
  3. Avoiding a hard border for the movement of goods
  4. Aiming to preserve North-South and East-West cooperation, including on energy.

As far as the Good Friday Agreement is concerned, the paper points out that it was an agreement between the UK and the Irish Republic rather than the EU. Among other things, it affirmed “the permanent birthright of the people of Northern Ireland, irrespective of Northern Ireland’s constitutional status: to identify themselves and be accepted as British or Irish or both, as they may so choose; to equal treatment irrespective of their choice; and to hold both British and Irish citizenship.”  The UK Government has every intention to preserve this arrangement after Brexit.

The Common Travel Area pre-dated either the UK or the Irish Republic joining the European project. Indeed, Irish citizens have enjoyed special rights in the UK for most of the period since 1922 – a reflection of the strong, historic links between the Irish people and those in the UK. The Common Travel Area in its present form also involves the Isle of Man and the Channel Islands, which were never part of the EU. It allowed freedom of movement throughout the area and  allows Irish citizens to vote in the UK’s locla and Parliamentary elections.

Given that the Common Travel Area arrangements have been administered by the governments of the parties involved rather than by the EU and that the EU has been happy about this, the document maintains that there should be no reason why this situation should not continue after Brexit.

The “hard border” issue is likely to prove the most complex. In 1972, the paper informs us, there were 17 HM Customs and Excise boundary posts at the major road crossing points along the 310-mile long Northern Ireland land border and more than 200 other crossings not approved for vehicular traffic.  These have all disappeared but this is the number of potential crossing points which would need to be reinstated if a “hard border” were imposed. No wonder all sides are keen to avoid such a scenario.  Some farmers’ land straddles the border.

The paper recognises that it cannot propose a unilateral solution to the problem of maintaining the free flow of trade across the Irish border. It does, however, point to instances “where the EU has set aside the normal regulations and codes set out in EU law in order to recognise the circumstances of certain border areas.” – including the border between the Greek and Turkish sectors in Cyprus and the Croatia/Bosnia border. At the same time, the paper acknowledges that resolution of this issue “cannot be based on a precedent”. This makes sense for, after all, the EU’s aspiration is for Cyprus to be reunited with both parts of the island in the EU and likewise, Bosnia is a candidate country, even though it is unlikely to be joining the EU any time soon. By contrast, the UK is going in the opposite direction.

The paper also refers to the position paper on customs. Obviously, on the one hand the peoples of the UK and Ireland have an unique relationship, but the Irish Republic is an EU member state and part of the EU’s Single Market and Customs Union.  A solution for customs issues at the Irish border is inevitably going to be linked to wider customs and trade issues which will need to be addressed as part of the Brexit process, but as anyone who has visited the Irish Republic will be very aware, a substantial percentage of the products on sale in supermarkets in Irish towns and cities originate in the UK. It is therefore unsurprising that Irish officials are very concerned about the damage their economy may suffer if no trade and customs agreement is in place on Brexit. Leo Varadkar, the Irish Taoiseach, expressed a wish that the UK would not actually leave the EU, or if it did, that we would remain within the EEA. Dan Mulhall, the Irish Ambassador to the UK, by contrast, hoped that we would remain inside the Customs Union.

So the  progress towards the “innovative and untested” customs proposals and the possibility of a temporary customs arrangement discussed in the earlier position paper will be followed particularly closely in Dublin. Given that even if the UK government  changes tack and opts for ongoing membership of the EEA, agricultural goods would be outside this arrangement, it will take a lot of hard bargaining on both sides if all goods and services are to enjoy even relatively free access across the Irish border, whatever form that border may take. If it sticks to the proposals outlined in the position paper, there will be a number of areas where agreements on mutual recognition of conformity would have to be signed and time is short.

The North-South East-West cooperation may be a new term to many of us. North-South simply means the Belfast-Dublin axis and East-West refers to the relationship between London and Dublin. In many ways, the various fora such as the British-Irish Council and the British-Irish Intergovernmental Conference which have been set up under this label are the outworking of the recognition of the  close historic and geographical links between the UK and the Irish Republic. The cooperation has manifested itself in some specific sectors such as energy and the position paper emphasizes the need for the cooperation to continue after Brexit.

With this in mind, the concluding statement that a formal agreement between the EU and the UK on the Irish border issue early in the Brexit negotiations would not mean the end of any dialogue between the UK and the Irish government makes perfect sense. There will be a number of bilateral issues to resolve which do not directly involve the EU as a whole.

As with the position paper on customs, the abiding impression left by this document is that it has identified the issues which need a resolution without offering too much detail as to how they are to be resolved. Unlike the customs paper, however, where failure to reach an agreement would be far more disastrous for the UK than for the EU as a whole, when it comes to Ireland, a crashing out of the EU with no agreement would probably hit them harder than us. The Irish government is well aware of this and we cannot but hope for their sakes as well as ours that it will not be WTO rules on March 30th.