Brussels’ provocations

By Horst Teubert

German business associations are calling on the EU Commission to end its Brexit provocations. A disorderly Brexit would entail enormous costs for the German economy, the President of the German Chambers of Industry and Commerce (DIHK) warned; therefore an amicable Brexit agreement with London must be reached. The Federation of German Industries (BDI) expressed a similar view. The head of the EU’s Commission’s recent audacious financial demands and deliberate indiscretions have stirred massive resentment in the United Kingdom and were rightfully considered an attempt to influence Britain’s upcoming parliamentary elections. Observers attribute these indiscretions to EU Commissioner Jean-Claude Juncker’s German Chief of Staff, Martin Selmayr (CDU), who is currently playing a key role in the Commission’s Brexit negotiations’ preparations. The German Chancellery is now calling for restraint in view of the severe damage a hard Brexit could entail for the German economy.

The Commission’s Indiscretions

German businesses are complaining about the EU Commission’s recent provocations: On the one hand, the deliberate indiscretions concerning confidential talks on April 26 in London between the British Prime Minister, Theresa May, the President of the EU Commission, Jean-Claude Juncker, and their respective closest collaborators in preparation of Brexit negotiations. The alleged contents of the talks were leaked to a German newspaper, which published a detailed report, spiked with assessments, presenting the British government as blind to reality, uncompromising and disunited.[1] Juncker’s statements, reproduced in the report, are rightfully regarded in Britain as an attempt to tarnish Theresa May’s Conservative government and thereby reinforce EU-oriented forces, particularly among the Liberal Democrats and segments of the Labour Party during the election campaign – apparently to no avail. The obvious attempt to interfere in the country’s internal affairs has stirred massive resentment in the United Kingdom. In last week’s local elections in various parts of the country, all pro-EU parties, except the Welsh Plaid Cymru, lost mandates, whereas the conservative party made substantial gains. In spite of the significance of particularities in local elections, this is regarded as an expression of the wide approval for May’s political course.

Berlin’s Special Role

London has taken note of the special role Germany is playing in this affair. The indiscretions were published in a German newspaper and were probably leaked by the German EU official Martin Selmayr, a member of the CDU. Selmayr is Commission President Juncker’s Chief of Staff, and, according to reports, he is closely allied with Chancellery Minister Peter Altmeier. He is considered to be Juncker’s most important prompter, having a “tight grip” on the Commission, according to observers. (german-foreign-policy.com reported.[2]) He also holds a prominent position in the Brexit negotiations: Last October, Juncker mandated him to conduct regular preliminary talks on the Brexit negotiations with London. In the meantime, Selmayr has repeatedly announced that “Brexit will never become a success,”[3] thereby following Berlin’s suggestion that the Brexit could possibly have a deterrent effect on EU critics in other member countries. Selmayr is suspected of having leaked the recent indiscretions, because they contained also those parts of the confidential talks in London, in which only he and Juncker had participated on behalf of the EU. Michel Barnier, the chief Brexit negotiator, and his deputy, Sabine Weyand, joined the talks only later on April 26th. Alongside Selmayr, trade expert Weyand is the second German in a decisive procedural position in the Brexit negotiations.

100 Billion Euros

Alongside this indiscretion, the most recent hike in the amount Brussels is demanding that London pay for its exit from the EU is being met with resentment in Great Britain. Even the 60 billion euros, mentioned a while back must be seen – to put it mildly – as an unrealistically exorbitant starting point for the negotiations. Last week, the commission increased the amount even further, to €100 billion, according to which, two years after its exit, the United Kingdom is to pay, for example, agricultural subsidies for other EU countries, as well as EU administrative costs, alongside co-financing both the European Central Bank (ECB) and the refugee agreement with Turkey. On the other hand, London would not be able to lay any claims to its share of the EU’s assets.[4] Observers suppose that these unorthodox demands have been ultimately raised to increase pressure on London’s government and lower its re-election possibilities in favour of EU-oriented forces – until now, to no avail.

More Strain on Germany

Instead, Brussels’ provocations are now leading to public complaints from the German economy. Britain is its third largest sales market for the highly export-dependent German industry and its second largest foreign investment site. At a time when business with important business partners is suffering – due to sanctions (Russia) or political tensions (Turkey), when trade with its most important ally, the United States, has become unreliable with the recent change of government and its number one sales market – the Euro zone – remains deeply embedded in a crisis, German business associations are adamantly refusing to take on any more risks.[5] “Now, it is important not to smash any more porcelain during the talks,” warns Dieter Kempf, President of the Federation of German Industries (BDI), in reference to Brexit negotiations. “Reason and pragmatism” must be the guidelines for “both” negotiating partners.[6] One should not forget “that the Brexit will come at high costs, also for the German economy,” warned Eric Schweitzer, President of the German Chambers of Industry and Commerce (DIHK). A disorderly Brexit, in which merely WTO standards apply between the EU-27 and Great Britain, trade between Great Britain and the EU would engender trade tariffs of around twelve billion euros. Because of the extensive exports to the United Kingdom, this “would engender an enormous additional strain, also on German enterprises.”[7]

Calls for Restraint

Over the weekend, the first calls for restraint had been heard in Berlin because of complaints from within business circles, and the fact that the EU’s provocations seem to be backfiring in the United Kingdom. Chancellor Angela Merkel made known that she is “upset” about Commission President Juncker, because “his failed Brexit dinner” has only made the climate worse between Brussels and London.[8] The German MEP Ingeborg Grässle (CDU), chair of the European Parliament’s budgetary control committee, criticized Juncker in the name of the European Parliament. “It is time that the EU Commission presents a bill comprehensible for everyone,” she demanded in view of the sum London has to pay for the Brexit. “We want to maintain good relations with the British.” The most recent demands – a good example of the EU Commission’s dealing – are “completely exaggerated.”[9]

The original was published by german-foreign-policy.com and is used with permission

[1] Thomas Gutschker: Das desaströse Brexit-Dinner. www.faz.net 01.05.2017.
[2] See Eine nie dagewesene Machtkonzentration.
[3] Florian Eder, David M. Herszenhorn: Brexit will never be a success: Juncker’s top aide. www.politico.eu 05.05.2017.
[4] Hendrick Kafsack: Ich will mein Geld zurück. Frankfurter Allgemeine Zeitung 04.05.2017.
[5] See A Dangerous Game and Auf brüchigem Boden.
[6] BDI fordert Pragmatismus im Brexit-Poker. www.handelsblatt.com 06.05.2017.
[7] DIHK warnt vor hohen Brexit-Kosten. www.dihk.de 04.05.2017.
[8] Merkel verärgert über Juncker nach Brexit-Dinner. www.spiegel.de 06.05.2017.
[9] Andre Tauber: Wie hoch ist der britische Anteil am EU-Vermögen? www.welt.de 07.05.2017

Customs Union: from Zollverein to irrelevance

By Ian Milne

Preamble

Orwell’s Nineteen Eight Four came out in 1948, less than a decade before the official birth of the European Community.  In Orwell’s vision, three totalitarian super-states, Oceania, Eurasia and Eastasia, were perpetually at war.

The European Community was – is – merely the latest version of the chimera of a single European state that had been pursued in the nineteenth century by writers such as Victor Hugo, by Continental tyrants such as Napoleon, and, in the twentieth century, by German governments led in 1914 by Bethmann-Hollweg  and from 1933 to 1945 by Hitler.

Consciously or not, the European Union was built on similar assumptions: that the post-war world would consist of huge “blocs”, competing for resources & markets, and that European states were destined to amalgamate into a single state. In the Eurocrats’ weltanschauung – world-view – North America constituted one bloc, Europe another, while to the East, (the Soviet Union, its first candidate, having failed) China would exercise hegemony over the Asian land-mass.

The EU Customs Union

Since its accession to the “Common Market”,  “British Trade Policy is not to have a British Trade Policy”. The UK hasn’t been in control of its own trade policy since 1973. What the UK has had since 1973 is being trapped – for the first time in its history – inside a customs union – the EU Customs Union.

The EU Customs Union, the only one in the developed world,  is a relic from the “Fifties” –  the 1850s. This is how it came about.

In  German & French “received wisdom”, customs unions are (still !) a peculiar obsession. The 19th century German customs union – “Zollverein” –  was the mechanism associated in the German collective consciousness with the Bismarckian creation of Prussia & then the German Empire.

On 4th September 1914, a few weeks after the  outbreak of the First World War,  Chancellor Bethmann-Hollweg issued his letter setting out German war aims. War aim number four1 was to “create a central European economic association through common customs treaties…….”. (A Figaro journalist, Eric Zemmour, describes this as a plan for the “vassalisation économique” of France through the mechanism of a customs union2.)

Two years later, in 1916, when the war wasn’t going too well for Germany, Berlin offered a separate peace to the Belgian Government (then in exile in Le Havre3), involving the evacuation of German occupying forces from Belgium & the signing of a bi-lateral Belgian-German customs union4.   This was turned down by the Allies.

In early 1917, when a compromise peace with Britain, France and Russia might just have been possible, German aims were for a “German peace” with a customs union led by Germany and with the involvement of Austro-Hungary and Romania, thereby solidifying Germany’s hold over its supposed allies and converting them to a de facto part of the peacetime German economy, no different from Alsace-Lorraine and a large slice of Belgium which Germany also proposed to retain.

In the next war, in 1942, when Germany still believed it would win, the Reichsbank organised a conference5 in Berlin to plan how Germany would run the European economy afterwards.  This involved a European Customs Union – Zollverein – very similar to the one we have today.  (It also involved a single currency with – believe it or not – an opt-out for the UK).

 Almost two centuries on, in 2016, with average customs duties worldwide (including in the UK) down to a little over one per cent6, customs unions have lost whatever economic raison d’etre they ever had.

The EU is likely to experience a significant decline as an important trading partner in the future due to demographic issues. These two Global Britain briefing notes (here and here) list the projections for population growth and decline within and outside the EU. It is particularly interesting to see the very different projections for France and Germany.

Ian Milne

1          The full text (translated) is: “We must create a central European economic association through common customs treaties, to include France, Belgium, Holland, Denmark, Austria-Hungary, Poland “sic”, and perhaps Italy, Sweden, and Norway.”
2          Eric Zemmour, Figaro, 29.9.16 
3          The building which housed the Belgian government in exile between 1914 & 1918 survived the 1944 bombing & still stands in Saint-Adresse, a suburb of Le Havre.
4          Georges-Henri Soutou, La Grande Illusion, 1914-1920, pp 75.
5         The title of the 1942 conference was “Europäische Wirtshaftsgemeinschaft”
6          In 2013, 82 % by value of all UK imports of goods from outside the EU bore zero customs duties. The remaining 18% of such imports bore an average rate of EU-mandated customs duties of 8%. That 8% average is likely to be lower now.

 

Photo by Polybert49

The options for our railway network after Brexit

With all the many complexities of securing a trade agreement and agreeing the terms of our divorce from the EU, the future for the UK rail network is not likely to be in the forefront of the minds of our politicians during the next two years – apart from perhaps the ruinously costly HS2 project.

Once we are out of the EU, however, a number of new options are possible for our railway network which would have been out of the question had we voted to remain.

Before considering these options, a couple of misconceptions need laying to rest. Firstly, the EU was NOT responsible for rail privatisation.  The late Bob Crow of the RMT union made this claim some years back, but Directive 91/440, the apparent culprit, talks of “separating the management of railway operation and infrastructure from the provision of railway transport services” (in other words. separating track from trains), but adds that while “separation of accounts” is compulsory, “organizational or institutional separation” was optional.

What it fact happened is that the UK began the privatisation process under John Major and the EU  adopted some features of the UK model at a later date. The complex and unwieldly franchise system from which our railways currently suffer, however, is also a creation of the UK government and nothing to do with the EU at all.

So once we are out of the EU what changes? Firstly, it becomes possible for Jeremy Corbyn to fulfil his pledge to re-nationalise the railways. It was one of the first promises he made on becoming leader of the Labour Party and one which would have been impossible as a member of the EU. Already, the track and infrastructure is in public hands with Network Rail having replaced the privately-owned Railtrack in the aftermath of the Hatfield accident of 2000, which was caused by a broken rail and which brought to public attention Railtrack’s poor stewardship of the railway infrastructure. Furthermore, some franchises, including the East Coast Main Line from 2009 to 2015, were taken over by the State when the operator felt unable to continue running them profitably. Stringent terms are attached to franchises, so in one sense, passenger train operating companies do not have that free a hand under the franchise system.

Mr Corbyn’s planned renationalisation would be accomplished by not renewing franchises at the end of their term and trains then being run buy the state. As more and more of the network  reverted to state control, outside the EU, he could then, if so desired, return our railway network to the monolithic structure of the British Rail era.

At the other end of the spectrum, outside the EU, it would be possible to return to the “vertically integrated ” railways which pre-dated the rail nationalisation of 1948, where privately companies owned their own rolling stock, track, signalling and stations. Given the requirement to separate  track from trains would no longer apply, it would make possible, at least in theory, a complete privatisation of the rail network and a much simpler structure, with the government playing a very minor role.

Of course, it would be possible to carry on much as things are at the moment – indeed, this will almost certainly be the case in the immediate post-Brexit period as there will be far too much else requiring the attention of the government and Whitehall.

In summary, therefore, Brexit makes possible a number of options which would not be on the table if we had voted to remain an EU member state. Public opinion on re-nationalisation is sharply divided and there would be complexities facing any reorganisation. For instance, what of specialist freight operators and charter train providers, most of which are completely privately-owned? While there is a considerable degree of support for taking scheduled passenger services on the UK’s main lines back under public ownership, only real hard-line left wing ideologues wold go as far as wanting to take the freight companies back into public ownership.

One welcome and uncontroversial benefit of leaving the EU would be the chance to replace the EU’s Interoperability Directives with something far simpler. These  pieces of legislation stipulate a very complex registration process for new rolling stock which allows locomotives, carriages and wagons to operate across international borders. Given the UK’s geographical location, a very low percentage of trains in this country are ever going to operate across international boundaries – only Eurostar services, car and lorry shuttles through the Channel Tunnel, international freight services and the very limited service across the Irish border between Belfast and Dublin.

It is utterly pointless therefore for an operator like Trans Pennine or Chiltern Trains, for example, to have to comply with this directive. Currently, under EU legislation, they are required to do so even though their services do not go anywhere near international boundaries.

What needs to be remembered in studying any policy area where the EU has either full or partial competence is that there is always a political element. Regular visitors to this website will be aware of John Ashworth’s stinging criticism of the Common Fisheries Policy. It was designed as a tool of integration and its potential to help build a united Europe was far more important than the effect it might have on actual fishermen – especially UK fishermen.

EU transport policy likewise has been designed to facilitate integration – in particular, the burgeoning network of high-speed railway lines being built to link major European cities. Our course, an independent UK may decide that we still think it is a good idea to have a high-speed network linking London with the North of England and Scotland, but as with other areas of post-Brexit policy, our prime consideration will be what is best for the people of this country. What this might entail will depend on who is in power, but at least future governments of whatever hue will have far more options as they no longer have their hands tied by the EU’s all-consuming desire to create a federal superstate.

How to negotiate Brexit

Now the UK has triggered Article 50 and is entering negotiations with the rest of the EU, it is worth taking a rough look at what the government should do in the negotiating process.

The Position in 1975

The NO Campaign in 1975 stated “If we withdrew from the Market, we could and should remain members of the wider Free Trade area which now exists between the Common Market and the countries of the European Free Trade Association.”

That position was supported by Enoch Powell and Tony Benn and the NO Campaign in 1975 simply because they recognised that this Free Trade area was a trading association without any political implications.

The EEA [European Economic Area], although considerably modified, is essentially the successor to “the wider Free Trade area”.

Clear Aim and Clear Plan

At present it is unclear whether the government has either a clear aim or a clear plan.

While it is true that the Prime Minister has ruled out the UK remaining in the ‘Single Market’, she has not specifically ruled out retaining EEA membership.

Of course, it would be best to stick with the EEA for at least some years in order to reduce the magnitude of the task of leaving the EU.  More important, any losses in trade from leaving the EEA would be sudden and might affect large amounts of exports, especially goods.  The bright picture of extra trade globally is just that – a bright picture which could take years to bring about.  So there is a major temporal dislocation which must be factored in to future calculations.

If the UK becomes a third country vis-à-vis the EU, there is likely to be a trade in goods exports drop off because of customs and regulatory complexity.

Whether the UK opts for an EEA solution or not, the details of the financial divorce, organising trade relations with other countries on succession to EU trade arrangements, setting up greatly expanded and separate UK customs for the UK, etc., would be necessary.  It is just simpler to do this while UK/EU trade is relatively undisturbed.

How much would the ‘hit’ be?

It is worth looking at the quantities and types of goods exported by the UK to the EU.  Excluding agriculture and fish, whose regulating régimes are specific, goods exports to the EU were about £140 billion per annum in the period 2012-14.

It would seem that about 30% of exports would be relatively unaffected (except possibly by tariffs):

  • Basic materials
  • Coal, gas, etc.
  • Gold and precious stones
  • Motor cars via dedicated export points
  • Ships and aircraft
  • Oil – crude and products

So the ‘at risk’ total is about £95 billion.

The ‘hit’ on this could be estimated quite speculatively at 10-20%, so a loss of trade in goods of £10-20 billion.

This ‘lost trade’ would not necessarily be the same as a financial loss.

Most exported goods contain raw materials and components so there is a ‘netting off’ process.

Trade statistics exaggerate the importance of trade in an economy, and globalised supply chains distort trade statistics even more because of double, triple and more percentage counting.

The actual financial loss to the UK might only be the ‘profit margin’ if the displaced labour and capital could find alternative employment or returned to their country of origin but it would be prudent to assume the net ‘hit’ would be in the £5-10 billion range.

More important would be the disturbance to the structure of the exporting firms and the labour market, with considerable shedding of labour – in manufacturing, a most unfavourable outcome.

Trading under WTO rules

It has been conclusively shown by eureferendum.com that few countries trade purely under WTO rules.  There are numerous trade treaties (not free trade agreements) which govern the trade between the EU and third countries.  These have often taken many years to establish.

The government has said it wishes to establish a Free Trade Agreement with the EU but many hard Brexiteers state that, if a favourable FTA cannot be agreed, the UK would fall back on the WTO rules, but this would be a massive disturbance to existing UK exports to the EU.

There are some quite weak safeguard clauses in the WTO rules.  These were not incorporated in the WTO agreement in anticipation of such a massive and sudden change in trading relationships but, rather, refer to sectoral problems.

However, a scenario where UK goods exports to the EU fall drastically, while EU exports to the UK carry on as normal, is so disturbing and unsustainable that invocation of safeguard clauses might be necessary.

The final fallback position for the UK government in this scenario is trading with the EU under some emergency system such as an Exchange Equalisation Fund.

This, of course, would be a breach of WTO rules but would be the only alternative to financial disaster.  It would, of course, be presented as a temporary measure.

As a matter of political realism, EU Treaty rules and WTO rules are servants to national governments who retain responsibility for the prosperity of their peoples.

Breaching of EU rules have been quite common:

  • Breaches of the budget overspending rules of the EU Stability and Growth Pact by France, Germany and others.
  • Breaches of the Maastricht Treaty on no bail-out clauses for EU member states.
  • Breaches of the Dublin Convention on asylum seekers by Germany and others.

Additionally, many NATO-EU governments have breached NATO agreements on defence spending.

EU rules and treaties have been breached by EU member states and condoned by the EU because they believed, correctly or not, that the prosperity of their peoples required such breaches.

Breaches of the WTO rules fall under the same rubric.  If adherence to WTO rules threatens financial stability and prosperity, they must be considered.

The ‘money’

Whether the UK remains in the EEA or whether it does not, there will be a financial divorce on the UK leaving the EU.

The reason is that the EFTA EEA states have little financial relationship with the EU, making only a small contribution to the workings of the EEA agreement.  Additionally, but outside the EU financial structure, are the Norway and EEA grants.

The EFTA EEA states do not pay anything into the EU budget or have any responsibility for the reste a liquider amounts of EU programmes (except for the EU programmes they have voluntarily joined, such as university research).

More importantly, these states have no liability, contingent liability, guarantees or ‘joint and several’ guarantees to any financial activities of the EU or its institutions, such as the ECB [European Central Bank] or EIB [European Investment Bank], the EFSM [European Financial Stabilisation Mechanism], the EU Balance of Payments programmes etc.  So, moving to EFTA/EEA status would still mean that a financial divorce of the UK from the EU would have to be negotiated.  It should be noted that the potential losses of the ECB and the EIB, which includes an unfunded, irresponsible lending programme begun by Juncker, are absolutely enormous.  One advantage for the UK is that the EU is hardly going to acknowledge these potential losses and include them in its demands.

Another background point before considering the financial divorce is defence costs.

At present the UK is increasing its defence and security presence and spending in Eastern Europe, whereas many NATO countries, as President Trump pointed out to Angela Merkel, do not adhere to NATO spending targets.

It is difficult to see how any financial package on the UK leaving the EU can be discussed when other EU-NATO countries are falling down on their obligations and have serious past shortfalls.

By now, the UK government should have to hand a schedule of what amounts are material to be considered by the UK and the EU on divorce:

  • Defence spending
  • Current budget
  • Reste a liquider amounts

Additionally, the UK should be targeting its extrication from all liabilities, contingent liabilities and guarantees, as well as totalling its contributions to EU assets.

The European Parliament

The divorce terms have to be approved by the European Parliament, which can easily sabotage any agreement in the last few weeks of the two-year negotiating period with or without the encouragement of EU leaders.

It seems obvious, therefore, that at the very beginning the two parties must agree that if the European Parliament rejects an agreement between the EU Council and the UK, the two-year time limit on negotiations must be extended indefinitely.  Otherwise the whole negotiation is at the mercy of an irresponsible actor.

Open Europe’s proposals for a trade deal outside the Customs Union

Open Europe did not win to many friends in the run-up to last June’s referendum vote, its “reformist” position created mistrust among both leavers and remainers, being too supportive of staying in for the former  and too EU-critical for the latter.

Following the vote to leave, Open Europe has continued to contributed to the debate, producing analysis now aimed at securing what is, in its opinion, the best possible Brexit deal.

Its latest offering came out earlier this week. Entitled “Nothing to declare: A plan for UK-EU trade outside the Customs Union“, the full paper can be downloaded from the Open Europe Website.

During the referendum campaign, the customs union hardly featured as an issue, unlike the single market. This is unsurprising as the leave campaign emphasized the importance of being able to strike our own trade deals – something which is impossible as a member of the customs union.

Open Europe’s key points are as follows:-

  1. The UK should leave the EU’s Customs Union (EUCU). The UK Government has stated its intention to leave key parts of EUCU (the Common External Tariff and the Common Commercial Policy). Open Europe’s assessment is that leaving these and EUCU overall is correct. Brexit means the UK must be able to shape its own trade policy. It can only do so outside of EUCU.
  1. The UK should not seek a ‘half-in, half-out’ arrangement, which would be the worst of all worlds. The UK should leave EUCU entirely to maximise opportunities. Prime Minister Theresa May has suggested that she is open to being an “associate member” of EUCU or remaining a signatory to elements of it. Open Europe believes that, while it is sensible to keep an open mind, no ‘half-in’ option is better than being fully out. Nonetheless, the UK should consider retaining membership of some relevant conventions.
  1. It is in both the UK’s and EU’s interest quickly to secure full cooperation on the practicalities and administration of customs as part of a comprehensive Free Trade Agreement (FTA). Such an agreement could be a chapter in a UK-EU FTA or an accompanying, discrete customs facilitation agreement. The EU already has agreements on customs facilitation with non-members, including Switzerland and Canada. A comprehensive UK-EU FTA will ensure the continuation of tariff-free UK-EU trade and minimise customs delays.
  1. There will inevitably be a degree of cost to the UK economy associated with leaving EUCU. Some costs will be one-off adaptation costs (e.g. technology investment which may have benefited the UK anyway); other costs will be on-going frictional costs to UK-EU trade. These costs can be minimised and may be offset by trade liberalisation with non-EU partners.
  1. The UK must take action now to minimise costs and seize new opportunities. Some steps are unilateral, domestic reforms; others are bilateral with specific EU members (above all Ireland); other negotiations need to happen at EU level, or indeed more broadly.
  1. There will also be costs to the EU economy and these costs will be much greater if full customs cooperation with the UK is not secured. The costs to the EU economy will be greatest in those countries and industries which export the most to the UK. If comprehensive customs cooperation and an FTA are secured, these costs will be minimised.
  1. There are challenges and opportunities from leaving EUCU but these vary from sector to sector, and even between companies in the same industry. Individual companies will need to look carefully at their supply chains and consider making adjustments where appropriate.
  1. Free trade does not require a customs union and over half of UK trade happens without it. Most UK trade (51.5% in 2015) is not with the EU. Non-EU trade takes place without a customs union and is growing faster than trade with the EU. In 2015, the US was the largest recipient of UK goods exports (16.6%). There is no EU-US FTA, let alone a customs union.
  1. Companies with complex supply chains can trade without a customs union. For example, automotive supply chains cross the US-Canada border. Both countries are North American Free Trade Agreement (NAFTA) members, but are not in a customs union. Nonetheless, leaving EUCU will challenge companies with complex supply chains. To address challenges, the UK and EU need an FTA to eliminate tariffs, to agree liberal cumulation so more products transformed in either the UK or EU can be considered as originating anywhere else in the UK or EU, and to cooperate and use technology to minimise bureaucratic delays and costs.
  1. The UK should ‘grandfather’ – i.e. replicate – the FTAs that the EU has concluded with third countries. The UK, as an EU member, is currently party to over 30 FTAs with over 60 non-EU countries. The Canada-EU FTA, CETA, is one example. Discussions on how to ‘grandfather’ these agreements should be underway bilaterally between the UK and third countries but also need to engage the EU. Protecting these agreements will secure the freest possible trade, safeguarding existing global supply chains, and supporting growth in global trade.
  1. There is an extremely strong economic case for full UK-EU customs cooperation; the question of whether it is achieved or not is primarily political as much as practical. Reaching a comprehensive UK-EU customs agreement will be technically easier than other trade agreements. As an EU member, the UK’s customs systems are already fully recognised by EU members and the UK already applies EU product standards. Businesses across the EU are used to tariff-free trade – so there will be less pressure to defend specific industries.
  1. The UK and EU should consider a transition period to extend the UK’s EUCU membership for one or even two years. Theresa May has suggested “phased implementation” for new arrangements on customs systems. The two-year Article 50 timetable is a challenging limit for negotiations. A transitional period would increase chances of a favourable deal for both sides, and minimise potential disruption to UK and EU business. It would also give governments and business time to adapt, including by upgrading customs procedures and IT. Agreement on a transition period is most useful early in the Brexit negotiations to reduce the risk of companies making rushed decisions on changes.

 

Some helpful insights from the Freight Transport Association

The really hard tasks will begin soon. Once Article 50 is triggered, the UK government will then have to negotiate a Brexit deal that will enable our trade with both the EU and the rest of the world to continue.

As an example of how complex this might be, the Freight Transport Association (FTA) has published a submission it made to Parliament, expressing a number of concerns facing the industry.  Like many organisations involved in trade with the EU, the FTA wishes to ensure that we do not face huge disruption as a result of Mrs May’s decision that we will leave the Single Market.

The piece is worth reading in full, but a few points are worth highlighting:-

  1. There will almost certainly need to be a transitional trading arrangement between the UK and the EU. Negotiating a full trade deal may be very tight, if not unachievable, within the two year timescale of Article 50.
  2. No deal will give us as unfettered access to the Single Market as EEA membership would have done. There will inevitably have to be some trade-offs.
  3. Increased Border controls will be very time-consuming. Falling back on the WTO option would be particularly bad in this respect. The port of Dover would suffer more than anywhere else as freight movements are predicted to rise to between 14,000 and 16,000 per day in the next decade.
  4. Although tariffs are falling worldwide, some sectors of the economy would suffer if tariff-free access to the EU were lost. Tariffs of 10% or more could be imposed on motor vehicles, for instance.
  5. The biggest worry is that the EU may not want to tackle trade issues until after Brexit.  Michel Barnier, the European Commission’s Chief negotiator, made a statement suggesting that the two-year period following the formal triggering of article 50 would only be devoted to withdrawal arrangements and that issues related to the post-Brexit trade relationship with the EU would only be dealt with post-Brexit.  While this is only one person’s opinion and that other voices within the EU are keen to avoid such a disastrous scenario, it shows that the UK’s negotiators will be facing some quite difficult individuals on the other side of the table.

No, Brexit is not going to be easy. We can but hope that the Government has been preparing for these eventualities and knows what it wants before the negotiations begin.