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.

 

Forgetting the lessons of the past

Oh dear. They never learn, do they?

Those Eurocrats over in Brussels think that they have hit on a clever new ploy to victimise Britain and punish us for having had the temerity to vote to Leave. After years of telling us that life outside the EU would be awful for Britain, they have now been forced by reality to admit that, actually, it is going to be pretty good. All those free trade deals that Liam Fox is busily chasing are going to be good for British business.

So now the EU has decided that when the rules of the EU say that a member state cannot agree to any trade deals due to the restrictive nature of the Customs Union, what it really means is that we cannot even talk about a free trade deal until after we have left.

What they hope to do is build in a time lag of a year or more between the UK leaving the Customs Union and any new trade deals coming into operation. That will hit the pesky Brits in the pocket and allow the Eurocrats to crow over our misfortune.

And they intend to follow that up by dragging their heels over a UK-EU trade deal. They will throw obstacles into the path of British trade to the EU. More punishment for the UK.

But they forget that this has been tried before. And it did not end well for the European Empire that tried it.

Back in 1806 the Emperor of the French, Napoleon Bonaparte, ruled most of Europe. France itself extended deep into what are now Italy and Germany, while his family and acolytes sat on thrones in Italy, Germany, Poland and Scandinavia. Only Britain stood defiant. After the Battle of Trafalgar in 1805 Napoleon had no chance of an armed invasion of Britain. He was stymied.

Then he had an idea. He called it “The Continental System”.

Under this masterful plan all contact between Britain and the European Continent would be cut off. Not even the mail would be allowed through. All trade would grind to a halt. Britain would be economically prostrate. She would be bankrupt in a matter of months and forced to surrender. Napoleon issued his orders. The ports were closed to British ships, no ships could sail for Britain. Every country in Europe was bullied into joining the Continental System.

All except one: Portugal. Portugal is Britain’s oldest ally and had important trade links to Britain. So in 1808 Napoleon invaded Portugal. To do so he had to march through Spain, and so invaded Spain as well. The Portuguese asked for British help. The British sent an army under Wellington and so began the Peninsular War that would drain France of men and money.

Meanwhile, the Russian economy was tottering toward collapse without British trade and British investments. The Tsar of Russia lifted the embargo and began trading with Britain again. So in 1812 Napoleon invaded Russia, a campaign that destroyed his own army. With the threat of Napoleon’s army gone, more and more countries opened up to trade with Britain. They had been suffering economically and unemployment was rising.

In any case the French economy itself was crumbling. The tax take was nose-diving and Napoleon’s government was facing bankruptcy. Napoleon could no longer keep a large army in the field. He was defeated and exiled to Elba. His attempt to return to power was crushed at Waterloo. He ended his days a prisoner of the British on the remote island of St Helena

As for Britain, how had she fared while Europe suffered massive economic dislocation and bankruptcy? Well, British trade with Europe fell by 55% between 1806 and 1808, and did not recover for years. However, the British had the open sea to take advantage of, and they did. British ships had to take British goods further, but they found eager customers.

Britain ended up more prosperous after the Continental System than before.

If only the Eurocrats bothered to read their history they could save themselves a lot of trouble.

Photo by pijpers662

What we now know and what we don’t know

Mrs May has finally delivered he much-awaited speech setting out her Brexit plans.

So what do we know?

We know that she has set herself a very ambitious timetable if she is to secure a deal within the two-year timescale stipulated by Article 50 of the Lisbon Treaty, especially as she has promised a Parliamentary vote on the final deal.

Some of the points she mentioned come as no big surprise. We will no longer be subject to the European Court of Justice. “We will not have truly left the European Union if we are not in control of our own laws”, she said. We could also have taken it as read that she does not want to see any hard border reinstated between Northern Ireland and the Irish Republic.

It was no surprise that she expressed a determination to restrict immigration, openly acknowledging that it was a big concern for many during the referendum campaign. “The message from the public before and during the referendum campaign was clear: Brexit must mean control of the number of people who come to Britain from Europe. And that is what we will deliver.

So how does she propose to deliver this greater control? The balance between immigration control and access to the Single Market was  the most keenly-awaited aspect of the speech. The answer is that she wants maximum access to the EU for our companies without being a member of the Single Market. The Norway and Liechtenstein options appear to have gone out of the window. “I want to be clear. What I am proposing cannot mean membership of the  Single Market….Being out of the EU but a member of the Single Market would mean complying with the EU’s rules and regulations that implement those freedoms, without having a vote on what those rules and regulations are. It would mean accepting a role for the European Court of Justice that would see it still having direct legal authority in our country. It would to all intents and purposes mean not leaving the EU at all.”

So what will replace our single market membership which will enable us to maintain our trade with the EU? These were her words:- “Instead we seek the greatest possible access to {the single market} through a new, comprehensive, bold and ambitious Free Trade Agreement. That Agreement may take in elements of current Single Market arrangements in certain areas – on the export of cars and lorries for example, or the freedom to provide financial services across national borders – as it makes no sense to start again from scratch when Britain and the remaining Member States have adhered to the same rules for so many years…..I …want tariff-free trade with Europe and cross-border trade there to be as frictionless as possible.”

However, things start getting a bit confused at this point. “I do not want us to be bound by the Common External Tariff.  These are the elements of the Customs Union that prevent us from striking our own comprehensive trade agreements with other countries.  But I do want us to have a customs agreement with the EU. Whether that means we must reach a completely new customs agreement, become an associate member of the Customs Union in some way, or remain a signatory to some elements of it, I hold no preconceived position. I have an open mind on how we do it. It is not the means that matter, but the ends.” Her options as far as the customs union is concerned may be very limited. Interviewed on BBC Radio Four’s World At One programme, the German MEP Elmar Brok was adamant that there could be no “associate membership” of the Customs Union.  

Mrs May did not go into too much detail about future cooperation with the EU on criminal justice issues. “A Global Britain will continue to cooperate with its European partners in important areas such as crime, terrorism and foreign affairs…..With the threats to our common security becoming more serious, our response cannot be to cooperate with one another less, but to work together more. I therefore want our future relationship with the European Union to include practical arrangements on matters of law enforcement and the sharing of intelligence material with our EU allies.” Hopefully the end of our  membership of Europol, no more welcome for any Eurogendarmerie on UK soil and the end of our involvement with the flawed European Arrest Warrant.

Her insistence on a phased approach – an orderly Brexit (the final point in her speech) – suggests that she is keeping some cards up her sleeve. She insists that “it is in no one’s interests for there to be a cliff-edge for business or a threat to stability” and although ruling out “unlimited transitional status” she did not specifically exclude  a limited transitional arrangement.

Furthermore, although rejecting EEA membership, she said nothing about a shadow EEA arrangement – in other words, behaving as if we are in the EEA, which is an agreement and not an organisation. This would mean applying EU standards to all our exported goods. As she plans to repatriate the acquis, this is by no means impossible as the EU standards would still apply. Under the rules of the World Trade Organisation, if exports conform to the standards of the country that it is being exported to, their entry cannot be refused. Since 1992 the EU has been legally bound to accept global standards, so if it refused to do so, we could take it to court.

Another option which has not been openly discussed but should not be ruled out would be to use Australia’s relationship with the EU as a model. In 1997, Australia’s government signed a joint declaration on EU-Australian relations, followed two years later by a Mutual Recognition Agreement. The UK could do likewise, or make a unilateral declaration, up to and including a commitment to full regulatory harmonisation.

In short, there is more to come. She has clearly not revealed her hand totally and some commentators reckon that the what has been dubbed a “hard” Brexit may turn out, as further details ares revealed, to be not as “hard” as some have concluded. Anyway,  we will await further developments with interest.

New Leave Alliance monograph:- Leaving the Customs Union

No one mentioned the EU’s customs union during the referendum campaign. An article in the Financial Times on 26th July stating that Dr Liam Fox had pressed Mrs May that we must leave the EU’s customs union was the first instance of it being brought to our attention.

This has led to a degreee of confusion. Firstly, what exactly is it? Secondly, how does it differ from the Single Market? The latter issue is particularly important as the two have been confused.

For anyone who is unclear on this subject, this précis of the latest Leave Alliance monograph explains the subject in a clear and straightforward way. You can also download it from the Brexit DVDs, Books and Monographs page of our website.

The Single Market explained (Part 1): the latest Leave Alliance monograph

The Leave Alliance, of which the Campaign for an Independent Britain is a member, has produced a further Brexit monograph: Leavng the Single Market – Part 1

Alternatively, a full list of monographs can be found on this page of the Leave Alliance website.

There has been much debate about “Hard” and “Soft ” Brexit and whether or not we should stay within the Single Market. As this monograph shows, the issue is considerably more complex.  It is not by any means a  light read, but an extremely helpful and detailed explanation of what the Single Market actually is.