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.

 

Photo by Peanut99

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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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.

Varadkar gets a caning from Lord Stoddart over Brexit comments

THE PRESS OFFICE OF

The Lord Stoddart of Swindon (independent Labour)

News Release

8th August 2017

 

Comments from leader of “EU minnow country” go down badly with Brexit peer Lord Stoddart of Swindon

The independent Labour Peer, Lord Stoddart of Swindon has taken the new Prime Minister of the Irish Republic, Leo Varadkar to task about his contribution to the ongoing debate over Brexit and advised the “stripling leader of a mini-state” to “learn his trade” before presuming to lecture the United Kingdom.

Lord Stoddart said: “The British people must be getting fed up with EU minnow countries telling them either to stay in the EU or agree to conditions like remaining in the Single Market and the Customs Union, which would effectively keep our country in the EU.  The latest culprit is the Prime Minister of the Irish Republic (population 4.7million) Leo Varadkar.  He should be reminded that the United Kingdom is the Republic’s good friend and a substantial trading partner –indeed, such a good friend and partner that that it gave Ireland a loan of £3billion to save it from bankruptcy caused by its membership of the single currency, during the last recession (I wonder if they have paid it back yet?).

“This stripling leader of a mini-state should learn his trade before presuming to lecture substantial and successful countries like the United Kingdom on how to proceed on Brexit, particularly after its people have voted in a democratic and free referendum to leave the European Union.”

Avoiding the cliff edge?

Brexit news has come thick and fast this past week. While we don’t see the need to comment on every twist and turn, some recent developments have been quite significant.

In particular, following reports of disagreements within Mrs May’s cabinet over how “hard” Brexit should be, we are now informed that the Cabinet is united over the need for a transitional deal pending full departure from the EU.  There has been considerable pressure from business leaders worried about the relatively short timescale to prepare for departing the EU. According to the Daily Mail, Mrs May told a group of senior figures from industry that she wanted to avoid a ‘cliff-edge’ exit from the EU.

The article also said that even David Davis, one of the ministers keenest to leave the EU as soon as possible, is reconciled to a transitional Brexit period lasting until 2022.

Of course, with 2022 is now the new date for the next General Election, this puts a great deal of pressure on the Government to make sure we’re through the transition period before voters go to the polls. A recent survey by YouGov studied the main reasons given by voters for supporting the two big parties in this year’s election. Among Tory voters, Brexit came top of the list with 21% citing it as their top concern. By contrast, Brexit (either supporting or opposing it) did not feature at all in the top 10 reasons why people voted Labour.  Achieving a successful Brexit looks like being essential for the Tories if they are to stand a chance of remaining in power next time round.

One big issue in many voters’ minds was immigration and it is possible from the snippets revealed by a government source that no attempt will be made to restrict migration from the EU during the transition period, although when the BBC reported on this topic, it merely used the term “might be” no restriction. If this is the case, it would confirm Mrs May’s statement earlier this week that whatever the transitional arrangement may be, it is not going to include remaining within the Single Market. If so, what will it include? A safer transitional option, the EEA/EFTA route, would enable us, via the Liechtenstein Solution, to start imposing restrictions  far sooner.

Opposition to housing development in greenfield sites and in small towns is not going to go away either, particularly as an increasing number of people are starting to make the obvious link between housing shortages, concreting over the countryside and immigration. This will only add further pressure on the Tories.

However, if voters may be concerned that the government is kicking its migration target further down  the road, the House of Lords Economic Affairs Committee thinks otherwise, noting that Brexit will encourage firms to replace cheap labour with robots. In a sense, this is nothing more than the House of Lords playing catch-up. Almost two years ago, Andy Haldane of the Bank of England said that millions of jobs would be replaced by robots in the next twenty years. Even allowing for exaggeration and/or technology not developing as fast as suggested by the headline report, if we start to become a world leader in artificial intelligence, we will be struggling to find work for the current immigrants and with the exception of top professionals, certainly won’t want any more.

As the summer recess begins, the government will not have an easy job to  keep everyone happy, be it the many shades of opinion among leave voters, the Business community or even the Cabinet. We are still woefully thin on detail about even its transitional plans, but at least we have now been told that the important players are not only talking to one another but listening and attempting to find common ground that will keep most leave voters and business people on side. That still leaves a lot of concerns unaddressed, but for this small mercy we must be thankful.

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Who will blink first?

Our attention has been drawn to an interesting article which appeared on the Conservative Home website. The author, James Arnell, claims that we in the UK have a different mindset when it comes to negotiations. “In the UK”, he claims, “parties generally start from a position which is more or less reasonable on each side and move together to a deal relatively quickly, seeking to avoid unnecessary escalation up the chain of command.”

The Continental approach is very different:- “Negotiations generally start with almost ridiculously extreme positions on each side….It is not at all unusual for these steps….to be accompanied by walkouts, requiring bosses to get things ‘back on track’. Ultimately, this continental form of negotiation culminates in a relatively rapid final phase of negotiations between the ‘head honchos’, in which, after months or years of painful posturing on both sides, points are traded embarrassingly quickly and a deal is sealed.”

Mr Arnell says that we should really start worrying if the negotiations are going smoothly at this stage as it means that the UK side would have been giving too much away.

The author works for Charterhouse, a private equity firm.  His biographical page on that firm’s website states that he is a barrister who speaks French and German fluently. All things considered, this article on ConHome sounds like it has been written by someone with first-hand experience of the Continental mindset with which David Davis and his team are having to deal during the Brexit negotiations. Maybe this is why not a lot is being given away by the UK government. While such tactics may ultimately turn out to be the best way of getting a favourable deal with the EU, as we have pointed out the lack of the details of any Brexit masterplan is causing concern for a number of business figures who are keen to know in far more detail what the government’s exit plans actually are.

A little extra piece of detail did emerge yesterday morning. According to Open Europe, Theresa May was adamant that even any transitional deal would not involve membership of the Single Market.  “We said we would no longer be members of the single market because we will no longer be members of the European Union.,” she said. Fair enough, but if there is another plan, not only organisations such as the Campaign for an Independent Britain but more importantly, some big names in the business world are straining at the leash for some reassurance.

Some confirmation of Mr Arnell’s analysis of the Continental mindset has surfaced in the shape of a  reference document of the Workshop on “Common Fisheries Policy and BREXIT” held on 21th June 2017, by the European Parliament’s Committee on Fisheries.  Concern has already been voiced about our denunciation of the 1964 London Fisheries Convention, an agreement which pre-dated our joining the EU allowing limited access to vessels from other Western European nations to certain areas of the waters between 6 and 12 nautical miles from our coastline.

As the wording of the original document was vessel-specific and no boats permitted to access our waters in 1964 are likely still to be active, denouncing this Convention could turn out to have been little more than a precautionary measure. The message it conveyed, however, was that the UK is serious about regaining control of all of our waters right up to the 200 nautical mile/median point limit and it was not well received. The response of Geert Bourgeois, the Flemish Prime Minister, was to wave around an ancient charter signed by Charles II in 1666 allowing fifty herring boats from Bruges “eternal rights” to fish in UK waters.  A bit of research showed this action to be nothing more than sabre-rattling. Even nearby Zeebrugge, a far more important fishing port than Bruges these days, could only muster 43 fishing boats in total four years ago.

So it comes as no surprise that the European Parliament is keen to see EU boats continue to plunder our waters. Although trade and fisheries will be handled separately, the report says, “The fact that these issues will be negotiated in separate legal frameworks should not lead to the fragmentation of fisheries issues, which should be addressed in their entirety and together, so as to ensure that the free movement of fishery products is linked to free access to waters and resources and vice versa”. As John Ashworth of Fishing for Leave commented, “The EU will want to tie the whole package together using blackmail on trade” –  In other words,  let us fish in your waters more or less as before or we’ll make it hard for you to sell fisheries products in the EU.

John has studied the issue of historic rights and has concluded that we can take back control of our waters without being open to a legal challenge over this issue. Nonetheless, the European Parliament document says “These historical fishing rights should be taken into account in the negotiations to facilitate preferential access by Member State fleets.” I shan’t repeat his rather forthright comments about this for fear of offending anyone’s sensitivity, but suffice it to say that he is distinctly unimpressed with the reasoning of the European Parliament! As an aside, it is worth pointing out that the European Parliament has a relatively minor role to play in the Brexit process, but its attitude is unlikely to be different from that of other EU institutions.

The bottom line is that if there is no agreement on fishing, the EU will be the clear loser. We would have full control of our waters right up to the 200 nautical mile/median point on Brexit day and no EU vessel would be able to fish anywhere within it. The loss of access to EU waters by our fishermen would be more than compensated by having exclusive access to our own.

This, or course, assumes that Michael Gove does not blink first and give way. The denunciation of the 1964 Convention was a move in the right direction, but the howls of protest from across the Channel are a warning to him that he will need to hold his nerve.

Indeed, it may not just be Mr Gove who needs to take James Arnell’s advice on board. Yanis Varoufakis, the former Greek Finance Minister has written a book called Adults in the Room based on his personal experience of how awkward he found EU officials to be.  On the other hand, while we have the upper hand on fisheries, we certainly don’t when it comes to other important areas of trade. Our negotiators must hold their nerve and not be intimidated, but they know that the mantra “no deal is better than a bad deal” is no more rooted in reality than the prospect of fifty 350-year old herring boats from Bruges suddenly appearing in the Channel demanding their eternal rights to fish in our waters.

Photo by waltercolor