Britain needs to play it smarter

There is some chatter on the web as to whether Brexit can be parked. Personally I don’t see that happening. Call it a hunch but I think the process has taken on a life of its own independent of the politicians and they lack the coherence to influence it in either direction. I can, however, see Brexit transmogrifying into something that is neither Brexit nor EU membership.

The repeal bill process is not an afternoon at the photocopier. It’s a major feat of legal engineering and it is going to take years. We can pass certain bills that technically mean we have left but the Brexit limbo could be of such a composition where making the final switchover in various sectors, ending EU supremacy, would be viewed as so destructive that it would go into some sort of review, much like TTIP has, where it exists as a concept but it’s not actually going anywhere until it’s taken off the shelf and dusted down.

We have heard much about the possibility of an accidental Brexit where we crash out without a deal, but there is also a possibility of “accidental remain” where our lack of direction and inability to agree on anything leaves it hanging in the wind.

The only way I see to avoid this fate is for the government to face the reality that the EEA is the fastest and most practical means of leaving the EU. It doesn’t matter if the EEA is suboptimal. It has the singular merit of being out of the EU.

We can quibble until the end of time over the various compromises the UK would have to make but since the advent of the WTO agreement on Technical Barriers to Trade there is little likelihood of reaching that elusive regulatory sovereignty. That issue we can address later. To my mind it is secondary to ending EU political union.

If we do not want to drift into a Brexit limbo then we need to see some decisive action from the government. All we are seeing right now is dithering, pretending it’s all there for the taking when what we’re actually doing is reinventing the wheel – and a poor copy at that.

The basic mistake is the belief that the Brexit process itself is the opportunity to do everything all at once. This is a classic misnomer. If anything the Article 50 process is a lengthy admin chore we must go through before we can start looking at systemic reforms. The only safe and sensible way to leave is by reverse engineering our membership and that means the first step has to be quite close to EU membership. It wouldn’t even matter if post-Brexit absolutely nothing had changed. What matters is that, having completed Article 50, we would have the power to start changing things on our own schedule.

This is the bit where us leavers need to get real. All of us have a strong dislike of the EU, but we cannot say that everything about economic integration is bad. What matters is that we preserve what is worth keeping and build on it. It would be a grave mistake to sacrifice any European trade in the belief that trading with the rest of the world will compensate. It really won’t.

That though, is going to require some adaptation to our ideas. Like it or not, the EU has us over a barrel. As the regional regulatory superpower it does call the shots, and since the EU has a number of other countries hooked into regulatory harmonisation by way of FTAs we are going to find the wiggle room for an independent UK régime will be next to nil.

Ultimately we are going to have to change our attitude to the EU in order to make a success of it. The hostile and confrontational tone is not doing us any good and it’s dangerous because we will need the EU’s extensive assistance in borrowing their third party cooperation agreements and trade deals. Secondly, since we won’t be going all out for regulatory sovereignty, our trade policy will have to be a collaborative and complementary policy to that of the EU.

As we have seen the EU likes to get bogged down in deep and comprehensive bundled deals which take a number of years and very often get tied up in technical detail at the last minute over soft cheeses or formaldehyde content in furniture. Despite this method causing a number of hang-ups for CETA and the demise of TTIP, they don’t seem to have learned. There are other ways.

What we can do is look at effects based trade policy. As a foreign policy objective we want to reduce the push factors that drive migration. In order to do that we need to get the poorest countries trading. We are told by Suella Fernandes that Brexit means we can reduce tariffs for Lesser Developed Countries. This fails on three counts in that for a long time the UK will maintain the existing tariff schedules, LDC’s already have tariff free access under the Anything But Arms agreement – and finally, it’s non-tariff barriers which stand in the way.

Ultimately LDCs struggle to meet stringent standards. Jacob Rees-Mogg and the likes would have it that we can trade away our safety standards but that invites a deluge of counterfeit and dangerous goods. Consumers won’t wear it. Our mission is to use our aid budget for technical assistance to ensure that they can meet regulatory requirements for export. Not only does that improve their ability to trade with the UK it gives them access to the European market as well.

Effectively we would be improving access to the single market for everyone. The benefit to us is the eventual slowdown in migration but also more trade means more opportunities for UK fintech and business services. Something our economy is geared toward in ways that France and Germany are not.

By acting in this way we have no real need to get bogged down in comprehensive bilateral talks as the EU does. What matters is we are enabling trade and paving the way for the EU to forge deals, to which we can be a party. Sector by sector we can improve the viability of African trade at a speed the EU is incapable of.

As much as this approach is in the cooperative spirit, little by little it removes the EU’s excuses for excluding poorer countries and in so doing we make allies and friends with countries with whom we cooperate. From there we can forge sectoral alliances to further pressure the EU into liberalisation and perhaps changing its stagnant trade practices.

All of this is quite futile though if we maintain an adversarial attitude to the EU. If we leave the single market we actually surrender an ace in the hole for our trade strategy while also losing the opportunity to expand and enhance it – and wrest it out of EU control. Moving entirely out of the EU sphere leaves us hobbled in Europe and pecking at scraps elsewhere.

I wish I could report otherwise but it’s time eurosceptics faced facts. The world got complicated while we were in our EU slumber. The beast we helped create is a power in its own right with its own gravitational pull. What is done cannot be undone. What we can do is leverage our position as an agile free trading country to strengthen the global rules based system and drag the EU out of its protectionist instincts. If we can do that we solve a number of problems not only for the UK but Europe as a whole.

Photo by (Mick Baker)rooster

We must not allow Remainers’ predictions of economic doom to become self-fulfilling

This article by Ewen Stewart of Global Britain first appeared on the Brexit Central website and is used with permission.

The general election has excited the dwindling army of hard core Remainers. A ‘done deal’ is now being challenged with usual suspects claiming that a hung Parliament re-opens the debate about the nature of the UK exiting the EU.

What is clear is that this election was fought largely on domestic issues and not Brexit. While there were differences in the Conservative and Labour approach, both were clear in their manifestos that the UK would leave the EU and the jurisdiction of the ECJ, regain control of domestic borders and withdraw from the Single Market and Customs Unions.

The areas of difference, in terms of policy towards the EU, were largely over employment law and environmental regulations. Thus, those politicians claiming the election result re-opens the debate are trying to subvert an agreed democratic process.

However, while there is no justification for watering down the terms of the exit from the EU, it is clear that Project Fear is rearing its head again. But even if there is a complete breakdown of discussions with the EU, the UK will perform perfectly well so long as confidence holds. Global Britain’s estimate is that even under ‘no deal’ the GDP effect would be negligible.

Why can we be so confident of this?

Those who thought the UK economy would collapse after the referendum were very wrong. They misjudged what the key drivers of the UK economy were and the importance of EU membership in that mix – and indeed the very nature of why trade takes place.

The die-hard Remainers are trying the same trick again with talk of a ‘cliff edge’ and despair. But they misunderstand what makes an economy tick. The primary drivers of the UK economy are monetary policy, consumer spending and public spending. All these factors are largely domestically driven and not materially affected by EU membership.

The impact of slightly higher trade barriers, to the EU, would not be meaningful in the context of the UK economy. Trade is about willing buyers and willing sellers, competitive advantage and innovation, and much less about regulatory framework. Most countries trade with the EU under WTO rules – US, China, Japan and Australia for example – and do so very successfully. Why should the UK be any different?

Moreover, claims that Foreign Direct Investment (FDI) into the UK would collapse have proven unfounded. After the referendum, investment increased, despite investors being well aware that the UK was going to leave the EU. According to UNCTAD, FDI into the UK surged to USD$179bn, the second highest in the world after the US – a marked increase on 2015. The combination of continuing strong consumer growth and substantial business investment has been a primary factor behind the UK’s strong economic performance and record employment levels.

But here is the rub: the constant talking down of the economy, for political reasons, by those trying to unpick the referendum by creating fear, risks becoming self-fulfilling if we are not careful. We must confidently point out that the EU is a fairly low-level factor in the UK’s economic prosperity and the Remainers’ constant doom has been confounded.

We need a rational debate about the nature of the UK economy and not one constantly undermining confidence for political ends. Let us remember that 60% of the UK economy is consumer-orientated. Furthermore, like it or not, government spending accounts for 43% of spending and remains a key driver. It seems likely the Government’s response to the election will be to encourage a modest fiscal expansion. However, perhaps the greatest single influence on the UK economy is neither the Government nor the EU, but the Bank of England, which can choose to stimulate (or not) through monetary policy and possible quantitative easing.

Exports are clearly important but even if talks completely break down and the UK relies on WTO rules (with average tariffs at 1.4%), the reality is that the impact would be fairly minimal. It is simply scaremongering to argue that leaving the EU would have a material impact on growth, unless confidence cracked.

Moreover, the EU has hardly been a success. While the EU’s tail may be up now after President Macron’s election and with slightly improving growth figures, we should remember it has been the slowest-growing region on the planet for over a generation.

Further, its record in signing trade deals is lamentable. It has failed to reach agreements with the US, China, Japan, Brazil and Australia, to name but a few. While the single currency will probably survive, it can only do so by federalising and centralising yet further. The interests of the Eurozone members and the rest will continue to diverge. The UK leaving the EU should be a win-win for both parties: we can follow our global mission encouraging free trade and co-operation and they can focus on their constitutional agreements.

However, we need to challenge those who mislead, constantly blaming everything on Brexit, no matter how tenuous. Ultimately, if we are not careful this could hit confidence. That is why the language of George Osborne and Co is so potentially dangerous, for their deliberate over-emphasis on fear and frankly misleading analysis which may start to worry the bedrock of the UK economy, the consumer. We must point to the facts of the UK economy and why the Remainers were wrong post-referendum and why they are wrong again now. All we have to fear is fear itself

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

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.