The border which nobody wants

Ar first glance, it seems utterly bizarre. We don’t want to build a hard border fence between Northern Ireland and the Irish Republic and neither do the Irish or the EU. No one wants it but it may nonetheless have to be erected.

The reasons lie with the UK’s change in status. If it leaves not only the EU but also the European Economic Area, it becomes a Third Country. The EU does not permit goods to be transferred across its borders without the necessary customs clearance and the fact that we are going to maintain regulatory convergence with the EU up to Brexit day makes not one iota of difference.

But couldn’t we just agree to treat Ireland differently? In this instance, the rules of the World Trade Organisation wouldn’t allow it. Discrimination in trading arrangements that favour one country over another without any formal trade deal is not permitted – and we can’t strike a bilateral trade deal with the Irish Republic as it has no freedom to negotiate such deals, being a member of the EU. After all, this desire to regain control of trade policy was one of the reasons why we voted to leave.

So it is no surprise that Mrs May came away empty handed from her meeting with Jean-Claude Juncker yesterday. It is hard to read between the lines and fathom out what really went on. Did she really consider a deal which would have seen Northern Ireland end up with separate trading arrangements from the rest of the UK?  Such an arrangement would compromise the constitutional integrity of the UK and thus was never going to be acceptable to the Unionist community in the Province. “Northern Ireland must leave the European Union on the same terms as the rest of the United Kingdom,” insisted Arlene Foster, leader of the Democratic Unionist Party.

On the other hand, the Dublin government insists that EU regulations on issues such as food safety and animal welfare must be maintained in Northern Ireland, to avoid damaging cross-border trade once Britain leaves the EU’s single market and customs union.  However, to repeat, mutual recognition of standards cannot be agreed without a formal trade arrangement and that isn’t going to be on the table any time soon.

Parliament’s Exiting the European Union Committee published a report which  was decidedly pessimistic about the  prospects of a deal given Mrs May’s insistence that we will be leaving the Single Market. “The Committee does not see how it will be possible to reconcile there being no border between Northern Ireland and the Republic of Ireland with the Government’s policy of leaving the Single Market and the Customs Union.”

Quite why the Customs Union has to be dragged into this debate is anyone’s guess. There are seamless borders between non-EU Norway and EU member states Sweden and Finland. This is everything to do with the Single Market but nothing at all to do with the Customs Union, of which Norway is not part.

There can be no doubt about the concern felt in the Irish Republic about the prospect of “no deal”. Comparing the UK to EU-27 as a whole, our country could well end up facing the greater problems in the short term. Some individual countries would not suffer that badly either. Germany, for example, would soon shrug off any decline in trade with one of its major export markets and find others. For the Irish Republic, however, the effect of “no deal” would be devastating. We are the second largest importer of Irish goods and services after the USA, receiving 13% of total Irish exports. We are also the biggest exporter to Ireland, with a 24% share of Irish imports.

Given these figures, you would expect the Irish government to be among the most dovish of EU27. Unfortunately, according to Anthony Coughlan, this is far from being the case. In an e-mail to Edward Spalton, our Chairman, he wrote:

The members of the political Establishment in the Republic of Ireland, dominated as they are by career Euro-federalists, hope fervently that the whole Brexit project can be aborted or made effectively meaningless by doing everything they can to obstruct the EU/UK negotiations and by interacting privately with those cross-party interests that are seeking to test Brexit to destruction in Parliament. Irish policy-makers are doing everything they can these days to encourage this end, egged on by the Brussels people –  while not saying so publicly of course.”

He went on to claim that there was some collusion between Irish Euro-federalists and UK remainiacs: “I have not the least doubt that  key Irish/EU grandees such as Peter Sutherland, John Bruton, Pat Cox  and Alan Dukes are interacting at present with the likes of  Peter Mandelson, Keir Starmer, Tom Tugendhat et al to do all they can to frustrate Brexit in Parliament and that they are being encouraged by Messrs Barnier, Juncker and the Brussels people to do this, with the full support of the Irish Government and Opposition behind the scenes.”

Some eagle-eyed readers will remember that Peter Sutherland, a former European Commissioner, was the person who told the House of Lords that the EU should do its best to undermine the ethnic homogeneity of individual nations by increasing mass immigration. Anyone in this country who is formally associated with this contemptible individual is truly beyond the pale.

Given these serious allegations of troublemaking by Irish politicians, it is unsurprising that Mrs May has been sent a letter signed by a number of Tory MPs, economists and business leaders urging her to take a tough line with the EU, insist on a trade deal and walk away if the EU will not play ball. Add into this potent brew the firm and perfectly understandable stance of the DUP that every part of the UK must leave the EU on the same terms and it is unsurprising that David Davis has found himself having to work hard to find a solution to the impasse. His latest suggestion is that that the whole of the UK, and not just Northern Ireland, should retain regulatory “alignment” – not “convergence”  -with the EU.

Even before any discussion has taken place on what this actually means, however, an un-named EU official has effectively torpedoed the whole idea:-  “The UK will not have any say on the decisions taken in Brussels and will basically implement them without having any influence over them… it makes the UK kind of a regulatory ‘protectorate” of Brussels.‘” Any suggestion that such an abject surrender would be acceptable to the signatories of the letter to Mrs May – or the DUP for that matter – is plainly ridiculous.

It isn’t easy to separate the wood from the trees in the current flurry of activity, but it is looking highly unlikely that the Brexit negotiations will be moving on to the next stage (i.e., trade talks) after the critical European Council meeting later this month. The deadlock over the Irish border issue is raising the stakes higher by the day and it would be a brave man who would place any money on what the eventual outcome is likely to be.

Photo by Michael 1952

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.

Mrs May keeps us guessing

It would have been a futile exercise to report every twist and turn in the recent debate about “hard” and “soft” Brexit. Far better to wait and see what Mrs May and her collegaues actually plan to do.

Yesterday, we were given some inkling as to her future plans, although it didn’t amount to as much detail as many would have liked.

There were, however, some encouragements in other areas. She made it quite clear that there was to be no second referendum and that those who wanted to challenge the result needed to wake up and smell the coffee:- “But come on.  The referendum result was clear.  It was legitimate.  It was the biggest vote for change this country has ever known.  Brexit means Brexit – and we’re going to make a success of it.”

This has been one of Mrs May’s stock phrases since taking office.  Yesterday, we came a little nearer to knowing what it actually meant. “There will be no unnecessary delays in invoking Article 50.  We will invoke it when we are ready.  And we will be ready soon.  We will invoke Article 50 no later than the end of March next year.” Fair enough. This is a confirmation of what had widely been expected. Thankfully, business will have less than six more months of uncertainty, for as well as a date being set, it is looks likely that by then, our exit route will have been determined.

But what will that route be? We were told what it would not be:- “It is not going to a “Norway model”. It’s not going to be a “Switzerland model”.  It is going to be an agreement between an independent, sovereign United Kingdom and the European Union.” Furthermore, alongside repealing the 1972 Accession Treaty, she intends to convert the Acquis into UK law when the Article 50 period is complete, so the WTO route looks to be off the table too.

So what does that leave us with? How is she planning to square the circle between trade and immigration control? There was not a great deal of detail:- “I know some people ask about the “trade-off” between controlling immigration and trading with Europe.  But that is the wrong way of looking at things.  We have voted to leave the European Union and become a fully-independent, sovereign country.  We will do what independent, sovereign countries do.  We will decide for ourselves how we control immigration. And we will be free to pass our own laws.”

On the one hand, she was quite clear that some restriction of freedom of movement will have to be part of any deal:- “We are not leaving the European Union only to give up control of immigration again” yet at the same time she insisted, “I want it to give British companies the maximum freedom to trade with and operate in the Single Market – and let European businesses do the same here.

Still a bit opaque. The Liechtenstein compromise would fit all the criteria she listed. Another possibility would be the Australian 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. There don’t seem to be many other choices.

Mrs May is deliberately not giving too much away on the negotiating tactics, but she didn’t mince her words about the irreconcilable Remainiacs:- “When it legislated to establish the referendum, Parliament put the decision to leave or remain inside the EU in the hands of the people.  And the people gave their answer with emphatic clarity.  So now it is up to the Government not to question, quibble or backslide on what we have been instructed to do, but to get on with the job.

Because those people who argue that Article Fifty can only be triggered after agreement in both Houses of Parliament are not standing up for democracy, they’re trying to subvert it.  They’re not trying to get Brexit right, they’re trying to kill it by delaying it.  They are insulting the intelligence of the British people.”

In summary,  there were some good things in the speech and not a lot to cause major concern, although Richard North takes the PM to task for claiming we would make our own decisions about how our food is labelled, as those regulations originate with the World Trade Organisation, to which (presumably) she would still wish us to belong. That apart, it was a speech which certainly did not deserve the put-down in the Daily Mirror, suggesting that Mrs May was a prisoner of “ideological Tories who get out of bed every morning to wind back the clock to a bygone age.”  Such garbage is typical of those people who do not accept that it is the EU which is a relic of a bygone age. On the contrary, Mrs May wasn’t anyone’s prisoner. She was spelling out her own positive vision for our future in that speech. The Sun called her a “capable PM we  can be proud of.”  Well, she is continuing to wn over the doubters and  you could sense her genuine enthusiasm as she talked about her “ambitious vision” for post-Brexit UK and it’s good that she isn’t letting herself be rushed, but a little bit more detail about how we  are going to get there would be welcome.  Hopefully , we won’t have too long to wait.

Container inspection at port of entry

The BBC’s Fake Britain series was not produced to make a contribution to the debate on options for UK trade once we leave the EU. However, this latest episode, which shows the identification, inspection and eventual rejection by the Port Health Officer at Southampton of a distinctly dodgy container, consisting mostly of food products  from China, contains a number of incidental details of great importance to this subject which will be  exercising the minds of government ministers and civil servants in the coming months.

Anyone interested in the subject of how trade passing through our ports is regulated should watch the  first ten minutes of  this episode while it is still available on the BBC website. (You will need a valid TV licence)

The first thing which strikes anyone watching this programme is the huge volume of containers handled at this port – 1.3 million per year. Southampton is a port of entry for goods from outside the EU and thus a first line of defence against risks to public health, not only for the UK but for the whole of the EU.

The officials are first drawn to examine the container because its documentation is incorrect. Then on inspection, the contents of the container are not the same as those on the packing list.

The Port Health Officer remarks that there is no EU-approved manufacturer for one of the meat products. People often say “China has no free trade agreement with the EU”. This is true enough but China has many agreements with the EU about mutually recognised standards of quality and traceability for different classes of product, approved manufacturers etc.

These agreements are mostly registered with the UN rather than the WTO. Many commentators discussing the trade issue have overlooked them, continuing to believe that tariffs are the main or sole barriers to trade.  China’s trade with the EU is therefore dependent on far more than “WTO rules” about tariffs alone.

These Mutual Recognition agreements are critical. If they did not exist, every single container from China would have to be inspected individually for compliance with EU standards – a  hugely expensive and very onerous task given the volume of trade.

The legal compliance and safety of goods made and circulated within the EU rests on the common regulations enforced by each member state and certified in the documents accompanying each container. If these are all in order, containers from member states cannot usually be detained for inspection when crossing EU borders. That is the effect of the Single Market. Trade moves very much more easily. For this reason, there are very few BIPs (Border Inspection Posts) at ports which mostly handle trade from one EU country to another.

If the UK were to leave the EU without a comprehensive agreement on maintaining the mutual recognition of the standards (with which we already comply), then our trade with the EU would be gravely handicapped. Relying solely on basic “WTO rules” means that every container would have to be inspected. Some people have advocated “WTO rules” – saying “Better no agreement at all than a bad agreement”. As far as we know, no other country relies on this sort of trade relationship with the EU.

Photo by Robert.Pittman

Photo by Robert.Pittman

Five more monographs on Brexit from the Leave Alliance

The Leave Alliance, of which the Campaign for an Independent Britain is a member, has produced five further monographs on the subject of Brexit.

They can be downloaded here:-

Post-Brexit regulation

Trade agreements

WTO Schedules and Concessions

A European Economic Space

Liechtenstein reprised

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

All are well worth reading, setting out some of the issues we will need to face when negotiating our exit from the EU.

 

 

Andrew Tyrie’s paper “Giving Meaning to Brexit”

A paper called Giving meaning to Brexit by Andrew Tyrie MP, has just been published by Open Europe.

Mr Tyrie is Chairman of the House of Commons Treasury Select Committee and former Chairman of the Parliamentary Commission on Banking Standards. Given he supported remain during the referendum campaign, it is highly unlikely that  you will agree with everything he says, but it is nonetheless interesting to read the thoughts of one influential backbench MP on the subject of Brexit.

He spends some time explaining why he feels the so-called “WTO option” is not viable except as an emergency fall-back if negotiations with the EU break down.

He also addresses the issue of single market in some detail, although like many other commentators on this subject, he hasn’t done his homework very thoroughly. He talks of a Norway-type relationship giving us “no formal say” over the development of financial services regulation. This is not true. Norway is widely consulted in the framing of EEA-relevant regulation, even if it does not have a vote. He does, however, mention that with much financial regulation originating in global organisations (with the EU merely acting as a conduit),  withdrawal from the EU would give us an independent seat on all those bodies where we are currently represented by someone from the EU.

Given the influence of global bodies in dictating the terms of international trade, he feels that the promised “bonfire of regulations” upon withdrawal will not be anything like as great as has been claimed, although he identifies one or two beneficial changes that may be possible .

He also says little about the possibility for non-EU members of the EEA to restrict free movement of people, which Liechtenstein has done, merely usng the phrase “emergency brake”, which is not a very accurate description of the possibilities under articles 112 and 113 of the EEA arrangment.

He is critical of the substantial savings promised by some “leavers” and is very sceptical that we will be £350 million per week better off.  He also doubts that a settled arrangment with the EU will be complete within the two years stipulated by Article 50.

On a more positive note, he does see the freedom to make our own trade arrangements as one of the big benefits of Brexit.

He says that Parliament should be given a chance to “express a view” on the planned negotiations before Article 50 is triggered, but does not call for a vote.

As for the future of the EU without the UK, he feels that sudden collapse of the project would be disastrous for us as well as the EU, but he does not mention the possibility of other nations peeling off one at a time, which cannot be ruled out and which would not necessarily cause a collapse. His description of the EU project as the “most sophisticated system of cooperation and integration, supported by the rule of law, between a large number of nation states – freely entered into – ever attempted” is a bit wide of the mark, given the deceit used by Edward Heath to take us in and the considerable sweeteners and twisting of the rules used to ensure that other candidate states vote to join when they get round to holding referendums on membership.  I recall being told that in Malta, for instance, voters were told that not voting would count as voting not to join the EU, which was a lie.

In spite of these reservations, the essay is worth reading if for no other reason than it shows that most erstwhile Tory remainers have accepted the result and just want to make Brexit work as best as it can,  for which we must give thanks.