In my last BrexitCentral article, I posed the rather obvious question to the EU: “Would you rather have a no-deal-style Irish border with or without £39 billion?” That choice, which Brussels seems not to have understood, has now come into sharp focus and it seems now that the answer is likely to be presented to them as a fait accompli.
Aside from the niceties, the fundamental objection to Theresa May’s proposed deal is the potentially perpetual lock-in to a customs union. The “joint committee” means of course that it will be for the EU to decide when or whether we can leave. It is unheard of, and utterly unacceptable, for anyone (and certainly any country) to be potentially bound in perpetuity by an arrangement that they have no ability to terminate.
In the political declaration – i.e. informally – the EU says that the Irish backstop, separating Northern Ireland from the UK by remaining in the customs union and adhering to the EU rule book, might be avoidable by either a technological solution or an appropriate trade deal. But it’s quite clear that the only trade deal that will satisfy them with respect to keeping the Irish border open is one that keeps the whole of the UK in the customs union. As a result, the UK would not be able to enter into global Free Trade Agreements (FTAs). That is precisely their desired outcome, so they are unlikely to show any enthusiasm for a MaxFac solution. At the same time, with £39 billion committed unconditionally, the UK will have absolutely no leverage.
We have no need to wait for proof of that. At the recent EU summit, Emmanuel Macron warned that if, in future talks, the UK is unwilling to make compromises over fishing, the negotiations for a wider trade deal could be slowed down, which could lead to the last-resort backstop plan coming into force.
So it follows, as night follows day, that we could be – if not forever then at least for many long years – in either a temporary or permanent customs union with the European Union. To avoid the Damocles sword of the backstop from destroying our negotiating position, we must decouple the Irish border issue from the trade negotiations. How to achieve that is by using no deal as the bridge to the arm’s length negotiation of the new relationship.
Parliament now seems very likely to reject the proposed deal. So in the absence of new legislation, therefore, we will leave on 29th March 2019 with no deal (as explained by Stewart Jackson on BrexitCentral here). So what are the implications of that?
EU short-term trade: We would have to trade with the EU on WTO terms until a free trade deal can be agreed with them. This is undesirable but not catastrophic. 39.3% of UK imports and 33.1% of exports are conducted under WTO rules with non-EU countries. Most countries in the world (111 out of 195) trade with the EU under WTO rules, including China, India, Russia, the United States and Singapore. Despite tariff and non-tariff barriers, Britain’s trade with non-EU countries is in surplus and growing, while our trade with the EU is in deficit and shrinking.
If the EU imposes a 10% tariff on our exports and we tax their imports into the UK at 10%, prices go up to the extent that not offset by significantly lower world prices than EU prices for food and commodities. 10% tariff provides a revenue boost to HMRC, to be spent to our benefit. Exports are harder but offset by a fall in sterling that boosts exports while making imports more costly – no bad thing to help rectify our appalling adverse EU balance of trade.
Meantime, domestically, the UK can think about diverging from some EU regulations. Clearly, businesses exporting to the EU will have to comply with EU product standards and trading terms but the burden of those standards need not necessarily be imposed in the 94% of businesses, representing 88% of GDP, that trade only domestically or with non-EU countries. (CETA clearly does not require Canada to impose all 100,000 pages of EU rules and regulations upon every Canadian business.)
EU long-term trade: Michel Barnier himself said, in his speech announcing the deal, that agreeing a free trade deal with the UK should be much quicker and easier than FTAs with other countries as we start from a position of complete alignment. And we have in CETA, the EU/Canada FTA, a ready-made template for the trade agreement between the EU and the UK. That is not to say that the negotiations will be easy if, for example, the EU’s demands include full access to UK fisheries, which is why it is so vital that we can back up a tough stance with a £39 billion carrot.
Friction: Queues at Dover would be bad news but friction can be minimised, for example, by trusted-trader status for regular just-in-time supply-chain consignments and number-plate recognition that opens barriers automatically on designated trusted trader lanes etc. There are four months to take steps to increase capacity (a job that should have been started two years ago), for example by establishing an inland port and protected route to the seaport.
The recent paper published by Global Britain and the European Research Group, Fact – NOT Friction: Exploding the myths of leaving the Customs Union, shows that “fears are driven by a series of myths about how customs procedures work”.
Global trade with EU partners: Much capital is made of the fact that we currently benefit from EU FTAs that allow us to trade freely with more than 40 non-EU countries. This is true but they include places like Guernsey, Guadeloupe, San Marino, Büsingen am Hochrhein, the Falklands and South Georgia. The EU has trade agreements with only three of the UK’s principal trading partners – Switzerland, South Korea and Canada. People love to proclaim the fact that “a single trade deal can take years or decades to agree” with the clear implication that that is bad news. It is not. On the contrary, for countries with whom the EU has existing FTAs, it is fantastically good news. It stands to reason that, save to the extent that the parties wish to change anything, all that is needed is to copy the current FTA between the EU and that country, change the name of the contracting party and sign it.
New global FTAs: We would be able to negotiate and enter into global FTAs at the earliest opportunity. Very many countries have expressed a desire to do so – Australia, Argentina, Brazil, Canada, Chile, China… and I’m only up to the Cs.
Global trade before new FTAs: Meanwhile we will no longer have to impose the EU Common External Tariff on imports from the rest of the world: 15.7% on animal products, 35.4% on dairy products, 10.5% on fruit, vegetables and plants, 12.8% on cereals and preparations, 23.6% on sugars and confectionery. 19.6% on beverages and tobacco.
Non-trade issues: Many non-trade issues are addressed, directly or indirectly, by the 585-page draft Withdrawal Agreement: citizens’ rights, EU access to the City, defence and international affairs, aviation, Horizon 2020 etc etc. If the EU became obstructive over many of these, it could present severe problems. As the issues have, presumably, been agreed because they are to mutual advantage, it is hard to see why the EU would consider it to be to its benefit to behave aggressively (other than to prevent the UK from leaving).
The Irish border: As Andrew Lilico pointed out on BrexitCentral, the border between Northern Ireland and the Irish Republic has some 275 crossing points. The border separates regulatory, tax and legal regimes that are very different and is controlled via a combination of administrative cooperation, whistle-blowing, auditing, site raids by customs, tax and regulatory enforcement officials. There are – currently – occasional random spot-checks on roads leading up to and at the border, as well as cameras and other physical infrastructure at the border.
Lilico also noted some UK press discussion suggesting that the EU would impose stop-and-check controls at the border, like those between the EU and Turkey. Such an attempt is certainly possible, but seems highly unlikely because of the scale of the task (275 crossing points, more than all other land crossing points into the rest of the EU from other countries); and because the Irish Government claims that the EU has given undertakings that no such controls would be introduced; and because Ireland seems unlikely to allow them to be imposed, even if the EU so desired.
There has been much talk of technological solutions that will take years to develop but the European Research Group’s paper, The Border between Northern Ireland and the Republic of Ireland post-Brexit demonstrates how each of the issues can be addressed without the need for technology not yet invented. The Irish Government and others dismissed the paper immediately as “pure fantasy”, apparently because of concerns about ability, without either a hard border or ‘new technology’ (what kind of new technology?) to prevent smuggling or the import of non-compliant goods into the EU. At present, the Republic of Ireland physically inspects only 1% of imports, so 99% of contraband and non-compliant goods are already getting through!
Some 33% of Northern Ireland’s goods exports (all sales outside the UK) went to the Republic of Ireland in 2016 and were worth around £2.7 billion (€3.1 billion). The EU’s imports from the rest of the world amount to around €172 billion and the EU’s GDP was about $17,300 billion (€15,200 billion) in 2017. In the unlikely event that 25% of all goods transported across the Irish border was undetectable contraband or non-compliant goods (pretty unlikely that), this would represent 0.5% of all imports into the EU and 0.005% of EU GDP. But it wouldn’t be 25%, would it? Who is being fantastical here?
As the ERG paper says, “no border is 100% secure against smuggling. Smuggling takes place across EU borders in Eastern Europe and the Mediterranean. Moreover, it occurs at present across the border between Northern Ireland and the Republic of Ireland. Drugs, fuel, tobacco, cigarettes and other illegal goods have been smuggled across the Irish border since the 1920s but cross-border co-operation is already used to combat criminals. The PSNI, the Garda Síochána, customs authorities and law-enforcement agencies co-operate to counter this trade. Law-enforcement agencies on both sides of the border co-operate to suppress smuggling without anyone suggesting that border posts and checks would make their efforts more effective.” And there are better ways to identify non-compliant goods than by random 1% or 3% checks at the border.
The latest ERG paper, Your Right To Know – the case against the Government’s Brexit deal, extols the virtues of ‘A better alternative – a “Super Canada” Free Trade Deal’, but misses the point. Yes, Canada-plus would be a million times better than the Chequers plan and the currently proposed Withdrawal Agreement but it does not address the Irish border issue. Although Canada-plus has been offered several times by the EU, they offered it only in combination with the backstop of Northern Ireland being separated from the rest of the UK.
I would therefore say that the two things – the Irish border issue and UK/EU trade relationship – need to be decoupled. We should leave with no deal and confront the EU with the Irish border problem in March 2019.
Thereafter there will still be issues over the nature of the trade deal – whether it will be close to Canada-plus or will have to be more limiting because of the EU’s unwillingness to contemplate anything that might allow the UK to become competitive. We would need to weigh up the benefit of a UK/EU FTA based on a customs union and common rule book against the known drawbacks – EU regulations imposed on the 94% of UK businesses, representing 88% of GDP, that trade only domestically or with non-EU countries; no say in determining future regulations or trading standards; no ability to innovate; no ability to negotiate trading standards as part of FTAs; and maybe, if remaining in the customs union, no ability to enter into global FTAs at all.
By decoupling Irish border issue from UK/EU trade relationship, the Irish border will no longer be the overriding, determining factor. It will be for the UK to decide what is in its best interests, like the other 40 countries, large and small, that have entered into widely varying trade arrangements with the European Union
And £39 billion retained will, without doubt, focus the minds of those on the other side of the negotiating table – but the £20 billion or so of net contributions that they would have received during the two-year transition period will have been irrevocably lost.
We now learn that the Treasury predicts that the country will suffer £150bn in lost output over 15 years under no deal, with Theresa May’s plan costing in the region of £40bn.
This latest manifestation of Project Fear has to be the ultimate insult to the nation’s intelligence.
With or without Mrs May’s Withdrawal Agreement, we will have the ability, within 2 years or more, to conclude a free trade deal with the EU – without a shadow of doubt a far more favourable one if we are able to negotiate while holding out a £39 billion carrot and without the Damocles sword of the Northern Ireland backstop suspected over our heads. And, dependent on how closely we decide to tie ourselves to EU standards, the ability to conclude FTAs with other countries.
The only counteracting drawback of no-deal is the short-term damage (and, conceivably, any irrecoverable long-term damage) to UK/EU trade as a result of the short-term disruption arising from the loss of the transition period. But we’d start with a saving of £20 billion or more from net contributions to the EU over two or more years. And benefit from earlier freedom to deal with our fisheries and agriculture (and, and… need I go on?)
No doubt the Treasury will, as usual, refuse to disclose its ridiculously biased assumptions.
The post We must decouple the Irish border issue from UK/EU trading relationship appeared first on BrexitCentral.
The Chequers proposal had two aims: (1) ensuring frictionless trade and (2) solving the Irish border problem. Its proposal to keep the entire country (not just businesses that trade with the EU) perpetually locked to EU standards in which we have no say, and from which we cannot depart to enable us to agree trade deals with other countries, was totally condemned by both Leavers and Remainers.
The ‘common rule book’ was rejected by the EU for ‘cherry picking’ and undermining the Single Market; and the ‘combined customs territory’ was rejected by the EU which, justifiably, refuses to delegate its tariff collection to a third party. So Chequers was on life-support. The addition of “temporary” all-UK membership of the Customs Union is unacceptable to us without a time-limit and unacceptable to the EU without a backstop-to-the-backstop that could ultimately separate Northern Ireland from the UK. Finally, the idea of an extended transition (that wouldn’t necessarily solve the Irish border problem) has been universally rejected by all wings of the Conservative Party.
Even if Theresa May managed to pile in enough further concessions to solve the Irish border problem (if it really is a problem, not just a political device), that wouldn’t be the basis for a deal unless we were prepared to sign the Withdrawal Agreement and contract to pay £39 billion with no understanding of the nature of any future trading relationship (since Chequers has been rejected by the EU). Not even Mrs May – surely – would do that?
So, fortunately, through her successive and futile concessions to the EU, Mrs May seems to have put the final nail in the coffin of the Chequers plan, and left the way open for a fresh and possibly more sensible approach.
Boris Johnson’s Plan B or Canada+++, or whatever you want to call it, has been dismissed by critics, including Mrs May, as ‘fantasy’ because it does not solve the Irish border problem. Up to now, Mrs May has been able to claim that ‘only my plan can solve the Irish border problem’. That argument is now demolished.
So now a “no-deal” seems increasingly likely. There are some potential upsides: we will save most of £39bn (not all, because legal obligations will be honoured) and be free at once to negotiate Free Trade Agreements around the world. Downsides include the cliff-edge in March 2019 (although the Government is now, belatedly, making serious plans for no-deal); trading with the EU on WTO terms until a free trade deal is agreed with them; potential UK/EU border friction (at Dover, etc); and having to deal with the Irish border.
The exact wording of the backstop agreed in December 2017 was:
“In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.”
As Boris Johnson and David Davis were reportedly told, this wording and the implied definitions were pretty narrow and meaningless, i.e. that “those rules” which apply to goods exported from the UK to the EU across the Irish border must be aligned with EU regulations. That is seemingly obvious… and harmless. There’s not a word about Northern Ireland staying in the Single Market or having to follow the EU rule book for everything. “Those rules”, it says, not “all rules”. What the EU has been demanding is something far beyond what they agreed with the UK last December.
It must be perfectly plain that we will not allow the EU to try to split Northern Ireland from the rest of the UK (any more than they would expect Spain to split off Catalonia or France, Corsica or Normandy).
If there is no deal, the Irish border will still exist, and neither Ireland nor the EU will want to invoke a hard border. Britain certainly won’t. So some kind of pragmatic monitoring/enforcement arrangement would have to be agreed between the respective customs authorities in the event of a no-deal.
By offering one concession after another Mrs May is just manoeuvring herself and us further and further into a tight corner. Much simpler to say “no”, we won’t play your game, it’s no deal.
With no-deal, the EU will have to tolerate what they consider to be an unsatisfactory border arrangement and forgo their £39 billion. Why would they allow their intransigence force us into that situation when they could do a deal under which they tolerate – temporarily – that same unsatisfactory border arrangement and pocket their £39 billion?
So the choice for the EU becomes a simple one: do you want a no-deal-style Irish border arrangement with or without £39 billion?
As to future trading arrangements, Mrs May must be persuaded that the Canada-plus formula offered by the EU is the most favourable for the UK. While entirely frictionless trade would be very nice, the price she is proposing to pay – EU regulations imposed on all UK businesses including the more than 80% that trade only domestically or with non-EU countries; no say in regulations or trading standards or ability to challenge regulations that especially damage British businesses; no ability to innovate; no ability to negotiate trading standards as part of FTAs; cumbersome tariff reclaim procedures – is simply too high as an alternative to accepting some friction but minimising it. When encountering friction, you don’t scrap the machine, you apply oil: trusted-trader status for regular just-in-time supply-chain consignments; number-plate recognition that opens barriers at designated trusted trader lanes. Where is the friction?
Where are the obstacles? There is only one – the need for a firm negotiating stance.
Last Thursday, the same day that we read “Theresa May to trigger full-scale parliamentary no-deal planning ‘within three weeks’”, we read of Guy Verhofstadt brazenly insisting there’s a 0% chance of a deal unless we agree to the EU’s Irish border demands, apparently blind to the consequences to the EU – a no-deal Irish border problem and a £39 billion financial black hole.
On the other hand we have seen Wednesday’s news: “France threatens to block Calais port to the UK if we refuse to pay £39bn divorce bill”. The EU persists in making unjustifiable and unconscionable demands regarding the Irish border, aimed solely at keeping us in the Customs Union and so preventing us from entering into global free trade deals.
Their insistence on their childish game of chicken is getting beyond ridiculous. Is this how intelligent adults behave? Don’t intelligent adults just sit down and agree new feasible cooperative arrangements that will be to their mutual advantage? It’s called an amicable divorce.
The post We must stop playing the EU’s games and be clear we are willing to walk away with no deal appeared first on BrexitCentral.
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