How vital is it for the UK to maintain the absolute right to exit the Customs Union? As pro-Brexit MPs have their political will tested to destruction, this question has become the fulcrum of the UK’s attempt to exit the EU.
The answer lies in a painstaking assessment of the UK’s trading performance within the EU. Using Office of National Statistics Data, Part 1 of my analysis showed how the Customs Union accounts for easily the worst-performing element of UK trade. Part 2 analysed the cost — in particular to the UK’s car producers and food consumers. Here I put the UK’s performance inside the Customs Union into global perspective. With multiple, 20-year comparisons — in US–EU trade, intra-EU trade, UK productivity and EU growth — this analysis reveals that the UK’s track record inside the Customs Union has been uniquely poor, by every reasonable measure or comparison. (All data used here is presented and sourced in: UK Trade: Goods & Services and UK’s Top 10 Sectors. Readers are invited to peruse both.)
The UK’s stagnant exports: What’s not to blame
The UK’s poor EU goods-export performance – a growth rate of just 0.22% per year since 1998 – is often attributed to the EU’s own flaccid economic growth. As a root cause, however, this is easy to eliminate by making two comparisons: first by measuring the UK’s performance inside the Customs Union against the exporting prowess of multiple non-EU countries; and second, by analysing how our EU partners have fared with each other over a similar period.
First, the track record of non-EU countries. In April 2017, Michael Burrage compared the growth rate of the UK’s goods exports into the EU with the growth rates achieved by multiple non-EU countries in It’s Quite OK to Walk Away. Using seven international trade databases, Burrage calculated that the growth rate of UK goods exports traded tariff-free into the EU’s Single Market from 1993–2015 was lower than for 35 other countries, many trading under Word Trade Organisation (WTO) terms. In no particular order, the countries that outperformed the UK included: Canada, the United States, Singapore, Brazil, Switzerland, India, Bangladesh, and – just– Australia.
Of the major global economies, only Japan has performed worse.
Second, the record of the UK’s own partners within the EU. What should deeply worry Customs Union supporters is that the UK’s performance inside the Customs Union is uniquely poor even by European standards. According to Eurostat data, the UK’s goods export/import ratio (expressed as a percentage) within the EU has plummeted from 80% in 2003 to just 63% in 2017, far below Germany (now at 124%), France (86%), Italy (112%), Netherlands (113%), and Spain (91%). Incidentally, Ireland’s export–import ration with the EU stands at an impressive 155%.
As shown in Part 1, the UK’s services exports to the EU do not and cannot redress the UK’s resulting trade-in-goods deficit, so long as the UK stays in the Customs Union.
What these comparisons reveal is that the UK’s goods-export performance with the EU since 1998 is uniquely poor, even though the UK’s EU-bound goods exports is precisely the sector the Customs Union is supposed to promote. The UK’s failure cannot be attributed to the EU’s own poor economic performance, since virtually every other major economy in the world has performed better over the past 20 years whether they happen to have been a member of the Customs Union or not. Suppose, then, the UK has just been uniquely unlucky in the range of goods it exports to the EU? Suppose the types of goods the UK makes are flukishly unsuited to the terms of the Customs Union and the tastes of Europe’s consumers?
Uncle Sam thrashes the UK in Europe
Fortunately, we can test this assertion too, because the United States’ own trade with the EU presents an almost heaven-sent comparison. The reason is the near equivalence in the value of the UK’s and US’s goods exports to EU back in 1998, and a startlingly similar range of export products – from aerospace goods and motorbikes to construction-site diggers and whisky.
Back in 1998, US goods exports to the EU were fractionally lower than the UK’s: £91.7 bn to the UK’s £99.9 bn at the prevailing exchange rate (UK Trade: Goods & Services, Tab 3, Section 10). But since then – more precisely, since 2008 – US goods exports have grown far more quickly. Over the entire, two-decade period, US goods exports to the EU have grown at a compound annual growth rate (CAGR) of 2.11% per year — as opposed to the UK’s 0.22% per year (Section 9).
Analysts can never say how the UK’s EU trade would have evolved from 1998 to 2017 if the UK had been outside the Customs Union. But a few deft comparisons – with non-EU countries’ trade, with intra-EU trade, with US trade growth, with the UK’s productivity growth, and with the EU’s own growth rate – reveal that by any reasonable comparison, the Customs Union has failed to deliver value to UK exporters since 1998 (For calculations and sources see UK Trade: Goods & Services).
The result: after 20 years of not being in the Customs Union, nor having a bilateral trade agreement with the EU, nor participating in Single Market rules, the US has comprehensively outstripped the UK as a goods exporter to the EU, with exports worth £219.8 bn in 2017 as opposed to the UK’s £164 bn. From near parity in 1998, US goods exports to the EU have grown almost 2% faster per year than the UK’s and are now 35% more valuable. As far as any analysis ever can, this dramatic divergence in export performance proves that seamless, tariff-free trade with the EU is absolutely not vital to exporters.
So, what is going on? Economists may one day discover that the Customs Union has been positively deleterious to UK producers as opposed to plain unhelpful. For what it’s worth, this author observes that Customs Union confers no commercial advantage in sectors where the UK is highly competitive (aerospace, defence jet engines, pharmaceuticals), and gives EU companies preferential access where the UK typically isn’t (mass-market cars, food, agriculture, machinery). And where the Customs Union provides no advantage, EU customers often procure US goods: EU airlines’ general preference for US-made turbo-jet engines would be a good example (UK’s Top 10 Sectors, Tab 2 (Transport), Section 5).
Nevertheless, the immediate issue is practical: Is the UK’s experience inside the Customs Union sufficiently bad that the absolute right to exit is worth the risks of a unilateral exit from negotiations and trading with the EU on WTO terms? In the global scale of poor trade relationships, does the end result of the UK’s experience in the Customs Union – a steadily deteriorating £95 trade deficit – really matter?
The £95 billion warning sign
The most logical comparison is, again, with the United States. That country, too, runs huge trade deficits in goods, which are partly redressed by surpluses in services. It’s biggest is the (2017) US$337 billion trade deficit with China. Highlighting this deficit formed a major element in Mr Trump’s campaign for the White House. US trade policy aims to reduce it.
So how does the scale of the UK’s deficit with the EU stack up with the US deficit with China? Are they of equal import? Or, to fashion the question more bluntly: should MPs worry that at some point, the UK’s £95 bn deficit with the EU will become an incendiary political issue all of its own?
If you convert the UK’s overall 2017 EU deficit into US dollars (goods plus services) at an exchange rate of $1.35 to £1, the resulting UK–EU deficit is $78.7 billion. But then the US economy is approximately 6‒7 times larger than the UK economy. Taking that into account, the UK has a deficit in comparative terms approximately 47% bigger than the US’s (Tab 3, Section 8).
More generously, you can translate the dollar trade deficit into a deficit per head of population, which gives a UK‒EU deficit of $1,216 per head, as opposed to a US‒China deficit of $1,050 per head. Calculated this way, the UK has a headache that is 16% more painful than the one that helped get Mr Trump elected.
Regardless of how adeptly the UK uses this deficit in future trade negotiations, it will, since it is deteriorating, eventually transmute into a political debate about the impact the Customs Union has on jobs. At that point, proponents of a new UK‒EU customs union – or indeed, any form of apparently seamless trade – are likely to hit extremely choppy political waters.
No, the Customs Union doesn’t create jobs
The reason for caution is the glaring discrepancy between the growth rates of exports and the UK’s own productivity growth rate (UK Trade: Goods & Services, Tab 3, Section 9). Observing that hundreds of thousands of jobs currently depend on trade with the EU is a quite different proposition to saying that membership of the Customs Union and Single Market has created jobs that otherwise wouldn’t exist — or that it isn’t steadily removing them.
The difficulty here is that the UK’s annual goods-export growth rate to EU (0.22%) is far lower than those other metrics which economists would normally expect it to exceed. It is just one-tenth of the UK’s average 1998–2017 GDP growth rate (2%, according to ONS). It is also slower that the Eurozone’s own growth rate, of 1.56% per year (calculated from 1995 – 2018, Section 5).
But the UK’s goods-export growth to EU is also far slower than the UK’s productivity growth rate over the same period ‒ 1.19%, according to ONS ‒ which is the rate at which UK companies and organisations become more efficient each year. This means it is statistically impossible for there to be more people engaged in EU goods-export activities in 2017 than in 1998. Which means, in turn, that the Customs Union cannot – net – have added a single job to the UK economy since 1998. Statistically, there have to be fewer jobs (as measured in value) involved in exporting goods to the EU in 2017 as compared to 1998 — despite the Customs Union.
In contrast, the growth in the UK’s EU trade deficit from -£5.6 bn in 1998 to -£95 in 2017 denotes the creation of hundreds of thousands of jobs in other EU countries, to supply goods to UK markets. This author roughly estimates the number created in EU to supply the UK’s motor market alone since 1998 at just over 40,000 (see Part 2). It is clear that continental Europe benefits greatly from keeping the UK in the Customs Union. What the UK gets out of it is – statistically – a mystery.
Summary – The Customs Union fails to deliver
So: if the Customs Union and Single Market have gently throttled UK export growth over 20 years; if they deliver crushing deficits that the UK’s non-EU trade then has to pay for; if their quality of seamlessness lies principally in helping investment slide overseas; if they force-feed UK households on the most expensive food on earth while offering no reciprocal advantage to any sector of UK trade except financial services, and then only in a limited way; if the reason for stagnant exports can’t easily be attributed to anything other than the Customs Union and Single Market themselves; and if the end result is a deficit 16% worse than the one that helped gain the Presidency for Mr Trump, then the UK’s strategic interest should be crystal clear.
Whatever its theoretical benefits, it has proven to be the wrong customs union for the UK since 1998. It delivers no commercial benefit to the UK’s fastest-growing manufacturing sectors (pharmaceuticals and aerospace); and leaves all the UK’s other major goods-export sectors in a state of either stagnant growth, huge deficits, or both. By any reasonable comparative measure the UK’s performance inside the Customs Union since 1998 is the picture of a failed trading relationship. And yet clinging to that failed relationship may now prevent the UK from liberalising trade with export markets that have grown quickly during the past 20 years – markets that are receptive to UK goods; markets that actually create jobs.
If the price of the UK’s exit from the EU is remaining in the Customs Union, then the cost will be paid by the UK’s manufacturing industry. That’s the lesson of the past 20 years.
In the recent Commons indicative votes on alternative Brexit options, the idea of remaining in the EU’s Customs Union emerged as the most popular future relationship with the EU even though, like every other option, it failed to get a majority. This is of course because it is Labour’s preferred option although Labour, fantastically, supports the idea only if the EU gives the UK a say in determining future EU trade policy (which it won’t).
Labour supporters of the Customs Union rarely say anything much in detail about why they support this option beyond a vague intention to preserve jobs, though what these jobs might be is rarely made clear. In fact, there is little evidence that a customs union would be a good idea for the UK.
The main arguments for a customs union are that it will guarantee tariff- and quota-free access for UK exports to EU markets and that it will avoid UK firms having to bear customs and ‘rules of origin’ costs that they would face in a free trade agreement (the latter involve the costs of ensuring product has enough ‘local’ content to qualify for zero tariffs). On top of this, it is claimed that a customs union solves the problem of the Irish border.
In our view, the purely economic arguments in favour of UK customs union membership with the EU are weak:
- There is not much evidence that a customs union would be more beneficial for UK-EU trade than a standard free trade agreement (FTA). A large-scale academic study from 2006 finds no evidence that customs unions outperform FTAs, while a more recent study even suggests the EU customs union has a smaller trade creating effect than FTAs such as NAFTA (which covers North America).
- Rules of origin costs are often hugely overstated. Claims that rules of origin costs for UK businesses in case of a UK-EU FTA could be as high as 7-8% of trade values are far too high. A careful study by the WTO suggests such costs are less than 1% of trade values, and often negligible.
- Costs of customs processing are also massively exaggerated. Claims by HMRC last year that customs costs could total 1% of UK GDP or 6% of trade values are anything from five to twenty times too high; they are based on dubious calculations and are totally at odds with on-the-ground industry experience.
- A ‘new’ UK-EU customs union would not even remove customs-related costs. Formal customs checks within the EU customs union only ended in the early 1990s due to the Single Market Programme, and still exist in Turkey’s customs union with the EU. Moreover, the documentary requirements associated with trading in a customs union can actually be greater than for trading on WTO rules!
- The UK’s foreign trade structure is not suited to a customs union. Customs union arrangements have some logic where one economy does a very large share of its trade with another. But the EU now represents only around 45% of UK goods exports and this share has been dropping rapidly. Twenty years from now it is likely that the EU will take only around a third of UK goods exports.
- The UK would remain locked into the EU’s highly protectionist agricultural trade system. High EU tariffs on agricultural products represent a heavy ‘tax’ on UK consumers. UK consumers are denied the choice of cheap food from outside the EU and pushed towards consuming expensive products from within it. This cost is high at 0.5-1% of GDP.
Moreover, the strategic/political arguments in favour of a customs union are even less compelling:
- Entering a customs union would make meaningful trade deals with other economies impossible. There could be deals on trade facilitation or deals on services but their scope would be very limited. Why would India or the US be interested in a deal on services (potentially benefitting the UK) when the UK had nothing to offer on the goods side?
- The EU would be able to ‘sell’ access to UK markets with no reciprocal benefits for the UK. Britain would be in the same boat as Turkey: when the EU does trade deals with third parties, these countries gain tariff-free access to Turkish markets but Turkish exporters do not gain automatic reciprocal access to these third countries.
- Britain would have no voice at future WTO discussions about global tariffs. It would simply have to accept whatever the EU agreed.
- The EU would be able to damage UK business using anti-dumping actions. Under a new UK-EU customs union the EU would be in charge of the UK’s ‘trade defence’ measures such as ‘anti-dumping’ actions. The EU could force the UK to impose steep tariffs on goods from third countries, hurting UK businesses and consumers. Worse still, the EU might insist on being able to impose anti-dumping duties on the UK as well – as is the case with Turkey.
- A customs union would not simply cover tariffs and quotas. The EU would also require the UK to follow EU rules in a broad swathe of policy areas including competition policy, environmental policy and social and labour standards – without any say. This would not only be a huge loss of UK sovereignty but also dramatically narrow the UK government’s freedom of action in key economic policy areas.
- A customs union does not solve the Irish border ‘problem’. Customs checks only represent a small element of potential border checks at EU borders today. A bigger issue is product conformity and other single market rules. This is another reason why any customs union would require either effective UK single market membership or border checks between Britain and Northern Ireland and/or Britain and the rest of the EU.
In summary, a customs union arrangement whereby the UK contracted out huge areas of trade and economic policy-making to the EU would be totally unsuitable for an economy like Britain’s.
Customs union arrangements may work well for small economies that do an overwhelming share of their trade with a large neighbour. But the UK is the world’s fifth largest economy, with a diverse pattern of foreign trade and with business and consumer interests that will often diverge from those of the EU.
It is no accident that Canada and Mexico are not interested in joining a customs union with the US, despite their strong trade orientation towards the US. They know that the loss of economic independence involved would be far too great to justify a modest reduction in border frictions. The calculation should be the same for the UK.
Supporters of a customs union have suggested the UK could somehow retain some influence over decision making in such a new UK-EU arrangement. But this looks like a fantasy. It would be legally and politically difficult for the EU to grant any significant decision-making power to the UK. The best the UK could hope for would be some kind of observer status. But the arrangement would remain a thoroughly one-sided one where the UK would have no power either to veto potentially damaging agreements or to push for deals that benefited it.
Entering a new customs union with the EU would be a backward-looking step for the UK, with a massive loss of policy independence and flexibility while leaving businesses and consumers at risk of having damaging decisions imposed on them with no say in how those decisions were taken. It would also give the UK minimal additional policy freedom in the trade and economic policy area. Overall, it is hard to imagine a more sub-optimal policy.
The post A dozen reasons why a UK-EU Customs Union remains a terrible idea appeared first on BrexitCentral.
One way to assess the value of the Customs Union to the UK is to track the trajectory of our principal export sectors over time. Since 1998, the UK’s fastest growing major goods exports (globally) have been pharmaceuticals, transport equipment and motor vehicles — in that order. None owe their commercial success to the Customs Union. Pharmaceuticals are almost free of global tariffs and so are aerospace products, which contribute 92% to the UK’s transport equipment exports.
Meanwhile the UK’s motor vehicle exports to EU peaked in 2007; the UK’s outstanding growth in the vehicles sector is powered purely by global enthusiasm for British motors.
But any meaningful analysis of the impact of the Customs Union has to place UK sectors into proportion – which means ranking them according to two-way trade. Here, there are two easy winners. UK–EU trade in motor vehicles is easily the country’s biggest, worth £67.5 bn in 2017. Next comes trade in food products and agriculture, worth £39.8 bn.
As the leading sectors in UK–EU trade, these pair have three things in common: they enjoy the highest levels of protection of any manufacturing sector in terms of the EU’s external tariffs; they generate the UK’s biggest EU deficits (£28 bn and £19 bn, respectively), and they are both represented by industry bodies that want the UK to maintain seamless trade with the EU.
First, cars. Using a three-year average at the start and end of this period and adjusting for inflation, UK motor-vehicle exports to EU have managed only fractional growth in 20 years: just 0.4% per year since 1998, or 6.7% over the entire two decades. Unnervingly, that growth is concentrated in the first half of the 20-year period. Adjusting for inflation, the value of average exports for 2008‒2017 (£15.03 bn, in 2015 prices) was lower than 1998‒2007 (£15.92 bn). This means by some measures, motor vehicles exports to EU are falling. Zero tariffs; zero market barriers; zero growth.
But here’s the problem: since 1998, imports from the EU have motored along nicely, growing at 3.6% per year. The result is a gigantic £28 billion deficit just in motor vehicles and parts — almost sufficient to write off the UK’s entire surplus in its trade in services.
Meanwhile, in the non-frictionless, non-seamless, non-Customs Union world of non-EU trade, UK exports have leapt ahead by a staggering 7.9% per year. Virtually all of the UK’s growth in motor-vehicle exports since 1998 is attributable to selling premium models to countries outside the EU: principally China and the US, but also ultra-high-end luxury models to the Middle East. The result is that despite being worth just a third of EU exports in 1998, exports to non-EU countries zipped past EU exports in 2012 and are now worth substantially more — £25.3 bn to £19.6 bn in 2017.
And thanks to the iron laws of mathematics, this difference will now accelerate away.
So, for the UK’s most-valuable trading sector, the Customs Union has operated as a one-way street. EU-based car-makers have retained a vice-like grip on the UK’s most-valuable import market with an 83.8% share that has dropped only fractionally since 1998. But there’s no reciprocity. Instead, UK auto manufacturing has relied for growth on global markets, with the result that the EU’s share of UK exports has plummet from 73.5% in 1998 to 44.7% in 2017.
Incidentally, this is easily the fastest switch-around of any major UK export sector, in the sense of exports switching from EU to non-EU countries since 1998. What’s more, the prominence of North America and China as markets for the UK’s premium marques implies that the proportion of the UK’s global motor exports already conducted on WTO terms probably exceeds the 73% average for UK goods.
Thus, the net effect of the Customs Union since 1998 has not been to create a springboard for UK manufacturing into continental Europe. Instead, it has placed a springboard in continental Europe, for overseas car manufacturers to ramp up their exports into the UK. Net investment has drifted from the UK to elsewhere in EU, and the growth in the UK’s auto deficit from £8.1 bn in 1998 to £28 billion deficit in 2017 is the living, haemorrhaging proof of it.
In employment terms, that springboard has bounced, very roughly, the equivalent of 40,000 jobs straight into continental Europe (This calculation is approximate. The UK’s trade deficit with the EU has widened by £17.32 billion (in 2015 prices) from 1998 to 2017. In the US, NBC estimates that wages contribute 10-15% of the cost of the average motor vehicle, and the average salary of a UK car worker, according to Auto Express, is £39,000. Using the lower figure, gives a value equivalent of 44,410 jobs. ).
The lethal aspect to this trend, however, is the way it is now edging into the UK’s premium sector – the power-house of the UK’s non-EU export growth since 1998. Jaguar‒Land Rover has now inaugurated production of its I-Pace and E-Pace models at Magna-Steyr in Graz, Austria, while BMW produces its second-generation Countryman models at VDL Nedcar in the Netherlands. Tellingly, the UK job losses announced by Jaguar-Land Rover in January 2019 followed the opening of a new £1 bn factory at Nitra, Slovakia, an investment decision that predates the UK’s 2016 referendum, and was part-induced by €125 million of EU-approved Slovak state aid.
Thus, for the UK’s biggest traded sector, the theoretical benefits of the UK’s membership of the Customs Union have failed to translate into measurable benefit. The protection of a 9–10% external tariff has not stimulated demand for UK-made vehicles and parts among EU customers over the past 20 years. Nor yet have the supposed obstacles of trading on WTO terms held back British motors from tripling sales (in real terms) since 1998.
The only observable impact of Customs Union membership has been to preserve the UK as a highly lucrative captive market for EU producers, with an 83% share of motoring imports.
Food for thought
Trade isn’t just exports, though. The equally vital role of trade is to secure for UK consumers the best quality goods at the lowest price. And if there’s one sector where this matters more than any other, it’s the UK’s second-biggest EU trade sector: food and agriculture.
At 0.7% of GDP, the UK’s agricultural sector is easily the smallest per head of any major economy in Europe. The UK is, perforce, a massive importer of food and agriculture products — currently to the tune of £42.9 billion per year. And so, even for non-free-traders, this is one area of trade where the interests of UK consumers easily outstrip the interests of UK producers.
Consequently, the UK’s strategic interest should be uncomplicated: to enable UK citizens to buy the cheapest and the best-quality food available on global markets. Yet this is precisely what the Customs Union prevents. By imposing ultra-high tariffs on non-EU food and quotas on imports, the EU forces UK consumers to purchase food from EU producers, who just happen to be the highest-cost food-producers on the planet.
But here’s the kicker: thanks to the Customs Union, the UK’s forced dependency on high-cost food is actually rising (Tab 8, Food, in UK’s Top 10 Sectors). Back in 1998, the EU supplied 67.8% of food products imported into the UK; this has now risen to 76.3%. The balance moderates slightly if you include agricultural produce (e.g. cereal) but agricultural produce is just 23% of the food that the UK imports. Add that to the mix and the UK’s reliance on EU for imports of all food-stuffs is still increasing, and stands at a 69.9%, totalling £30 billion in 2017.
Does this matter? Recent analysis from the Institute for Fiscal Studies by Peter Levell downplays the effect which the removal of tariffs would have on consumer prices, asserting the net effect on average households of the removal of all tariffs would be just 0.7% – 1.2%. The excellent analysis misses three factors, however: the effect of competition, the role of regulation, and the qualitative impact of changed spending habits – especially on less-well-off households.
First, the opening up of a protected or captive market to global prices would instantly stimulate competition, and competition would then become the dominant price-setting factor, not the old tariff differential. If overseas food producers bit straight into EU producers’ market share, EU producers would have to do reduce prices and become more efficient to retain market share (or gain fresh subsidies). There’s no telling how far price reduction would go but the dynamic of fresh competition for market share is the factor that would drive price reduction, not the original tariff advantage.
Second, some tariffs are particularly high, and their removal would disproportionately impact some households’ quality of life. As the IFS itself has itself pointed out, the least-well-off 20% of UK consumers spend more than 20% of their income on food. Imagine, then, the consequence of eliminating the effective 60% EU tariff on beef. Argentinian and Brazilian producers would charge into the UK market, and prices would quickly drop. But the effect would be qualitative. Families – and individuals, more to the point – would change spending habits and start eating high-quality beef, while paying less for the novelty. On them, the effect of tariff-free food would be immense.
Third, creating an open market in UK food stuffs wouldn’t simply be a matter of removing tariffs, but of reforming regulation to ensure it becomes non-discriminatory. And for consumers to benefit, a post-Brexit UK would also need to ensure compliance among trade partners. Analysts need only contemplate the effect – on consumers and UK car production – of the 2015 demise of the Land Rover Defender, when Jaguar Land Rover decided to comply with EU emissions regulations which other European car makers chose to flout. Without re-regulation, and compliance among trade partner, UK markets – especially food markets – will not become genuinely open, and value won’t flow to consumers.
In summary, a practical test of the utility of the Customs Union has to rest principally on the experience of motor vehicles, and food/agriculture. They are the UK’s two largest two-way sector trade with the EU and it’s where protective EU tariffs have the greatest trade-distorting impact.
In both cases, the trade data for 1998–2007 show the effect of the Customs Union is to retain or grow the UK as an essentially captive market, without reciprocal benefit to UK producers (in the case of cars) or UK consumers (in the case of food). And even from UK food producers’ perspective, exports of food products to markets outside the EU have grown faster than inside it (3.5% to 2.7%) despite the high tariffs and regulatory burdens common in trade in food. The rise in salmon sales to Korea following implementation of the 2011 FTA implies that the UK has much to gain from negotiating access to Asian markets – not just for fish, but also cheese and beverages.
I invite you to step through the experience of all the UK’s biggest trades by downloading the spreadsheet The UK’s Top 10 Sectors. The story described above repeats to a greater or lesser extent in each. The UK’s record inside the Customs Union is so unrelentingly poor that it begs a bigger question: do other countries fare any better? Is the UK’s experience just uniquely, inexplicably bad?
To answer that question, in a final instalment I will compare UK performance against other EU countries, non-EU exporters, the US’s and the Eurozone’s own growth rate.
The post The curious effect of the EU Customs Union on the UK’s cars and carbs appeared first on BrexitCentral.
There’s a difference between what the Customs Union was supposed to achieve in theory and what it’s actually achieved in practice. Thanks to historical trade data published by the UK Office for National Statistics (ONS) in September 2018, we now know the difference is huge. By making multiple comparisons in UK, EU and non-EU trade since 1998, it’s possible to judge the UK’s record inside the Customs Union over the past 20 years, and assess the value of seamless, tariff-free trade with the EU in terms of what it’s actually achieved.
All my data is sourced from ONS September 2018 release unless otherwise stated and compiled in two spreadsheets: UK’s Top Ten Sectors, which analyses each principal UK traded sector in turn, from motor vehicles to beverages; and UK Trade in Goods & Services which directly compares UK’s trade in goods and services. Both cover the period 1998 to 2017 and I would encourage readers to download are inspect them.
Export Growth: 1998 to 2017
For a first-pass assessment of UK’s trade record in the Customs Union, divide all UK exports into four, roughly equal parts: exports of goods to the EU (worth £164 billion in 2017); exports of services to the EU (£117 billion); exports of goods to non-EU countries (£175 billion); and exports of services to non-EU countries (£162 billion). Now, using the historical trade data published by the ONS in September 2018, calculate the average yearly growth rate for each of these four categories from 1998 (or 1999 for the services data) to 2017 (the method used is to take a three-year average at the start and end of the time period, and then adjust for inflation using the ONS’ own import/export deflator).
The results are perverse. The UK’s slowest-growing export trade since 1998 is goods exports to the EU, which have grown by just 0.2% per year since 1998, or 3.7% over 20 years. Yet this is precisely the sector that is supposed to benefit from tariff-free trade within the Customs Union. And even 0.2% is misleading. Most growth occurred pre-2007; adjusting for inflation, average annual exports in 2008‒2017 were actually lower than 1998‒2007 (See Tab 3 in UK Trade in Goods & Services, Section 2, line 77. £144.7 bn as opposed to £145.6 bn in 2015 prices).
Conversely, the UK’s fastest growing exports are services exports outside the EU, unimpacted by either the Customs Union or Single Market regulation. At 5.6% per year over 20 years, these exports have grown so fast in the last 20 years, they are now worth almost as much as UK’s entire goods exports inside the Customs Union.
Next fastest is UK’s services exports to the EU, growing an impressive 5.2% per year. This sector is marginally impacted by the Single Market. A portion of financial services are impacted by EU regulation, although financial services exports contribute just under one-third, or 31% of UK services exports to EU. (Overall, just 11% of UK services exports are financial services exports to the EU – for a breakdown of UK’s services trade see Tab 2, UK Trade in Goods & Services).
Meanwhile UK’s goods exports to countries outside the EU countries – and outside the Customs Union – have grown at a crisp 3.3% per year since 1998. This sector is heavily influenced by the Single Market, whose rules apply to most goods made in UK, but they are conducted outside the Customs Union. And thanks to the trade-database research of Michael Burrage, It’s Quite OK to Walk Away, we can approximately calculate the proportion of UK’s non-EU exports that has been conducted on World Trade Organisation (WTO) terms.
Taking the year 2015, Burrage estimates that 6% of UK’s exports went countries with whom UK enjoys an EU-negotiated free trade agreement (FTA). Another 8% went to European Free Trade Agreement markets. This means, approximately 73% of UK’s exports to non-EU countries was conducted on WTO terms. Much of the rest (principally Switzerland) is with countries that impose near-negligible tariffs on non-food imports.
Consequently, the 3.3% per year growth rate achieved by UK’s non-EU goods exports is a strong and accurate reflection of UK companies’ ability to trade on WTO terms. Since 1998, UK businesses have proved more adept at growing markets outside the Customs Union than in it, despite the tariff and customs barriers they confront in most non-EU trade. Meanwhile, UK businesses have failed to grow markets inside the Customs Union, despite the fact that this trade with the EU is tariff free.
What’s to blame for this discrepancy – or more accurately, what’s not to blame – will be analysed in Part 3 of this analysis, when UK’s export growth is compared to Euro-area growth, intra-EU trade, UK productivity, and EU–US trade over the same period. But in a straightforward assessment of the value of the Customs Union to UK, the data are unforgiving: that part of UK exports that is governed by the Customs Union is easily UK’s worst performing.
The Customs Union: Qui Bono?
Not so with EU imports, however. Back in 1998, UK’s EU goods trade was roughly in balance, -£5.6 bn in current prices). But since then, imports from the EU have grown at a strapping 3.4% per year. The import sectors displaying the fastest growth are motor vehicles, (with imports growing 3.6% p.a., to reach £47.7 bn in 2017), food products (5.3% p.a., to £23.2 bn) and pharmaceuticals (7.3%p.a., to £22 bn), with this last import category showing especially rapid growth since 2011.
So, since 1998, the track record of the Customs Union has been to take a trade relationship that was trim and balanced and turn it into a £95 billion deficit, which is larger – per head – than the US trade deficit with China.
Here again, the ONS November-release trade data helps because we can see to what extent UK’s services trade with the EU will ever balance this equation out. And the answer is: it won’t.
Services exports to EU may be growing nicely (5.2% p.a., as opposed to services imports growth of 3.0% p.a.) but the £36 bn surplus it generates pays for just one-third of UK’s deficit in trade in goods. And since the difference between UK’s goods export‒import growth rate (3%) is wider than the difference in the UK’s services export‒import growth rate (2.2%) it never will – so long as UK maintains its current terms of trade with the EU.
The perverseness of UK’s EU-trade outcomes extends to the deficits UK incurs on those individual trade sectors most impacted by the Customs Union (See Tabs 2-11 of UK’s Top Ten Sectors. Data for each sector is presented in turn, in order of the total value of UK exports. Together, these top ten sectors contribute 80.9% of UK manufacturing exports, or 71.1% of UK goods exports). The UK’s two biggest two-way trade sectors with EU are motor vehicles (worth a combined £67.3 in 2017) and food & agriculture (£39.8 bn). These are also the two sectors where the EU’s common external tariff (CET) exerts the biggest impact on UK trade, and theoretically provides the greatest ‘protection’. Yet these are simultaneously the sectors where UK incurs its biggest deficits (See Tab 1, UK’s Top Ten Sectors. ‘Manufacturing’).
Both of these deficits have increased dramatically since 1998: by £19.2 bn (current prices) for motor vehicles, and £14.1 bn for food & agriculture. These deficits reflect a surge in imports from fellow Customs Union member states, for which no commensurate reciprocal gain or trade-off can be found in any other sector of UK’s goods trade. In other words, there is no trade-off within the Customs Union.
At this point in the analysis, it’s worth stepping through the 20-year trajectories of each of UK’s top ten goods-trade sectors to try to map supposed tariff-free advantage with actual outcome. What you find is either a sizeable and growing deficit: food products (-£14.4bn ); and beverages (-£2bn ); or stagnant growth plus a sizeable deficit: motor vehicles (0.4% p.a., -£28.bn); machinery (-0.1% p.a., -£7.2bn); chemicals (0.7% p.a., -£3.5 bn); computers and electronics (-5.8% p.a., -£11.3 bn); basic metals ( 1.% p.a., -£3.4 bn ); and electrical goods (-0.9% p.a., -£4.4 bn). Since we have now compassed 72% of UK’s goods exports, the obvious verdict is hard to swerve.
Damningly, the only two of UK’s top-ten EU traded sectors that have performed strongly since 1998 derive next-to-zero commercial advantage from the Customs Union. The UK’s second biggest export sector – transport equipment, which is 92% aerospace related (and therefore trades tariff-free) – has climbed a decent 2.7% per year. And UK’s pharmaceuticals exports (up 6.3% p.a. to EU, since 1998) gain minimal competitive advantage because major developed economies abolished tariffs on end-user pharmaceuticals during the Uruguay Round, which concluded in 1993.
So, on the basis of the UK’s own 20-year trade data, there is not one, single major sector of trade in which the Customs Union has delivered clear, demonstrable benefit to UK since 1998. Shown in aggregate, across all UK trade, the failure is stark. What’s troubling – for UK consumers, at least – is that the Customs Union appears to be turning the UK into a series of tightly controlled captive markets for EU producers. To see how, I shall in due course take a detailed look at the 20-year history of UK’s two biggest EU traded sectors — motor vehicles and food.
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There has been much speculation about what the UK and EU will do in the event of No Deal, focused in the UK on the no-deal planning notices emanating from the Department for Exiting the European Union. What little attention has been paid to the Department for International Trade (DIT) has usually taken the form of criticism that crucial deals for the UK’s external trade will be lost because we will have failed to novate or roll over the agreements with a host of countries we have through the EU.
Any DIT announcement of a successful roll over or novation is usually accompanied by howls of derision from various doomsayers who say that this is a small percentage of the number of agreements the UK has through the EU with other countries outside the EU27. Reference is often made to 60 or 70 agreements that fall into this bucket (it is actually around 40 agreements covering around 70 countries).
When it comes to what we might have if we leave with no deal, the analysis is entirely static, assuming that some mythical gate will come down and foreclose all trade if we have not immediately rolled over all agreements, and assuming that whatever we have when we leave will remain the status quo forever from that point. It is also fair to point out that our trading partners have been confused by the UK’s EU negotiating strategy, something on which DIT has no input, and this has led our trading partners to doubt that we will ultimately be in a position to offer deep liberalisation in the future, because we will be locked into the EU Customs Union or have such high regulatory alignment that we will be unable to have the requisite regulatory autonomy to make us relevant to them.
This uncertainty has certainly impacted their negotiating strategy, and made them more determined to extract as much as possible from us now, because they believe our EU strategy will mean we will be unable to negotiate properly in the future. The more that parliamentary voices lobby hard to take No Deal off the table or extend Article 50, the less incentive these countries have to close these agreements with any urgency, so our own lack of discipline is contributing to the issue.
Despite this hostile working environment, DIT has been quietly and successfully rolling over many of these agreements; and with regard to the ones that matter – and that actually impact meaningful amounts of UK trade (as opposed to say agreements with Andorra and San Marino) – progress is relatively good (with a couple of exceptions which I will discuss below), even in the event of the UK leaving the EU without a signed withdrawal agreement.
First of all, some threshold points. It is often assumed that if 1% of our trade is with country X, and country X has a trade deal with the EU, this means that if that EU-X agreement is not rolled over in favour of the UK, then that means all of that 1% of our trade will fall to zero. But this is not how trade works. Clearly for some products, especially agricultural trade where tariffs are high, failure to novate could have a big impact on our exports (assuming the agreement in question lowers agricultural tariffs for country X, not always the case in the EU-X agreements).
But equally, where the tariffs are low, and industrial goods tariffs are very low (Most Favoured Nation rates for industrial goods are on average 3%-4%), then failure to novate will simply mean a marginally higher tariff that may be compensated for by a host of other factors such as currency fluctuations or tax policy. Right now, even in some of the most established agreements, such as NAFTA and the EU-South Korea agreement for example, some traders still choose to pay the MFN rate and do not take the benefit of the preferential rate because proving origin is more hassle than just paying the low MFN rate.
With that caution, let’s look at progress to date. The agreements that we have through the EU (excluding the recently-signed Japan agreement where tariff cuts only commence in January 2020) account for 11% of our total trade. Looking at how much trade is duty free around the world (or duty free under a GSP programme), it would not be surprising if the trade actually affected – in case the agreements are not rolled over – would be approximately half of that. Of these, the Swiss agreement alone – which has been rolled over – is worth 20% of our trade. Other significant agreements here include CETA, covering a further 12% of the trade under these agreements (almost rolled over), and the EU’s agreements with South Korea and Singapore, each covering around 10% of this trade.
Equally it is worth pointing out that 20 of these EU-X agreements account for only 0.8% of total UK trade. Many of the EU-X agreements are Economic Partnership Agreements (EPAs) that are with small developing countries, not critical to UK trade. We would certainly like to replace these arrangements with UK arrangements, but we should take the opportunity of having a different approach to development here. The EU’s approach to development is to charge high tariffs on the products that developing countries produce (often with significant tariff escalation), and to compensate by lowering that rate through its preference programmes such as GSP, and GSP+ which are conditional (and could be lost by the developing country for any number of reasons outside of the control of individual traders and exporters), and to limit the unconditional programmes (Everything But Arms) to only the poorest of the poor.
A smarter approach for all sides is for the UK to actually be genuinely open to the products of these countries, but to compensate them on a one-off basis for the preference erosion that this will cause. We should also eliminate tariff scalation from our schedules so that these countries are incentivised to go up the value chain and garner more value for their producers – a key element of development. Notwithstanding this, the UK and the Eastern and Southern African states have now rolled over their agreement with the EU.
The UK is very close to rolling over the EEA agreements which cover around 2% of UK trade, mostly with Norway, as Liam Fox pointed out in a ministerial statement last week. We have also rolled over a series of nuclear safeguarding agreements. The UK has acceded to the Common Transit Convention. Although the UK is a member of the WTO by right, and does not have to re-accede to it, it does have to accede to the WTO Government Procurement Agreement, and is in the process of doing so. The recently-signed Swiss agreement also contains important cumulation provisions covering goods originating in the EU, EFTA and Turkey. Crucially, goods that would have been considered ‘of community origin’ by either the UK or Switzerland will remain so.
But trade is also more than just about trade agreements. The UK has been able to roll over a number of mutual recognition agreements (MRAs) that are very important to facilitate trade. MRAs make it easier for people to trade and easier to prove that their products satisfy the standards and regulatory requirements of the other party. The UK has already signed MRAs with the US, Australia, Israel and New Zealand. There are sectoral agreements on insurance with the US and Switzerland, on wine with Australia, and the US. A range of air services agreements have been signed with the US, Canada, Switzerland, and Israel to name a few. The UK and New Zealand have rolled over the UK-NZ veterinary agreement. A distilled spirits mutual recognition agreement with the US (with whom there is a rapidly growing whisky trade) has been signed and a similar agreement is due to be signed shortly with Mexico.
It is true that there are issues with the Japanese and South Korean novations, but it is important to understand why this is the case. In the case of Japan, the Japanese recognise that the EU deal is not an ideal agreement in terms of Japanese trade policy. Japan has made concessions on data that do not suit its IP-based economy that relies on data flow. The Japanese would rather have the UK in the CPTPP arrangement rather than simply rolling over the agreement, and that would be in our interests too. They rightly don’t want the new EU-Japan agreement to be the basis for the UK-Japan trading relationship going forward. This is because Japan is particularly concerned about countries like its large neighbour, China, which are increasingly pushing anti-competitive and prescriptive regulations domestically and on the rest of the world. This would stifle their own innovative industries.
Like many global supply chain managers, Japan needs an open trading, pro-competitive regulatory environment. It sees the UK as potentially moving in that direction, and if the UK accedes to the CPTPP, it also sees a possibility that the US will one day return to the TPP fold. If the UK, US and new accession countries like Indonesia and South Korea accede to the CPTPP, then it will command 45% of the world’s GDP, and include the fastest growing countries in the world (compared to the EU27’s 20% assuming static performance over time, whereas it is likely that on current trends the EU27 will decline from this 20% figure).
Indeed, the Japanese may also think that their current negotiating position will prevent a “No Deal” situation arising. There is also a specific nuance with the EU-Japan agreement because it is a new agreement and the tariff cuts are only just starting, and the MFN rate applies to all UK and EU trade until January 2020 anyway. Whatever else is said, the Japanese are committed to a better agreement with the UK than the EU, but only want to go to the Diet for approval once with a better agreement. Other countries have complicated legislative processes too.
In the case of South Korea, they want to see more liberalisation from the UK than they secured from the EU, which is also to be expected. The UK can liberalise more than the EU, but does need a base line from which to operate. It is fair to say that the Koreans have been particularly affected by the confusion in Parliament regarding an extension of Article 50. Why should they negotiate with any urgency, if in fact there is no need to do so?
Additionally, both the Koreans and Japanese have given confused messages – on the one hand seeking more liberalisation either directly or through CPTPP accession, while maintaining that the UK should disturb their UK-EU27 supply chains as little as possible – two inconsistent positions. It would be better for all if these managers of global supply chains took the position that they wanted maximum trade openness between the UK and EU through a comprehensive, advanced FTA consistent with allowing their global trade ambitions of more liberalisation and pro-competitive regulation to be simultaneously fulfilled.
With regard to Turkey, the hysteria is even more divorced from reality. We could never negotiate anything with Turkey until we have actually left because Turkey is in a partial customs union with the EU. Nothing has changed there. It is not news that this particular agreement won’t be rolled over by March 2019.
Of course, if a deal can be agreed, the EU-X deals would continue to apply in their entirety until the end of the transition period. No-one wants a no-deal scenario, but the UK has made sufficient progress on rolling over some of the existing FTAs, MRAs and other sectoral agreements such that leaving without a deal would not be the disaster that some have painted.
We would of course continue this process after we have left the EU, and extend it to include further and deeper liberalisation. However, amendments like Cooper-Boles force other countries to assume that No Deal is in fact off the table, and so there is no point in drawing down political capital with their own legislatures if it not necessary – another example of the UK shooting itself in the foot, but that’s a mistake that is being made by those voices calling for No Deal to be taken off the table or for Article 50 to be extended. It cannot be laid at the door of the DIT. It’s a bit like sending your army into battle, but deliberately taking away its weapons.
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More attention is needed to be given the tariff policy Britain must adopt on leaving the EU on 29th March. It now looks likely that this will have to be without a withdrawal agreement. However, this has the advantage that Britain can shape its tariff policy from day one.
This is a responsibility that British governments have been able to avoid during the period of EU membership. Now they are regaining that responsibility, they must seize it promptly.
Before the end of March, the Government should publish a White Paper explaining that:
- It has sought to negotiate a withdrawal agreement, but unfortunately no acceptable agreement could be reached, so while the UK remains open to agreement, European leaders have ruled out further negotiation. This means the European Treaties cease to apply to the United Kingdom on 29th March 2019. Britain’s trade with the EU will then be governed by the World Trade Organisation agreements, which govern most of Britain’s trade already.
- The WTO agreements are international law and Britain will honour them in full. It expects the EU to do likewise.
- The EU will now be obliged to apply its Common External Tariff (CET) to British exports, treating the UK on equal terms with other third countries, on a Most Favoured Nation (MFN) basis. Tariffs must be accepted as a disadvantage, but it has now become a very minor one: on industrial exports from the UK to the EU, the CET averages about 3%.
- As far as British imports are concerned, Britain will not be obliged to charge import duties; but where it does so, it must charge a rate which treats all WTO members equally. Absent a withdrawal agreement the EU must be treated on the same basis as other WTO members. Britain will inherit tariff bindings, as a result of which its import duties cannot exceed those of the European CET.
- Importantly, however, Britain will be free after 29th March to reduce or eliminate import duties whenever it sees fit (see below).
- Apart from tariffs, the rule of the WTO for all other aspects of trade is non-discrimination. Non-Tariff Barriers are prohibited by the WTO so far as they afford protection to domestic production (GATT Art. III.1). So far as they arise out of the operation of internal laws (industrial safety etc.), all such laws must be applied equally: they must accord imports treatment “no less favourable” than that accorded to products of national origin (GATT Art. III.4). They cannot discriminate against imports from other WTO members.
The White Paper will explain the application of these rules carefully, emphasising that they are tried and tested by many years of practice worldwide. It will emphasise three key facts:
(a) that most of the UK’s trade is already conducted outside Europe, most of it under the WTO rules;
(b) that Britain trades more successfully outside Europe than within it; and
(c) that most of the EU’s trading partners worldwide trade with it under the WTO rules, and do so with success.
FIRST PHASE OF TARIFF POLICY: KEEPING TRADE FLOWING
After 29th March, the immediate priority will be to keep trade flowing in an initially uncertain environment. During this phase, the Government should suspend all import duties from all sources. The WTO rules allow this, provided the suspension is on an MFN basis.
This will mean that no inbound consignments are interrupted for tariff reasons.
SECOND PHASE OF TARIFF POLICY: ELIMINATING HARMFUL IMPORT DUTIES
Then, as it becomes clear that trade is flowing smoothly, import duties would be selectively reinstated, selectively reduced and selectively eliminated. This is the stage at which Britain’s trade policy will begin to take shape. It is important to emphasise that Britain will have no freedom to raise tariffs above their CET level. It will be tied by WTO bindings not to do so. Trade policy will take the form of selective reductions and eliminations of import duty, below their present CET levels – cuts which Britain can now make (and has hitherto been prevented from making) include the following:
- Foodstuffs will be imported free of all duties. Note that this is one of the principal benefits of Brexit. The present CAP duties are very high, often above 50%. Eliminating them would bring major reductions in food prices, to the benefit of families. It would restore the traditional British policy of leaving food untaxed. Many countries in the world are exporters of food. The return of Britain as a buyer of food in world markets will be seen as a major advance towards freer trade from the EU’s protectionism.
- Clothing and footwear. Duties should be cut to a maximum of 5%. Under the EU’s CET, these currently attract duties up to 20%. Again, the UK is a substantial net importer of these items and eliminating duties on them will bring major reductions in prices, to the benefit of families.
- Automotive components, parts and sub-assemblies. Duties should be removed. These currently attract duties of around 5%. Eliminating them will help UK assembly plants relying on supplies from Europe and Japan on a “just-in-time” basis.
- Semiconductors. These attract CET duties of 12%-15%. These should be removed. British IT industries are substantial net importers of semiconductors and are currently burdened by duties intended to protect continental suppliers.
- Other industrial intermediates, materials, components, sub-assemblies etc. Duties should be removed wherever the UK is a substantial net importer.
- Other products of any kind not made in the UK. Duties should be removed.
THIRD PHASE OF TARIFF POLICY: PREPARING FOR FREE TRADE AGREEMENTS
While it is making these unilateral tariff cuts, the UK should also announce its willingness to conclude free trade agreements with any willing partner on a basis of reciprocity, eliminating all import duties in both directions. This should apply to all the UK’s trading partners worldwide, not excluding the EU.
The detail of each negotiation will of course take time to tie down. However, the WTO Agreement allows GATT (Art. XXIV) the formation of interim agreements which can be brought into provisional application, and thus given early effect. In this way, tariffs can be eliminated in advance.
Negotiating priority should be given to:
a) suppliers of products which the UK needs to buy, where the European CET is high and where the British aim is to secure more affordable prices (e.g. foodstuffs from Argentina, New Zealand, clothing and footwear from China and India); and
b) promising markets where import duties against British exports are still high (as with India and China). One may note in passing that the EU comes into neither of these categories: EU duties against British industrial exports will be low (average 3%). A free trade agreement eliminating these will be of modest value and not worth paying too high a negotiating price to obtain. Meanwhile, Britain will have no need for expensive European food once supplies are available duty-free from other more reasonable suppliers.
Thus Britain will make important tariff cuts unilaterally, and others will follow free trade negotiations. Together they will add up to a significant liberalisation and a clear declaration that Britain, on regaining the right to direct its own trade policy, intends to drive it strongly in a liberalising direction. These tariff cuts would establish Britain as once again a beacon of freer trade, to its own benefit and to the benefit of its trading partners worldwide. It is important to send this signal immediately on Britain gaining the freedom to do so.
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What follows is an open letter to the Prime Minister written by a businessperson who backed Leave at the referendum but who for professional reasons is currently unable to enter the political fray.
Dear Prime Minister,
I have watched with a sense of appalled inevitability your recent unsuccessful visit to Brussels, characterised as it was by a lack of ideas, an absence of combativeness and a reckless and relentless desire to cling on to every rotten element of the vassal state deal that you and your small Remainer clique of advisers in Downing Street have concocted with the EU. Harsh words? Perhaps, but they are words that are endorsed – sometimes in more polite phrases, sometimes in less polite phrases – by the vast majority in our country and even of our Parliament.
Why are you so recklessly clinging to every suspect element of this ‘Brexit in name only’ deal? Many believe the problem all began with your still-secret promises made to Nissan, the car manufacturer in Sunderland, shortly after you took power in 2016. You have never published those promises. Many of us guess that it was partly as a result of those promises that in your talks with the EU you then gave away – whether in ignorance or because you never truly meant to leave the Customs Union – every possible negotiating element that would allow the United Kingdom to pursue its own independent economic and trade policies. Was that so? Can you not come clean with the electorate and tell us what those Nissan promises were, how much they are now constraining you and how much your desire to cling to your secret agreement with one company, Nissan, has led you to all this foolishness? Because if that is the case, then the honourable thing for you to do would be to resign and let someone else – someone not burdened by that promise – create a way forward for our country that is not shackled by that apparently all-constraining Nissan cursed promise.
If there was no such promise, then I am puzzled by your insistence that a WTO-terms deal – what is most truthfully termed a ‘Sovereign Brexit’, the thing that 17.4 million people actually voted for – must be ruled out by you. Your Remainer friends who dominate the media have managed to spin non-facts into a general belief that a Sovereign Deal would be catastrophic. Your grid in Downing Street has, month after month, delivered to a credulous press and public a remorseless stream of doom-laden statements by those rent-seeking members of the business community on whom you have chosen to rely to spin your message. Yet neither you, nor the spinners, nor your business allies, actually ever credibly articulated what the specific negatives of such a deal would be (the contemptible catastrophe forecasts by your discredited Treasury modellers, and by your apparently politically motivated Governor of the Bank of England, are no longer believed by anyone – as I am sure you must know).
What could go wrong, and what would go right, in a Sovereign Brexit? The claims of your Remain-loving enablers as to what might go wrong are economic. They relate first to exports from the EU into this country and second to exports from the United Kingdom into the EU. Once even the briefest analysis is conducted, both sets of claims are quickly seen as hogwash.
Exports from the EU into the UK – no disruption threat there
There have been the most extraordinary and juvenile claims of potential (albeit very short-term) shortages in this country after 29th March 2019. Even you, lamentably, mentioned your diabetes and your desire for being sure of your supply of insulin. Who persuaded you to say that? Did you give the slightest thought to how ridiculous that scare story was? Insulin is sold under a wonderful system we call private enterprise, from one company to another. In the UK’s case, it’s mostly a Danish company selling insulin to companies in Britain. The insulin is put on a plane or a boat and comes over to our country. What, do you assert, would prevent this from happening after a Sovereign Brexit? Come on, what? Are you saying that the EU would somehow seek to prevent insulin being placed on a ship or a boat and exported to us? You aren’t saying that, are you? Such an action would be illegal. Or, OK: let’s even say that, however unlikely, the EU indeed decided on 29th March to start acting entirely illegally (again: for a short period of time only, which is all they could possibly ever do). Then the UK would get its insulin from the US, or the Danish company would sell the insulin to Norway, or some other non-EU country, which would then export it on to the UK. Businesses successfully deal with complications of this sort all the time. All that the EU’s (highly, highly unlikely) illegality would result in is the Danish company losing money, one way or another. But you and I know that the EU wouldn’t shoot itself in the foot like that.
So, were you claiming instead that Britain would somehow put up barriers against Danish insulin coming into the country after 29th March? We wouldn’t, would we? Come on, you know that, don’t you? So why did you raise a false scare story, that would have had tens or hundreds of thousands of diabetics worried that their supply of insulin was suddenly going to dry up, when you know it’s hogwash? Isn’t that the sort of rabble-rousing nonsense that we try not to do in the Conservative Party?
Insulin is just an example of any other product that comes into the UK from the EU. We would not prevent any product from arriving; the EU would have no legal locus (or indeed any physical ability) to prevent any product from being sent; can you please just stop being silly and admit that there would be no supply shortages in the UK? (And please, can we in particular try to keep our Conservative ministers from making fools of themselves, in their eagerness to support you, by escalating the level of ludicrousness of such scare stories from a possibility of momentary disruption of a day or two, through to six-week problems, through to six-month problems? The more outlandish their claims get, the less anyone believes them – though some Remainers tactically pretend to. We will actually need to have a set of ministers who are seen as competent by the UK electorate after all this settles down, if the Conservatives wish to remain in power.)
The UK’s exports to the EU – not credible to assert any long-term or even short-term disruption
Let’s turn to the second set of scare stories running against a Sovereign Brexit. We keep being warned about “lorry parks in Kent”. The idea is that Calais will somehow impose restrictions on us, so that we won’t be able to get our goods speedily into France and through to the rest of the EU. Of course, we send just 6% of the UK’s exports through Calais, and those exports can swiftly be diverted to go through other ports, were Calais were to seek to prevent the easy flow of UK goods into Europe. But we needn’t particularly worry about anything like that happening, because every local official from Calais, and the Pas de Calais region, has said that this will not happen. It would take an edict from President Macron – an edict that would be entirely illegal, whether in EU law or in the WTO agreement – to impose such a blockade (Indeed: if you really were to believe – and I for one don’t think you do – that Macron would truly seek to impose an illegal blockade, then it would be utterly abject of you, and unworthy of the Prime Minister of our sovereign nation, to bow to a perception of a threat of this sort).
In any event, let us assume that the worst happens and that Macron does indeed seek some way of blocking British exports into the EU. The French did that once before, when they for a while diverted Japanese VCRs to Poitiers, so that EU manufacturers could win in the VCR market. They were very swiftly brought to court by the WTO and made to stop. Japanese VCRs continued to dominate the world (and the EU) market. France have never tried that trick again. And what would be the result for the French, were they to try it on us? Well, within a couple of weeks, as their just-in-time-systems were affected, thousands of French and German auto workers – possibly tens of thousands, in the unlikely event that the French were successful for more than a few days – would be thrown out of work, as French and German car manufacturing plants had to shut down. Do you really think, Prime Minister, that this would be allowed to happen? Or is your assertion, that somehow the EU would inflict such a monstrous act of self-harm upon itself, just a stance that you are pretending to believe in, so as to insist on this foolish deal that you and the EU are trying to impose upon the British people?
In either case – exports or imports – the very wildest claims are of a possible disruption that would last for, even your wildest claims allege, only a few months. Why, then, should this be the dispositive consideration, when we are talking about Britain’s future for many decades to come? Why would you shackle the country permanently to a lordly EU, in order to avoid a very temporary (and, if you read my above arguments, not going to happen anyway) disruption? Why would you abandon even the threat of a WTO terms deal – and in so abandoning it, allow us to become the hapless prey of what everyone now knows are entirely ruthless EU negotiators?
The Irish Border and the Backstop – a Hoax
On the Backstop, and its claimed urgency and importance, the trick is to look at your language, where one finds your people always using the passive mood – a classic giveaway. You say you are worried about a hard border “being imposed” (passive mood). You do not offer a noun in front of the verb, to show who it is, exactly, that is predicted to be going to do this “imposing”. That’s because, in fact, nobody wants to, nor do they intend to, impose such a border. You have said that Britain will never impose a hard border. The EU has said that it will never impose a hard border. The Irish have said that they will never impose a hard border. The Revenue of the UK has said that imposing a hard border will in all circumstances be entirely unnecessary. Talk of a hard border is nonsense, and you know it. Plan after plan has been published showing how the Irish border question can easily be dealt with, away from the border. To assert that this issue might bring back the IRA, that there will be one disaster or another if we don’t have the Backstop, is irresponsible. Which brings us back to what many aver, that the Backstop is just a cover for implementing some promise you made to the auto industry in 2016, that we would be in some form of Customs Union with the EU – precisely the thing that 17.4 million people voted against.
(And by the way, could you please get your people to stop briefing the credulous media as to how the EU don’t like the Backstop? To believe that – if indeed you do – would be a colossal, monumental piece of self-delusion. The EU love this Backstop, created as it is without an exit clause, with the EU entirely in control as to when – if ever – the backstop is removed. And Leo Varadkar is of course – and rightly – terrified of a Sovereign Brexit because the Irish economy would, unlike the UK’s economy, drastically contract as soon as we stopped buying Irish agricultural products and started buying cheaper, alternative produce from New Zealand and Argentina, were the EU to fail immediately to agree a free trade deal with the UK.)
As constituted in your proposed deal, the Backstop turns Britain into a permanent, shackled vassal state of the EU, subject to all its laws, on which we’d have no say; gradually reduced to a pathetic vestigial outcropping of the EU, with German goods and French produce increasingly defined under EU laws as the only sources that we will be allowed to accept. If the EU wishes – and why should they not? – that Backstop would be for good. Our manufacturing, already half destroyed by our membership of the EU, would continue to shrink, and our farmers and fishers would continue to be at a disadvantage – forever.
The positives of a Sovereign Brexit
So much for the specious arguments that a Sovereign Brexit would be problematic, and that your surrender deal is therefore necessary. But what about the positives for a Sovereign Brexit? I sometimes wonder what Downing Street’s grasp of numbers is like. Do you have any true feel for what £39 billion, so insouciantly promised to the EU in return for illusory favours, could do for this country were we to spend it on ourselves, as we could if we opted for a Sovereign Brexit, rather than giving it away?
For a start, were there any sector (including your much-loved auto sector), but let us say, for example, the agricultural or the fisheries sector, that indeed for some (unlikely) reason suffered during any years of further negotiations, then just a small fraction of this £39bn would be enough to keep those industries whole, for the (in the scheme of things) short period it took to get a free trade deal with the EU. We do not owe this £39bn to the EU. It’s possible that the EU could make an argument for us paying over a small fraction of that amount as one or another obligation, that we might eventually agree, but we certainly wouldn’t pay it any time soon, were the EU to keep on playing the sort of hardball with us that they have adopted so far as their negotiating posture; it would take them years, possibly decades, to establish legally that we owed the money.
Regardless, there is no way that the UK would ever have to pay anything but a small fraction of the full sum. Don’t you think, Prime Minister, that the EU are rather keen to have that money? Do you not see that by ruling out a Sovereign Brexit, and by promising to pay the money before you have agreed a trade deal with the EU, you have taken two enormous bargaining chips off the table? Wouldn’t keeping that money in a Sovereign Brexit scenario make a huge positive impact for the UK?
So, for a start, we’ll have that £39 billion (a sum that in your deal, as we pay it to the EU, will massively and worryingly increase this country’s debt – for no clear return). But a Sovereign Brexit will give us so much more than just that money; we’ll retain our ability to do free trade deals with that part of the global economy from which 90% of future global growth will be coming (you may know this as the ‘not the EU’ world. I hope you sometimes think about it?); we’ll keep our ability to unshackle our entrepreneurs from EU regulation (so that, as just one random example, we can regain the 12% of the global clinical trials industry that we used to have, until EU regulations in 2002 suddenly collapsed our share to around 2%); and above all, the clothing, food and other essentials that the people of the United Kingdom buy in the future being far cheaper as we move outside the protectionist barriers of the EU’s Customs Union and Internal Market.
You know very well, Prime Minister, how all of your allegedly neutral and objective advisers have ostentatiously ignored all of these benefits. You know they have failed to seriously review the many analyses that show that far from a Sovereign Brexit being negative for the British economy, it is likely instead to have a significant positive effect. You know that the insistence of your Treasury officials on publishing neither their models, nor the assumptions they put into those models, make an absolute nonsense of the credibility of those models and a mockery of the alleged impartiality of those officials. Please, Prime Minister: you are juggling with the future of this country. At the very least, you should be honest with the people of this country – both in acknowledging the above points, and in forcing your officials to own up to the way they have jammed their thumb onto one side of the scales of public opinion.
Prime Minister, you are offering us a deal where you propose to break up the Union and hand Northern Ireland over to the EU. You intend to hand over money ahead of any trade deal, thus assuring that whatever is agreed in that deal will be even more horrendous than what you have come up with so far – Gibraltar threatened, our fisheries destroyed, our people deprived of their chance for the benefits of free trade and subjected to semi-permanent, quite likely perpetual, enshacklement to the EU. You have gone back on every single promise you made when the Conservative Party made you their leader, when you gave your Lancaster House speech, when you said “Brexit means Brexit”.
The sorry band around you are desperate for your deal to go through because if we went for a Sovereign Brexit instead, they, and their enablers in the media and big businesses, would be exposed as the complete charlatans that they are, when a WTO terms Leave is implemented (the Leave that those 17.4 million voters expected to happen). This is why your myrmidons are fighting so hard, because all of them – your advisers, the civil servants involved, the Treasury forecasters, your small clique of Remain ministers, The Economist, the FT, the BBC, and on and on – would have no choice but permanently to disappear from public life once we implemented a Sovereign Brexit and all their egregious negative spinning and outrageous scare stories were proved as false as their original 2016 Project Fear was.
You, however, Prime Minister, have a glorious chance to escape their fate, by doing one thing: you can still, now, and energised by Juncker’s utterly disrespectful behaviour to you in this past week, turn around to the European Union and say, finally:
“Fine. I understand you don’t want to do a deal. We’re now going to go full bore for a Sovereign-terms Brexit. Let’s sort out some administrative things like us allowing you to fly your planes over the UK, but other than that, let’s see each other in Geneva at the WTO. Do come back to us if you want to discuss some kind of Canada-plus deal, but otherwise, let’s all spend our time constructively in the next three months preparing for Britain’s Sovereign Exit from the EU.”
For the sake of our country Prime Minister, please take this chance. Now.
Pulling the vote on its Withdrawal Agreement at the eleventh hour, the Government acknowledged what we already knew: the Backstop proposal is completely unacceptable and the Agreement stood no chance of winning the support of Parliament.
But rather than simply seeking “reassurances” on this issue – which, though a central objective, is but one of many – the Government needs to consider more boldly the possible alternative arrangements which might command Parliament’s support. The President of the European Council, Donald Tusk, offered just such an alternative in March: a wide-ranging, zero-tariff trade agreement.
That deal foundered on the question of the Northern Ireland border, but existing techniques and processes can resolve this.
This view is endorsed by the professional customs body, CLECAT. They recommend we acknowledge the present state of customs technology, using procedures based on intelligence and risk management available in current EU law. These are currently used to manage the border which already exists – for VAT, tax, currency, excise and security – and can form the foundation for continued seamless trade.
From my October meeting with Michel Barnier and senior officials, I know that a willingness exists on the EU side to explore these possibilities more fully. The meeting also confirmed that Tusk’s offer is still on the table.
Rather than cling hopelessly to the Withdrawal Agreement, the Government must return to that offer. By resolving the border question with existing techniques, we can immediately start negotiating an optimal, wide-ranging Free Trade Agreement. I have already presented the Government with a Trade Facilitation Chapter and new Border Protocol to catalyse this process.
In parallel, we must intensify our preparations for trading on WTO terms. This is no cause for alarm, and those doubting this should look to the UK’s booming exports – up by nearly £100bn since before the referendum. The latest ONS figures put exports to non-EU countries at £342bn, compared to exports to EU countries of £274bn.
Much of that boom is through expansion into new markets. Since 1998, UK goods exports to non-EU countries have grown 16 times faster than its exports to the EU.
Yet scaremongering has clouded our perception of WTO rules. We are told that just-in-time supply chains will be unable to continue across customs borders. But in reality the operation of these chains is as dependent upon non-EU goods as on those from the EU. 21% of UK automotive manufacturers’ bought-in supply chain comes from outside the EU – compared to 36% from the EU and 43% from the UK – yet the customs procedures required for that sizeable proportion do not pose an insurmountable problem.
We are told that even minor customs delays will cause unprecedented queues on the M20 and economic disaster. But Operation Stack – limiting access to the Channel Tunnel and the Port of Dover – was activated for seven months in total between 1998 and 2015, without any of the “catastrophes” now imagined.
Responding to these Project Fear claims, we must always ask: why? Why would a rules-based organisation like the EU suddenly start behaving illegally, to the detriment of its people and in defiance of international agreements? As Xavier Bertrand, President of the Hauts-de-France region, has said in dismissing fears of major disruption between Dover and Calais: “Who could believe such a thing? We have to do everything to guarantee fluidity.”
It is true that the EU has trade deals with around 70 countries, which the UK will have to novate. This process has already begun and no country has signalled an unwillingness to co-operate. But remember that many of these agreements are very small. Switzerland alone accounts for half of UK exports to these 70 countries and it, Norway, Turkey and South Korea account for over 75%. Renegotiating a small number of agreements to cover the vast majority of this trade should not be a prohibitive task.
Though not an optimal arrangement, there is thus nothing to fear from WTO rules. Its 164 members represent 98% of world trade. We must be ready to trade on those terms to smooth the transition and demonstrate that we are serious.
That way, we shall be negotiating a Free Trade Agreement with the EU on sure foundations. Realistically, of course, a full agreement will not be reached by March, but this need not pose a problem. So long as progress has been made towards an agreement by then, the EU and the UK can jointly notify the WTO as soon as possible after our exit date of our intent to negotiate an FTA. Under Article XXIV of the General Agreement on Tariffs and Trade, after notification of a sufficiently detailed FTA with an appropriate plan and schedule, we could maintain zero tariffs and no quantitative restrictions for a “reasonable length of time” (exceeding “10 years only in exceptional cases”) without violating the bar on discriminating against other nations under WTO rules.
So, rather than the Withdrawal Agreement’s choice of a transition period ending in “20XX” or a potentially permanent and definitely intolerable backstop, this proposal would provide stability and clarity for the time-limited negotiating period, delivering a zero-tariff, mutually beneficial trade agreement. That would surely command a majority in Parliament. That is the alternative. That is the way ahead.
This is an extended version of an article originally which appeared in the Daily Telegraph
A true economic miracle is happening. An extraordinary leap in the UK’s global export trade has occurred – a complete reverse of the ‘Doomsday’ predictions of the Treasury, Bank of England and Department for Business in London both before after the Brexit vote.
According to figures published by the UK Office of National Statistics in November – in the second calendar year following the EU referendum – exports to non-EU countries were £342 billion while exports to EU countries were £274 billion.
In the same period, the growth in exports continued to outstrip the growth in imports, almost halving the UK’s trade deficit from £23.4 billion to £15.8 billion. Most exceptionally, since the referendum, exports have increased by £111 billion to £610 billion.
Doubters will say it is a temporary blip caused by the falling pound. Not true. The boom is in new markets, and largely in new products and services, too. UK exports not just increased but doubled in hitherto obscure countries such as Oman and Macedonia. Exports to distant Kazakhstan climbed to $2 billion, only slightly less than the UK’s exports to Austria, worth $2.43 billion in 2017, which like many EU nations buys very little from the UK.
In the 12 months to September, the value of UK exports grew by some 4.4%, including strong growth in the manufacturing sector. Indeed, HMRC stated that exports of goods had shown “robust growth in every single region of the UK”. The number of Welsh SMEs which export doubled during the last two years to 52%.
Curiously, none of this has been spotted by any of the UK’s headline media – the BBC, Sky News or the FT. Not a peep from the new editor of the Daily Mail. Even The Economist was asleep on the job. Meanwhile, various government departments are spending much of their time issuing ‘Death in Brexit’ forecasts in a co-ordinated campaign with the Bank of England and other allies – and rarely champion our achievements.
Four years ago I was interviewed by Richard Cockett, The Economist’s UK business editor. I told him the UK was experiencing an unparalleled SME boom. How did I know, he asked? Since leaving the FT as a technology correspondent and columnist in 2003, my small team in central London has maintained a uniquely comprehensive database of more than 70,000 UK smaller companies.
As a result, daily we receive an avalanche of success stories. In the food and drink sector alone, if you want whisky marmalade or beetroot ketchup, or 500 new gin varieties or more than 1,000 new craft beers launched since 2011, our very brave, risk-adoring micro-SMEs will deliver.
If a New York cathedral needs a new, hand-made organ that £3 million contract comes to Britain. We sell sand to Saudi Arabia, china to China, and Turkish delight to Turkey. In the ultra-competitive auto components sector, UK exports are up 20%. Luxury goods, consumer goods, clever instrumentation for NASA and crucial cerebral input into US defence projects are all avidly listed in our dataset.
And yet, in our view the true importance of the export boom is as much political as economic. It proves that a No-Deal exit from the EU – or what I much prefer to call ‘Our Own Deal’ – is by far the best option, and far less damaging and disruptive than the ‘experts’ at the Bank of England, IoD, CBI, OECD and World Bank have forecast.
Far from being the ‘poverty and isolation’ scenario predicted by the chin tremblers who endlessly appear on Radio 4, the UK will be far much dependent on the EU in as little as five years.
Fears about UK-made cars from Japanese firms such as Nissan and Toyota being cut off from Europe are groundless. First, the UK could retaliate against BMW and VW – something no post-Merkel German politician would tolerate. Any anti-Japanese actions by the French would result in the rapid diminution of the £4 billion annual exports of French cosmetics to Japan. And the French know it, no matter what Macron might bluster.
But the export explosion is not the only piece of recent great news for the UK – there is more. First, in October 2018 Japan’s Prime Minister, Shinzo Abe, invited the UK to become part of the Pacific free trade pact – although this is dependent on the UK leaving the EU’s Customs Union. It would make the UK the sole geographically-distant member of the grouping, helping the country to rebuild trading links around the Pacific Ocean that stretch back more than two centuries.
Next, BP’s huge Claire Ridge oilfield, west of the Shetlands, just came on stream, providing no less than £42 billion in revenues over the next 25 years. It is a development much envied across energy-starved Europe – and there are more oilfields to come.
At this critical moment in the Brexit saga, it is vital the UK now wakes up to the much brighter future it has outside of the EU, and vital that Mrs May copies the bravery of our SME exporters. The so-called ‘No-Deal’, a term that needlessly frightens ordinary citizens, should indeed be re-named ‘Our Own Deal’, in which we invite all nations to trade with us on fair trade, low or no tariff, basis.
The UK economy will soon be in a solidly secure position to refuse any damaging ‘deal’ from the European Commission. Perhaps it was always the height of imbecility to think we could ever get a good deal from the Commission.
Finally, the tide of history is in our favour, even in Europe. The current, sub-optimal generation of European politicians – Cameron, Merkel, Juncker – will soon ‘be history’. Merkel goes next year – and every EU Commissioner will be replaced, too.
As Brexit talks limp from one embarrassment to the next, a No-Deal option will not be the doomsday Theresa May, the financial and property elites, and the heads of the UK’s top organisations and PLCs have long predicted. In fact the UK should never have negotiated with the Commission – from whom no fair deal was ever possible. The UK should introduce its own deal, ‘Our Deal Now’, in which we offer all nations fair trade agreements with no or low tariffs.
For hundreds of thousands of small UK companies, a complete split from the EU can’t come soon enough.
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I was pleased to attend the publication of Lord Lilley’s Fact – NOT Friction in London this week; an excellent, informative paper published jointly by the European Research Group and Global Britain explaining how there are widespread misconceptions about the costs and implications of not being in a customs union with the EU. I agree with him: these misconceptions have led the Government into the wrong negotiating strategy for Brexit.
In Rotterdam the week before last, I saw how transit documents procured in advance and lodged electronically allow veterinary goods from third countries all over the world outside the EU to move predictably and rapidly into the EU, and be cleared by their import declaration and any other checks necessary in commercial premises 40km behind the border.
The three essential documents to make this run are the export declaration; the transit document to get the goods through and behind the frontier; and the import declaration that can then clear the goods once inland.
Non-veterinary goods go deep into Europe under such documents and are cleared when the import declarations are made on arrival at customer warehouses or kept in bond for future clearance.
The cost of this whole customs process is around €25 per document or between 0.1 to 0.4 per cent of value for the average consignment value of €25k depending on whether a company gets a customs broker to procure some or all of the documents, (plus up to another 1 per cent for the veterinary inspections on veterinary goods, around a third of which could be subsidised by our government if it chose to do so, being the government vet fee).
The export declaration is fairly easy for companies to do themselves, but the transit document and import declarations take a bit more customs expertise. Specific border inspections for veterinary goods can take place in authorised commercial premises well away from the frontier itself, and from the perspective of their authorisation they just need access to adequate space and facilities, government vet availability, and reasonable off-site access to professional sample testing facilities.
These processes do not require the exporting country’s domestic regulations to be aligned with the EU. EU standards need to be met for imports in the same way that goods exported to the US need to meet US standards.
What they do require for borders to remain efficient is for the documents to be prepared in advance so that lorries do not need to be stopped before leaving because they can’t be guaranteed to get through the other side.
The costs involved were corroborated by a major Japanese car company operating in the UK which told us in our International Trade Committee a few weeks ago that they can run these documentary procedures in-house for about £30 per shipment of equivalent salary cost. Multinational firms such as these are already well used to the data and documentary requirements for sourcing components globally.
I also met roll-on roll-off ferry operators in Rotterdam who have Nissan’s UK operation as a major client, who are expanding capacity to meet demand for regular just-in-time shipments and are most focused on getting their customers, who are often the freight forwarders, geared up to ensure all arriving trailers have the right pre-cleared documents. They need them an hour in advance to be able to match up their port traffic management systems with the documents of the lorries they expect to arrive.
There is no reason why similar processes could not also be effected behind the border at Calais to keep the frontier flowing freely and shipments being cleared with predictable timing as in Rotterdam, and if the authorities there want to keep their business that is what they will end up doing.
We need to get our exporters and our exporting ports and service providers geared up to have their export and import declarations and the transit documents ready in the same way. That way just-in-time supply chains are not threatened.
Businesses need to be ready with processes for generating the data to lodge electronically. Dover, Folkestone and Calais need to adjust their port inventory management so as to reconcile their traffic bookings and manifests with the documents matching the shippers’ documents. At first this might have to be somewhat rudimentary because the authorities have left preparation so late, perhaps being done by hand and needing more advance notice; however more efficient modern systems could be introduced fairly quickly.
Investing in these logistics processes will be equally useful for trade, whether, as is my preferred option, we end up with a regular free trade agreement as offered by the EU in March (and the processes can be adapted to ensure no hard border in the island of Ireland too); whether we leave the EU at the end of next March without agreeing a Withdrawal Agreement; or whether we have an “orderly no deal” with side agreements in key areas like transport and licensing which can help the logistics industry, as the “no-deal” preparation the EU has set out suggests they want. The basic requirements for borders are the same, and are what businesses all around the world manage successfully with standard processes every day.
If we prepare in this way, we will be prepared, whether we are able to arrange zero tariff and zero quantitative restriction trade with the EU before or after the end of March next year.
It is worth considering the costs of these processes in the context of the rest of the transport supply chain. They are a very minor part of the cost of the overall shipping cost, which is often many hundreds of pounds for each of the inland transport legs, from premise to port, port to premise, and the ferry or rail crossing carrier cost.
At 0.3 to 1.4 per cent of average shipment value they are also only a tiny fraction of the 12 to 24 per cent non-tariff barrier costs that were assumed in the “Cross-Whitehall Briefing” leaked in February, which were the major factor in the Government’s negative economic forecasting of World Trade and FTA scenarios for our trade with the EU.
The Government has ill-advisedly been using these hugely over-negative estimates as the reason for its negotiating strategy of high regulatory alignment and “frictionless” trade with the EU, and this has landed it in its current mess. Ironically the outcome of that mess is the idea of the customs union “backstop”, which when you read the small print contains the more costly and completely antiquated requirement for physical paper forms inspected and stamped by customs officers, for every commercial shipment between the EU and Great Britain, and every shipment across the Irish Sea.
While there may be a few teething troubles with the above processes being implemented from the second quarter of next year, with the right application by authorities and businesses costs of such high scale shouldn’t eventuate, and in any event won’t persist for 15 years as Government assumes.
In particular the car industry should be able to adapt relatively easily, and rather than prejudice our independence by worrying about overestimated costs, we should focus on getting small- and medium-sized businesses ready, and improving general business conditions. Whatever the size of business, most just want certainty as to what they need to do, and that is of far more value right now than indefinite transition, more political argument and risk.
The perfectly normal customs processes I saw, available now, without new technology and under current EU law, should be the focus. Preparing them is a far better strategy than tilting at the windmills of a never-to-be practical “Facilitated Customs Arrangement”, suffering under the illusion that economic Armageddon is the alternative, and waking up to the reality of the EU being in control of our destiny.
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Will Theresa May's plan for a 'Stormont veto' over the Irish border backstop help win support for her Brexit deal?Analysis: The PM is desperate to convince the DUP to back her deal, but may be making promises that cannot be kept, says John Rentoul
- Britain might be facing challenging questions, but its political system is working just as it should