Wednesday, 14 November 2018

And now we wait


You'll have to excuse me for the prolonged radio silence here since the summer. I have been juggling full time work and a Masters degree and have not had the time or energy to contribute with anything close to the consistency I managed last year. That and, to put things mildly, we haven't heard much in the way of substantive policy developments emanating from Brexit discourse since really last winter. In recent months discussion has mostly taken the form of speculation, until the whipping up of rapid panic which has gripped elite circles and political Twitter over the last 48 hours.

Tonight, we await the publishing of the long-awaited withdrawal agreement. If those mysterious "sources" are broadly accurate, we are looking at a deal which reflects a Prime Minister trying her utmost to wriggle out of a corner. If the period of transition (March 2019-December 2020) does not yield the proposals needed to establish a workable framework for future trade, taking into account red lines and both sides' constitutional requirements, the backstop will appear thus: an all-UK customs union and a NI-specific arrangement on full single market participation.

The exact nature of the Northern Ireland element is very interesting and I am hesitant to make any firm predictions at this point. I will say that I think the provisions will be extensive but subtle, likely bolted into annexes by the Commission, knowing full well that most people won't bother to read them. Some reports have suggested that the backstop is a full UK setup, with "deeper provisions" for Northern Ireland, but to me this is all semantics and my assumption is that an all-UK formulation will end up appearing more like a two-tier system of rules, establishing a customs border in the Irish Sea.

What is interesting is that though none of this has been confirmed, one would be forgiven for thinking it had been judging by the ferocity of the Tory Brexiter response. I can't say I have much sympathy for them. Their input has not extended very far beyond sloganeering and wild claims about the alleged fruits of a no deal scenario. And that applies to the assortment of think tanks which lace the Tufton Street area. Mrs May has done well in my estimation to keep their influence at arms length and she should perhaps be credited for not entertaining a no deal scenario as much as she could have.

I will reserve judgement on the withdrawal agreement until I have sunk my teeth into the meat and potatoes of it but for now it might be worth examining a rather interesting parallel with Norway's EU accession referendum in 1994, which saw a turnout of almost 90% of the voting electorate. The result swung, of course, in favour of 'No', by 52.2% to 47.8%, and the country proceeded to establish an appropriately reflective relationship with the EU given the proximity of the vote. The EEA Agreement became the destination for the Norwegians, symbolising their intention to stay close but remain outside.

Ostensibly, what appears to be the fabric of May's draft exit agreement more or less mirrors this concept and that is no bad thing. This is one thing it will have going for it and observers of Brexit, particularly those of the Leave persuasion, would do well to acknowledge it. What we are looking at in the coming days is not the Norway option but oddly enough it does have a Norwegian tinge to it because we are in effect reverse engineering a broadly opposite (yet almost symmetrical) approach to our European trade and political relations.

The UK's over-reliance on JIT supply chains and deep integration within the EU's internal systems (the union customs code, rapid alert system, market surveillance programme - the list is extensive) make it difficult to coordinate any abrupt or fully detached exit. This isn't how trade works. Globalisation of standards, driven in no small part by the EU itself, seriously undermines any logic in leaving the structures of the single market. Especially if done so on a semi-constitutional basis where a part of the Kingdom remains embedded further within the system than another part.

A few minutes ago the Prime Minister announced that the cabinet had agreed to allow the government to proceed and work with both the draft withdrawal agreement and outline for the political declaration. We are told that a statement is due in the Commons tomorrow, but that trailing just behind this news is a bubble of thus far well-repressed anger in Tory ERG circles. Yesterday I predicted that May would be toppled as a result of her agreement and there is every chance this will still happen. Chequers initiated two resignations and I don't expect this deal to be any different.

I must confess that if May is toppled I'll be a little choked up for her. She hasn't been an exemplary Prime Minister by any stretch of the imagination and I find her politics a little too authoritarian and ban-happy. But what she has managed to do is walk a tightrope of tightropes, enduring the respective gravitational pulls of the factional interests around her, in order to cobble together what may best be described as a half way house between what is desired from the Brexiteers and what is required at negotiator level to satisfy thorny issues like the Irish border.

Don't mistake my comments for unbridled support. I would have preferred a shot at Efta and at least a concerted effort to plug the customs union gap by stitching together various country-specific protocols to deal with the residual border demands - even if unsuccessful. One wonders whether a commitment to Efta from the outset might have created sufficient political will to craft something hodge-podged and technologically bespoke for dealing with any residual border issues. I also think a simple association agreement would have been preferable to an apportioned backstop settlement afflicting a certain segment of the country. But hey-ho, there is little more we can squeeze out of reality.

The withdrawal agreement is now online and available here, alongside the outline on the political declaration. Events have unfolded since I began writing but I am yet to properly read either document. 

Tuesday, 3 July 2018

Roadblock


Brexit has been a topsy-turvy journey for me. I have made and lost friends, made countless mistakes, learned a great deal about trade and politics and perhaps even more about myself and where I might like my career to go. My main regret is not bothering to learn as much as I have quicker so as to nail down a more central and professionally useful spot within Brexit's intellectual domain. As it is I am left in what I can only call an idiosyncratic position, outside of any relevant bubbles and unable to influence as much as I believe I ought to.

If you are a consistent reader here you will by now know most of the story. It started with a liking to Faragism and the potential of UKIP, transitioned into participation in Vote Leave circles and winded up inside the belly of the Leave Alliance. I have met everybody there is to meet and worked with enough characters to last a lifetime. Along the way there has been a lot of mind-changing and a gradual acceptance that policy - particularly on this scale - is never as easy as it is portrayed within the confines of referendum narratives.

Last week I tweeted that I was now off the Efta/EEA bandwagon. My hands have been forced by conflicting truisms more so than any developing dislike for Efta. I still support a soft Brexit which allows us to leave behind as much of the political baggage as we can whilst retaining that all-important symmetry in our regulatory architecture. The world has changed and so have the nature of our supply chains. We needn't inflict undue damage onto ourselves by pulling frantically from systems we benefit from and will not be able to replicate unilaterally.

I should first of all clarify that I like the Efta position and any remaining advocates of the option can and should consider themselves political allies of mine. I respect the advantages that come with pooling resources and technical expertise that comes with being part of a trading bloc, no matter if we shrink from 28 to 5. I also think the EEA Agreement provides quite a steady framework with room for maneuverability by means of country-specific protocols now seen with the parties states. I will not renege on all the positive claims I have made about Efta/EEA.

The conceptual conflict which underpins any accession to Efta is the inevitable clash between continued adoption of a comprehensive customs union and Article 56.3 of the Efta Convention, which states (with my emphasis):

"Any State acceding to this Convention shall apply to become a party to the free trade agreements between the Member States on the one hand and third states, unions of states or international organisations on the other."

In other words, since a comprehensive customs union replicating the existing CET is a necessary, though not sufficient, component in preserving a frictionless Irish border, and since the UK Government has shown no promise in being able to table a workable alternative, keeping a customs union (covering substantially all the trade between the parties) appears to be inevitable. I am ambivalent about this because I recognise both the advantages and disadvantages to being inside a customs union. It is not my preferred outcome but we have to deal with challenges head on.

In continuing to be wrapped inside the CET, the UK will have no tangible power over tariff alteration. This will come at a cost as we will find that some of the independence of our trade policy is sacrificed. Moreover, the EU's external tariff walls are not aligned harmoniously with the FTAs of Efta, whose agreements focus heavily on issues like tariffs on industrial goods and fish, dispute settlement, procurement and sustainable development. Regulatory practices will remain tied to the architecture laid out in the EEA Agreement. Tariff differentials are where FTA contents diverge from the CET.

Efta does not and cannot influence the EU's external tariff walls. Its constituent countries simply deal with the hurdle when and where they export, which explains why Norway's border with Sweden is not frictionless. Stark differences in policy construction, especially in the fishing and agriculture sectors, are precisely why the EEA Agreement chops off chapters 1-24 of the Community's coding system on tariff application. This mostly comes in the form of subsidy and tax differentials. The CAP and CFP therefore fall away from the EEA and Efta/EEA countries deal with the ensuing friction.

There are currently 28 Efta FTAs, all of which differ in varying respects to parallel EU agreements. This clash stands as the primary barrier to any remote chance of accession to EFTA. It is something I should have noticed a long time ago, but alas I have been a little slow. The focus now needs to be directed towards the potential of an Association Agreement (AA), now the sole workable Brexit proposal, whose strength is derived mainly from the fact that it is conceptually very vague. Effectively, an AA is an empty box in which to place all the content and baggage of negotiations.

AAs can more easily be sold to the public as trade deals and, from the perspective of government, can provide shelter to fudged language in order to get us past impasses created by red lines. Moreover, a UK-EU AA sits firmly in line with Article 8 of the TEU, which obliges the EU to form comprehensive relationships with neighbouring countries within its sphere of influence. We would have the opportunity to create what may eventually turn out to be a framework adjacent to that of the EEA. This would guarantee full participation in the Single Market.

The EU has been willing to negotiate from the outset. May's cabinet and parliamentary party have prevented clarity of proposals and we have been dithering hopelessly for months. Insiders within Brussels, like Andrew Duff, are beginning to point towards an AA as a useful escape route just in case things go south. We do not need to flirt with a WTO 'fallback' when there is a much more practical and amicable solution now on the table. Efta is out and so too is an FTA. We need to think outside the box and explore the uncharted waters of association.

Tuesday, 19 June 2018

Why I don't like Free Trade Agreements


I had quite an interesting exchange with David Bannerman, the Tory MEP for the East of England, on Friday evening over Twitter. We clashed over the use of a Free Trade Agreement in any UK-EU future relationship scenario. Mr Bannerman is under the impression that a 'Super Canada' (as he calls it) type deal is both available to us and ideal for our post-Brexit EU trade. Of course, he is entitled to his opinion, but I do not share his position. And given that our interchange was unfortunately cut short, I thought it would be of some use to clarify why.

The initial battle line in our dispute emerged when another user asked for my thoughts on his Super Canada aspiration. Bannerman had been at an event with Barnier's Chief of Staff and an assortment of Brexit minister from other member states, after which he tweeted that all were hopeful of an ambitious FTA. This he labelled Super Canada. I responded:

"What is there to say? FTAs are retrograde, macroeconomically ineffectual and limited in the level of market access they can achieve. There really is no Super Canada."

Bannerman then hit back, explaining:

"Utter nonsense. Retrograde?! Why does EU indulge then with FTAs all around the world? CETA gives 99% access to EU Single Market; 92% in agriculture due to French protectionism. U.K. is being offered 100% tariff & quota free - an open market. So none of the 19,753 EU tariffs of CU."

My comment summarised most of my dissatisfaction with FTAs, but really there are four good arguments against their utilisation, especially within the context of Brexit. The fourth point, which I forgot to add in the moment, was that the enforcement regime which couples any FTA is not suitable for post-Brexit trade relations. This is because both the EU and UK are operating with intricate, often JIT, supply chains which are vulnerable to even the most subtle of disruption. Evidence of this need only be sought from 2016, when the French introduced enhanced passport checks at Dover and the lorry queues reached 17 miles, not all to too far from my home in Kent.

I do not need to use this blog for excessive repetition and so I do not feel it is necessary to go over the effects on the enforcement regime when we transition from the safety of the Single Market to the bristle harshness of an FTA. If you are new to this blog, I have written about the re-organisation of customs and regulatory formalities in such an event here and here. Suffice it to say that any exercise in reverse engineering of trade relations such as this will facilitate the re-imposition of controls at the point of the border, precisely where supply chains are so fragile.

British manufacturing has grown used to rapid movement of goods, and of components and processing inputs which go into goods. Reliance on Just in Time production methods, which are designed specifically to reduce storage costs, has strengthened as a result of the effectiveness of the EU's market surveillance programme and Customs Union, which work in symbiosis with one another. For exporters, the resultant level of comfort cannot be afforded by FTAs. It is conceptually impossible for an FTA to produce frictionless borders between trading partners.

Away from the border, the macroeconomic benefits of FTAs are small at best and pitifully unworthy of years of negotiations at worst. CETA, provisionally applied between the EU and Canada, is expected to boost European GDP by as little as 0.03%, a figure so small it pains one to think about the value in years of arduous negotiations, which incidentally remain threatened by Italy's heightened faith in geographical indications. A 2007 Copenhagen study projected a boost of a mere 0.3% for European GDP upon the application of the EU-Korea FTA, then (and still) an example of a pretty ambitious FTA.

If Mr Bannerman is under the impression that any 'Super Canada' will boost GDP then he would be naive. Any exit from the Single Market is bound to hit GDP by at least 5%, a figure which could plummet to 10% if we fail to mitigate the effects of becoming a third country with targeted customs cooperation and various elements of mutual recognition. Furthermore, analyses from other EU member states tend to demonstrate quite similar trends. A report on the impact of six EU FTAs on the Dutch economy concluded:

"The estimated impact of six envisaged bilateral EU Free Trade Agreements (FTAs) on the Dutch economy is small. If all six envisaged FTAs were to take effect simultaneously, Dutch real GDP would grow by around half a percentage point." 

Here we are talking about minuscule figures which appear to bring to question whether or not bilateralism is actually worth much. And that is the whole point: There is a reason I refer to FTAs as retrograde. They are not fit for purpose in a world which increasingly organises standard setting with a top down approach. As mechanisms seeking to globalise agreements on regulatory practices develop, it becomes far more important for countries to participate in multilateral arenas in order to exert as much influence as possible on the trading system.

Non-tariff barriers have clearly emerged as the common enemy in modern trade. Bannerman points to the benefit of a zero tariff continuum, and he is not incorrect in doing so, but his focus is misplaced. As I have written about elsewhere, regulatory protectionism is the real issue for us to worry about. The effects of NTBs on the cumulative costs of trade are far higher, both nominally and as a percentage, than any effects felt by residual tariffs. Indeed, with tariffs we can at least pinpoint certain sectors - particularly agriculture - where improvements can still be made.

Actionable and inactionable NTBs are scattered right across trade like a painted mood board. It is true that not all can be dealt with. Sometimes by virtue of differences in national legislation, culture and language, sometimes by virtue of geography and sometimes by virtue of national efforts to protect domestic industry (as in the case of America and their refusal to adopt European car manufacturing standards developed by UNECE). Every day their navigation slows the cogs of trade and actively harms the economic development of - in particular - LDCs.

The point here is that if one is to make tariff elimination a priority, then leaving the Single Market is made an entirely pointless pursuit. The fact of FTAs remaining effective eliminators of tariffs is more a reflection of low external walls than it is of the effectiveness of bilateral negotiations. Bannerman refers to a zero tariff regime as an "open market" but this is highly disingenuous. A market plagued by technical barriers to trade, from administrative hurdles to documentary checks to licensing practitioners and establishments, is no open market at all.

All indicators point towards the future depending far more on multilateral sector-specific agreements, especially if we are already wasting years of discussion on FTAs. If anything, MFN constraints now placed upon the scope of FTAs further demonstrate the futility of bilateral negotiations. Equal treatment amongst new generation FTAs is advanced primarily as a means of achieving some kind of level playing field, but in reality the whole process of two WTO members going 'beyond WTO' with an FTA to begin with will leave imbalances for countries vis-a-vis its trading partners.

Since FTAs scoop together multiple issues and sectors, negotiations are more likely to encounter friction and important issues are overlooked. Agreements on sector specifics, sometimes called Partial Scope Agreements (PSA) and sometimes referred to simply as 'unbundling', are mostly technical in nature and are thus better equipped to close loopholes otherwise exploited by criminal activity. Global unbundling is on paper a massive diplomatic effort, and this is indeed true in application, but so are FTAs, which have proven to be far less effective.

I have had discussions with trade negotiators online which have revealed to me that speed is the name of the game. If a negotiation is to fail it must fail quickly. The same is true of success. By building sector and issue-specific concords from the groundwork laid in global regulatory agencies, countries can reach precise agreement on technical regulations more easily and flex their diplomatic muscles by influencing standards at their very genesis. With bilateralism, years of effort is absorbed and little gains are made across the board. Unbundling can help to promote the opposite.

UNECE, a regulatory forum I retain quite a lot of interest in, has shown real promise in its combative approach to issues like documentation for use by cargo ships and labelling standards. This isn't of course to say that everything can be achieved in a reasonable time frame. Some barriers will persist simply because they must do so. But we have to look to the future and sensible alternatives to present methods must form part of that future. Brexit, if it does anything, gives the world a chance to rethink trade efforts and examine new possibilities.

Wednesday, 23 May 2018

A drop in the ocean


For those who may have missed it, a useful slide was tweeted out yesterday by Michel Barnier's adviser, Stefaan De Rynck. As we see above, it depicts the nature of the EU's regime on external controls imposed upon third countries. The red text was not added by me but is in fact very interesting. It highlights the extent to which a customs union relates to border friction, and by comparison the use the Single Market (EEA) has in diverting controls away from external borders. This will be of particular significance to the Irish conundrum.

In essence this slide tells us that when in a customs union with the EU, checks for proof of origin and payment of tariffs are not necessary. There is a very simple reason for this. By virtue of the fact that members of a customs union have a Common External Tariff (CET) wrapped around them, it can be assumed that a good inside that customs union either originates in the EU, in which case it automatically qualifies for preferential treatment, or it has filtered through the CET in order to move on to a member state, and so also qualifies. Checks for origin therefore move to the external borders.

In reality these two checks are pretty minor, but they become important precisely because in order to carry them out, a modest amount of infrastructure is required. Typically this amounts to customs posts, a lorry park and officers instructed to scan barcodes on documentation for feeding into highly integrated computer systems. The technological aspect of customs procedures is likely where the British government will struggle most, and I think this element of the Irish border issue is increasingly under appreciated. Violence is not the only potential problem to worry about.

In the event of the absence of a customs union between the UK and EU, exporters will likely need to provide some form of origin declaration at a border facility and where necessary proof of tariff payment. Some hauliers will also be asked to provide an invoice when transporting goods on behalf of another company. The issue with these stoppages is that they build up and create time-consuming queues. It is unclear how long customs queues will be and what material impact they will have upon, especially, just-in-time supply chains. Disruption may mean some supply chains are lost altogether.

Customs checks imposed upon British exporters in the event of an absence of a customs union will be pretty painful, but they are merely a drop in the ocean when we compare the impact with the impact of leaving the Single Market. It is here, denoted by the black ink in the graphic above, where much of the enforcement regime - where the checks come in - will be fundamentally altered. As I have been at pains to point out at this blog, one of the primary benefits of the Single Market is that it positions checks on product standards at the point of production, before goods reach importing member states.

This point is absolutely central to understanding the effects of leaving the EEA on the EU's enforcement regime and on our borders and supply chains more widely. The Single Market plays host to an intricate web of regulatory agencies that are responsible for cross-communication in the event of potential criminal activity and maintaining information on the completion of checks and the manner in which checks out to be carried out. This web is called the EU's market surveillance programme, the primary mechanism held responsible for keeping our borders frictionless.

Through a Rapid Alert System (RAS), agencies communicate with each other in order to weed out any counterfeit goods or general customs risks. Customs is intelligence-led and the market surveillance programme is designed to facilitate information-sharing through complex databases and analysis. Member states are in constant contact with each other through this largely invisible system, ensuring that the free flow of goods can continue for exporters and importers, and that fraudsters can be caught and prosecuted if necessary.

The text in black ink above outlines the breadth of influence possessed by the Single Market, and just how important it is to us. It is one of the main reasons why I don't support leaving the EEA. To be a part of the Single Market means to be a part of its enforcement regime. Leaving those regulatory agencies (which comes with de-alignment) means the relevant checks are re-positioned to the point of the border. This is just how trade works. This concept stands as the primary structural difference between a Free Trade Agreement and the Single Market.

It is a little ironic that just hours after we see this slide emerge, a van driver speaks to James O'Brien on LBC and outlines the difficulties he faces outside the Customs Union. He spoke passionately and articulately and I sympathise with his situation. This is why I despise the constant lying from figures like Dan Hannan and Kate Hoey, who serve only to maximise their own partisan audience share. The point I seek to make, though, is that the bigger picture paints the Single Market as a far more important instrument in the border cleaning process. I think a re-focus is in order.

Friday, 18 May 2018

The more things change


That I can spend seven weeks completely isolated from Brexit noise, return and slot seamlessly in to the chronology of events speaks volumes to the uncomfortable dithering over our EU withdrawal. It has nothing to do with me or my knowledge. It is precisely because nothing of any particular significance has taken place that I needn't have worried about losing track of things. We are no closer to reaching solutions to the core problems and this government instead prefers to dance around flirting with made-up answers to complex questions. See maximum facilitation.

Upon returning to Twitter's wonk bubble I notice immediately the familiar stench of intellectual atrophy emanating from Westminster. Ignorance of concepts still pervades what is left of trade debate and there are no signs that anything will improve any time soon. Some politicians still believe that an FTA can achieve frictionless borders with the EU if coupled with advanced elements of mutual recognition. Others are convinced that a no deal Brexit will not give rise to any new technical barriers to trade on the grounds that we already have full regulatory equivalence.

The more I have analysed Brexit the better I have come to realise that I have been right over the past year to place my faith in the inevitability of a soft Brexit. The irony from the outset has been that the harder our leaders have dug for a hard Brexit, the more clearly they have exposed the underlying necessity of a soft one. To Leavers I say this isn't half bad and we can make the most of a  much better situation, and to Remainers I say that the worst is probably over. The kicking of the can further down the path is not at all coincidental. It is the effect of red lines meeting a brick wall of trade realities.

In all of this I still believe in the primary purpose of Brexit, itself a political (not economic) pursuit. People ask me why I haven't converted to a Remain position and my answer has stayed more or less the same. I believe the UK is better off with the Single Market and worse off with ever closer union, which I believe extends the chain of accountability and pushes the levers of governance further away from citizens. Remaining would also still equate to very limited wiggle room for the kind of treaty change we need in Europe.

I also believe that a gradual regulatory separation between eurozone and non-eurozone EU members was to become a necessary component to future European integration. In this I saw an Efta Brexit as a mechanism by which we could jump-start a slightly different power dynamic on the continent, enabling us to position ourselves at the forefront of a European alternative to close-knit political union. Whether this happens in practice is anybody's guess, but there is a lot to be said for the argument that the EU's inner eurozone core is in need of special attention.

The case, now, for an EEA Brexit is unchanged and really rather simple. In retaining the EEA framework, we avoid the economic consequences attached to leaving the Single Market. This will prove invaluable because British supply chains have spent upwards of four decades acclimating to the EU's intricately developed systems. Sudden disruption is to supply chains what Christmas is to turkeys. Furthermore, by slipping into a ready-made package we are better able to eliminate much of the can-kicking and conceptual haziness from the process.

In all honesty the boat may already have left the harbour on applying to rejoin Efta, but this needn't cause too much in the way of panic. If the UK finds itself floating in a bespoke EEA position in the forthcoming years, application to rejoin may seem like the natural next step in order to maximise consultation and participation at key bodies within the EEA. The framework is based upon extensive collaboration and mutual trust, and its inherent flexibility makes it worthy of more serious consideration as a future UK pit stop.

Whatever red lines still breathe life in Whitehall are sure to die as negotiations progress. There are too many to work with and some are in direct contravention with others. And in all of this time wasting lies the uncomfortable fact that there is actually little point in leaving the Single Market. Standard setting is increasingly organised at a global level and the world is slowly converging on multilaterally agreed regulations. Any reductions in gross immigration will likely be modest and we will be left feeling as if we have opted for the short straw come the end of it.

Sunday, 25 March 2018

Too many eggs in the wrong basket


We know by now that leaving the EU means leaving its Customs Union. The Customs Union is an integral tenet of the Union’s treaties, and as such, simply falls away after the transition period comes to an end. For the UK, leaving it brings both opportunity and difficulty. Outside the (or a bespoke) Customs Union, we are able to regain much of the independence of our trade policy, but the necessity of customs posts dotted along the Irish border will be the price we pay.

Leave campaigners have consistently, and with some merit, pointed to a withdrawal from the Customs Union as being a sort of launching pad towards a new, UK push to champion global free trade. This, many argue, rests on the ability to reduce or ultimately abolish tariffs. The issue, though, is that by focusing purely on the gains to be made from tariff reduction we are setting ourselves up for underwhelming results. We are ignoring important points about protectionism and the nature of the Customs Union.

In the international trading system, any substantive efforts to promote free trade must focus on overcoming what are called non-tariff barriers. Typically NTBs come in the form of divergent regulations – different rules specifying the conditions for market access, and countries continue to struggle to find ways of agreeing on harmonised rules to facilitate trade. Without reaching common standards, trade will be either much more difficult or implausible altogether.

Most protectionism is now regulatory protectionism. Countries use rules and regulations to protect the integrity of their domestic markets, requiring of trading partners adoption of these rules. This development has emerged in response to plummeting tariffs, sparked largely by globalisation. More and more academic studies are pointing towards the effects of NTBs as representing far bigger costs to global trade than those added by tariffs.

Since the Customs Union only deals with tariff issues, as a protective device its use is inherently limited. The Customs Union does not give us common regulation and nor is it a device for rulemaking. Its only residual feature is the Common External Tariff (CET). But even here the extent to which the Customs Union is protectionist is somewhat exaggerated. The EU has implemented an intertwined mix of different initiatives designed to alleviate the tariff burden it imposes upon other countries.

The first of these initiatives is the Everything But Arms agreement (EBA), which provides 49 UN-classified Least Developed Countries (LDCs) with tariff-free access to the EU’s Internal Market. As the title suggests, this applies to any goods which aren’t arms or armaments. The second such initiative is a Generalised Scheme of Preferences (GSP), or a GSP+ scheme, which provides low to middle income and vulnerable low to middle income countries with tariff free access across two thirds of product categories.

Arrangements like these offer what is effectively a waiver on the Customs Union. They say that for countries which are poorer and trying to develop, application of standard EU tariffs is unnecessarily punitive and stifles the promotion of economic growth and free trade. On Brexit, the UK will not be able to offer these countries preferential tariff regime, and the lesson here is that the scope of the Customs Union is far more restricted than is widely claimed.

Of course, the Customs Union is protectionist and demands that the needs of many European producers are prioritised over the needs of consumers. I broadly agree that tariff reduction is a positive thing, but at the same time I don’t subscribe to the notion that the way to go is total unilateral disarmament. In dropping our tariff walls to zero post-Brexit we would leave ourselves with much less in the way of negotiating leverage.

The UK will find benefit in leaving the Customs Union, but it is important not to wildly inflate our expectations of what is to come. Tariff differentials create border friction, along with the Rules of Origin hurdle which will be reintroduced when exporting to the EU as a result of leaving the Customs Union. Without the or a comprehensive customs union, the Irish border will not be completely frictionless, though technological devices can help to alleviate some of the pressure.

I don't want the UK in any sort of post-Brexit customs union with anybody. But I acknowledge that this cannot be squared with frictionless trade on the Irish border. Really it is a question of weighing up the benefits of such an arrangement with the drawbacks. The Customs Union does create barriers to trade but it is important that we identify where these are. I think a little calm on the question of post-Brexit trade policy is in order if we are to discuss the merits of leaving the Customs Union constructively.

Saturday, 3 March 2018

A looming deadline


Last summer I made quite a fuss about two important provisions within the confines of the EEA Agreement. They are Articles 126 and 127, which deal with withdrawal and the scope of the Treaty's application. Some of my more long-term readers will remember work I have written on the legal withdrawal from the EEA, such as here. My position, in summary, was that in order to formally initiate its departure from the Single Market, the UK Government would have to invoke Article 127. And that not doing so would see us enter a period of legal haziness.

Article 127 of the Agreement states: "Each Contracting Party may withdraw from this Agreement provided it gives at least twelve months' notice in writing to the other Contracting Parties. Immediately after the notification of the intended withdrawal, the other Contracting Parties shall convene a diplomatic conference in order to envisage the necessary modifications to bring to the Agreement." This twelve month period extends to March 29th 2018, a date which sits but a few weeks away. The deadline for invoking this Article is closing in.

Quite what happens if the government does not pull this lever I do not know. Frustratingly, legal opinion is heavily divided on the issue and far be it from me to masquerade as some kind of QC or expert on international law. I try as hard as possible to base my views on the available evidence and will reference those with the expertise as I go. I have found use in following the arguments of the Single Market Justice campaign (led by Peter Wilding and Adrian Yalland), this paper produced by the Institute for Government and this EEA Briefing Paper, which notes:

"The United Kingdom is a separate “Contracting Party” to the EEA Agreement in its own right: so it is bound, in its own right, by the EEA Agreement. It owes obligations under the EEA Agreement to States that are not members of the EU (Norway, Iceland and Liechtenstein), and since it is a basic principle of international law that States are not affected by Treaties to which they are not party, it is impossible to see how the rights of those States (and the rights of their citizens) could be affected by action under the EU Treaties. 
Some commentators have pointed to the fact that Article 126(1) refers to the territory covered by the EEA Agreement as being the “territories” to which the EU Treaties apply (in addition to Norway, 3 Iceland and Liechtenstein). Indeed, this was the Government’s initial position prior to the commencement of the EEA Judicial Review. 
However, the Government then abandoned this position and finally accepted that Article 126 did not “give rise to termination of the EEA Agreement ipso jure”. In fact, if the intent of Article 126 were to limit the Agreement only to states which are at any time member states of the EU (and Norway, Iceland and Liechtenstein), the use of the word “territories” would then be incongruous. 
It is made clear by Article 126(2) that “territories” refers to territories which are not included within the Contracting Parties’ national borders, but for which the Contracting Parties have diplomatic responsibility. Article 126(2) then disapplies the Agreement from some of those territories."

Readers should remember that the European Economic Area is a separate legal entity from the European Union. The EU makes up a large part of that area, with three Efta states (Norway, Iceland and Liechtenstein) making up the other part. A portion of the EU's acquis is transposed into the EEA Acquis, where fisheries and agriculture are notably excluded and the residuals in the framework relate only to trade. The EEA becomes effectively an extension of much of the EU's internal market, so we are left really with two Single Markets, almost totally identical, sitting side by side.

The 2015 Referendum Act did not cover membership of the EEA. And, as per standard UK constitutional requirements, new parliamentary legislation is the only mechanism through which a change in international law can have any domestic effect. Unlike most countries on the continent, we are a dualist state and, since Brexit is rooted largely in a clamouring for parliamentary sovereignty, it seems fitting to honour the process with a little consistency and take the appropriate legal and parliamentary route towards whichever destination this government is steering us.

I notice also that my friend Jonathan Lis has written a useful article on the issue just recently. I was happy to see this because I had completely forgotten about its importance in debate. So much concentration has been placed upon Article 50 (of a separate and legally distinct Treaty) and phase two and transition periods that the EEA elephant in the room has been left marginalised so to speak. This oughtn't continue. We aren't appreciating the enormity of the legal uncertainty which could lie ahead. I am talking the UK operating as a third country (to the EU) and EEA signatory simultaneously. Politically these positions stand in direct contradiction to each other.

Even if legally it is decided A127 invocation isn't necessary, we should still opt to do so for the sake of clarity. Most Efta officials believe that formal notification of withdrawal is congruent with the scope of the agreement. So too do a large number of barristers. The weight of this opinion renders mine valueless but I will make my points regardless. My agenda here is clearly political. Nonetheless a good way to build on the Prime Minister's pragmatic speech this week would be to take our loose ends seriously and tie them up wherever possible.

Thursday, 1 March 2018

A further complication


I am coming to the end of my body of work on the EU's Customs Union, and on customs unions in general. Most of the content here can now simply be re-plugged, rather than added to, and I thank readers who spend their time sharing it. I mentioned in my post on Tuesday that there were a couple of little residual issues left to write about for the sake of informing those invested in these issues. One of them is the relationship between services and customs unions, tackled here, and the other is the variety of exemptions from the Customs Union afforded to poorer, developing countries.

In truth I should have grappled with this stuff before the referendum but it wouldn't have made much difference. The level of knowledge of the features of customs unions in the Commons is so dire and I have no real way of influencing public policy. All I can hope to do is inform the informers, which I rather think must continue with broad clarification on the relationship between trade in services and customs unions. This issue has been left uncharted thanks to stoic agreement that tariffs do not apply to services, but there are important exceptions to this rule that are worthy of discussion.

Thankfully, grasping a broad outline of services trade is not especially difficult. The WTO's General Agreement on Trade and Services (Article 1.2) outlines four international modes of service. Mode 1 is cross-border, where a customer in country B receives a service from country A by means of post or telecommunications. Think architectural drawings or medical advice. Mode 2 is where consumption takes place abroad, for instance in the case of a patient travelling to another country in order to benefit from some kind of medical service.

Mode 3 services are transmitted by commercial presence abroad, where a company based in country A sets up a subsidiary in country B and offers services from that sister outlet (such as EasyJet in Vienna). Mode 4 services involve the movement and enterprise of persons. An individual, such as a caseworker or consultant, moves to a different country and provides services in the new country. An argument can therefore easily run that since services do not relate in any way to customs duties, they are not affected by a (or the) customs union.

Except this is not technically accurate. And to understand why we need to delve into changes to manufacturing techniques and examine the role of service inputs in goods, or 'services in a box'. This we have come to term Mode 5 services, which have fallen completely under the radar of trade discourse and the WTO's website. This is perhaps useful as the simplicities of the Customs Union have themselves been difficult enough to grasp for the relevant politicians. Further complication of discourse is arguably ill-advised for those who do not consider themselves Brexit or trade obsessives.

Mode 5 services are goods to which a service (or more) has contributed or accompanies. An example of a Mode 5 service might be a software package embedded within a bundle of IT hardware or design engineering accompanying an automotive part. They are services which are inseparable from and embedded within goods, which then rely on GATT for general trading guidelines, meaning that they count as goods and that they may be subject to duties. This means that if the value-added service element appears within a product which qualifies for a duty, we know we have a Mode 5 service.

For manufacturers the external sourcing of service content, whether domestic or international, represents an increasingly quantitatively significant part of production. We refer to this trend as the 'servicification' of manufacturing and Mode 5 services exports now form around 35% of the EU27's merchandise exports, according to 2009 TiVA statistics. This is a mathematically important chunk.  Typically, merchandise exports will mean retail goods, as they are unnatural products which are produced in response to consumer preference and market demand.

So services relate to the or a customs union in so far as a service element is added to a good which must filter through some kind of duty. Inside the EU, UK exporters exporting to Europe are not presented with any additional hurdles. The very fact of the CET being wrapped around EU members and (theoretically) eliminating the possibility of circumvention means that preferential treatment is assumed. A good will either originate from within the EU or it will have been fed through the CET. Tackling tariff differentials becomes a problem for customs officials at the EU's external frontier.

In leaving the EU's Customs Union and not establishing a bespoke alternative, Mode 5 services are likely to face documentary hurdles since they will simply be treated as goods. This could mean they qualify merely for MFN tariffs or FTA-negotiated tariffs depending upon the nature of the future relationship. Customs officials will simply treat them as they would other physical goods. Their job is to assess whether the relevant VAT and tariff has been paid and translate any transactions to HMRC upon scanning paperwork. The fact of an internal service element existing will mean nothing.

What makes this interesting is that often Mode 5 services add substantially to the value of a product. We might be looking at research and development or we might be looking at some form of marketing consultancy. All indicators point towards Mode 5 services gaining traction as an influential aspect to modern trade and this may be an area where tariffs have a more discernible impact. And beyond tariff rates, a post-customs union UK will need to accompany Mode 5 service goods with certificates of origin in order to prove qualification for preferential treatment.

Another important point here is that plain to see are failings at the WTO. Exporters are in urgent need of a global redefining of trading rules to accommodate significant changes to the ways in which services are actually administered. Effectively trading actors have jumped ahead of the rules and find themselves in need of guidance. The omission of Mode 5 services in both GATS and GATT reflects how far multilateral trade negotiations have actually fallen behind developments in manufacturing and globalisation. Global talks are long and arduous, technological change is often very rapid.

The end result is that we have yet another sizeable gap in Britain's understanding of trade. Just as it embarks upon the greatest shift in trade policy in living memory.