Monday, 12 February 2018

Walking the walk

I have just noticed this article on the Politico website discussing the potential of Brexit to undermine Pakistan's integration in the European Union's GSP+ scheme. It notes:

"Britain prides itself on having won this sweetheart deal for its former colony, a country of 210 million people, where many families have relatives living in the U.K. British members of the European Parliament, who played a key role in lobbying for Pakistan’s GSP+ status, reckon that Pakistan would be increasingly isolated after Brexit. They said that they had to overcome resistance from EU heavyweights back in 2014, and warned that antipathy could well return when GSP+ comes up for renewal in January 2020.
The loss of GSP+ would be a big blow to Islamabad. Almost three-quarters of all European imports from the GSP+ program come from Pakistan. Some 82 percent of these purchases are textiles and clothing. Pakistan’s exports to the EU increased by 38 percent over the three years since it signed on in 2014, rising to €6.2 billion in 2016 (EU exports were valued at €5.3 billion). The bump in exports turned the EU into Pakistan’s largest trade partner."

Alas, I have caught the piece a few days late but nevertheless there are interesting points to be made about it. Firstly, for the sake of clarity, a Generalised Scheme of Preferences (GSP) is a program designed to offer developing countries preferential market access when trading with major economies. This preferential market access comes in the form of reduced or zero tariffs and focuses on encouraging economic growth and promoting liberalised conditions for trade. Eleven such schemes exist at the WTO, this is not a unique EU policy model.

Secondly it is important to note that the EU's GSP program is separate from GSP+. GSP+ countries enjoy more incentives to join but must comply with stricter joining requirements. Unlike with GSP countries, GSP+ countries are not subject to what is called 'graduation'. This occurs when the average imports of a product group from a country exceed 17.5% of GSP imports of the same products from all GSP countries during three years. The figure is 14.5% for textiles. The product type from one GSP country, therefore, 'graduates' by becoming competitive and does not need GSP preference.

The GSP+ scheme also demands that participating countries ratify 27 core international conventions relating to strengthening labour rights and environmental protection, and aim to encourage effective governmental implementation of these provisions. In order to qualify for the scheme, a candidate country must be "a vulnerable developing country with a non-diversified economy and low level of imports into the EU." The third criteria here is what ensures that what is essentially a violation of the Customs Union is acceptable. In other words, we don't buy a lot from them, so we'll let them off.

On Brexit, Pakistan will lose a key ally in the EU and there is no way to sugarcoat this. There is no way of knowing whether terms will be rearranged given the pressure from other EU member states not to afford Pakistan GSP+ status. A relegation to GSP is unlikely but possible, and in such a case would threaten the GSP preference eligibility of Pakistani textiles under the graduation system. Pakistani diplomats will need to convince the EU to allow for the preservation of their current terms. For this, human rights concerns will need to be addressed in order to instill confidence in Brussels.

Upon leaving the EU the UK has the chance to furnish its own Generalised Scheme of Preferences. If we are going to turn all the talk of championing free trade into something resembling policy, it might be wise to start here. Fiddling about with the CET, if indeed we have that freedom, will be arduous and in some sectors (see agriculture) not worth our time. We will be a young and inexperienced customs entity so biting off things we can chew will be necessary. A new UK GSP can be organised unilaterally and relatively easily, with templates aplenty to use as guides.

I do not see this as a hurdle. The UK is a major economy and certainly has a duty to help LDCs in any way that it can. The west has produced a number of instruments, like the Everything But Arms Agreement, which seek to open markets to the poorest people on the planet. Perhaps the focus on tariffs has at times been a little too much but at least good intentions are there. We also need to concentrate on diverting aid budgets and resources to enabling LDCs to knock down regulatory barriers to trade with developed countries. This ought to be an important priority too.

A GSP is a start and provides the UK with the ability to put its money where its mouth is. So far the most genuinely refreshing aspect to Brexit has been Gove's new wildflower proposals post-CAP. We need to compliment this with a commitment to aiding the world's poorest. Leaving the Customs Union does not magically produce free trade (whatever that is). We need to work to enhance free trade and familiarising ourselves with mechanisms designed to facilitate this seems to me a wise place to begin. 

Sunday, 11 February 2018

Customs confusion

Public discourse is still blighted by an inability to nail down the features and competencies of the EU's Customs Union. This fact was highlighted quite starkly today when Iain Dale described this afternoon's Sunday Politics debate between Daniel Hannan and Seema Malhotra, the Labour MP for Feltham and Heston, as the 'best thing on TV so far on the subject'. Worryingly, Mr Dale might actually be right. But this shouldn't be misconstrued as a glowing review of the above. Instead it ought to shed light on the amount of progress we are in need of making.

If this is indeed the yardstick against which all future Customs Union discussion is held then it oughtn't be too difficult to top it. While the media froth and scream about the political influence of George Soros, who most people couldn't pick out in a firing line and certainly do not care about, there remains widespread misunderstanding of the Customs Union. Something which matters a whole lot more. The Customs Union is now the centrepiece of Brexit debate and will shape much of the withdrawal process from here on out. It is crucial that journalists and politicians grasp the important concepts.

My particular frustration with Hannan's performance earlier on is that he managed to tell an outright lie and get clean away with it. It might be ignorance or it might be a deliberate twisting of the facts. I cannot know for sure. Not only did his lie go uncorrected, it is also extremely common, and given how influential he can be in this debate it is important that we discuss and correct the important error he has made. Hannan is a remarkable orator and I consider this dangerous. He has the ability to make almost anything he says sound true, even (as was the case today) if it is not.

His false contention, made in both his opening soapbox and later on during questioning, was that the Customs Union prevents the UK from negotiating its own trade deals. This is not true and its inclusion stuck out like a sore thumb, ruining what was otherwise quite a useful discussion. Hannan himself performed well if we exclude this point. Again, the problem here is that this myth is circulated a lot. Almost everything written about the Customs Union in newspapers and policy papers makes claims vaguely similar to this. With absolutely nothing in the way of evidence to back it up.

To be clear, there is nothing at all about a Customs Union which prevents members negotiating their own separate, bilateral trade deals. The EU's internal mechanism which does prevent this course of action is the Common Commercial Policy, which ought to be thought of more simply as a Common Trade Policy. The CCP, Article 207 of the Treaty on the Functioning of the EU (TFEU), binds member states together in trade negotiations, removes their right of initiative at international forums and ensures they must arrive at commonly agreed proposals for technical standards.

Where folk think the Customs Union enters this equation I do not know. It is a separate device whose only residual feature is the Common External Tariff, which shields European producers from global competition and eliminates a Rules of Origin hurdle between members. The very fact of the CET being wrapped around every EU member state rules out any circumvention. An assumption can therefore be made that every good inside that external wall qualifies for preferential treatment. There is therefore no need for British exporters to produce certificates of origin at other EU customs posts.

It is true that the Customs Union restricts the independence of British trade policy. Membership means we cannot alter substantially all the tariffs it covers. But restriction of domestic trade policy and inability to sign trade deals are not the same thing. Trade deals cover so much more than the ability to alter tariffs. They relate to regulatory harmonisation, services, foreign policy, customs cooperation, rules of origin provisions, recognition of standards, competition law and domestic governmental reform, among other, equally complex components.

These are wholly separate conceptual domains and any trade deal which does not wander into tariff-alteration territory is neither prohibited nor necessarily undermined by the presence of a customs union. Given that so much focus has been placed on the fact that Britain is largely a services economy, I am surprised that very few people actually make this point. Arguably, since tariffs on industrial goods are minuscule, and declining quickly elsewhere, and since the EU is working on further reduction by upholding GSP schemes and international agreements, the tariff domain is inherently limited in its importance.

My point here is not that I want a new UK-EU customs union to be established. I'd prefer for both sides not to agree to a bespoke customs union. I am merely outlining the relevant competence boundaries and pointing out that a bespoke customs union with the EU would leave our hands partially tied, but not quite as tied as is widely suggested. Trailing alongside a powerful and experienced neighbouring customs entity in some form or another is inevitable. We just need to accept this and try to play the game as effectively as we can.

What may be useful is for readers to take a look at existing global customs unions, of which there are 16 (including the EU). Mercosur is a major example, located in South America and consisting of Brazil, Argentina, Uruguay and Paraguay. Switzerland and Liechtenstein form a customs union not relevant to the EFTA Convention or Single Market. The EU also forms a distinct and separate customs union with Turkey, which includes everything but agricultural products and public procurement. All such countries are able to negotiate bilateral deals of various kinds.

Albeit forever trailing EU negotiations, Turkey has negotiated its own FTAs, including one with South Korea. It has done this in spite of its participation in a customs union. Turkey's bargaining position is weak: they must automatically apply tariff concessions after the EU has negotiated FTAs, and will subsequently arrange reciprocity with relevant trading partners. Brussels takes the lead on the application of tariff concessions and Ankara follows slowly behind. Independence of trade policy is stifled but bilateral deals are not out of bounds.

In truth, countries found inside customs unions do not operate truly independent trade policies. Debate in Britain must in part be informed by this fact but must also recognise that there are many different kinds of trade deal. For those less well-informed it may be easy to fall into the trap of assuming that a trade deal means an FTA. The focus on FTAs will need to subside if we are to provide clarity on the parameters of a customs union. And commentators and politicians afforded the luxury of authority have a duty to replace today's yardstick with something much, much more accurate.

Saturday, 10 February 2018

Clutching at straws

Perhaps the most intriguing question we will need answered in phase two of the withdrawal process will be whether or not a frictionless Irish border is achievable outside some form of UK-EU customs union. From a Leave perspective this is where we enter more dangerous water as far as maintaining the public appetite for Brexit. Once we concede on replicating the framework of the Customs Union, which would need to cover substantially all the trade between the two parties, we take a huge chunk out of the value of leaving. In other words: bad PR for Brexit.

Something I have noticed in recent weeks is that Remainers appear to have a spring in their step as far as arguing for a retention or simulation of the Customs Union. This is probably partly strategic, because not ever did we hear any praise offered in favour of Customs Union participation in the months which led to the vote. Remainers have stayed quiet about the Customs Union, likely because they know it does not offer much in the way of material or political benefit. As positives go, its use only really stretches to the elimination of a Rules of Origin hurdle and other, tariff-related customs procedures between member states. The bare bones of trade.

Where Remainers are right, though, is that where the preservation of a frictionless Irish border is concerned, nobody can point to an objectively workable alternative to the EU Customs Union. Even quite detailed and authoritative reports, such as the EU Parliament's 'Smart Border 2.0' paper, admit that the off-the-shelf templates are limited in their friction-reducing capabilities. And so we are stuck, with the wonks having fun knowing full well that it gives them a chance to mock and deride childish suggestions from hapless politicians unable to grasp the basics of trade systems.

One good thing is that on all sides we see enormous political will defending the importance of a frictionless border. The difficulty, though, will come in transposing this energy into practical application. Physical infrastructure will denote a step backwards and intricate supply chains will be highly sensitive to the erection of new tariff and non-tariff frontiers. Manufacturers like LacPatrick are engaged in what we call X-crossings, where goods cross the border back and forth as part of the same supply chain. Stoppages will be felt most forcefully in arrangements such as these.

Usefully, this is one aspect of Brexit not bogged down by a lack of clarity. We know exactly the criteria our proposals must meet: there can be no physical infrastructure. I have tried my utmost to find a bespoke, creative technological solution to border friction outside of the Customs Union but have had no luck. I have tried to make the case for auditing systems where goods originating on the island are tagged for scanning and tariff differentials settled between the UK and EU monthly. But this solution, despite its logistical difficulties, ignores the issue of competitiveness (the CET ensures a level playing field within) and would likely violate MFN rules.

One idea which gained a surprising amount of traction today was the potential of 'hi-tech' Canada-US checkpoints for use as a template for a Customs Union alternative. As ever what amounts to very little was jumped on by The Telegraph and a knot of increasingly desperate Tory MPs. Marcus Fysh tweeted:

"Visited this week. V efficient border: only 3% of trucks are pulled aside of which 99% just x-rayed further, adding 5-10 mins to the v short normal clearance time. Need for "hard" border gateways on the border itself is driven by immigration ie people movement controls, which shouldn't be needed in Ireland if Common Travel Area outside Schengen with authorities sharing information on immigration at other external borders is present."

He correctly asserts that much of the infrastructure along Canada's many checkpoints with the United States is designated to dealing with immigration. Canadian and American citizens enjoy visa-free travel between each country but must present a passport upon crossing the border. This will of course not be an issue on the island of Ireland because there appears to be no political support for a cessation of Common Travel rules and I think the Common Travel Area works fine as it is. Customs posts checking people would represent symbolic regression in the same way that other checks would.

But where Mr Fysh misleads us is in his claim that "only 3% of trucks are pulled aside." This is false and a deliberate misinterpretation of what is in reality a staged process. Since there exists no customs union between the US and Canada, documentary procedures are inevitable. Every truck crossing from the United States into Canada must pass through and stop at what is called a primary inspection lane. No exceptions. Fysh makes no mention of this initial stage and so his figure is demonstrably inaccurate and he ought to withdraw his comment and apologise.

Prior to arrival at the primary inspection lane, the vast majority of truckers, that being those carrying low-risk commercial goods, will have signed up to the established 'Free and Secure Trade' (FAST) program. This is a cooperative system set up with the aim of speeding up and simplify the processing of low-risk commercial goods. Effectively it is an American-Canadian Authorised Economic Operator (AEO) equivalent, whereby participants in supply chains are granted fast-tracked customs and security procedures. Eligibility for the FAST program is weighted upon cargo type and clearance with US and Canadian security agencies. FAST lanes are not present at every border crossing.

Truckers are expected to have with them a form of identification, as well as customs documentation like an export declaration and a certificate of origin. Often some form of commercial invoice is necessary to prove the validity of information provided. They must also make note of the weight of their vehicle in order to assure conformity with Canadian requirements and legislation. All of these this are presented to the customs broker: a physical person in a physical cabin with physical and technological equipment at his or her disposal. Again, every driver is subjected to this primary check.

Beyond this is a stage known as 'secondary inspection'. This is only necessary when requested by customs officials and is likely the source of Fysh' 3% figure. After procedures in the primary inspection lane are complete, almost all vehicles are waved into Canada. But some are not and it is here where further infrastructure is used for the purpose of additional, security-related checks. Selected drivers are then directed to a secondary counter, a separate examination dock or an X-ray machine, usually used for detection of stowaways. Occasionally, more suspect vehicles will make use of two or more of these stations.

Despite the technical detail, the picture painted here is a pretty simple one. The mechanics of the US-Canada border ensure it is no precedent for Ireland and no useful alternative to the EU's Customs Union. I must also add that Canada and the US make up two thirds of NAFTA, itself a Free Trade Area. Notice once again how the existence of what is essentially a modified FTA does not in any way produce frictionless borders. We also see in action the kinds of documentary requirements presumed unnecessary between EU members by virtue of their participation in the Customs Union.

Where there is scope for learning from arrangements in place on the Canadian border is in the development of AEO-type schemes which relieve some of the pressure on sensitive crossing points. The UK will need to explore ways in which it can organise burden-lifting systems for its border with France which can deal with customs procedures and possibly thornier areas of trade like VAT protocols. The good thing is that we have workable templates which will aid us here. Mutual recognition of AEO programs will be an essential feature of friction-reduction post-Brexit. As will the Common Transit Convention.

Of course, this only goes part of the way to preserving frictionless trade and certainly is no adequate solution for Ireland. I don't underestimate the significance of avoiding physical infrastructure on the Irish border and have never pretended that there is an easy answer. Our politicians have a duty to themselves and to border communities to take this issue seriously. Which is exactly why it is crucial we spend time rubbishing bogus proposals.

Friday, 9 February 2018

Back to work

Calendar with back to work sticky note

Please accept my apologies for the prolonged inactivity at this blog. 2018 has not been as kind to me as I had initially hoped and I have found myself really rather stressed by various personal predicaments. I have for some time been burrowing myself into a hole that I cannot seem to get out of and the situation is becoming fairly desperate. Many readers will know that since September I have been a Masters student at Royal Holloway. A short while before this I was made redundant from a job I had and enjoyed with my local council, which disrupted plans to transition it to a more part-time role.

Since then I have had to self-fund, with the help of state loans, which only really cover the (increasing) cost of tuition, and an overdraft. I didn't drop out because I felt that it was the right thing to do. My gut instinct was always to get my MSc and I tend to follow that instinct religiously. The difficulty has been that I have bitten off more than I can chew in the sense that I thought I would be better able to manage finances during this academic year. This has proved not the case and, given that I am from a low income family and need to support the household by paying rent, I have found myself understandably conscious of the possibility of requiring emergency accommodation or homelessness.

I am not going to put pressure on my family by avoiding paying bills and should the worst happen, we would need to go our separate ways and they would need to downsize. Oddly enough neither my bank nor my university have really done anything of note to help me. Huge pots of funding linger for splashing out on undergrad students but scope for helping out postgrad students is almost non-existent. The end result of all this is that I am unable to do very much and have found myself feeling pretty depressed and embarrassed. I don't really have anyone else to blame for all of this, and finding work has proved extremely difficult because of scheduling issues and the fact that my CV is tailored to certain kinds of work.

Another reason for my absence is that, in truth, not very much has taken my fancy Brexit-wise over the last few weeks. There hasn't been much in the way of negotiating progress to sink my teeth into and as I see it, the cabinet are yet to decide upon their opening pitch and signal of intent as regards an eventual destination. I notice, firstly, that the country is beginning to fiddle around trying to understand the main features of the EU's Customs Union. For those of us with a grasp of it, and I consider myself somebody in this category, it can be a little tiring. So much nonsense has been spewed out regarding what it does and does not have competence over that even attempting to inform the wider public has become largely an impossible task.

There is now pretty much unanimous agreement amongst the Brexit obsessive commentariat that the UK needs to make known the general direction of travel in which it wants to head. This is really a question of deciding whether or not we remain within the EU's regulatory architecture, where we want our enforcement and surveillance regimes to come in (i.e. at the border or at the point of production), and which frameworks - such as some form of Customs Union - we wish to have continued or bespoke participation in. In essence, do we want the EEA with trimmings or a Free Trade Agreement with all the non-tariff barrier baggage.

I have found some enjoyment from the confusion still persisting over the difference between the and a customs union. Anybody requiring work of authority on what exactly the EU's Customs Union is and what the reasons are for the crucial distinction may like to read either this or this. There isn't all that much of importance to remember. The significant points are that when we leave the EU we leave the Customs Union, the Customs Union eliminates the Rules of Origin hurdle for British exporters exporting to Europe and that the Customs Union does not prevent us from signing our own bilateral trade deals. Otherwise, how would Turkey manage to secure an FTA with South Korea?

There is little point in discussing the merits of 'staying in' the Customs Union. It is an integrated mechanism within the EU's matrix of treaties and is provided for use by members alone. Monaco is an exception to this rule but through a bilateral agreement with France allows itself to be considered 'French territory' for the purposes of remaining inside the Customs Union. There is no remotely similar geographical or political precedent for the UK to take advantage of. And, to be frank, neither should we both trying to stay in it. The Customs Union does restrict the independence of our trade policy, mainly by ensuring we cannot alter certain tariffs, and there are gains to be had from leaving it.

One is also forced to wonder why the UK Government has not yet bothered to solidify its overall position on the direction in which we will be taking Brexit. My guess is that this is probably because no single proposal satisfies everybody in the cabinet, let alone parliament and country. And it is exactly here where things get really sticky. I still believe in an EEA Brexit, given that it is the only way to leave the EU without falling into third country traps and succumbing to significant hits to GDP, but I have never argued that it will be enough for all Leavers. There is a certain more-Brexity-than-thou attitude amongst the hardliners. For them, no European scheme or framework is worth remaining in, and there is no convincing them otherwise.

In recent days the worry of a no-deal fallout has crept back into my mind. The transition is not legally guaranteed and there is only so much UK pushback that can be withstood in Brussels. I keep looking over the red lines on all sides of this negotiation and they appear to point to the fact that we will either crash out with no deal or remain wedged into some bespoke Single Market framework, which has its advantages if it is secured properly using existing agreements. One possibility is that the UK Government will commit to full regulatory alignment, which would include participation in regulatory agencies and the market surveillance programme, but tell its electorate that we have achieved a meaningful exit.

There is also the question of the Irish border. We are expected to propose all-island specific solutions in order to arrive at a situation in which we do not need to remain in the Single Market or the Customs Union. The former is absolutely fanatical rubbish, the latter unlikely. The EU's official recommendations (page 12), published last year, say:

Interestingly the same report notes that even with an agreement which included all the above provisions, there would still be minimal friction. The report explains in multiple paragraphs that so-called 'Smart Border' proposals produce 'low-friction' arrangements. And even low-friction borders can be difficult for drivers and supply chains, as my explainer on the nature of the Norwegian-Swedish border outlined. Delving into more specific areas of trade has taught me, among many things, that no outer European Union frontier is entirely unpoliced, even where otherwise close cooperation is maintained.

I therefore take quite a pessimistic view of the likelihood of the UK being able to cobble together a workable and sufficient proposal for the Irish border. Ireland's veto over the whole thing will complicate matters and could potentially blow a huge hole in the whole withdrawal process if we do not take the issue seriously now. I expect to see soon the return of the 'unilateral non-policing' proposal, likely from Rees-Mogg or Farage, who claim we can go to the WTO, whose mission is to promote trade liberalisation, and use that as a pretext for legitimising non-policing (which wouldn't be reciprocated and could help to undermine product standards domestically).

Ultimately clarity is the immediate priority. Phase two will be judged largely on the extent to which we can at long last provide the clarity which has been missing from the Brexit debate. The cabinet must make a decision now or it will back itself into a corner we are unable to escape from. A direction of travel must be laid out, keeping in mind that Norway and Canada do not form a spectrum. They are two separate boxes - one of which we must open before any tinkering and arguing of the toss can take place. I have made clear which box I think this Government should open. All we need now is a little purpose and urgency from them.

Wednesday, 3 January 2018

A borderline solution

Call me naive but I am going to press ahead with the idea that we will stay in the Single Market. I just do not see us leaving it in any meaningful sense. We can call it EEA associate or attach any number of mathematic symbols we like but we will not escape the logistical implausibility of the UK leaving it. And nor do we need to. In taking advantage of the framework's inherent adaptability we can secure an improved deal on free movement. I also think we owe it to ourselves to stay in. We ought to be proud of our role in creating the most effective reducer of non-tariff barriers in the history of trade.

In the coming months I will focus much of my energy on our participation in the Customs Union, which I think will take centre stage in phase two of the Article 50 process. The reason is that it is here where I think the most interesting debate can be found, particularly around the issue of the Irish border and how we can best work to preserve the maturation of the peace process. If spectators of Brexit thought Ireland played a prominent role in phase one, they are in for a big surprise. The most significant provision (para 49) in last month's agreement will come back to haunt us:

"The United Kingdom will propose specific solutions to address the unique circumstances of the island of Ireland. In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and Customs Union."

The inclusion of the phrase 'the United Kingdom will maintain full alignment' is crucial because it rules out any plan B which focuses on Ireland-specific solutions. The point being that Northern Ireland will leave the EU on the same regulatory terms as the rest of the UK, as it well should, given that the constitutional reform I hope Brexit ignites should not take the form of sharp economic imbalances. Categorically I can tell you the DUP will stand by this red line and if our negotiators attempt to undermine it then all support for the Tories will be pulled.

The other problem with a deal which sees Northern Ireland in the Single Market and Customs Union and Britain outside is that negotiating future trade agreements will be made unbearably complicated, if not impossible. And why would third countries wish to enter negotiations which apply to some parts of UK territory and not other parts? Moving the customs border to the Irish Sea would present us with a whole new world of problems which our government would not have the intellectual prowess to be able to deal with. The only way out is a unified way out and that is that.

As readers will know, this blog has for months been making the case for the Norway option. I have never argued we can replicate the it exactly because that isn't possible. What I mean is that we should open the Norway box and try to carve out the best arrangement we can with the tools we find inside it. Taken literally, though, a Norway deal would not alone suffice in solving the Irish border problem. Peter Hitchens is wrong to claim it would do so 'at a stroke'. The EEA merely gets us close to the finish line. It is, if you'll pardon the pun, a borderline solution.

The Single Market fixes almost every conceivable customs check. This is because the enforcement strategy is peeled back behind the border and aimed at the point of production, where conformity to standards is assessed by a hierarchy of agencies which form the EU's market surveillance programme. The EEA therefore gives us not just regulatory conformity, but the assumption of regulatory conformity, and this point is crucial when one attempts to understand the fundamental structural differences between the Single Market and Free Trade Agreements.

But in any event there would be a few residual issues to overcome. One thing I will not do to readers is expose difficulties with other proposals and then present mine as if it is perfect. It is not and reaching a solution as far goes maintaining a frictionless Irish border will require a certain amount of tampering. Norway's border with Sweden is lightly policed due in large part to its location just outside the Customs Union. Dotted all along the border are customs posts at which lorry drivers must present paperwork. Hauliers tend to outsource and pay specialist firms to produce the paperwork.

Some border crossings require check points on both sides and some on one side. Clearance can be carried out by either country in respect of the rules and on behalf of both countries. Requirements for customs controls at the border are paperwork based because they relate mostly to tariff and VAT issues. In 1995, Norway and the Community came to an agreement on customs cooperation, which is complemented by Protocol 11 of the EEA Agreement, which enabled both sides to develop an administrative framework for activity on the Norwegian-Swedish border.

Truckers transporting goods from one side of the border to the other only have to stop once. At some customs facilities queues can extend to a couple of hours on busier afternoons. The average waiting time for drivers at customs at the Svinesund bridge, one of a number of border crossings used by HGVs, is eight minutes. If I am making a lot of a little here then that is deliberate. The situation I describe is precisely the sort of arrangement we need to avoid in Ireland, where customs facilities will invariably be working with much longer queues given comparatively higher traffic volume.

Physical inspection of goods, such as in the case of plant health rules, is limited to random or exceptional circumstances and even then Article 5 of Protocol 10 of the EEA Agreement provides scope for those checks to be carried out away from the border, such as at the good's destination. It is also often necessary for the purpose of cracking down on smuggling and cross-border crime, which is made especially problematic by Norway's strict domestic regime on the taxation of alcohol. Effectively a huge black market has been created for criminals and this remains an ongoing cause of checks.

Ireland has similar issues with counterfeit goods but I don't imagine alcohol-related crime will be as much of a problem. But the main difference is that for sensitive historical reasons, the Irish border needs to be free of physical infrastructure. Even cameras are pushing it. Norway does not have to grapple with this requirement and so puts up with the bare minimum, which itself can be cumbersome and has been achieved through years of close cooperation and a high level of mutual trust. Starting afresh is quite different and we are better off remaining inside systems we are familiar with.

The negotiating tension looming in phase two will therefore revolve around the need to keep the entirety of the UK inside the, or a, Customs Union. With some reluctance I am beginning to accept that it will be necessary. The ultras won't like it but they will soon realise they are not in the driver's seat. For me it is not the burning red line it ought to be. Outside the EU we can promote trade liberalisation by championing initiatives designed to knock down regulatory, non-tariff barriers, which have emerged as far more potent threats to what we like to call free trade.

The Customs Union is not the be-all and end-all of everything and neither are tariffs. Since the immediate development of Anglo-Irish relations will be critical I can see a good argument for staying in the Customs Union, at least until we have built a satisfactory computerised interface which can deal with a Rules of Origin hurdle (explained here) and the tariff-relevant documentary procedures imposed upon countries exporting into the Customs Union. Until then our time would be best spent diving into existing global mechanisms designed to combat NTBs and learning how we can strengthen them.

In all of this, a worry I have is that some of the needless anti-Irish bigotry will reemerge and intensify. The sort of hatred and snarling which came out of certain political corners towards the latter end of 2017 is what we will need to steer clear from. The Sun's childish attack on the Irish Prime Minister and Gerard Batten's embittered and moronic tweet about Ireland relying on the UK for its existence come to mind. It is so typical of the headbangers that when confronted by reality they will still grab any opportunity to turn the blame on others. Even if their blame is so deeply illogical.

Ireland did not vote for Brexit. It is merely coming to terms with the decision of its neighbour. The enormous progress we have made in the last twenty years does not have to be undone by hotheads incapable of reconciling with a soft Brexit. Surely our relations are worth more than a fiddling with tariff walls (which are slowly being lowered anyway). For the communities in the locality of the Irish border, customs posts are symbolic regression and stand in contradiction to the degrees of openness, access and trust which have been allowed to mature ever since the Good Friday Agreement.

I know what is coming. By the time spring rolls around we will be bombarded by cries from the hardliners about the great Customs Union betrayal. They will demand we walk out and bring the whole thing to an end. But we should spare a thought for the border communities - in some cases our very countrymen - and their warnings of violence and the undoing of progress. It might be better instead to channel any anger into encouraging the development of technological alternatives to Customs Union membership. The zero tariff zealots can't have it all their own way. 

Tuesday, 2 January 2018

The early bird catches the worm

Ryanair is an EU-based airline set up in Dublin. After Brexit it will have no problems flying from Ireland to other member states, just as it doesn't now. The difficulties will emerge with respect to the continuity of its three internal UK routes: Edinburgh-Stansted, Stansted-Belfast and Belfast-Gatwick. Shortly before Christmas, reports The Guardian, Ryanair used its new UK-based subsidiary, Ryanair UK, to apply for an aviation license so as to continue operating these three routes after we leave the EU.

In order to conduct its activity in the EU, Ryanair needs to be in possession of an Air Operator Certificate (AOC). The certificate is issued by the competent governmental authority of the member state it is based in. AOCs rely on Regulation (EC) 1008/2008 on 'common rules for the operation of air services in the Community' for their authority. Ryanair was given its AOC by the Irish Aviation Authority and the awarded certificate is recognised EU-wide as part of a harmonised system.

Once an airline is issued with an AOC it can operate anywhere in the EU. In the case of the UK, we are dealing with the Civil Aviation Authority (CAA). The CAA issues different types of AOCs and applicants must determine which one is relevant to them. Factors like the type of aircraft and routes operated will help to inform the applicant of their required certificate. Every single UK airline operating routes within the EU follows this procedure with no exceptions.

On Brexit, whether this be in 2019 or 2021, the UK is no longer part of the Community to which the above regulation refers. This means that AOCs granted by the UK's Civil Aviation Authority are no longer valid and recognised in the EU. Article 3.1 of the Regulation explains: "This Regulation regulates the licensing of Community air carriers, the right of Community air carriers to operate intra-Community air services and the pricing of intra-Community air services."

The literature is therefore clear that AOCs are applicable to the Community only. In the case of Ryanair this isn't such a big deal as it is not a UK airline. The purpose of setting up a subsidiary company in the UK is to begin the process of gaining an operating license to allow its services to continue in what will become a third country. As regards internal UK routes, Ryanair enjoys quite considerable market share, particularly through its low-price London to Belfast services.

EasyJet has precisely the opposite problem. It operates using an AOC granted by the CAA but as it is a UK-based airline it will have no trouble with its domestic operations. The issue for them is access to the Community, and so they have decided to spend £10m on establishing a subsidiary in Vienna, called EasyJet Europe. Post-Brexit they will need to maintain equivalence with EU regulations and either re-apply for a new license or apply for continuity on the current one.

Once Brexit has taken place, the UK will likely unilaterally recognise EU-administered AOCs in order to allow for maximum stability as far goes inbound European flights. The Regulation, along with the rest of the EU acquis, will find a home in UK law but will need to be altered so as to only include UK-relevant sections. The result of all this will be that our airlines will end up in possession of two adjacent licenses, one for the Community and one for the UK.

Airlines which set up skeleton teams in the EU, which I might suggest will be most, will find no substantive operational changes. In accordance with the Regulation, they will need to prove to the Commission on request that they are maintaining regulatory conformity (Article 8.1) and a review conducted by the competent authority of the member state in which they set up will take place two years after their new Community licenses take effect (Article 8.2).

This strategy will likely be adopted by other UK airlines and I see this as being a common development in 2018. Unlike with other common EU systems, such as Whole Vehicle Type Approvals, where producers will not have the same amount of flexibility, there is a useful workaround for Britain's airlines. But that workaround can be expensive. Airlines will not want to fork out on the costs of setting up subsidiaries and those that do might decide to abandon intra-UK routes altogether.

Another important point to make is that the cited Regulation laying out the common rules for the operation of air services makes clear that the text has EEA relevance. This means that setting up a subsidiary in the EU will allow airlines access to the airspace of EFTA EEA states, and that when the UK Government recognises EU-granted AOCs, that recognition will automatically spread to Norway and Iceland too. Switzerland, as ever, has its own distinct relationship with the EU governing aviation.

This post only attempts to explain why there is a need for subsidiaries and the preparatory arrangements currently being made by airlines. The question of our continued participation in the European Common Aviation Area (ECAA), and therein our access to the Single European Sky, is separate and very much up in the air. My understanding is that during the transition period (2019-2021) we will continue to operate under these frameworks with no substantive changes.

What comes after is anybody's guess. If our ECAA membership lapses then we will need to be invited by the Commission to rejoin, as per Article 32 of the agreement. Given that a prerequisite for membership is full equivalence with EU law it is entirely possible that a precursory invitation will be extended in negotiations to come. Participation at Eurocontrol, which assists in the development of the Air Traffic Management system, can be pursued separately as it is not an EU agency.

The CAA has also recommended that the UK remain under the umbrella of the European Air Safety Agency (EASA), the EU's aviation regulator. It will not have the expertise nor capacities to completely reconstruct distinct regulation in any quick or efficient way. And nor is there any real point in doing so. The commercial aviation sector in its current form is well established and we gain nothing and disrupt everything with unnecessary disentanglement.

The EU has shown willingness to work closely with neighbours in so far as promoting aviation integration and this need not change with the UK. Projects of mutual interest can and ought to be prioritised. We have regulatory conformity and this should provide an absence of technical barriers to continued participation in the ECAA. Luckily for us the matrix of aviation organisations before us transcends EU membership and thus smooth cooperation is perfectly achievable.

Monday, 1 January 2018

The UK needs to establish its own trade strategy

There is no way to repaint Brexit as something which does not disrupt the flow of the international trading system. Nor as something which will not require a very difficult (and expensive) overhaul of the fabric of our domestic governance and the systems embedded in it. These facts hold true even if we commit to staying in the Single Market, which I believe we will have no choice but to. Our trading arrangements with the EU and third countries will find themselves fundamentally altered and we will need to radically reform the ways in which our civil servants are mobilised.

I am currently trying to get hold of Tim Shipman's new book Fall Out, which I am being forever recommended to read. Occasionally I see people I follow on Twitter sharing excerpts from it which highlight the difficulties pressuring behind-the-scenes mechanics in Whitehall. It does not appear to be a very pretty picture. From what I gather, Shipman highlights the unrest and unhappiness of many ministers, as well as the headless chicken-like effects on civil servants brought about by the government's complete lack of clarity as regards its desired Brexit outcomes and objectives.

Given that 40 years of EU membership necessitated gradual outsourcing of policy commitments, technical expertise and administrative systems, British governance has to some extent coasted along on auto-pilot. This is most easily captured by our exporting of our trade competence to Brussels and the current panic over policy repatriation more or less proves my point. Brexit involves collecting competencies our current strata of ministers played no part in shaping and so we were always going to experience a degree of what I would call intellectual atrophy.

In preparation for leaving the EU, we will need to cement a trade strategy. This strategy would need to concentrate as much on fostering domestic governmental reform as it would establishing international goals for our trade. The domestic side of things is important because trade policy begins at home. If we undergo a reset as a new and distinct customs entity on feeble ground, with inefficient departmental structures and parliamentary unrest as a result of inadequate transparency, we will not progress very far. These are obstacles we can do without erecting.

One of the reasons why I support Brexit is because I believe, on balance, we are more sovereign outside the EU. There are many trade-offs involved because the concept of sovereignty is nebulous. Perhaps some of the promised gains are overblown but neither is sovereignty uniformly illusory. Only one corner of the world is politically unified in this manner even with extensive globalisation. The role of parliament is a sensitive issue for me and I think we need to find ways of incorporating parliamentary procedures into our new trade strategy.

A trade strategy which respects the role of parliament would be in keeping with the purpose of Brexit and the direction most would like to see the UK head in. The current arrangements will see future trade deals negotiated by the UK ratified in accordance with the Constitutional Reform and Governance Act 2010. The Government will be expected to present parliament with the negotiated deal and an accompanying explanatory memo. The Commons decides whether it will vote and if it were to reject a deal, a three week period is launched for the purpose of amendment and discussion.

But parliamentary involvement must extend beyond this. Small crops of parliamentarians should be permitted access to texts prior to ratification through a parallel body comprising cross-party participation. There will need to be trust so as to minimise disruption caused by whistleblowing or mishaps when handling sensitive information. And then there is the problem of too much parliamentary interference undermining our negotiating position. Here we face a crucial test as regards our emergence as an independent negotiator. A balance will be found by trial and error.

One slightly tweaked solution, highlighted by the Institute for Government in this report, could be the development of a Canadian-style convention. On page 28, they note: "Canada has decided to expand parliamentary involvement in the ratification process through convention. In Canada, a new system was adopted in which the Government would table the agreement in Parliament for 21 days prior to ratification." The difference is subtle in that Canada affords a more secure window in which its parliament can scrutinise an agreement.

Being a constitutional cousin it makes sense to look to Canada for ideas on how to expand parliamentary involvement in trade policy. A convention might be a useful mechanism for us to work with. I also agree with the absence of a law requiring parliamentary ratification on the text of a trade agreement. Again it is one of those areas where sovereignty involves trade-offs. We can strengthen the role of the legislature in other, more creative ways without damaging our bargaining position or the credibility of our team of negotiators, who will need to learn by their own mistakes.

As I see it the main problem with the UK's constitution is a blurred separation between the powers of the executive (government) and the powers of the legislature (parliament). This is because the former comprises members of the latter. We have been left in a situation whereby parliament is used as a recruitment pool by the executive. Whips, government ministers, Parliamentary Private Secretaries and other MPs moonlighting in junior executive positions tend to vote robotically with the executive. Parliament's ability to hold the government to account, therefore, is much more limited than need be.

A new trade strategy which prioritises the role of parliament links to constitutional reform in that it can have a domino effect. Upon policy reconstruction, other departments can look to establish mechanisms which carve out concise roles for the legislature in terms of scrutinising legislation. This could help get us some way to to clarifying and further separating powers between the executive and the legislature. Rethinking the structure and efficiency of our constitution should be the name of the game and I see Brexit as a way of encouraging this.

There are opportunities to revitalise constitutional discussion right across the system, I am not just talking about trade. Brexit forces us to think about who we are and where we are going once again. I also think localism will emerge as an elephant in the room. The adminisrative burden on Whitehall will be immense even if we retain our EEA membership. Reshaping our fisheries and rural/agricultural policies will be monumental tasks in and of themselves. Devolution of powers, perhaps for the sake of unloading the burden and freeing up resources, could well be necessary.

Don't be surprised if Brexit leads to widespread system revamps in terms of recruitment upsurges, administrative systems and communicational pathways. Trade is cross-departmental by definition. We will need to carve out an effective horizontal format between government departments which facilitates direct communication and encompasses the necessary and relevant points of contact. This I would suggest might well extend to Committees represented by trade union officials and business leaders, all of whom will be invested in the policy consequences of pipelined trade negotiations.

By integrating Whitehall's departments we can ensure that negotiators have access to the feedback of industry and interest groups. There is no one way to do it but finding the right communication linkages will be crucial. Seniors in government will need to be briefed by working groups and from there the Government's Trade Policy Strategy Board Committee can be directed. Industrial leaders and devolved administrations will need to see sections of text for additional comment before negotiations are concluded. This will help to inform the demands of our new negotiating team.

But ultimately it is in the global arena that we will need to be most active. We hear talk of a global Britain leading the way in free trade promotion. There is merit to this idea but it will depend very much on where we focus our energies. Actions speak louder than words. Tariff reduction, for instance, is not a priority even if it was reciprocated by other countries, and if we stay in the Customs Union will not be viable anyway. If we want to bat for trade liberalisation then we will need to place the knocking down of regulatory (non-tariff) barriers to trade at the forefront of our strategy.

We can do this, as I have written elsewhere, by championing global initiatives designed to steer regulatory systems towards one another. Not all NTBs are actionable, given disparities in national laws, cultures and trade policies, but many are. UNECE's Single Window is an exciting development in modern trade which I am following closely. Its purpose is to simplify paperwork procedures for participants across supply chains into an integrated online interface. I use it just as an example, but these sorts of ventures are where we can support, or perhaps lead, trade facilitation efforts.

Britain already does play a role at Standard Setting Organisations, but it is limited by the aegis of the Common Commercial Policy. We have nonetheless demonstrated effectiveness as far as tackling corruption at the ISO and I do not argue we are totally alien to existing agencies. It will be a case of trying to figure out where our interests lie and what we can do to promote them. Sitting in discussions and voting with other countries matters. Funding research projects which inform technical standards matters. There are avenues which exist 'upstream' of Single Market and EU level for us to work in.

Whitehall will need to familiarise itself with the fact that regulatory protectionism is a hugely pertinent issue which has developed as a kind of knee-jerk response to low tariffs and exposure to international competition. A focus on tariff reduction will be a complete waste of time and resources. Relearning trade means discovering what is important and what isn't important to those involved in trade, and my fear is that those Brexiteers demanding a free trade utopia after leaving the EU are trying to steer an intellectually vulnerable government in the wrong direction.

Another point is that a trade strategy can only account for things we can control. We do not yet have an army of experienced negotiators and there is no available shortcut round this. We are not the world's largest market and have not traded independently since 1973. We will have ring rust and will need to take advantage of whatever necessary to aid acclimation to the global system, whether it be copy and pasting existing trade agreement text into our negotiating armoury or learning how to navigate international bodies and gain access to privileged 'rooms' and committees.

I take the view that in challenge there is opportunity. The current intellectual impasse affecting government departments and the ongoing governance struggles will continue for the time being, but they are not immovable or necessary obstacles. The vote to leave the EU was a vote for a domestic reset as much as it was a vote for a global reset. For the UK it is sink or swim time.

Thursday, 28 December 2017

The Customs Union is of minimal importance

In a letter sent to Jeremy Corbyn, Vince Cable and Caroline Lucas yesterday, Ian Blackford, the SNP's leader at Westminster, says the following:

“As we move into the crucial second phase of the Brexit negotiations, it is now absolutely vital that we have an effective cross-party effort to safeguard our membership of the single market and customs union. It is time for MPs of all parties to put politics aside and work together, in the national interest, to protect our place in the single market and customs union. Short of retaining our EU membership, that is by far the least damaging option, the best compromise, and the only way to protect jobs, incomes, and workers’ rights."

He is partly right and partly overdoing things. I am happy to see support for a softer Brexit, which I consider to be in our interests, but I don't get too carried away with interventions of this kind. The thing about a soft Brexit is that it is more likely to be brought about by logistical reality than ever it is the views of parliamentarians. The UK must leave the EU, must do so on uniform regulatory terms and must not undermine the Good Friday Agreement. Unless we pull something remarkable out of the hat, to me this means we will stay in the EEA.

Blackford is correct to warn against leaving the Single Market. The Single Market gives us not only regulatory conformity, but (more importantly) the assumption of regulatory conformity. This assumption we retain thanks to a carefully constructed behind-the-border enforcement strategy, where checks take place at the point of production. European agencies coordinate with governmental departments in order to ensure that the necessary standards are being adhered to. This we call market surveillance and is the reason for the absence of bureaucracy between the borders of member states.

It is also protected by a myriad of different defensive mechanisms. In order to export a car into Europe, for instance, third countries must be granted with EU Whole Vehicle Type Approval (WVTA). The UK's Vehicle Certification Agency explains that this device is designed to ensure that vehicles "meet relevant environmental, safety and security standards." This is an example of a non-tariff barrier, and leaving the Single Market framework could quite easily mean abandoning these approvals, as explained by Patrick Keating of Honda at a recent Industrial Select Committee.

It is for reasons like this that job warnings are entirely appropriate. Barriers to exporting will hurt productivity and an enforcement strategy which returns to the point of the border will cause break downs - some temporary and some permanent - in our supply chains. Just in Time (JIT) supply chains, where importers import parts as and when they need them and not in bulk (so as to cut storage costs), would find themselves particularly at risk. These are issues which are not easily dealt with as a third country, even with Mutual Recognition and Customs Cooperation agreements.

Where the likes of Blackford are wrong in my opinion is in placing so much importance upon the Customs Union. Thinking back, the Customs Union was barely mentioned during the referendum campaign. Vote Leave had nothing interesting to say about it and neither did any of the other Leave campaigns. Occasionally, individual politicians would reference the benefits of leaving it but nothing of substance was discussed. For this and other reasons, therefore, the Customs Union has remained largely uncharted territory, with few understanding its functions and scope.

In principle a Customs Union is a trading arrangement which comprises of a Common External Tariff (CET) and tariff-free trade between the countries inside. There are 16 Customs Unions in the world if we count the three separate agreements the EU has with Turkey, Andorra and San Marino. Others include the Eurasian Customs Union and Mercosur (in South America). Customs Unions tend to be operated amongst countries in close geographical proximity to one another and are a device used for strengthening both political and economic integration.

In the case of the EU, the Customs Union is no longer the reason for tariff-free trade between member states. That burden is now the competence of the Single Market, specifically Article 10 of the EEA Agreement, which states: "Customs duties on imports and exports, and any charges having equivalent effect, shall be prohibited between the Contracting Parties." Herein lies the major difference between Customs Unions in general and the EU's Customs Union. Hence the emboldened distinction between 'the' and 'a'.

The EU Customs Union's only residual feature is the CET. It is not the centrepiece of the EU's customs checks and information-sharing systems and it is not the mechanism which prevents bilateral UK trade negotiations. These things relate to the Union Customs Code and the Common Commercial Policy respectively. The external wall of tariffs which surrounds the EU does have a restrictive influence on the independence of British trade policy, in that it renders certain tariffs unalterable, but not all trade deals are tariff-relevant. Some focus on services, customs or Mutual Recognition.

Another point about the significance of the Customs Union is that it is replicable on a sectoral basis. We can copy over the CET on agricultural or alcoholic imports, for the sake of argument, or we could do what Turkey does and implement the CET on industrial goods. The Single Market cannot be replicated from the outside. Monaco also has a unique arrangement whereby it is inside the Customs Union thanks to a bilateral agreement with France allowing the EU to consider it French territory. This is not a precedent for the UK but I mention it because the facts are always interesting.

I favour leaving the Customs Union. It's protectionist and does, I rather suspect, harm consumers. Both sides of the Brexit debate greatly overstate the benefits and drawbacks of the Customs Union. We don't need to be inside it, but the gains from leaving are modest at best. Tariffs have plummeted globally and will continue to do so. They are much less of a problem to deal with than regulatory protectionism, which as we have discussed is the most important trading issue facing the world. We are essentially playing a game of Whac-a-mole: as tariffs drop, non-tariff barriers grow.

This has been the knee-jerk reaction of producers around the world as they have been exposed to more and more international competition. This is the reason I consider tariffs to be relatively insignificant. In principle I favour reducing tariffs, but I don't support dropping our tariff walls to zero post-Brexit because it will leave us with less leverage when negotiating with trading partners as an independent country. The unilateral free trade types view leaving the Customs Union as a passport to a free trade utopia, but a hard look at things tells a completely different story.

Such people also ignore the primary benefit of being part of the EU's Customs Union. I don't support being in it but I believe in having at the very least an honest debate about these things. Selective ignorance won't help readers and it certainly won't help me. Where the Customs Union does help us is in overcoming a Rules of Origin hurdle when exporting to the European market. That is, we do not have to prove that our goods originate from the UK in order to qualify for the tariff-free trade I mentioned earlier. There is quite a lot in this so it is worth unpacking it bit by bit.

Firstly, by Rules of Origin we mean the criteria necessary to determine the national source of a good. In practice, if the UK wants to take advantage of preferential tariffs agreed in trade agreements (such as in the EU-Korea FTA), it must prove that its goods come from the UK or have had sufficient work done on them in the UK. Sufficient work means any amount of processing above a certain percentage threshold agreed within the relevant trade deal. The proof is provided in the form of a document, whose text is determined by international conventions and customs authorities.

EU members don't need to carry out origin checks between one another because they know that anything that has entered a member state from outside the EU has filtered through the external tariff wall. That level playing field, crucial to the integrity of the Single Market, is therefore maintained. The CET is wrapped around every member state to eliminate the possibility of circumvention by a third country exporter. A good originating from the UK on its way to France is on equal footing with a good originating from the United States and heading through the UK on its way to France.

EU member states do operate checks on origin on goods coming from third countries. There will be a swift check to establish the exporting country and a further check, again through provided documentation, to see if the exporter qualifies for preferential tariff treatment facilitated by whichever trade agreement applies to the countries involved in the exchange. Our ports are not bogged down by these procedures. Checks for origin represent very light border friction taking up but a few seconds of transporting time. Thankfully they are smooth and not cumbersome.

Beyond this we have cumulative Rules of Origin, or what is called cumulation. In essence this is about recognising the origin of processing inputs, like components. Not the good itself. I mentioned earlier that the UK has to prove that 'sufficient work' has been done on a product it is exporting in order to qualify for preferential treatment. This is what I refer to now. In some cases, our exports to the EU will not be made entirely in the UK. Our cars, for instance, comprise of on average 41% local content, meaning 59% of the processing inputs (parts) were sourced from abroad.

There are three types of cumulation: bilateral, diagonal and full. FTAs routinely include agreements on bilateral cumulation. This means that country A agrees that processing inputs sourced from itself can be counted as being from country B by the time that good is exported from B to A. Diagonal cumulation is the same, but with added countries, like country C. A, B and C must all have FTAs with each other and agree amongst themselves that processing inputs from A incorporated into a good in B can be exported to C as if they all came from B. And the same for the other two countries too.

Diagonal cumulation is covered by Protocol 4 of the EEA Agreement and by the PEM Convention, which I believe the UK should rejoin post-Brexit. These devices simplify our RoO hurdle after leaving the Customs Union by facilitating qualification for preferential tariffs amongst the contracting parties. The danger of not having a cumulation agreement, if you are still wondering, is the same issue I mentioned above: countries can circumvent higher tariff walls by exporting into the target country through other countries (with whom they enjoy preferential tariff rates).

Full cumulation, on the other hand, is a slightly distinct arrangement. It is about including defined third countries completely outside free trade areas to participate legally in the processing procedure. So work done in a country outside of a free trade area can effectively count towards the production of a good. There will again be a percentage threshold, so the input from outside the free trade area (or web of FTAs) must be limited or it will not count as originating from one of the countries within the free trade area.

Cumulation relates to the Customs Union in that once we have our own schedule of FTAs, with low or zero tariffs on certain goods, there is potential for the UK to be used as the go-between country for exploitative exports seeking to circumvent the CET. This is really the important point. Single Market or not, we can sign our own FTAs and once we get off the ground and have our own distinct trading network in place it will become more of an issue. Rules of Origin is already an obstacle for our exporters as regards our trade with the rest of the world. We are simply extending that obstacle.

As for tariffs, if we stay in the EEA in some existing or bespoke form, we will have tariff-free trade, but not on all products. Article 8.3 of the EEA agreement states the agreement applies to “products falling within Chapters 25 to 97 of the Harmonized Commodity Description and Coding System”, i.e. manufactured goods only. Chapters 1-24 of the Harmonised Commodity Description and Coding System covers agriculture & fisheries products. The reason for these sectoral tariff differentials is that the CFP and CAP are not part of the EEA acquis. They are solely EU mechanisms.

The short of all this is that in principle the Customs Union doesn't matter very much. It doesn't benefit the economy in any noticeable way and doesn't have material benefits for citizens. It no longer facilitates tariff-free trade inside the EU and doesn't prevent bilateral trade negotiations (as other nations in Customs Unions demonstrate). But there is a caveat. It just so happens to be the case that the UK needs the Customs Union a little more than does the average EU member state. Because where it does have importance is in relation to the preservation of a frictionless Irish border.

If Northern Ireland pulls out of the Customs Union (and therefore the CET), it can be used as a back door for goods getting into Ireland at cheaper tariff rates. Thus, the EU would require physical infrastructure on the border in order to deal with origin checks. One way for the UK to avoid this scenario is to commit to aligning its tariff walls - also known as staying in the Customs Union. Initially I was under the impression this wouldn't be possible, but there now appears to be scope for it. This would mean sacrificing some of the independence of our future trade policy.

We could also have an Ireland-specific solution and move the customs border to the Irish Sea, but I don't think the DUP will accept divergence of this kind between Northern Ireland and Britain. They have been clear about the importance of Northern Ireland leaving the EU on the same terms as the rest of the UK and I consider this perfectly reasonable. The third option is to undermine the GFA completely and press ahead with customs posts. This is politically very risky even if the peace process has matured in a stable and promising way. In doing this we would be playing with fire.

This triad of options will form much of the battleground in the second phase of the Article 50 process. Christmas provided us with a welcome break from proceedings but when things resume they will be more hotly contested than before. Phase two is where the detail comes in. Haziness and broad outlines no longer suffice and I think the central theme of the coming months will be our place in the Customs Union. Things are about to get very interesting indeed.