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.

Tuesday, 27 February 2018

Intelligent naivety

Slowly, the obsessives in Brexit's intellectual domain are arriving at a general consensus of understanding as to the features of the EU's Customs Union. It has been a frustrating journey, partly because certain people who claim to be expert on these issues did an inadequate job of informing the necessary players prior to the referendum result and so politically active circles have lagged behind ever since, hurrying attempts to grasp an important pillar of this debate. In this we thickos have been at pains to make up ground and inform others.

This blog has covered the basics. We know what a customs union is, we know that it restricts the independence of our trade policy but does not prevent the signing of all trade deals, we know that the Customs Union eliminates a Rules of Origin hurdle when exporting to the EU and we know that we leave it when we leave the EU (post-transition, presumably). Thankfully there is less to grapple with than the ignorance of our politicians appears to imply. There are, though, a couple of much smaller, residual issues left to tackle but I will save them for a later date.

The latest development in the national customs union debate is yesterday's announcement from Jeremy Corbyn. His party claims that it supports full membership of both the Single Market and Customs Union during the transition period and, beyond that, "a new comprehensive UK-EU customs union to ensure that there are no tariffs with Europe and to help avoid any need for a hard border in Northern Ireland. But we are also clear that the option of a new UK customs union with the EU would need to ensure the UK has a say in future trade deals."

There are quite a few claims here worth commenting on. To begin with, the guarantor of tariff-free trade across the EU and Single Market is Article 10 of the EEA Agreement. For the Efta/EEA states the omissions of agriculture and fisheries from the provisions of Article 10 are not inevitable. They are merely the result of domestic political policies, like vast disparities in agricultural subsidies leading to a notable imbalance in competitiveness. It is highly dubious for a politician to contend that the Customs Union ensures tariff-free market access.

On the point about the Irish border, Corbyn chose his words quite carefully. To "help" avoid a hard border in Northern Ireland rather emphasises the fact that a customs union alone does not bring about a frictionless Irish border. A customs union deals with an origin check, in which certificates and invoices are scanned by officials at customs posts, and enables one country to determine whether the relevant tariffs have been paid on goods. Customs unions do not deal with sanitary and phytosanitary checks, which require physical intervention, and other general checks on the standard of goods.

These controls are removed by the Single Market, the mechanism which enables us to enjoy a behind-the-border enforcement regime and the absence of Border Inspection Posts (BIPs) and Community Entry Points (CEPs), which accommodate controls against third countries on animal and plant products respectively. Typically these control points are merged into one facility, such as in the case of Dunkirk, whose expansion in 2009 was privately funded to the tune of almost £4m. Leaving the Single Market will mean agricultural exports and imports are diverted through these checkpoints.

In addition we have a VAT hurdle to tackle, which becomes a border issue precisely because the regime is likely to transition from 'acquisition' VAT to 'import' VAT (exercised by Norway), where goods are held at the border until proof of VAT payment has been confirmed by customs authorities. Usually there is scope for mitigating VAT procedures at the border. Pre-arrival declaration systems, where importers pay VAT away from the border periodically subject to rigorous auditing of accounts, can be introduced by HMRC after adequate bureaucratic preparation has taken place.

There is some dispute over whether or not the EU will allow the UK to continue its participation in its VAT area, in the way that it does the Isle of Man. I personally think this is possible, especially if VAT proves to be the last area of contention for the border. The EU is known for its ability to fudge relationships and I don't see any particular reason why Brussels would be stoically inflexible here. VAT is not a huge issue and can in large part be dealt with electronically. If we can remain in the EU's VAT area, this would eliminate the border issue but would also require continued ECJ submission. It's a trade-off.

From a logistical and analytical perspective, the last sentence in Corbyn's customs union policy announcement is the trickiest. What we know for sure is that there will be no UK veto over future EU trade negotiations. There is no political will for this in Brussels and no precedent for it in the EU's other customs union relationships. It is out of the question. Whether we can influence the shape of future trade negotiations is unclear. We would, of course, only need a vested interest in contributing to discussions over changes to tariffs, as this would be where our trade policy would be restricted.

I believe that meaningful influence is highly unlikely. Third countries may in some cases request that the UK partake in discussion, but I cannot be sure about where or why. At best I might suggest that a consultative mechanism could be established to enable the UK to leave 'comments' on proposals and negotiation developments in a similar fashion to EEA legislative processes. They would have limited impact, naturally, but such is the very nature of customs union participation that the independence of trade policy is infringed upon. I am therefore clutching at straws to find ways of supporting Corbyn's aim.

Turkey, for instance, forever trails EU trade negotiations. 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. Notice, importantly, that Turkey is not guaranteed to receive reciprocity from third countries after obliging to apply these tariff concessions. Labour's new policy could well see the UK arrive at an identical position.

In this sense I think the change in party policy is logistically naive. Politically it is clever in its ability to tempt Tory remainer loyalists to vote against the Government and join opposition seeking to soften and water down Brexit. It might well be worth describing Labour's shift as intelligent naivety. Whether Corbyn and allies believe that Britain could influence EU trade deals whilst parked inside a parallel customs union is really not important. The Tories are the governing party and the pressure is now on Mrs May to pass crucial legislation, avoiding the prickles of thorny amendments.

Thursday, 22 February 2018

Quickie fantasies

One of the most pervasive fantasies of Brexit discourse is the idea that a Free Trade Agreement between the EU and UK would be a matter of unique simplicity. The justification for this claim tends to be that since both sides start from the point of regulatory equivalence and harmonised tariff regimes, reaching agreement would be straightforward and quick. This is a falsehood but nonetheless remains a very easy trap to fall into. Today, Andrew Bridgen, Tory MP for North West Leicestershire became its latest victim, as he told Business Insider:

"A free trade deal can be sorted very, very quickly. It isn't complicated is it? It's the most straightforward trade deal you could ever do. The free trade deal we could do with the European Union will be the most straightforward ever in history. We've got full regulatory equivalence. It's just a matter of what you want tariffs on. It could be done in an afternoon."

We all know that the best and most effective lies are those which contain a grain of truth. Though the term 'lie' may not be entirely appropriate here, the principle is more or less the same. Bridgen's assertion is a prediction, but it is one which will not and cannot come true. It is true that both sides start from the point of equivalent regulatory systems. This does not only mean adhering to the same set of rules. It also includes joint participation in regulatory agencies, the second of the important characteristics of regulatory alignment. But the trap lies just behind this truth. 

To lay the groundwork here for a moment, it is important to remember two things. Firstly, the UK can only enter into FTA negotiations once it has acquired the status of a third country. The withdrawal process does not include scope for concluding an FTA and nor does it come with the necessary time frame. We begin negotiating an FTA after we have left in 2019, which means during the transition period. Secondly, the looming FTA between the UK and EU is the most unique in the history of international trade. It symbolises an unparalleled resetting of tightly knitted economic ties. 

The way to begin disproving Bridgen's claim is to sit back and think about the purpose of a UK-EU27 FTA. The answer is actually pretty simple. It would be to establish a difference from the terms of EU membership, just as it is with other trading partners. A third country UK would operate a symmetrical regulatory and tariff regime, enjoying the terms outlined by the transitional arrangements without the internal democratic representation. The present volume of trade between the EU and UK will make this painful, but equal treatment rules are fixed in place and upheld for a reason. 

That the EU is protectionist is deliberate. It has created something worth having and preserving integrity is vital. If you want in, you bring obligations with you. No exceptions. If we refer to the EU as a 'protectionist racket', which it is, we need to remain consistent in our criticism and not chop and change this critique when it suits us. If we attempt this we will only be fooling ourselves and cheapening an already insufferable quality of debate. We must face up to the fact that in heading into negotiations with the EU we are swimming upstream in our fight for comparable market access.

Unlike ordinary FTAs, which seek to harmonise regulatory architecture, reduce tariffs and promote increased volume of bilateral trade and economic growth, this FTA would be somewhat different. Beyond tariff re-reduction, it would effectively seek to ensure that market access reached a plateau or compromise. It would start with equivalent trading terms but would evolve effectively a fight between efforts from the EU to forge a separation, and efforts from the UK to exploit the EU's right of reservation on its services MFN clause built into CETA. 

Examination of CETA's scope on services reveals how unimpressive it really is. This is the kind of sticking point where politicians will begin to appreciate more strongly the benefits of Single Market membership. Canada can pursue even greater services access, but in return it must shed much of its rulemaking apparatus and adopt EU requirements. The UK won't have the regulation adoption problem, it will have the opposite problem: we can meet their demands but the fight begins when Brussels realises it cannot overshare and be too generous. In trade, precedents matter. 

The EU knows that its relationship with the UK is not the be-all and end-all of its trade policy. For them we represent a 15% chunk of total trade, for us the figure is approaching 50%. Brussels must therefore reassure remaining members that it is in their interests to stay part of the club. It can and will move on. This is where the bargaining power favours the EU, a vastly bigger market with a significant experience leverage on a panicked and disorganised Westminster. It is also why I decided the best way of leaving the EU was to depart with a guarantee on EEA membership. 

I would also make mention here of the fact that regulatory equivalence does not and will not prevent border controls. As I have explained in more detail elsewhere, the main structural difference between an FTA and the Single Market is the nature of the surveillance and enforcement regime. In other words, where the checks come in. An FTA between the EU and a third country sees controls, whether they are customs checks or SPS checks (requiring physical intervention), reintroduced at the border. This is because the EU has no jurisdiction in the internal workings of a third country. 

It cannot organise a behind the border approach to controls in the way that it can with its members. The level of checks will prove bothersome in FTA negotiations and our negotiators will want as soft a border as possible. By virtue of the location of the enforcement regime, FTAs can't produce frictionless borders. This will have costs to supply chains and, in particular, UK based companies operating Just in Time production regimes. Parts required quickly will stumble their way through procedures not previously necessary. Arguments will break out here too as the UK seeks ways of easing the burden on its borders.  

Bridgen's absurd naivety went largely ignored by commentators today and this is a worrying sign. We are just months from the conclusion of the Article 50 period and still we have elected officials barely able to understand the basics. I can only despair when I look at the intellectual vacuums which grace both our major parties. Labour's new policy announcement on the Customs Union is a whole other post in and of itself. And the sad part about all of this is that those of us who are well-informed and care are not able to take a lead on debate. We are firefighters, running around in circles correcting the ignorant headline-grabbers as we go.

Wednesday, 21 February 2018

Diverging from reality

Some readers will by now have come across this Julia Hartley-Brewer interview with Steven Edginton in which she outlines what her approach to post-Brexit trade with the EU would have been. The specific, 90-second segment I want to address can be watched separately here. In the clip, Ms Hartley-Brewer explains that the government's negotiating 'strategy' ought to have been to tell the EU that "we want tariff free access and you can have tariff-free access to us." She explains that if the EU wanted to respond with punitive tariffs that would be "entirely their choice."

This is not accurate or legally workable. And fortunately it is not difficult to identify the problems with it. The root of the ignorance on display here is a failure to understand the consequences of becoming a 'third country' to the EU, as well as the application of international trade law. A third country, of course, refers to a non-EU member and is a necessary and inevitable consequence of leaving the EU and EEA. We acquire this status upon leaving and it is crucial this is understood. Acquisition of third country status has important ramifications for trade.

At the heart of the international trading system is a commitment to equal treatment. At the WTO this is called 'Most Favoured Nation' (MFN). MFN has emerged as an important pillar in global trade and acts as a barrier to undue discrimination and a promoter of liberalised trade, harmonised standards and fairness. It requires that WTO members apply the lowering of a trade barrier, such as a tariff reduction, to all other members. This applies to both goods and services. MFN is so crucial that it takes point in Article 1 of GATT, Article 2 of GATS and Article 4 of TRIPS, the WTO agreement on Trade-Related aspects of Intellectual Property Rights.

When the UK becomes a third country to the EU it inherits existing EU MFN schedules. Schedules cover goods and services. There is no such thing as a tariff schedule, though I may use the term from time to time for the sake of ease. Within goods schedules are tariff rotas, broken down into product categories. Typically lower MFN tariffs are found attached to industrial goods, averaging at between 3 and 4%, and higher ones in the agricultural sector. Tariffs on meats, cereals, vegetable oils and milk can be especially punitive, often reaching upwards of 30%.

Let's use beef as an example. In the case of beef, the EU-wide ad valorem, MFN tariff is 12.8% plus a charge of 3 euros per kilo. Currently 92% of the UK's beef exports go to the EU, with large proportions sent to France, Ireland and the Netherlands. For obvious reasons these exports are not met with tariffs of any kind. Upon becoming a third country and after the EU adheres to its equal treatment commitments, 92% of the UK's beef exports are automatically hit with the standardised ad valorem MFN tariff of 12.8%. It is not a question of the EU making a choice.

I am deliberately working with an agricultural example because it is in this sector that we see more clearly the impact that tariffs can still have. I tend to argue that tariffs are not the issue, but this is not uniformly the case. They are not problematic for most sectors, and indeed we do see continual efforts to bring about further reductions. These include international agreements like EBA and GSP (or GSP+) schemes, explained here. What I am trying to build is a picture of what slotting into third country tariff regimes will, not could, mean. Hartley-Brewer's element of 'choice' is totally irrelevant.

Interestingly, EU members are able to discriminate in favour of the UK as a fellow member, and this would appear to breach WTO rules on equal treatment. But it does not, as there are important exceptions. WTO members are permitted to move 'beyond WTO' (offer preferential market access) if and when they enter into a Customs Union or other Free Trade Area, such as an FTA, with another member. These exemptions are granted under Article XXIV of GATT, and being a customs union, EU member states are able to offer each other preferential market access in the form of zero tariffs without breaking rules.

These exemptions are important because they effectively encourage moves towards promoting freer and freer trade. But there is a catch. The UK will not leave the EU with a Free Trade Agreement, as this is not plausible, and so must rely solely on the MFN terms given to other third countries (not in a customs union or FTA with the EU). An FTA with the EU would take years to negotiate in spite of regulatory equivalence for the very fact that the whole purpose of the FTA would be to establish separation from the terms of EU membership.

As to Ms Hartley-Brewer's assertion that we can offer the EU tariff-free access, this is in principle true. We can unilaterally disarm, but it needs to be remembered that this would become the yardstick for our new MFN schedules. This means that we would need to apply the same treatment to all other trading partners for the sake of not falling foul of equal treatment rules. To one and to all. This will prove to be one of the most important lessons for the UK to learn as a newly established customs entity.

Total unilateral tariff-free trade is not recommended by industry, politicians or trade experts. In lowering our walls we would find ourselves with less to negotiate with. Incentive would be lacking for other countries to enter into improved bilaterals with us and we would be spending all of our time chasing other countries for reciprocity with much less to offer them in return. We would look weak. And this is without mentioning the costs to well-protected domestic producers, which could backfire for the government if certain sectors overwhelmingly vote Tory. These considerations will be pondered.

Enforcement of the core principle of equal treatment can be arduous. Dispute settlement is long-winded and involves many review stages. Lodged disputes can take years to settle. What we do have, though, is a system of checks and balances, in which any divergence from MFN undertaken by countries which results in undue discrimination is met with diplomatic chaos or trade wars. For the EU, making an exception for the UK would be impractical. The Customs Union and Single Market operate together and protect European markets for a reason. They are not to be undermined or played with.

One of the reasons that I ended up proposing a Norway-type model is that such an arrangement would allow us to circumvent standard third country protocols. In effect we would be able to leave without becoming a third country. In this we would have protected our place in the Single Market, more or less escaped political integration and avoided the hassles of technical and other non-tariff barriers to EU trade which wait for us on the horizon. Forgive the wretched expression but it would have been as close to 'cake and eat it' as we could possibly have gotten.

Tuesday, 20 February 2018

An important admission

Without meaning to dig up the issue of regulatory divergence yet again, I thought it was extremely important that David Davis made mention of the globalised nature of regulation and standard setting in his Vienna speech this morning. There he reminded business leaders that "the future of standards and regulations – the building blocks of free trade — is increasingly global", and that "by leading from the front and setting standards, you can drive innovation and enable new technology to thrive." This is an important new direction for the Brexit debate to head in.

I am happy to hear David Davis mention this because it has thus far been one of the detail elephants in the room. Important too was his assertion that standards form the building blocks of 'free trade'. What we call free trade is most effectively encouraged by harmonising regulation, and where residual tariffs are a problem, by the necessary reduction. A new standard can bind together two former diverging standards into a new, harmonised one, which in turn facilitates trade by freeing supply chains from a technical barrier to trade.

One thing I need readers to understand is that as far as trade is concerned, regulation itself is not the problem. The problem is differences in regulation, and in finding ways to reconcile divergent regulatory architecture. That all starts at the agencies referred to in Davis' speech. Importantly, not all non-tariff barriers to trade (usually regulatory) are what is called 'actionable'. A 2013 study by the Centre for Economic Policy Research concluded that about half of all present non-tariff barriers to trade are actionable, meaning they can be eliminated for the sake of liberalising the conditions for trade.

I describe Davis' comments as a new direction for the national debate because these points have largely escaped Brexit's public domain. We have spent so much of the past few years complaining about "EU rules" and "EU red tape" that we have failed to see a bigger picture. Even trade experts have often been guilty of casting their gaze too narrowly and focusing solely on the influence of the WTO. As far as I have seen they have not really acknowledged the activity undertaken horizontally of the WTO, in regulatory agencies seldom mentioned but ultimately vital to trade discussion.

Of these, UNECE, the ISO, CODEX, OECD and WCO (World Customs Organisation) are the most influential. Often what is seen on the ground as public policy derives from action taken at these forums. The shape of the headlights on your car, for instance, is determined not in Brussels but in Geneva, by UNECE 'working parties'. Incidentally part of the reason for the non-existent trade in cars between the EU and USA is that the Americans refused to adopt UNECE standards which would have forced US-based car companies into widespread redesigns.

During the referendum campaign almost no attention was paid to the origin of technical standards embedded within EU law. This is basically because it is not interesting. But, as with most boring political detail, it is important. The only regulation I remember being raised was the infamous 'bent banana directive', which was offered as a sort of meme to point out the ludicrousness of some EU rulemaking. Of course, the trouble here was that the EU is not responsible for the aforementioned regulation. That burden lies with Codex Alimentarius, a major agricultural regulator.

Mundane though the standard is (which bans fruit of abnormal curvature or damaged by pesticides and contaminants), it is interesting in that it captures quite neatly some of the intricacies of the globalised regulatory agenda. What we begin to see is that hidden agencies, granted their regulating authority by the WTO, are responsible for creating many of the rules governing trade systems. These are the arenas we will need to learn to re-assimilate ourselves into after Brexit. They are where much of our manoeuvring will need to be concentrated when trying to influence new global standards.

Towards the latter end of 2017 I wrote this blog post (read, incidentally, by two current cabinet ministers), which detailed the two major reasons why there will be no Brexit-induced regulatory sovereignty. The first reason was the crux of what I have discussed here, and the second was the inconvenient fact that we find ourselves alleyed between two regulatory superpowers in the EU and United States, who just so happen to be our two largest trading partners. We cannot converge with both, because the regimes are fundamentally very different. We have a choice to make.

My use of the term 'regulatory superpower' merely reflects the EU's important role in influencing international standard setting. To add another layer to the bent banana fiasco, the CODEX standard of 1997 is itself based on an originating EU standard constructed in 1995. So, in a nutshell, what we have before us is a vast matrix of organisations engaged in a complex interlocking of rulemaking. Often, global forums will take the nucleus of a domestic standard, often from the power responsible for the science and research which went into forming it, and transpose it into a global one. A two-way street, so to speak.

Both Remainers and Leavers have something to learn from all this. The globalisation of standard setting undermines two key arguments on both sides of the referendum debate. It rubbishes the claim that the add-on Single Market states (Norway, Iceland and Liechtenstein) have no say in EEA rulemaking, and it demolishes the argument that Brexit will bestow upon us newfound regulatory sovereignty. I have been at pains to point these things out, with almost no success given how little attention is paid to the issue of regulation by anybody in Westminster or the legacy media.

If we build on Davis' important admission we may be able to enjoy a more balanced and grown-up debate about trade in the UK. I know the whole topic is dry and does not wet the appetite in quite the same way that zero tariff fanaticism does. But the detail is important. The work achieved at global level, whether it be setting a labelling standard or a standard on car tyres, facilitates enormous amounts of trade. International cooperation is the name of the game and Brexit Britain will need to recognise where its resources and diplomatic energies are best spent. Today was a welcome step in a positive direction.

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.