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.

Saturday, 23 December 2017

Remember, we're leaving a Passport Union

The Home Office have announced that on Brexit, British passports will revert to their 'iconic' blue. I don't much care for the chosen shade but the symbolism here is important. In so far as they exclude the words 'European Union', I rather agree with the Prime Minister that our new passport will be an expression of our newfound independence and sovereignty. It is the principle which counts, after all. Not the colour. The current version is above all else a reminder that we are citizens of a political union, and an update will be quite the opposite.

Having grown up with passports I always remember as being burgundy, a change of aesthetic will prove somewhat refreshing, even for its own sake. It was always the 'European Union' part which bothered me most, for its legal and political connotations. It does, I concede, symbolise the freedom to work and (in many cases) live in other EU countries, but it also to me captures our loss of national independence and forced homogeneity.

Remainers who believe the colour is important to us are missing the point. It is about imagery and what it means to be a British citizen, not an attempt to recreate a past era which will not return. In fact, as I recall, quite a lot of people currently in their 40s will remember that many past passports were black and not blue, and this subgroup of Leavers aren't crying out for a black passport because it simply doesn't matter to them. The cost, too, is not an issue. The timing of the redesign has nothing to do with Brexit. The cycle is set at five years for security reasons and was approaching regardless.

But beyond the issue of what the passport represents, there is a wider and much more important point to be made about EU passports. The EU is not just a Customs Union, it is also a Passport Union, complete with standardised protocols covering the recognition of third country passports and additional travel documentation specific to each individual country. By third country, of course, we are referring to non EU (and EFTA/EEA) nationals. Switzerland, through bilaterals, does not count.

The basis for the Passport Union came shortly after our entry into the EEC, at a European Council meeting in December 1974. The then heads of government agreed: "A working party will be set up to study the possibility of establishing a Passport Union and, in anticipation of this, the introduction of a uniform passport. If possible, this draft should be submitted to the Governments of the Member States before 31 December 1976. It will, in particular, provide for stage-by-stage harmonization of legislation affecting aliens and for the abolition of passport control within the Community."

A further Council meeting in June 1981 "requested that the possibility of creating a Passport Union and, in advance, the introduction of a uniform passport, be examined", with the intention "to promote any measures which might strengthen the feeling among nationals of the Member States that they belong to the same Community." Basic parameters were here outlined concerning the inclusion of languages and personal information, a serial number and the date by which the harmonised passports were to be introduced.

The Passport Union was then updated by a further resolution in June 1982 which better clarified the physical nature of the passports, including watermarks, page-specific lamination and, of course, cover and page colours. The resolution says "The colour of the cover of the passport introduced by each Member State is as close as possible to RAL standard 4004 (Bordeaux red - violet) laid down by the German Standardization Committee." This appears, therefore, to be a recommendation. In 1995, after the signing of the Maastricht Treaty (which saw the EEC become the EU) the words 'European Community' were replaced with 'European Union'.

Alongside the harmonisation of Community passport standards was developed strict criteria for the recognising of international passports and relevant additional travel documents. This is where Brexit makes things a little trickier than just fussing about the colour of a cover. Assuming the UK leaves the Single Market and therefore becomes a third country, it will formulate the design of new passports in accordance with the International Conference on Passports, Customs Formalities and Through Tickets'. Also known as the Paris Conference.

This League of Nations agreement was signed to outline agreed standards which would facilitate international passenger travel. Annex I provides us with passport design specs and information requirements, still used today as the basis for their production. The Conference, though, has nothing to do with a nation state's right to establish distinct criteria for the recognition of travel documents as regards nationals from other countries. We have but a uniform format for design and standards for diplomatic passports but individual states retain the right to choose which documents they recognise.

In the case of the EU, a list has been compiled which highlights recognised travel documentation accompanying nationals from third countries. The list was established in conjunction with Decision No 1105/2011/EU and can be seen here. For a third country national, their ability to enter the European Union relies on the carrying of a document which appears on the list. This doesn't seem too complicated a concept to me. Notice that the UK is not on the list because, as an EU member, it is not a third country.

How this list relates to the UK in future will depend upon the terms of withdrawal. My gut feeling is that we will not leave the EEA even after the transition period, in which case we will not be a third country. But it is certainly a possibility, and in such a case we would have to join the list in some fashion. In such an event, the issue would be when and how this would be clarified. EU member states contribute to the list by informing the Commission of what they are and are not prepared to accept as valid travel documentation.

If the UK becomes a third country, member states will need to collaborate on what documentation they recognise as acceptable from British nationals entering their territories. It is entirely possible that this is agreed upon within the transition period. I can't know for sure because there is no Brexit-like template or case study with which to work. It is largely speculation at this stage. What will complicate matters is a scenario in which visas are reintroduced, given our free movement red line. If this is the case, the terms under which visas are issued will require extensive consideration.

Transitional arrangements, whereby current passports and documents are recognised and phased out into a new regime, will probably be necessary. Other documents, like repatriation certificates and refugee travel papers, may also need to be factored into discussions. I don't mean to bring doom and gloom to an otherwise lighthearted discussion about passports, but reality will need to be engaged with one way or another. And of course, like so many of our approaching concerns, this issue simply disappears on retention of EEA membership.

Thursday, 21 December 2017

Regulatory protectionism is the real issue

During last year's referendum campaign I argued back and forth with liberal minded folk about the impact on trade of leaving the European Union. Quite often the neoliberal and Lib Dem types would argue that Brexit would lead to a more protectionist trade policy and a notable expansion of the jurisdiction of the British state. Given the focus on borders and reinvigorating British industries, I thought this was a reasonable argument.

Of course, back then I knew very little, but what I did know was that the EU - and particularly its Customs Union - was protectionist. Markedly, in fact. I don't like the Customs Union for this reason. Its purpose has always been to act as a precursor to political union and nothing much more. I maintain that other than ironing out a Rules of Origin hurdle, it doesn't have a hugely positive influence on our trade or economy. If we protect the Single Market, all we need is a customs agreement covering RoO and agri-food tariffs and we can move on from it quite seamlessly.

It is here worth remembering that whilst in principle a Customs Union facilitates tariff-free trade within itself, in the case of the EU this does not apply. In 1994, the Single Market took control of this particular competence by means of 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." The only residual feature of the Customs Union, therefore, is the external tariff wall.

My point to those people worried about protectionism was that we could lower tariff rates outside the Customs Union, which is perfectly true (I carried this vein of argument through the campaign and out the other side, before realising earlier this year where our real priorities lie). Post-referendum this sentiment has grown into a quasi-obsession. The idea must be to unilaterally drop tariff walls otherwise we will not get the benefits of Brexit. I am of the view that in this we are setting the bar remarkably low and, in actual fact, focusing entirely on the wrong thing.

The problem with the argument is that it is based on something which is pretty insignificant. Protectionism is most commonly deployed through regulatory means and not with duties. Regulatory protectionism is interesting in that it is widespread but largely ignored, creating a kind of perfect storm scenario. In any given sector, the focus is always placed upon fiscal protectionism and not the wider issue. The broad ignorance of trade issues in Britain is reflected heavily by its pointless tariff fixation. It has to stop.

Michael Gove yesterday warned that he is not in favour of unilateral free trade as far as agricultural imports are concerned and would protect farmers if a WTO fallback was essential after Brexit. He told the DEFRA Select Committee: “My assumption and my preference would be we would maintain tariffs in order to ensure we did not have the sort of change occurring in agriculture which would lead to disruption which would be unhelpful for reasons of continuity of supply and health in the industry."

Leaving the Customs Union may allow for a lowering of tariffs but certain industries may find themselves exempt from the prospect. The DEFRA Secretary, whomever it was, was always likely to protect the interests of farmers at the expense of the consumer. Broadly speaking, what we have here is a situation in which the few are being prioritised ahead of the many. A part of me thinks this will never change, just as it hasn't changed in France, historically the European country most forcefully behind the idea of protecting agricultural industry from outside competition.

The Adam Smith types are right when they decry high tariff walls. Discrimination in favour of domestic producers may have electoral, social or soft-power benefits, but ultimately these all come at a higher cost for consumers. The result is that by tinkering with tariffs, some lose out and others win. Finding the right balance will be crucial and I think it is best to disregard the unilateral free trade types going forward. In principle I favour lower tariffs on agricultural imports, but there are bigger issues at play.

Gove spoke in the context of WTO fallback arrangements. This does not mean a no deal Brexit. It simply means leaving the Common Agricultural Policy, unless we can build something from within the transition period. The complexity and breadth of the CAP is such that policy reconstruction will take in excess of eight or nine years, and this is largely separate from the question of maintaining existing regulatory architecture. Initially, at least, we will need to shadow the EU CAP domestically in order to provide stability and avoid creating potentially harmful trade barriers.

What interests me is that there are currently no existing policy models that can be of any real use to UK negotiators. Existing European relations are important to consider because a huge proportion of our agricultural trade revolves around the continent. The EEA Agreement, and therefore the EFTA position, does not include any substantive provisions on tariff-free trade in agri-food with the EU. The CAP is not relevant to the body of the EEA acquis thanks in part to comparatively large agricultural subsidies from Norway and Iceland which exceed 50%, and this will appear to continue.

The Swiss arrangement has the same problem, again stemming from much higher subsidies which present the EU with a problem of unfairly aided competition.  But subsidy alignment aside, for duty-free access to the Internal Market Brussels also demands a high degree of regulatory equivalence in order to ensure a level playing field for its producers. In the case of Turkey, the exclusion of agricultural goods from their EU Customs Union agreement is largely the result of minimal regulatory alignment. This will need to be carefully considered when UK policy is redesigned.

This is regulatory protectionism, a far more potent obstacle to what we call 'free trade'. Post-Brexit, DEFRA will need to ensure continuity as regards our degree of regulatory symmetry with Europe if we want substantive access to their market. Without it, we will need to turn to the United States, who will be keen to flood our domestic market with chicken and beef produced cheaply and in enormous quantities. We could not compete on this front and consumers would increasingly find themselves with no financial alternative but to opt for American produce. Our farmers would lose out.

Here we see one of the main reasons for the regulatory disconnect between the US and the EU. Meat in particular is produced to distinctly different standards, with hygiene often cropping up as a highly politicised issue. These kinds of barriers are most prominent in the agricultural and automotive industries, as we have discussed before, and are useful examples of the usage of regulation as a protective device. It is more difficult to spot and more difficult to change. My point here is that those concerned about protectionism ought to be focused on regulation, not tariffs.

Regulatory protectionism is more important than tariffs because it has a much larger negative economic impact upon the costs of trade and because in many cases it actually prohibits trade. A tariff is a duty on an import, paid by the importing firm to the relevant customs authority. That is it. Global tariff levels have plummeted, including full rate tariffs, and we even have tariff rate quotas to ease the relatively small impact of these duties. Import tariffs are being lowered through multilateral and bilateral mechanisms all the time and present us with minimal cause for concern.

By contrast, non-tariff protectionism, which normally takes the form of regulatory barriers, represents a much more significant boost to the costs of international trade. It is also becoming trickier to navigate past. In 1995, the WTO received 386 formal notifications of NTBs. By 2013, this had risen to 2,137. A study published by the European Commission in 2009 found that non-tariff measures added more than 20% to the costs of international trade. A recent WTO tariff brochure concluded:

"Global trade in goods has been boosted by the reduction in import tariffs over the past 20 years. Even when countries have negotiated high ceilings for their tariffs on joining the WTO, they have consistently reduced the tariffs they have actually applied to their imports since becoming a WTO member."

The big picture here is that as one issue has receded, another has grown and taken its place. The increased reliance on regulatory protectionism comes as a result of a number of factors. Economic globalisation has increased access to goods and made producers more sensitive to external competition. There have also been legal mechanisms deployed at global trading forums to harmonise and restrict tariff measures, such as principles of equal treatment. Existing defences against regulatory barriers are agreed upon at the WTO and passed down to nation state level.

As regards post-Brexit agriculture, it appears to me unwise to worry too much about our tariff walls. It may even be the case that on a sectoral basis we replicate the CET in order to ensure the Irish border remains as soft as possible. The protectionist issue of significance is avoiding diminished access to the EU's Internal Market, where most of our agricultural exports are directed. Despite the widely-acknowledged economic sense behind tariff reduction, continued fretting about import tariffs unfortunately completely misses the point.

Monday, 18 December 2017

A spot of cherry picking

I now realise that I have not been as clear or detailed about certain aspects of post-Brexit trade options as I perhaps ought to have been and I hold my hands up to this. Usually I try not to fill posts with too much in the way of caveat because I believe doing so has the opposite effect to what I am trying to achieve: informing readers. I tend to paint what I consider to be the bigger picture and sometimes that means leaving nuance to one side.

As I explained yesterday, the UK faces a straight choice between Norwegian and Canadian models as far as our future relationship with the EU is concerned. This is correct but must not be taken completely literally. This is why I wrote in my blog post that the eventual arrangement would have "its own country-specific protocols fixed in". In other words, it would follow a general pattern but would retain a certain degree of uniqueness.

The thrust of the argument I am making here is that, whilst a UK-EU FTA would indeed be bespoke, Norwegian and Canadian models would represent the general principles dictating its nature. I did not mean to suggest that the UK should opt to replicate CETA or that the Canadian option necessarily meant a symmetrical agreement. The distinction here is important and in not being specific enough about it I have been a little lazy.

It is true that third countries cannot have the benefits of Norway and the obligations of Canada simultaneously. But that is not to say that there can be no cherry picking, the new buzzword in Brexit circles. It is not the case that there is a contradiction here. If I have given the impression the EU does not allow for cherry picking then this has not been done intentionally. It is not true. The EU has cobbled together quite a diverse range of relationships with major trading partners.

Instead of thinking in terms of Norway versus Canada, it might be better to reframe this paradigm into Norway-type and Canada-type. Norway can't be replicated to the last treaty provision because the volume of trade on its border with Sweden is sufficiently low to warrant simplified customs procedures and it doesn't carry the weight of the Good Friday Agreement. Most of the Norway position can be replicated, but the differences will ultimately what makes Britain's return to EFTA distinct.

One of the things I most like about the EEA Agreement is that it is a useful example of the cherry picking and flexibility I mention. The Single Market arrangement is static and flexible, demonstrating adaptability in its raft of country-specific protocols and independent solutions to specific problems. Norway's targeted border inspection programmes and Liechtenstein's carefully carved alternative to free movement are good pieces of evidence to which we can refer.

Where I have been plain and correct is in suggesting that a best of both worlds scenario will not emerge. The Single Market is conceptually very different from the scope of FTAs. To claim that we can merge the two together, possibly under the guise of starting with regulatory convergence, doesn't make sense. For it to come about, we would have to negotiate an FTA free from non-tariff barriers and border checks. And for Brussels this could not be allowed to materialise.

As regards trade, there are two principle differences between the framework of the Single Market and those built by FTAs. The first is a marked shift in enforcement and surveillance strategy - in other words: where the inspections and checks take place. In the EU and EEA, thanks to a widespread market surveillance programme, conformity to standards is checked at the point of production by a web of domestic government bodies, EU agencies and by producer self-assessment mechanisms.

This vertical system of inspection is facilitated through the EU's political and legal jurisdiction in the internal affairs of EEA countries. Identification of customs risks, such as counterfeit goods, is shared through a Rapid Alert System, managed by the Commission. This device is implemented for the purpose of information sharing and enhances communication between member states and the relevant bodies responsible for upholding the maintenance of standards.

Within the bounds of an FTA, this all changes. FTAs are signed with third countries in whose internal affairs the EU does not hold any political or legal jurisdiction. It therefore cannot establish any system of checks at the point of production and must wait to check conformity to standards at its external border. Customs checks are henceforth intelligence-led and organised strategically, operating purely in accordance with track record and data flows so as not to cripple supply chains.

FTAs therefore do not - and cannot - produce frictionless borders. The shift in enforcement regime insists this is the case, and there is no avoiding it. This must be recognised by the government and business community ahead of any such negotiations. An FTA which achieved borderless trade would spark a diplomatic crisis at the WTO and would undermine one of the many values of the Single Market. We cannot roll over the current non-tariff barrier regime from an outside position.

The second structural difference between the fabric of an FTA and that of the Single Market is a simple (and large) disparity in market access. No two FTAs are identical, but no FTA even remotely compares to the access enjoyed by Norway, Iceland and Liechtenstein. For Brussels, protecting the integrity of the Single Market is key. By this premise FTAs are extremely limited in what they can achieve right off the bat.

The EU's basic approach to an FTA is balancing a desire to liberalise the conditions of trade between itself and its third country partner whilst aiming not to give too much away. The focus will be on tariff reduction and easing or removing non-tariff barriers to trade, where there is much more in the way of progress to be made. The EU will then offer differing extents of access on a sectoral basis where full reciprocity of its rules and regulations can be negotiated.

The Swiss relationship with the EU is an interesting account of this. While I don't consider Switzerland's arrangements to be an applicable model for Britain, it does give us an indication of the hoops which third countries must jump through in order to achieve greater levels of access to the European market. Switzerland's entire SPS regime, for instance, is fully aligned with EU regulations and nestled under the auspices of the ECJ.

Existing FTA-based relationships encounter very similar problems. One of the issues with CETA is its notable lack of service coverage. Even services which are included, such as postal and maritime, are accompanied by a long list of reservations. Extended services integration, such as amalgamation within the EU's passporting framework, would require Canadian firms to comply completely with the EU's relevant regulatory model and establish subsidiaries within the Union itself.

In the case of the UK we are working backwards. It is a question of reverse engineering and carving out differences from EU membership. In this respect I think a UK-EU FTA would be more ambitious than even comprehensive modern agreements with, say, Korea. It would need to fall in line with the principles outlined above, so as not to fall foul of general WTO commitments, whilst managing to facilitate maneuverability and that all-important off-the-shelf look.

When EU officials talk about no cherry picking, they are referring to the general principles, not to sector specifics. One of the reasons why no FTAs are the same is because each one achieves different balances as regards market access and alignment with EU regulations. Every negotiation must include fussiness and specificity. It is perfectly reasonable, therefore, to expect an FTA between the UK and EU to include such cherry picking. Both sides will be engaged in it.

Disparities in market access between EU FTA relationships are also aided by EU safeguards against the demands of MFN clauses. CETA includes MFN clauses which call for any preferential terms agreed elsewhere to automatically apply to Canada, but Brussels can get round this by using what is called a right of reservation. They can simply tell Canada that the UK is permitted preferable services access, for instance, because it has pledged to remain fully aligned to EU regulatory architecture.

They key part of the above text is point (c). It tells us that the EU retains the right to offer differential treatment (such as preferential terms on services for the UK in a future FTA) in any event which 'requires the approximation of legislation in one more economic sectors'. This means that if the UK chooses to remain enclosed within the EU's services frameworks, most-favoured nation treatment can be deemed unnecessary and a precedent will be allowed to form.

Initially I was under the impression that Canada with variants of 'plus' would spark a diplomatic crisis between Canada and the EU. I thought CETA would automatically be entitled to a duplication of the bespoke terms but there appears to be a clever little get-out. Canada did not ever start from the point of regulatory harmonisation, so unequal treatment is justified. I apologise for the error and will correct this in future. These things are easily overlooked and my eye is only partially trained to spot them.

The point in all of this is more simple than I am making it. Norway and Canada are not ends of a spectrum, they are separate categories which are conceptually completely different. Replicating either perfectly is not possible, and nor should it be, but both models present us with directions of travel. We can't cherry pick between the structural differences between an FTA and the Single Market, but we can cherry pick on sector specifics. At macro level we have a choice to make, at micro level we have everything to play for.

Sunday, 17 December 2017

Clarity at last

It is now clear that after the transition period is over, Britain faces a binary choice. It must put its weight behind either a Canadian or Norwegian model, with its own country-specific protocols fixed in. There are no other workable options. This was confirmed in an interview with Michel Barnier yesterday, as he injected refreshing clarity into a process which has been characterised mainly by haziness and vapid sloganeering. He told Prospect magazine:

"They have to realise there won’t be any cherry picking. We won’t mix up the various scenarios to create a specific one and accommodate their wishes, mixing, for instance, the advantages of the Norwegian model, member of the single market, with the simple requirements of the Canadian one. No way. They have to face the consequences of their own decision.”

The reason why these two models are held up as our post-Brexit options is because they are so profoundly different in every conceivable way. This is exactly the point. The gulf is deliberate and must be maintained for the sake of preserving the functional integrity of the Single Market. It is upon examination of the gulf - the marked difference in market access, surveillance and enforcement strategy and obligations - that we begin to see just how FTA frameworks differ from the EEA.

This blog presses for the Norway option based on available evidence. Norway retains full access to the Single Market and the ability to sign trade deals both independently and as part of the EFTA bloc. Like Canada, Norway is not subject to the ECJ and, as I have explained, its financial contributions do not go towards the EU budget. On free movement, it has at its disposal safeguard measures which can be invoked unilaterally and have a track record of usefulness.

If Norway were subject to the ECJ, had more limited access to the Single Market and had no extra leverage on freedom of movement (which I do not really oppose), I would support an FTA solution no question. But these things are not the case. Britain led the creation of the Single Market and its supply chains are tightly integrated within its framework. They are therefore more sensitive to friction posed by customs checks. We owe it to ourselves to stay inside more than anyone else.

The other key point made by Barnier in his interview relates to the issue of the looming trade deal. He reiterated, I think importantly, that "the actual negotiations on the future relationship will only begin once the UK leaves the EU.” This is important to flag up because so many in the Brexit chatterati are getting this confused. Trade negotiations start from the point at which the United Kingdom becomes a third country to the EU, not any sooner.

They cannot begin beforehand because there simply isn't time to negotiate a bespoke FTA in the window we have remaining. A UK-EU FTA will be unique in global trade in that it will not focus on regulatory convergence, but upon cementing differences. It will be a shredding of existing terms and a separating of the UK and the EU trading framework. The EU will not ratify any trade agreement which provides the UK with preferable terms. It won't be worth the hassle at the WTO.

In this respect I foresee UK-EU FTA negotiations lasting in excess of a decade with some periodic stalling. The fact that we start with symmetrical regulatory regimes is irrelevant. The point of the FTA, as I have said, would be to achieve difference and create a divide where currently there are bridges. Furthermore, upon Brexit the UK will be a new and inexperienced customs entity with representatives unused to distinct UK trade negotiations.

In the initial period of trading independence, we will find ourselves paddling. We will need to learn how to self-organise and engage with global trading forums and agreements. This is not as patronising as it may sound. Teams of human beings negotiate, and like with every other facet of human activity, experience is everything. Savviness and familiarity with legal structures will not come instantly. Our intellectual muscles will need stretching out of inactivity.

Either way, we are slowly moving towards a better understanding of what lies ahead. We can at least be thankful for the choice presented to us. Brussels prefers Norway but will not be able to force us into either funnel. It will be interesting to see how domestic politics influences the preference of whichever government is at the helm in 2021. As for me, I will continue to make the arguments for our continued EEA membership at this blog and in the public domain because this thing is not over until it's over.

Saturday, 16 December 2017

Concerns about a transition

The European Council have published their phase two negotiating guidelines after accepting the Commission's recommendation of sufficient progress. The second phase will focus mainly on the terms of the UK's two-year transition from EU membership and a clarification of proposals for the maintenance of a soft Irish border. Upcoming negotiations are designed to outline an overall understanding of the framework of the future relationship, building on the guiding principles established in phase one.

Yesterday's report is light and understandably lacking in detail. There are, however, two important paragraphs which need to be discussed. The first, paragraph 3, touches on the general outline of the approaching transition period, noting:

"3. As regards transition, the European Council notes the proposal put forward by the United Kingdom for a transition period of around two years, and agrees to negotiate a transition period covering the whole of the EU acquis, while the United Kingdom, as a third country, will no longer participate in or nominate or elect members of the EU institutions, nor participate in the decision-making of the Union bodies, offices and agencies."

The second, in paragraph 4, clarifies the EU position on what the UK's obligations will be during the transition, which will form part of the eventual Withdrawal Agreement:

"4. Such transitional arrangements, which will be part of the Withdrawal Agreement, must be in the interest of the Union, clearly defined and precisely limited in time. In order to ensure a level playing field based on the same rules applying throughout the Single Market, changes to the acquis adopted by EU institutions, bodies, offices and agencies will have to apply both in the United Kingdom and the EU. All existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures will also apply, including the competence of the Court of Justice of the European Union. As the United Kingdom will continue to participate in the Customs Union and the Single Market (with all four freedoms) during the transition, it will have to continue to comply with EU trade policy, to apply EU customs tariff and collect EU customs duties, and to ensure all EU checks are being performed on the border vis-à-vis other third countries."

These terms were to be expected of what is essentially transitional membership. There is no time to negotiate bespoke arrangements which will merely be scrapped and replaced one way or another in the coming years. Business will not stand for it and neither will citizens. The EU clearly recognise this and have set their markers down early. Much like in phase one, these principles will be non-negotiable and the UK Government will need to work through and accept them. There is no other way.

I am not surprised by our staying in the Customs Union and Single Market, nor by our lack of voting rights or the continued exercising of third country controls. All things considered, a departing member of a club should be less or unable to determine its future framework. Nor is our requirement to remain attached to the CCP an issue. Outside of it we would not be able to negotiate anything meaningful because our eventual terms of trade with the EU are yet to be realised. This is one of the major problems with the bilateral route.

The result of all this is an immediate net relinquishing of sovereignty. For a while we will essentially take the form of a vassal state, a passive rule taker without even the solace of a distinct role at international regulatory forums to cling to. This is the worst of all worlds and is precisely why I don't think a transition is a good idea. There is nothing in this relationship which will keep Leavers or Remainers happy, and senior Tories are not likely to stay quiet about it either.

The Brexit vote was a call to shorten the chain of democratic accountability, and this transition, while it lasts, achieves precisely the opposite. I think it is right for the British Government to contemplate extending the Article 50 period as an alternative to sliding into a potentially fairly long-term transition. As noted above, the Council's guidelines describe the time frame as lasting 'around two years', which appears to me to suggest that it could go on longer. I think we should prepare for this possibility.

We are not too late to apply for an extension and I do not see why the EU27 would refuse this request. Phase two talks do not begin in any substantive sense for another few weeks, and additional guidelines will be adopted by the Council in March. There is time to reconsider and seek out other options. I think adding a year, or perhaps two, to the Article 50 period would at least see us avoid any looming vassalage and allow us to retain our voting rights. It makes a lot more sense if we view the future relationship through the prism of maximising sovereignty.

There is also the question of time. The Withdrawal Agreement eventually finalised between the EU and the UK will need ratification and existing treaties will have to be amended to incorporate the provisions of the divorce settlement. I don't know whether this will take three months or six. It will likely be somewhere in between. It therefore follows that phase two will need to be completed some time around the autumn of 2018. This is entirely possible, but given how touch and go the first phase of negotiations were, we cannot be so sure.

Phase two will require specifics across the board. An 'overall understanding' is the goal, as opposed to a guiding outline achieved in phase one. This means, among other things, devising a detailed framework for the Irish border, agreeing on a new VAT regime and establishing agreements covering aviation and recognition of qualifications. We will also need to clarify our intentions as regards our place in separate EU programmes related to security, research and education. There is no trade deal, there is only a withdrawal agreement.

A trade deal, if we get out in any meaningful sense, comes from the point at which we are a third country. This means after we have left the Single Market. This is crucial to remember because many of our politicians still believe we leave with a trade agreement. We do not. The Council refers to our status as a third country as being in effect from day one of the transition, but since we are replicating the same rules, enforcement and surveillance strategy enshrined within the Single Market, this doesn't bear practical resemblance. We become a third country in name only.

All in all my initial thoughts are that I am not convinced a transition is the way to go. We would not be kicking a can down the street so much as an entire cannery, and for all our troubles we emerge with no ability to influence the system's rule-making processes. I join others, like Jonathan Lis, who argue for an extended withdrawal period instead. Otherwise we will lose sense of why we are doing this to begin with.

Friday, 15 December 2017

Clarifying Norway's budgetary payments

One of the most curious things to characterise Britain's referendum discourse was the passive acceptance of falsehoods spread about the Norway option. Most of these lies came from senior Remain figures, who now beg and plead for a similar Brexit outcome and are likely to regret ever having propagated them. I have no sympathy for any of them. They made their bed and are now trying desperately not to lie in it.

Oddly enough, anti-Norway option myths have been quite strongly echoed by Leavers too. This might be down to a desire to act tough on free movement, having played a part in weaponising it over the past two years. I have always found this bizarre, given that the most ardent eurosceptics will always privately admit to being satisfied with EFTA if that is indeed our only suitable alternative to EU membership. A true eurosceptic would at least rationalise the options.

I will work with anybody to see the EFTA solution realised, but those on the Remain side who claimed, falsely, that Norway has no say in Single Market rules and pays for access to the Single Market must apologise and admit to their errors. Neither of these two claims is true in any meaningful sense, and since they make such a big deal about Leave falsehoods, it is only right that they take responsibility for their own misinformation.

This post will hopefully rebut the nonsense spewed over Norway's financial contributions, which are not what they seem. This pocket of debate has proved extraordinary in that it has unified both sides in ignorance. As a result, the Norway option has evolved into the target of identical and equally false critique from right across the referendum divide. I am routinely told that Norway pays for access to the Single Market, but as is often the case in politics, evidence does not stand with conventional wisdom.

So let's begin with the facts. The principles governing the structure and application of Norways financial contributions are outlined in Protocol 32 of the EEA Agreement. Norway's financial contributions can be divided into two categories: EEA Grants and full participation in cross-European and EU programmes. We should begin with the grant system, which also applies to both Iceland and Liechtenstein, who (being poorer per head and smaller) pay substantially less. According to the Norwegian government:

"The EEA and Norway Grants play a unique role in Norway’s cooperation with many EU countries. These grants are designed to reduce economic and social disparities in Europe. They are also an instrument for Norway’s European policy. The Government will ensure that the EEA and Norway Grants support Norwegian political priorities and lay the foundation for closer cooperation with the recipient countries and with EU institutions."

The grants play a significant part in Norway's cooperation strategy with the EU. They are aimed mostly at funding investment and research projects, but also help those countries in receipt to tackle broad issues like climate change and cross-border crime. Norway's access to Schengen's Information System helps in this regard. The money for the grants is divided between the three EFTA signatories and Norway necessarily contributes most of the funding. It is paid as good will to national governments, not to the EU budget.

The point about these funds being part of a strategy is important. To clarify, there is no support for the argument that this money is paid in exchange for full market access anywhere in EU literature. Norway gets full Single Market access by accepting fundamental EU freedoms. The money is irrelevant. EFTA itself points out that "the system is based on solidarity and not on fair return." These payments act as devices to enhance relationships, though I admit could well strengthen backhand leverage.

The second aspect to Norway's financial inputs is based on a series of EU and cross-European programmes designed to maximise cooperation, innovation and security. This is where things get tricky and where precision of research is vital, so let's work through this point by point. Firstly, Norway enjoys full participation in twelve EU programmes, which are listed here. They include Horizon 2020, Erasmus, Galileo and the Copernicus Programme, to name but a few.

The programmes are funded by the European Commission and each of the EFTA EEA states contributes to those allocated funds. The Working Group on Budgetary Matters is responsible for coordinating the procedure establishing the budget in close conjunction with the Commission. It also audits the final EEA EFTA budget. EFTA EEA states contribute on a GDP basis and in accordance with Article 82.1 of the EEA Agreement.

So far it sounds a lot like direct payments to the EU, the major operator of these programmes. But there's more. EFTA make clear in this document (page 55) that "EU programmes are financed through the Commission’s part of the EU budget. Since the EEA EFTA States do not contribute directly to the EU budget, EEA EFTA participation in a programme requires a yearly financial contribution to the relevant part of the Commission’s budget."

The relevant part is usually an administrative wing and will deal with expenses, office rents and general overheads. The contributing EFTA states also send policy advisers, who usually work for national or public institutions, to aid the Commission in kind. This is called secondment of national experts and helps to oil the machinery of the programmes. As for Switzerland, not an EEA but an EFTA country, participation is arranged separately and bilaterally.

Norway's decision to take part in twelve such schemes is taken at nation state level and remains unilateral. Liechtenstein is party to only three. The EEA Agreement enshrines no such requirement for uniform participation and the system is naturally subject to cherry-picking. I suspect for the UK this will be no different, though we may well end up retaining full access to a substantive list of programmes. It is in our interests to prevent a scenario in which too much disruption is inflicted upon significant, collaborative projects.

We benefit from participating and so do other European countries benefit from our participation. Our universities, for instance, are world-leading and EEA, Macedonian and Turkish students will always seek out opportunities to study here through continued operation of the Erasmus plus programme. Paying for membership seems to me fair and a no-brainer. Not even the headbangers will be able to complain about this concept. It is about what is fair.

What is important to note here is that the financial frameworks which exist between EFTA/EEA and the EU are based on principles of solidarity and close cooperation. In this regard, Norway provides us with a template on how to remain outside of political union whilst securing the best available trading terms and enjoying the fruits of trust and collective endeavour. The EU is rightly regarded as an important partner with which to work extensively.

This is the sort of relationship I have for years envisaged Britain managing with Brussels. The EU is here to stay and that is not always a bad thing. It ought to be treated as a valuable ally. Not all European institutions are worth pulling out of, much less for the sake of massaging hardline narratives. And, as outlined above, preserving participatory status within the fabric of existing programmes and offering reasonable grants need not entail payments for market access. Norway doesn't. Why should we?

Wednesday, 13 December 2017

Joining EFTA doesn't mean joining Schengen

Occasionally I receive tweets which tell me that EFTA membership would be politically unacceptable because it requires signing up to the Schengen Agreement. This is not true. The inclusions of each of the four EFTA members, Norway, Iceland, Liechtenstein and Switzerland are merely voluntary and entirely separate opt-ins. Membership of the Schengen area and EFTA - whether a country is in the Single Market or not - are not mutually inclusive events. The participation of EFTA states is merely coincidental. 

Schengen, most will by now know, is the borderless zone in Europe which removes the need for passport checks amongst those moving between partied states. At present, the area consists of 26 European countries: 22 are members of the European Union and the remaining four are EFTA. We can see that joining Schengen is not an absolute for EU members, as the entirety of the British Isles is exempt, as well as Cyprus, Croatia, Romania and Bulgaria. 

The purpose of Schengen is to maximise cross-border cooperation between states and facilitate free flow of citizens. At internal borders, member states remove unnecessary barriers to travel, such as ID checks or any obstacles which attack the fluidity of road traffic. The area does not completely eradicate police checks. If there is reason to suspect a possible threat to public security, border checks may be temporarily imposed. 

According to the EU: "A protocol attached to the Treaty of Amsterdam incorporates the developments brought about by the Schengen Agreement into the EU framework. The Schengen area is now within the legal and institutional framework of the EU." Despite not every EU member being a part of it, Schengen is an EU mechanism. EFTA participants retain, in effect, the status of associate membership. 

Each of the four EFTA states became party to the Schengen Agreement at different times and for different reasons. Both Switzerland and Liechtenstein began integration into Schengen in February 2008, after the conclusion of bilateral agreements with the EU. Almost six years ago to the day, Liechtenstein abolished all internal border checks and fully established its membership. In the case of Switzerland, land and airport checks had been removed by March 2009.

Norway and Iceland became immersed into the fabric of Schengen in 2001, after initially agreeing to accede in December 1996. From what I gather, it appears the two countries initially did not enjoy voting rights in the Schengen Executive Committee until their association was extended in May 1999. It is also here worth mentioning that the Nordic Passport Union facilitates the abolition of border checks between Sweden, Finland, Denmark, Norway and Iceland. 

The important deduction from all of this is that EFTA is not a precursor to inclusion into the Schengen Agreement, association or otherwise. It just so happens that each of the four countries joined. Interestingly, each of the countries faces little domestic pressure to reduce immigration and existing arrangements in place before accession ensured it was not a particularly big deal. For the EFTA states, the really important difference was gaining access to information-sharing IT systems. 

Beyond this, the EFTA Convention produces no reference to Schengen. There are eight references to 'free movement', with some pertaining to goods. Joining EFTA requires accepting free movement between bloc members, but this is a relatively small number of people and already existed thanks largely to the Nordic Passport Union and treaty annexes establishing specific movement protocols between Liechtenstein and Switzerland, both of which remain closely geographically and economically interwoven. 

Schengen will never be politically acceptable to Britain and I concede this. Nor do I particularly want us to join it. We have access to the Schengen Information System, an online device relied upon for strengthening internal security in the absence of cross-border checks, and this will have to do. It does, though, mean we cannot issue or access Schengen-wide alerts for refusing entry or stay into the Schengen area. In the event of rejoining EFTA, our opt-out would remain in tact. There is no back door for us to worry about. 

Sunday, 10 December 2017

It's a minus, minus, minus from me

Those of us keeping up to date with Brexit will know by now that our withdrawal options are narrowing at an extraordinary pace. This is now largely because the issue of the Irish border is guiding us towards a much softer, more integrated destination, and I don't necessarily think this is a bad thing. We are headed for a stay in the Single Market one way or another. Our focus should now be on how best to avoid the Customs Union, if at all possible.

This is where the Canada option falls way short. At first glance, it does nothing for the situation in Northern Ireland. Canada, despite its FTA with the EU, is still a registered third country. The EU has no business in its internal affairs, so enforcement and surveillance strategy is focused at the border. In other words, the checks and inspections make for border friction. FTAs steer regulatory regimes towards each other and reduce tariffs. They do not produce frictionless borders.

David Davis created a new term out of thin air this morning on the Andrew Marr show. He claimed that we could have CETA plus, plus, plus 'within minutes' of leaving the EU. I don't mean to take him too literally, but he is living in la-la-land. I always considered CETA plus to be a term completely devoid of any real meaning. CETA plus, plus, plus just takes the cake. I don't think readers should treat it any differently to any other example of vapid Tory sloganeering.

The first point to make about CETA plus, plus, plus is that it is not only favoured by the UK. It is also favoured by Canada and South Korea. This is because embedded within both CETA and the EU-Korea FTA are Most Favoured Nation (MFN) clauses. MFN clauses basically tell the EU: 'if in any other FTA you conclude, you agree to terms which are preferential to ours, we will automatically adopt them too'. Were the EU to agree to CETA +++, therefore, the terms offered would be extended to both South Korea and Canada.

But this is not worth overthinking. CETA +++ is not worth contemplating because the EU will not allow it. This is for the very reason we spoke about the other day at this blog: the EU is a protectionist bloc and must protect the integrity of its market. This is not a difficult concept to grasp, unless you are one of the headbangers who thinks the EU is protectionist when it suits arguments for leaving and at no other time.

Secondly, a bespoke CETA just isn't what we need. It doesn't take into account a sensitive peace agreement. It isn't conducive to the preservation of our intricate and integrated supply chains, which over 40 years have benefited from a widespread removal of non-tariff barriers to trade and a market surveillance programme designed to keep inspection contained to the point of production. It is also not a model for us due to its very limited services coverage.

In general, this is common of FTAs - even those which are modern and considered ambitious. CETA does not cover financial or air services, and those services (such as postal and maritime) which it does cover are accompanied by a large list of reservations. If we look at passporting, we see that in order to take advantage of the EU financial services ‘passport’, Canadian firms will have to establish themselves in the EU and comply completely with EU regulations. No exceptions. 

The short of it is that CETA is not even remotely comparable to the EEA. The terms built into the framework of the Single Market are not to be replicated from the outside and nor should we bother trying. This is perhaps one of the best arguments for the UK's continued participation. We are in large part a services economy and leaving the Single Market will mean throwing much of this expertise and prosperity away.

There will at some point be a Free Trade Agreement between Britain and the EU. Its nature, though, will not be defined by efforts to converge regulatory systems, since they are already harmonised. The challenge in an eventual negotiation for the EU would be how best to make sure it looked completely different to membership. For the UK, it would be a matter of using whatever leverage it can to maintain as large a semblance of membership of possible. It will be a tug of war we are likely to lose.

Saturday, 9 December 2017

There is no regulatory sovereignty

I am happy to see the Article 50 talks move on to phase two. Progress is encouraging even for its own sake. We've had to swallow a lot, particularly on the continued influence of the ECJ, but that was to be expected given the balance of power and restrictive time frame. There is no point in crying and whinging about capitulation. We should just get on with what we have and make the best of it.

Yesterday I wrote an article for in response to some of the outrage from the Brexit ultras. They believe the UK has capitulated, but in actual fact the negotiations have merely swung in the direction of reality. We are leaving a well-protected club that is intent on preserving the integrity of its institutions. Belief that both sides are on equal footing in this stand-off is verging on clinical madness.

It is easy for populist figures in Brexit circles to decry what they call the UK 'being sold down the river'. They are not in the negotiating rooms and their internal narratives are a comfortable distance from real world challenges. If we had negotiated with their demands, we would have crashed out with no deal and would need to rely solely on WTO rules as a basis for our trade, and the country would have endured untold economic and political damage.

From what I can gather, their anger appears to have stemmed from paragraph 49 of the joint Commission-UK Government report, which states: “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 the Customs Union.”

The headbangers are infuriated by this because they believe that Brexit gives the UK regulatory sovereignty. It doesn't. Nothing gives the UK regulatory sovereignty because regulatory sovereignty does not exist in any meaningful sense. At least not at nation state level. Last night on the BBC I raised the point that Single Market membership or not, we'll adopt standards determined at global level anyway. This fact has not been communicated to the public well, possibly because it is dry in nature. 

International bodies responsible for a large proportion of standard setting (exact percentages differ when we look sector by sector) include UNECE, the UN Economic Commission for Europe, now the primary European regulator; CODEX Alimentarius, the world's most influential agricultural regulator, based in Rome; International Standards Organisation (ISO); International Maritime Organisation (IMO); World Health Organisation (WHO); World Customs Organisation (WCO) and, of course, the OECD. These forums come under the umbrella of the WTO, which divides regulatory competence amongst them (usually on a sectoral basis).

These agencies are intergovernmental and are influenced by nation states and, crucially, the European Union itself. Regulatory governance is a two-way street and, quite often, finding the exact source of a regulation is made exponentially more difficult by the fact that these forums will take the core of an EU regulation, amend it, and then send it back down again. What we have is a mixed and very complicated picture.

Even the EU has lost control of a huge portion of its regulatory agenda, despite the influence it maintains at the tables of global forums. That infamous bent banana directive? The only one mentioned during the referendum campaign? It comes from CODEX and can be seen here. We adopt this as a member of the body in accordance with international TBT obligations (see below), regardless of our place in the EU or Single Market.

Harmonising devices are becoming increasingly significant. What makes them so crucial is that they act as impartial mechanisms for bridging regulatory divides between countries and major powers. A quick look at any of the EU's major trade agreements will find countless references to the agencies I refer to above. Find a PDF of any EU FTA at random and search for yourself. The efforts made to use global regulations as guidelines litter these agreements. They are staggeringly important and really capture just how widespread globalisation now is.

But beyond the global element, which I believe is vital, the UK has in front of it a binary choice. It can either remain embedded within European regulatory architecture or it can undertake a transatlantic pivot - effectively prioritising our second largest trading partner over our first. Opting for the latter will have profound consequences for our ease of trade with the EU. This is down to stark differences in product standards, most notably in the automotive industry.

If we twisted to a more Americanised approach to regulation, we would drive a wedge between ourselves and Europe. The more we diverge from the existing European regulatory sphere, the more checks we encounter and the higher the likelihood of our exports finding themselves incompatible with EU markets. Our beef would be checked to a higher frequency in order to ensure it did not come from America. Many of our cars would no longer meet vehicle type approvals.

Of course, the reverse is true also. There are barriers to trade between the UK and US thanks in large part to our current arrangement. The reason for the almost non-existent trade in cars between the EU and US is down to the US' refusal to adopt UNECE vehicle type regulations which forced them to redesign the sides of vehicles, in order to meet new crash standards, and the shape of headlights. Here we can see immediately the impact of a harmonised standard on vehicle type approvals.

Britain isn't going to emerge as a regulatory superpower because it is alleyed in between the two which already exist. We can only work with the reality we have and divergence for the sake of divergence is irresponsible, given the sensitivity and intricacy of most UK-EU supply chains. We can in principle divert where a standard comes solely from the EU, but obstacles like the maintenance of the Good Friday Agreement and the pressures on customs systems will render doing so completely pointless.

And we need to forget about regulatory bonfires. EU membership has for decades meant less and less red tape, at least as far as trade is concerned. Understanding this is vital to directing Britain's post-Brexit trade policy. If Britain wants to carve out its own leadership role, it must apply itself to strengthening global initiatives (like UNECE's Single Window) designed to minimise and eliminate technical barriers to trade. Otherwise, as a medium sized power, it will have very little influence or purpose.

An appearance on the BBC

If you have not already done so, please check out my appearance on BBC News last night, using the video embedded below. I spoke about my reaction to today's deal, EFTA and the source of many of the Single Market's rules. And yes, I slouch. Because it's comfortable. 

Thursday, 7 December 2017

A non-beneficial addition

It is not often that I agree with Mike Galsworthy, but he is right when he describes Martin Schulz' intervention today, calling for a constitutional convention on the formation of a United States of Europe, as helping 'flailing Brexiteers'. Actually, maybe 'flailing' is not the correct term. Some of the ultras are steadfast and know, in their world at least, exactly the way forward. The headbangers are already running with these comments, treating them as if they have effect tomorrow.

It is for this reason that Martin Schulz made a mistake today. He revealed his hand and did so just when Brexit was proving impossible to deliver. Of course, he has not revealed anything extraordinary. Veteran Leavers have been warning against bold steps towards further and irreversible integration for years. Schulz is merely communicating the essence of the EU's raison d'etre. For Leavers, this was always a matter of 'when' and not 'if'.

A few years ago the coalition government legislated to ensure that any updated European constitution is greeted with a domestic referendum in Britain. In the same way that Lisbon was. Or rather, wasn't. I make this point a lot because it signifies that at some point, even very soon, we were going to have to confront the question of our place in Europe. Lisbon propelled the project forcefully in one direction but it could not have been the end. There is still so much to coordinate and harmonise. 

Our handling of the whole withdrawal process has been amateurish. If anything it tells me that this is all happening too quickly and we never conducted sufficient planning. The root of this problem lies with the Cameron government's lazy and arrogant assertion that winning the referendum would be a forgone conclusion.

What we are likely to end up with is exactly what Schulz refers to: a two-tier Europe. Or perhaps a three-tier Europe if we factor in the surrounding EFTA states. It is difficult to predict what the European reaction to Schulz' call for full unity will be. Some states, like those relieved of the chains of communism, are still finding their feet as distinct constitutional entities. Others, like Denmark, are happy simply to pick and choose which aspects of membership suit them most.

I rather admire this obstinate attitude. It mirrors that of my own country. In fact, quite a number of parallels can be drawn between Denmark and Britain, certainly in the context of EU membership. Both countries joined together and have for many years enjoyed substantive opt-outs. Both countries surrendered successful fishing industries upon acceding to the Union. Both countries share a unique distaste for the idea of a European Army.

Eurosceptics at home will be buoyed by this news. I am glad too in that it will help to stave off second thoughts and may act as a reminder as to why we voted out in the first place. What is worth remembering, though, is that often it is the integration by stealth we should be most worried about. At least this pronouncement came publicly and directly, with no room for misinterpretation or a kicking into the long grass.

Of course, despite Schulz' view being widely-held in the corridors of Brussels, turning his ambition into reality will not be easy. In the current climate this new proposal is largely unworkable because there are too many imbalances as far as how interwoven each member is into the fabric of the EU. Ever closer union has taken place at different speeds and for different reasons. There may well come a time where member states face a simple 'stay or go' choice. A test of commitment.

A test, incidentally, I think the UK has failed. We don't want to be in the EU because we don't care for its aims or institutions. This is really the nub of it. We braved the leaving process before anyone else because it was destined to be this way. Even the most ardent Remainers know that we are a little different. Uncaring is perhaps too cold, but out of place certainly paints an accurate picture. I am happy we are on our way out, even if I refuse to believe that Schulz will get exactly what he wants.