Wednesday, 3 January 2018

A borderline solution

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, 2 January 2018

The early bird catches the worm

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monday, 1 January 2018

The UK needs to establish its own trade strategy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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