Tuesday, 27 February 2018

Intelligent naivety


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

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

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

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

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

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

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

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

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

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

Turkey, for instance, forever trails EU trade negotiations. Turkey's bargaining position is weak: they must automatically apply tariff concessions after the EU has negotiated FTAs, and will subsequently arrange reciprocity with relevant trading partners. Brussels takes the lead on the application of tariff concessions and Ankara follows slowly behind. Notice, importantly, that Turkey is not guaranteed to receive reciprocity from third countries after obliging to apply these tariff concessions. Labour's new policy could well see the UK arrive at an identical position.

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

Thursday, 22 February 2018

Quickie fantasies


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


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

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

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

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

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

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

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

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

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

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

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

Wednesday, 21 February 2018

Diverging from reality


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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, 20 February 2018

An important admission


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

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

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

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

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

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

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

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

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

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

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

Monday, 12 February 2018

Walking the walk


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

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

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

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

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

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

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

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

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

Sunday, 11 February 2018

Customs confusion


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

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

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


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

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

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

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

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

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

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

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

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

Saturday, 10 February 2018

Clutching at straws


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Friday, 9 February 2018

Back to work

Calendar with back to work sticky note

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

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

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

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

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

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

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

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

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

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


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

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

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