Sunday, 25 March 2018

Too many eggs in the wrong basket


We know by now that leaving the EU means leaving its Customs Union. The Customs Union is an integral tenet of the Union’s treaties, and as such, simply falls away after the transition period comes to an end. For the UK, leaving it brings both opportunity and difficulty. Outside the (or a bespoke) Customs Union, we are able to regain much of the independence of our trade policy, but the necessity of customs posts dotted along the Irish border will be the price we pay.

Leave campaigners have consistently, and with some merit, pointed to a withdrawal from the Customs Union as being a sort of launching pad towards a new, UK push to champion global free trade. This, many argue, rests on the ability to reduce or ultimately abolish tariffs. The issue, though, is that by focusing purely on the gains to be made from tariff reduction we are setting ourselves up for underwhelming results. We are ignoring important points about protectionism and the nature of the Customs Union.

In the international trading system, any substantive efforts to promote free trade must focus on overcoming what are called non-tariff barriers. Typically NTBs come in the form of divergent regulations – different rules specifying the conditions for market access, and countries continue to struggle to find ways of agreeing on harmonised rules to facilitate trade. Without reaching common standards, trade will be either much more difficult or implausible altogether.

Most protectionism is now regulatory protectionism. Countries use rules and regulations to protect the integrity of their domestic markets, requiring of trading partners adoption of these rules. This development has emerged in response to plummeting tariffs, sparked largely by globalisation. More and more academic studies are pointing towards the effects of NTBs as representing far bigger costs to global trade than those added by tariffs.

Since the Customs Union only deals with tariff issues, as a protective device its use is inherently limited. The Customs Union does not give us common regulation and nor is it a device for rulemaking. Its only residual feature is the Common External Tariff (CET). But even here the extent to which the Customs Union is protectionist is somewhat exaggerated. The EU has implemented an intertwined mix of different initiatives designed to alleviate the tariff burden it imposes upon other countries.

The first of these initiatives is the Everything But Arms agreement (EBA), which provides 49 UN-classified Least Developed Countries (LDCs) with tariff-free access to the EU’s Internal Market. As the title suggests, this applies to any goods which aren’t arms or armaments. The second such initiative is a Generalised Scheme of Preferences (GSP), or a GSP+ scheme, which provides low to middle income and vulnerable low to middle income countries with tariff free access across two thirds of product categories.

Arrangements like these offer what is effectively a waiver on the Customs Union. They say that for countries which are poorer and trying to develop, application of standard EU tariffs is unnecessarily punitive and stifles the promotion of economic growth and free trade. On Brexit, the UK will not be able to offer these countries preferential tariff regime, and the lesson here is that the scope of the Customs Union is far more restricted than is widely claimed.

Of course, the Customs Union is protectionist and demands that the needs of many European producers are prioritised over the needs of consumers. I broadly agree that tariff reduction is a positive thing, but at the same time I don’t subscribe to the notion that the way to go is total unilateral disarmament. In dropping our tariff walls to zero post-Brexit we would leave ourselves with much less in the way of negotiating leverage.

The UK will find benefit in leaving the Customs Union, but it is important not to wildly inflate our expectations of what is to come. Tariff differentials create border friction, along with the Rules of Origin hurdle which will be reintroduced when exporting to the EU as a result of leaving the Customs Union. Without the or a comprehensive customs union, the Irish border will not be completely frictionless, though technological devices can help to alleviate some of the pressure.

I don't want the UK in any sort of post-Brexit customs union with anybody. But I acknowledge that this cannot be squared with frictionless trade on the Irish border. Really it is a question of weighing up the benefits of such an arrangement with the drawbacks. The Customs Union does create barriers to trade but it is important that we identify where these are. I think a little calm on the question of post-Brexit trade policy is in order if we are to discuss the merits of leaving the Customs Union constructively.

1 comment:

  1. "The first of these initiatives is the Everything But Arms agreement (EBA), which provides 49 UN-classified Least Developed Countries (LDCs) with tariff-free access to the EU’s Internal Market. As the title suggests, this applies to any goods which aren’t arms or armaments. The second such initiative is a Generalised Scheme of Preferences (GSP), or a GSP+ scheme, which provides low to middle income and vulnerable low to middle income countries with tariff free access across two thirds of product categories."

    oh dear, leavers can't even use the "Bob Geldof" gambit, they will simply have to resort to "we won you lost"

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