In her keynote Brexit speech at Lancaster House in January this year, the Prime Minister outlined:
“I do want us to have a customs agreement with the EU. Whether that means we must reach a completely new customs agreement, become an associate member of the Customs Union in some way, or remain a signatory to some elements of it, I hold no preconceived position. I have an open mind on how we do it. It is not the means that matter, but the ends.”
In the White Paper that followed in February, the Government stated that it would prioritise securing “the freest and most frictionless trade possible in goods (…) between the UK and the EU“.
Last week, the UK government published two policy papers which attempted to propose possible solutions to the conundrum posed by Brexit: how to facilitate “the freest and most frictionless trade possible in goods between the UK and the EU” once the UK leaves both the EU Customs Union and the EU Single Market. One paper was on possible future customs arrangements with the EU. The other was on Northern Ireland and Ireland and included a section on how to address future trade arrangements over the Irish border with Northern Ireland.
The papers received a generally critical reaction, at least among those who would prefer Brexit not to happen. The Financial Times commented on its leader page on the customs arrangement paper:
“That the UK government is finally starting to make some proposals is positive. But they still lack detail and practicability. The customs paper is just 14 pages long and is discursive rather than decisive”.
Guy Verhofstadt, the European Parliament’s Brexit coordinator, tweeted:
To be in & out of the Customs Union & "invisible borders" is a fantasy. First need to secure citizens rights & a financial settlement
— Guy Verhofstadt (@GuyVerhofstadt) August 15, 2017
It remains the case, of course, that only staying within the European Union, either de jure or de facto, can deliver the level of frictionless trade that UK and EU exporters to each other’s markets currently enjoy. The best solution to the difficulties that Brexit will create would be for the UK to decide that it no longer wished to leave the European Union (or, in the next best option, to remain in the Single Market as part of the European Economic Area while creating a customs union with the EU).
However, the UK has, to date, ruled out this option, mostly recently in the joint op-ed written by the Chancellor of the Exchequer Philip Hammond and International Trade Secretary Liam Fox in the Sunday Telegraph on 13 August last which reiterated, again, that the UK was leaving both the Single Market and the Customs Union by March 2019. Thus, it is necessary to consider second-best options. The UK government’s language has now shifted to securing a future trade arrangement that “should mitigate to the greatest extent possible against any additional administrative burdens or delays”. That it now recognises that future arrangements cannot replicate what EU membership provides is a small concession to reality since the Brexit referendum.
But what exactly does the UK propose? To what extent might its proposals minimise the inevitable disruption to UK-EU trade after Brexit, or in what ways might they be developed to do so? I explore these issues in the attached paper. I reproduce the conclusions of the paper in this excerpt below.
The EU dilemma
It must be absolutely clear that the current ability to trade frictionlessly between the UK and the EU is due to the UK’s membership of the EU and can only be maintained if the UK were to remain a member. As the UK customs paper admits, any alternatives will increase the burden for business — whether by requiring companies to declare goods traded with the EU in the case of a streamlined system or by obliging them to track their final destination in a deeper customs partnership with the bloc.
Leaving aside the question of how to manage interim arrangements to avoid an immediate cliff-edge disruption to UK-EU trade, in the longer term if the option of continued UK membership of the EU is off the table, it remains the case that a lot can be done to reduce the additional trade costs that businesses will face. Many of the proposals put forward in the UK policy papers are sensible proposals, once it is accepted that they are second-best proposals compared to avoiding the consequences of having to deal with Brexit in the first place.
The difficulty is that the EU has not yet decided how it wants to treat the UK in the negotiations on a future trade relationship. Is it going to approach a future trade deal with the UK as it would a trade deal with some other third country with a desire to go as far as possible in reducing trade barriers and trade costs? Or is it going to approach a future trade deal with the UK with the view that the UK is a departing member state and thus trade frictions must be maintained as otherwise other Member States might be tempted to follow the UK route out of the EU – even where these trade frictions also hurt EU businesses?
On the one hand, the EU is in favour of comprehensive and ambitious free trade agreements with third countries which minimise trade costs and reduce unnecessary non-tariff barriers. On the other hand, if the EU enters into a customs agreement with the UK in the context of a post-Brexit free trade area agreement which really does try to minimise the administrative, delay and inspection costs of clearing customs, would this be seen as allowing the UK to ‘cherry-pick’ those aspects of EU membership that it likes? Would an agreement on mutual equivalence of sanitary and phytosanitary standards similarly be seen as allowing the UK to ‘cherry-pick’ those aspects of the single market that it likes? Are we negotiating with a view to punishing the UK for leaving? This is a hugely important question to which we do not yet know the answer. As I noted in a previous blog post, different EU Member States have different levels of exposure to UK trade and are likely to take different views on this question.
Formally, the EU’s position on these issues will not be decided until the EU Commission proposes a further set of draft negotiating directives to cover the second phase of the Article 50 negotiations. A European Commission spokesman has said the EU was working on its own paper on customs issues before the next round of Brexit talks at the end of August.
Under the European Council guidelines, discussions on the next set of negotiating directives cannot start until satisfactory progress has been made on the three issues which make up the first phase of the negotiations. It has been hoped that the European Council meeting in October might be in a position to confirm that sufficient progress had been made, but the slow start of the negotiations (although another session has been agreed for the last week of August) now makes it more likely that it will not be until December that the go-ahead can be given, if then. It will be important to start these discussions at the earliest possible time.
This post was written by Alan Matthews