The UK government’s recent paper on future customs arrangements sets out its objectives for how trade with the EU will be governed following Brexit. Thomas Sampson argues that the proposal is incomplete and leaves five key questions about the UK’s position unanswered.
The most welcome aspect of the government’s policy paper on future customs arrangements is its acknowledgement of the desirability of a transition agreement after the UK leaves the EU. A transition deal will avoid the risks of a cliff-edge Brexit in March 2019 and give the two sides time to negotiate a new trade agreement. The paper suggests the transition agreement could involve a “continued close association with the EU Customs Union for a time-limited period … based on a shared external tariff and without customs processes and duties”. In effect, it proposes that the UK remains in the Customs Union, although this is never explicitly stated.
Beyond the transition agreement, there is little new in this paper. Despite losing its majority in June’s general election, the government remains committed to the leaving the EU’s Customs Union in the long-run. Why the UK should leave the Customs Union is not explained and much of the paper is devoted to discussing how to mitigate problems that will result from leaving the Customs Union. Once the transition agreement expires, the government will seek a “new customs arrangement that facilitates the freest and most frictionless trade possible”.
The paper puts forward two approaches to achieving this objective: streamlining customs procedures between the UK and the EU as much as possible, or; a customs partnership in which there is no need for a customs border because the UK mirrors the EU’s import requirement for goods whose final destination is the EU. Both approaches are worth exploring further, but the hard work of assessing whether these ideas could work in practice has yet to be done. In any event, neither option could ever fully mitigate the increase in red tape and trade costs caused by leaving the Customs Union.
Overall, the paper suggests the government is in the early stages of developing its vision for the future of UK-EU trade relations and still wants to both have its cake and eat it. Worryingly, the paper does not explicitly address the trade-off between economic integration and political sovereignty the UK will face during the Brexit process. Here are five important questions about the UK’s position that the paper does not answer.
- Does the UK want to remain in the Customs Union during the transition period or not? A Customs Union is not like Schrodinger’s cat. Either you’re in it, or you’re not. Two days ago Philip Hammond and Liam Fox wrote that during the transition period the UK would be “outside the single market and outside the customs union”. Today’s paper suggests the UK wants to remain in the Customs Union during the transition. If the UK is in the EU’s Customs Union, it must impose the EU’s common external tariff on trade with the rest of the world, meaning Liam Fox cannot sign any new trade deals with non-EU countries. If the UK is not in the Customs Union, there will be customs procedures on UK-EU trade and the costs of trade will rise. The paper attempts to fudge this distinction, but the choice is unavoidable and needs to be faced.
- Is there sufficient time to negotiate a bespoke transition agreement before March 2019? Trade negotiations are lengthy and complex. The EU-Canada free trade agreement will start to come into force in 2017, eight years after negotiations began. A transition agreement is needed because there is insufficient time to negotiate a final deal before Brexit occurs. However, negotiations over the transition agreement will also face these time constraints. For this reason, it would be simplest for the UK to seek an off-the-shelf arrangement, such as continued membership of the Single Market or the European Free Trade Association (EFTA). The more the UK seeks to customise the transition agreement, the more complex and time-consuming the negotiations will become and the lower the probability of reaching an agreement. This increases uncertainty and raises the chances of a no-deal Brexit.
- Why would the EU agree to these proposals for a transition agreement? The EU holds the balance of power in the Brexit talks since it stands to lose less than the UK if talks break down. Consequently, understanding the EU’s objectives is useful for predicting the likely outcome of negotiations. The EU’s primary goal is to ensure its continued unity by protecting the integrity of its institutions. This means the EU will not allow the UK to cherry-pick the contents of any post-Brexit deal. The proposal for a partial customs union during the transition period is an attempt at cherry-picking and prompted the European Parliament’s Brexit co-ordinator Guy Verhofstadt to tweet that “To be in & out of the Customs Union … is a fantasy”. Unless the UK is willing to offer the EU something substantive in return, there is no reason to expect the EU will agree to this transition proposal.
- What arrangements will the government seek to govern trade in services with the EU? The position paper focuses on customs arrangements for trade in goods, but barely mentions services which accounted for 45 percent of UK exports in 2016. Leaving the Single Market will make it harder for UK services firms to export to the EU, particularly in areas such as financial services where the UK will lose passporting rights. The future of agricultural trade is also not discussed. Turkey’s Customs Union with the EU does not cover agriculture and it is unclear whether the EU would be willing to include agriculture in any transition agreement.
- Has the government undertaken an impact assessment of its proposals? There are many options for what Brexit could entail and no consensus for which option the UK should seek. In broad terms, the UK faces a trade-off between minimising the economic costs of Brexit by remaining closely integrated with the EU and taking back control by severing ties with the EU. Why has the government decided that leaving the Customs Union is in the UK’s best interests? What evidence has informed this decision? Either no impact assessment exists, or the government is keeping the findings of its impact assessment secret. Neither option is desirable. Given the importance of Brexit for the UK’s future and its lack of a parliamentary majority, the government should be as transparent as possible about how it decides the meaning of Brexit.
Please read our comments policy before commenting.
Note: This post was originally published on our sister site, LSE Brexit. The article gives the views of the author, not the position of EUROPP – European Politics and Policy or the London School of Economics.
_________________________________
Thomas Sampson – LSE
Thomas Sampson is a Lecturer in the Department of Economics and a Trade Research Programme Associate at the LSE’s Centre for Economic Performance.
‘What evidence has informed this decision?’ ‘assessment of impact?’ Thomas the only assessment was whether these fantasies would keep the Conservative party intact, i.e keep Rees-Mogg and the fanatics on board. Evidence and assessments might come in the way of that goal by showing stuff that might undermine their deluded agenda and which they do not wish to see.Anyway evidence and assessments is what those elite expert -citizens of nowhere do-and we know what the football hooligans in suits think of them.
“Why has the government decided that leaving the Customs Union is in the UK’s best interests?”
While in the EU customs union the UK must apply EU tariffs on all goods for consumption in the UK as well as those transiting to another EU state. Membership of the EU customs union also legally prevents the UK from negotiating trade deals regardless of when they are to be signed/implemented. Neither can the UK commit itself long term to having future trade deals negotiated by its economic competitors.
You haven’t actually explained here why leaving the Customs Union is a good idea. You see this quite a lot with the Eurosceptic case: simply listing constraints caused by being part of joint European initiatives, but without mentioning the benefits (or the costs of leaving). The Customs Union, like all forms of European integration, involves joint actions that produce benefits for all of its members. The cost is a loss of autonomy, but you balance that against the benefits. You can’t assess it just by citing the constraints.
Take the case of free trade agreements as a starting point. The Eurosceptic case is that the EU prevents us from signing free trade agreements and that by leaving the Customs Union we will be free to negotiate a series of free trade agreements that wouldn’t otherwise be possible. But leaving the Customs Union also means that we drop out of the existing free trade agreements that already apply to the EU: in some cases we might have to renegotiate these and the third parties who provided substantial concessions to the EU might be unwilling to provide the same concessions to a smaller market. Most free trade agreements are trade-offs between states: we’re bringing less to the table than the EU is in terms of the size of our market so we can expect fewer concessions. We effectively gain the autonomy to acquire worse trading arrangements than we already have.
Then there are the transaction costs associated with being outside of the Customs Union. If we have a customs barrier between us and the rest of the EU then it inhibits trade. We also end up with a decidedly problematic situation in Ireland. What we’re proposing at present is impossible as we’re claiming on the one hand we want to negotiate new free trade deals with other countries that are different from what the EU has in place, yet we’re also claiming we don’t want a hard border between us and Ireland. How is the EU supposed to prevent all of these new products that can enter the UK market from entering the EU’s market if there’s no hard border with Ireland? That position simply doesn’t make any sense.
At no point has the government presented a solid case for why the costs associated with leaving the Customs Union are worth it.
A customs agreement doesn’t simply set tariffs, it defines a precise description of the products and their quota’s (above which normal tariffs apply). When the UK leaves the EU it has no say over what new agreements contain or alterations of existing ones. For example, in return for a trade concession from India the EU might agree to exclude from EU exports to India a very precise definition of a form of alcoholic beverage that just so happens to mean Scottish whiskey. It isn’t just a possibility that they would do such things, it is a near certainty. Just look at how the regulation that attempted to push Euro clearing out of London, it never mentioned London but the combination of rules meant only the UK (and not non eurozone Denmark) was affected. Inside the EU customs union UK trade would be slowly strangled.
There is also a positive case for leaving the EU customs union. While the EU does have much greater negotiating power it is not used in a way that fits well with the UK economy. The UK is heavily services orientated (75%/80% ish I believe) but getting services included in a free trade deal is very difficult without making major concessions in an area such as agriculture. The EU would never do this but it makes far more sense for an independent UK. The result is cheaper food in the UK while freeing the massive services sector to enter wider markets. The UK will lose its existing EU deals and there will be short term pain from it. However the deals the EU did were with the UK as a member and the signatories to those deals will want to continue their UK exports. Those countries are already talking to the UK about replicating the existing deals.
The solution to the NI border is complex but workable. The UK is not proposing that an importer may set up business in Belfast importing chlorinated chicken and then export it via the republic to france. The idea is that low level intra irish trade continue unrestricted. External imports are classified by intended final destination and taxed accordingly. Where there is ambiguity the higher tax is charged and then the final user can reclaim the difference if they can provide proof of the location of consumption. This proposal ‘made sense’ and was actively being worked on by both the UK and Republics customs until the new Irish government made a political decision to stop preparations as brexit ‘was a UK problem’.
There are obviously going to be costs inflicted on EU trade by leaving the customs union and the single market. They are however for me an unavoidable consequence of leaving the EU. That decision was not economic but political and one I was converted to by the sight of an unelected man falsely claiming a political mandate as president of the EU commission.
Apologies, please replace ‘customs agreement’ with ‘trade agreement’. Brain elsewhere.
Mike – the Irish border solution is unworkable on many levels.
We will end up with tariffs applicable outside the SM/CU – we also need to check standards and so do they of products and manage duty. Paperwork and coding will be required on both sides.
“low level intra Irish trade” there is no such thing. – why can’t I route my products via 3rd parties across the border?
Imports are not classified by final destination – that’s not how trade works. If there is no border products will move legally or illegally.
There is no border between France and Ireland so products can end up anywhere in the EU once in IE.
Mike, I beleive there are coherent reasons to leave the EU but I find your ” road to Damscus” conversion very bizzare.
Please note that “President” in Europe means “Head” as in the ” President of the School”. The idea that all offices called ” President ” are meant to equate with the office of the President of the USA is
ludicrous.
Please note the EU is a project in the making. It’s currently a loose confederation that it’s members voluntarily join and (as the UK will) always leave.
Democratic governments voluntarily appointing delegates to Brussels for joint decision making is not anti democratic. I would have always prefferred more powers with the EU parliament, but the UK was government was one of the most strongly oppsed to giving the EU parliament more power. The UK government preferred inter government conferences with decisions made behind closed doors.
I neither thought or claimed the president of the eu commission performed a similar role in the eu as the usa president does there. What the president of the eu commission does have by eu treaty is direct and complete power over the commission. Every member of it including the commissioners must obey his instructions. He can sack any at will. Given the power of the commission i find that unacceptable. It could be tolerated while commission presidents renounced this power and agreed to take their direction from the eu council as all previous commission presidents have done. Juncker claims a political mandate and with it the right to pursue his own policies. He proudly declares it, if you doubt it just watch his first speech in parliament after his appointment.