The UK government’s plan for the future customs arrangements and transition period show how little the Trade department knows about trade. Time for the Brexiteers to prepare for a hard border.

Theresa May big-head puppet mourns at the grave of hard Brexit after hung parliament shock. Demonstrators in Westminster a day after the UK general elections on June 8, 2017.

 

 

When Hammond and Fox published a joint article in the Sunday Telegraph, the war between hard and soft Brexiteers seemed to finally be over. The Trade Secretary and the Chancellor assured us that the UK will leave the Single Market in March 2019, but still left to our imaginations what exactly the after-Brexit arrangements would be.

On August 15, businesses got their first preview of Whitehall’s position on the future of the UK-EU relationship. After reading Whitehall’s paper and the EU’s skeptical reaction to it, many doubts still persist.

In the 16-page-long document, the Government sets out its vision for the future customs arrangements with the EU. It also proposes an “interim period” that will smooth the Brexit transition, despite what was written in the Sunday Telegraph.

The first option is a “highly streamlined” custom check that will employ “technology-based solutions” to make clearance as fast as possible. Among the options, the Government mentions “roll-on, roll-off” ports that would allow traffic to flow smoothly, and the mutual recognition of Authorised Economic Operators, which would ensure some goods are not stopped at all.

The second option is a new customs partnership with the EU. This solution is deemed “innovative” and for some good reasons. It foresees the elimination of custom processes at the EU border, which means that the UK will apply the current regime for imports to goods consumed in the Union. But in order to be in line with the brexit rationale, meaning lowering tariffs toward non-EU countries, the UK will still be able to apply its own trade policy. The contradiction between the elimination of border checks and the willingness to have an independent trade policy will be overcome by setting up a “robust enforcement mechanism”, which tracks where imports end up being used or consumed, together with a “repayment” system allowing traders to be reimbursed the difference between the UK and EU tariff.

In order to smooth the transition to either one of these two regimes, the Government proposes to agree on an “interim period”, in which a “new and time-limited” custom union would be in place. Because this arrangement would not impose any border checks, the UK would de facto still be in the Custom Union. According to the Trade Secretary, this would still be consistent with the country signing new trade deals with other countries, although — and here is the catch — it would not bring them into effect if they were not consistent with the interim agreement.

There is a lot to unpack for such a short document and some questions immediately emerge. First of all, it is not clear how much all this will cost, nor what is actually needed in terms of infrastructure, bureaucracy and general administrative capacity. This is especially true at the Irish border, which is crossed by some 200 roads. Will technology be enough?

What is certain, however, is that trade with the EU will be more difficult. Whichever of the two solutions will be adopted, importers and exporters will need to adapt to a new, more complex regime. The idea – articulated in a recent BBC debate by Prof Minford and largely opposed by the economics profession – is that future free trade agreements with other trade partners will make up for these lost gains.

Leaving aside the irony of calling the UK “a proud champion of global free trade” in the same paper that sets out the plan for future custom checks, there are further and more worrying problems concealed by the engaging tone of the paper.

Starting from the most obvious one: the second option for a new custom union with the EU is completely unmanageable.

The plan tries to solve the issue of building a hard border with a tracking mechanism. The problem is unsolvable, though. If I am a Brazilian avocado exporter wanting to sell my goods to the EU, while the UK has lower tariffs, I would surely want to make all the shipments pass through London in order to pay less, since there would be border checks. The idea that Westminster has to still make me pay the EU tariff is to set up a “tracking mechanism” that knows where my avocados are consumed. Now, imagine that each year some £242 billion worth of goods are exported to the EU and that even a small proportion comes from non-EU countries. The amount of paperwork to make this system work would make the most efficient bureaucrat shiver at the thought. Indeed, it is no wonder that no other country on earth has ever thought about this. Do we still think the Trade Secretary is a champion of free trade?

Then of course there is the whole debate on the interim arrangement. Some thoughts on this point are warranted.

First of all, the Government is still convinced that the two year period will suffice to both agree on the divorce settlement and set up the new trade deal.

This clashes with the mandate of the chief EU negotiator, common sense and EU law. Indeed, the UK cannot legally sign any trade agreement before it has left the EU, which explains why Michel Barnier has instructions from the Council only on the terms of the divorce settlement and not on the future trade relations. If the average length of a FTA negotiation is two years, then it is clear that by 2019 a comprehensive trade deal will not be reached. Even more so if one considers the fact that most FTAs in that average do not have entire chapters on how to deal with the constellation of EU agencies that will need to go back to the UK’s competences.

So if a trade deal was not reached by 2019, businesses and traders would be faced with the difficult question of how to adapt during the interim period.

But let’s assume that two years is more than enough. After March 2019, the paper proposes a new Custom Union that would allow the Trade Secretary to sign new deals. However, the document also specifies that these trade deals would not enter into force if they were not consistent with the interim agreement. Because the latter looks very much like the current Custom Union, this means that no FTA would ever see the light of day during that period, since custom rules prohibit any country from having its own trade policy (because of the same “avocado problem” outlined above). If this is true, then the Government will limit its ability to discuss future deals with other potential partners.

Moreover, it seems like neither the media nor the cabinet have factored the EU’s position into the Brexit equation. In the directives for the negotiations, the Council explicitly states that during the interim period, all EU laws and regulations would apply. If this was the case, then the transitional period would turn into political suicide for the Government. Effectively, London would have no say in Brussel’s decision-making, while still contributing to the budget and enforcing EU laws.

A hard pill to swallow for the hard Brexiteers, but also the only one that would make them happy. Indeed, the harder the Brexit, the more arrangements with the EU will need to change, whilst businesses and the Government will require a longer interim period to adapt. This is perhaps the paradox of advocating a complete rupture with the continental block: in order to do it, more time is needed.

Though it is undoubtedly a positive that the Government’s paper sought to provide some clarity on its position to business and citizens, it seems as though the compromise between a hard and soft Brexit still needs some fine-tuning.

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