In my last BrexitCentral article, I posed the rather obvious question to the EU: “Would you rather have a no-deal-style Irish border with or without £39 billion?” That choice, which Brussels seems not to have understood, has now come into sharp focus and it seems now that the answer is likely to be presented to them as a fait accompli.
Aside from the niceties, the fundamental objection to Theresa May’s proposed deal is the potentially perpetual lock-in to a customs union. The “joint committee” means of course that it will be for the EU to decide when or whether we can leave. It is unheard of, and utterly unacceptable, for anyone (and certainly any country) to be potentially bound in perpetuity by an arrangement that they have no ability to terminate.
In the political declaration – i.e. informally – the EU says that the Irish backstop, separating Northern Ireland from the UK by remaining in the customs union and adhering to the EU rule book, might be avoidable by either a technological solution or an appropriate trade deal. But it’s quite clear that the only trade deal that will satisfy them with respect to keeping the Irish border open is one that keeps the whole of the UK in the customs union. As a result, the UK would not be able to enter into global Free Trade Agreements (FTAs). That is precisely their desired outcome, so they are unlikely to show any enthusiasm for a MaxFac solution. At the same time, with £39 billion committed unconditionally, the UK will have absolutely no leverage.
We have no need to wait for proof of that. At the recent EU summit, Emmanuel Macron warned that if, in future talks, the UK is unwilling to make compromises over fishing, the negotiations for a wider trade deal could be slowed down, which could lead to the last-resort backstop plan coming into force.
So it follows, as night follows day, that we could be – if not forever then at least for many long years – in either a temporary or permanent customs union with the European Union. To avoid the Damocles sword of the backstop from destroying our negotiating position, we must decouple the Irish border issue from the trade negotiations. How to achieve that is by using no deal as the bridge to the arm’s length negotiation of the new relationship.
Parliament now seems very likely to reject the proposed deal. So in the absence of new legislation, therefore, we will leave on 29th March 2019 with no deal (as explained by Stewart Jackson on BrexitCentral here). So what are the implications of that?
EU short-term trade: We would have to trade with the EU on WTO terms until a free trade deal can be agreed with them. This is undesirable but not catastrophic. 39.3% of UK imports and 33.1% of exports are conducted under WTO rules with non-EU countries. Most countries in the world (111 out of 195) trade with the EU under WTO rules, including China, India, Russia, the United States and Singapore. Despite tariff and non-tariff barriers, Britain’s trade with non-EU countries is in surplus and growing, while our trade with the EU is in deficit and shrinking.
If the EU imposes a 10% tariff on our exports and we tax their imports into the UK at 10%, prices go up to the extent that not offset by significantly lower world prices than EU prices for food and commodities. 10% tariff provides a revenue boost to HMRC, to be spent to our benefit. Exports are harder but offset by a fall in sterling that boosts exports while making imports more costly – no bad thing to help rectify our appalling adverse EU balance of trade.
Meantime, domestically, the UK can think about diverging from some EU regulations. Clearly, businesses exporting to the EU will have to comply with EU product standards and trading terms but the burden of those standards need not necessarily be imposed in the 94% of businesses, representing 88% of GDP, that trade only domestically or with non-EU countries. (CETA clearly does not require Canada to impose all 100,000 pages of EU rules and regulations upon every Canadian business.)
EU long-term trade: Michel Barnier himself said, in his speech announcing the deal, that agreeing a free trade deal with the UK should be much quicker and easier than FTAs with other countries as we start from a position of complete alignment. And we have in CETA, the EU/Canada FTA, a ready-made template for the trade agreement between the EU and the UK. That is not to say that the negotiations will be easy if, for example, the EU’s demands include full access to UK fisheries, which is why it is so vital that we can back up a tough stance with a £39 billion carrot.
Friction: Queues at Dover would be bad news but friction can be minimised, for example, by trusted-trader status for regular just-in-time supply-chain consignments and number-plate recognition that opens barriers automatically on designated trusted trader lanes etc. There are four months to take steps to increase capacity (a job that should have been started two years ago), for example by establishing an inland port and protected route to the seaport.
The recent paper published by Global Britain and the European Research Group, Fact – NOT Friction: Exploding the myths of leaving the Customs Union, shows that “fears are driven by a series of myths about how customs procedures work”.
Global trade with EU partners: Much capital is made of the fact that we currently benefit from EU FTAs that allow us to trade freely with more than 40 non-EU countries. This is true but they include places like Guernsey, Guadeloupe, San Marino, Büsingen am Hochrhein, the Falklands and South Georgia. The EU has trade agreements with only three of the UK’s principal trading partners – Switzerland, South Korea and Canada. People love to proclaim the fact that “a single trade deal can take years or decades to agree” with the clear implication that that is bad news. It is not. On the contrary, for countries with whom the EU has existing FTAs, it is fantastically good news. It stands to reason that, save to the extent that the parties wish to change anything, all that is needed is to copy the current FTA between the EU and that country, change the name of the contracting party and sign it.
New global FTAs: We would be able to negotiate and enter into global FTAs at the earliest opportunity. Very many countries have expressed a desire to do so – Australia, Argentina, Brazil, Canada, Chile, China… and I’m only up to the Cs.
Global trade before new FTAs: Meanwhile we will no longer have to impose the EU Common External Tariff on imports from the rest of the world: 15.7% on animal products, 35.4% on dairy products, 10.5% on fruit, vegetables and plants, 12.8% on cereals and preparations, 23.6% on sugars and confectionery. 19.6% on beverages and tobacco.
Non-trade issues: Many non-trade issues are addressed, directly or indirectly, by the 585-page draft Withdrawal Agreement: citizens’ rights, EU access to the City, defence and international affairs, aviation, Horizon 2020 etc etc. If the EU became obstructive over many of these, it could present severe problems. As the issues have, presumably, been agreed because they are to mutual advantage, it is hard to see why the EU would consider it to be to its benefit to behave aggressively (other than to prevent the UK from leaving).
The Irish border: As Andrew Lilico pointed out on BrexitCentral, the border between Northern Ireland and the Irish Republic has some 275 crossing points. The border separates regulatory, tax and legal regimes that are very different and is controlled via a combination of administrative cooperation, whistle-blowing, auditing, site raids by customs, tax and regulatory enforcement officials. There are – currently – occasional random spot-checks on roads leading up to and at the border, as well as cameras and other physical infrastructure at the border.
Lilico also noted some UK press discussion suggesting that the EU would impose stop-and-check controls at the border, like those between the EU and Turkey. Such an attempt is certainly possible, but seems highly unlikely because of the scale of the task (275 crossing points, more than all other land crossing points into the rest of the EU from other countries); and because the Irish Government claims that the EU has given undertakings that no such controls would be introduced; and because Ireland seems unlikely to allow them to be imposed, even if the EU so desired.
There has been much talk of technological solutions that will take years to develop but the European Research Group’s paper, The Border between Northern Ireland and the Republic of Ireland post-Brexit demonstrates how each of the issues can be addressed without the need for technology not yet invented. The Irish Government and others dismissed the paper immediately as “pure fantasy”, apparently because of concerns about ability, without either a hard border or ‘new technology’ (what kind of new technology?) to prevent smuggling or the import of non-compliant goods into the EU. At present, the Republic of Ireland physically inspects only 1% of imports, so 99% of contraband and non-compliant goods are already getting through!
Some 33% of Northern Ireland’s goods exports (all sales outside the UK) went to the Republic of Ireland in 2016 and were worth around £2.7 billion (€3.1 billion). The EU’s imports from the rest of the world amount to around €172 billion and the EU’s GDP was about $17,300 billion (€15,200 billion) in 2017. In the unlikely event that 25% of all goods transported across the Irish border was undetectable contraband or non-compliant goods (pretty unlikely that), this would represent 0.5% of all imports into the EU and 0.005% of EU GDP. But it wouldn’t be 25%, would it? Who is being fantastical here?
As the ERG paper says, “no border is 100% secure against smuggling. Smuggling takes place across EU borders in Eastern Europe and the Mediterranean. Moreover, it occurs at present across the border between Northern Ireland and the Republic of Ireland. Drugs, fuel, tobacco, cigarettes and other illegal goods have been smuggled across the Irish border since the 1920s but cross-border co-operation is already used to combat criminals. The PSNI, the Garda Síochána, customs authorities and law-enforcement agencies co-operate to counter this trade. Law-enforcement agencies on both sides of the border co-operate to suppress smuggling without anyone suggesting that border posts and checks would make their efforts more effective.” And there are better ways to identify non-compliant goods than by random 1% or 3% checks at the border.
The latest ERG paper, Your Right To Know – the case against the Government’s Brexit deal, extols the virtues of ‘A better alternative – a “Super Canada” Free Trade Deal’, but misses the point. Yes, Canada-plus would be a million times better than the Chequers plan and the currently proposed Withdrawal Agreement but it does not address the Irish border issue. Although Canada-plus has been offered several times by the EU, they offered it only in combination with the backstop of Northern Ireland being separated from the rest of the UK.
I would therefore say that the two things – the Irish border issue and UK/EU trade relationship – need to be decoupled. We should leave with no deal and confront the EU with the Irish border problem in March 2019.
Thereafter there will still be issues over the nature of the trade deal – whether it will be close to Canada-plus or will have to be more limiting because of the EU’s unwillingness to contemplate anything that might allow the UK to become competitive. We would need to weigh up the benefit of a UK/EU FTA based on a customs union and common rule book against the known drawbacks – EU regulations imposed on the 94% of UK businesses, representing 88% of GDP, that trade only domestically or with non-EU countries; no say in determining future regulations or trading standards; no ability to innovate; no ability to negotiate trading standards as part of FTAs; and maybe, if remaining in the customs union, no ability to enter into global FTAs at all.
By decoupling Irish border issue from UK/EU trade relationship, the Irish border will no longer be the overriding, determining factor. It will be for the UK to decide what is in its best interests, like the other 40 countries, large and small, that have entered into widely varying trade arrangements with the European Union
And £39 billion retained will, without doubt, focus the minds of those on the other side of the negotiating table – but the £20 billion or so of net contributions that they would have received during the two-year transition period will have been irrevocably lost.
We now learn that the Treasury predicts that the country will suffer £150bn in lost output over 15 years under no deal, with Theresa May’s plan costing in the region of £40bn.
This latest manifestation of Project Fear has to be the ultimate insult to the nation’s intelligence.
With or without Mrs May’s Withdrawal Agreement, we will have the ability, within 2 years or more, to conclude a free trade deal with the EU – without a shadow of doubt a far more favourable one if we are able to negotiate while holding out a £39 billion carrot and without the Damocles sword of the Northern Ireland backstop suspected over our heads. And, dependent on how closely we decide to tie ourselves to EU standards, the ability to conclude FTAs with other countries.
The only counteracting drawback of no-deal is the short-term damage (and, conceivably, any irrecoverable long-term damage) to UK/EU trade as a result of the short-term disruption arising from the loss of the transition period. But we’d start with a saving of £20 billion or more from net contributions to the EU over two or more years. And benefit from earlier freedom to deal with our fisheries and agriculture (and, and… need I go on?)
No doubt the Treasury will, as usual, refuse to disclose its ridiculously biased assumptions.
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