‘Malthouse Compromise’ wins DUP backing and support from trade experts

Late last night it emerged that MPs representing a broad cross-section of Tory opinion on Brexit had been working together on a new plan behind which Leavers and Remainers could unite. The so-called Malthouse Compromise – named after Brexit-backing minister Kit Malthouse who helped broker the discussions that brought the parties together – would provide […]

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Late last night it emerged that MPs representing a broad cross-section of Tory opinion on Brexit had been working together on a new plan behind which Leavers and Remainers could unite.

The so-called Malthouse Compromise – named after Brexit-backing minister Kit Malthouse who helped broker the discussions that brought the parties together – would provide for “exit from the EU on time with a new backstop, which would be acceptable indefinitely, but which incentivises us all to reach a new future relationship”.

Also reportedly involved in the talks that brought about the proposals were European Research Group stalwarts Jacob Rees-Mogg and Steve Baker, Remain-backing ministers Stephen Hammond and Robert Buckland, as well as Treasury Committee Chair and former Cabinet Minister Nicky Morgan.

The plan would extend the transition period by a year to December 2021, which would “allow both parties to prepare properly for WTO terms, but also provide a period in which the parties could obviate this outcome by negotiating a mutually beneficial future relationship”.

A summary of the proposals is circulating, which explains it as follows: 

Plan A – Revise negotiated Withdrawal Agreement and Framework

Outline:

  • Immediately table legal text to amend the Withdrawal Agreement to replace the backstop with an acceptable indefinite solution set
    out in A Better Deal, 12 Dec 2019
  • Maintain our offer on the rights of EU citizens in the UK, the agreed financial settlement, and the proposed Implementation Period
    (IP) until no later than Dec 2021, or sooner on conclusion of the Future Relationship (FR)
  • Require that, at the end of the IP or sooner, the UK shall negotiate fisheries access as an independent coastal state, under UNCLOS

Advantages

  • Rescues the Withdrawal Agreement
  • Maximises leverage plus secure a transition period
  • No backstop dangers: the new protocol is permanent, a “frontstop” and should be objectively acceptable to all.

Disadvantages

  • Uncertainty continues until the FR is ratified
  • Difficulty of persuading Eurosceptics to swallow:
  • – £39bn payment
  • – Saving the effect of the ECA during the IP
  • – Additional EU citizens’ rights
  •  – Other WA problems (DSC, CCP vs WTO)

Plan B – Basic transition agreement=====================

Outline:

  • Continue to offer legal text for Plan A and bilateral cooperation in areas of mutual interest, including security, in a spirit of goodwill
    and cooperation
  • Unilaterally guarantee EU citizens’ rights
  • Uphold current standards, pending a comprehensive FR
  • Offer to pay our net contribution (c.£10bn pa) in exchange for the Implementation Period as negotiated, until no later than Dec 2021
  • Require that, at the end of the IP or sooner, the UK shall negotiate fisheries access as an independent coastal state, under UNCLOS
  • Work to agree an interim GATT XXIV compliant trading arrangement, pending a comprehensive FR
  • Revise our financial offer to the minimum compatible with our public law international obligations and submit to arbitration

Advantages

  • Offers a standstill to 2021 to enable negotiations
  • Preserves optionality
  • Secures time
  • Secures exit

Disadvantages

  • Risks EU conditions, legislation, extension
  • No Withdrawal Agreement
  • Eurosceptic concern about:
  • – Structure of standstill, esp saving ECA effect
  • – Money

The DUP have been swift to endorse the Malthouse proposals, with party leader Arlene Foster issuing a statement to formally endorse the plan:

“We believe it can unify a number of strands in the Brexit debate including the views of remainers and leavers. It also gives a feasible alternative to the backstop proposed by the European Union which would split the United Kingdom or keep the entire United Kingdom in the Customs Union and Single Market. Importantly, this proposal would also offer a route towards negotiating a future trade relationship between the United Kingdom and the European Union.

“If the Prime Minister is seeking to find a united front, both between elements in her own party and the DUP, in the negotiations which she will enter with the European Union, then this is a proposition which she should not turn her back on. There is no better time to advance this alternative given the confusion and disarray which is now manifesting itself in Brussels. This has been displayed both by the contradictory EU statements and the panic stricken behaviour of the Irish government.”

Steve Baker has also released a letter in support of the Better Deal plan from a range of international trade experts, which reads as follows:

Dear Steve,

You have asked for our views as trade policy experts as to the proposal of a Better Deal as an acceptable Withdrawal Agreement that would allow the UK to proceed to the next stage of negotiations, and that would not, in our view take an independent trade and regulatory policy off the table, and would allow, if the UK so chose a clear and negotiable pathway to a comprehensive and advanced free trade agreement such as proposed in Plan A Plus.

We can confirm that in our view the UK would be best served by putting an offer like a Better Deal on the table, and allow the process of pressure and compression at the back end of the negotiations to start to take effect. We would anticipate that the UK will see datapoints emerge from the EU in the course of the next month, such as EU member state agricultural producers express concern about the possibility of no deal, especially Irish beef farmers, Bavarian dairy farmers, and French farmers. We would anticipate member states start to weaken in their unity vis-à-vis each other and the Commission. We have already seen signs of this from Germany, Poland, and from French farmers and fishermen. It is imperative that the UK keeps the pressure on (seeking an extension of Article 50 at the end of February per the Cooper-Boles amendment would be a fatal mistake as it would take the pressure off the EU just as it would otherwise be building). In addition, there is value to putting this facilitated approach on the table as if there is to be an FTA in the future, it will require discussion and evaluation now. It is better to get the EU used to UK ideas on this point, and to put some specifics behind Michel Barnier’s recent pronouncement that, in the event of no deal, alternative arrangements would have to be found for the Irish border. Furthermore, during this period, it would be important for the UK to line up its allies, especially those who run global supply chains through the UK and EU-27 such as the US, Japan, and Korea to name three in support of its reasonable proposals, thus increasing the pressure and compression on the EU.

In our view the current deal gives all the negotiating leverage to the EU during the negotiating phase and makes the path to an advanced FTA such as we have proposed in Plan A Plus extremely difficult. If comfort could be given that such an un-occluded path exists, then support might be brought to bear on all sides for an agreement allowing the transition period to be retained.

Yours sincerely,

Peter Allgeier, Former Deputy USTR and Former US Ambassador to the WTO
Eduardo Perez-Motta, Former Mexican Ambassador to the WTO and Former Chairman of the Mexican Competition Commission
Alan Oxley, former Chairman of GATT Council, Former Australian Ambassador to the WTO, founder of the Cairns Group
Lockwood Smith, former Trade Minister of New Zealand
Shanker Singham, former cleared advisor to US government, Mitt Romney Presidential Campaigns of 2008 and 2012, and formerhead of Squire Patton Boggs Market Access/WTO practice
Hans Maessen, Customs specialist, SGS Corporation, and representative of CLECAT, European Association of Customs Professionals
U. Srinivasa Rangan, Professor of International Business, Babson College, US

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Here’s how to solve the Irish border issue and make the Withdrawal Agreement acceptable

It is now clear that there is very little support in Parliament for the Prime Minister’s Withdrawal Agreement. The most important objection is the so-called Irish backstop in Protocol 9 which essentially keeps Northern Ireland in the EU indefinitely and binds the UK into a customs union from which there is no release unless the […]

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It is now clear that there is very little support in Parliament for the Prime Minister’s Withdrawal Agreement. The most important objection is the so-called Irish backstop in Protocol 9 which essentially keeps Northern Ireland in the EU indefinitely and binds the UK into a customs union from which there is no release unless the EU says so – which it would have little incentive to do. Even under our present terms, we can leave if we choose.

Other options such as another referendum, or some version of “Norway” are for various reasons unworkable. It is equally clear that neither side wants a “no deal” scenario. However, if a solution could be found that preserves the transition period and most of the Withdrawal Agreement, it must be considered, for the sake of continuity, good relations with the EU and the island of Ireland.

This week, I – along with Robert MacLean and Hans Maessen – have laid before policy-makers an alternative that we believe would remove those aspects of the Withdrawal Agreement which are unacceptable, and yet retain the genuine progress achieved to date. This is not to say that there is nothing else in the Withdrawal Agreement which is objectionable, including its one-sided structure. However, in the spirit of compromise, we do not pursue those matters, but offer a solution to the heart of the problem. This, we believe, solves the Irish border issue on a permanent basis, enables a backstop to exist on a basis acceptable to all reasonable stakeholders and builds on the EU’s offer to the UK of an advanced Free Trade Agreement with regulatory cooperation, customs facilitations and Irish border facilitations. This is part of a bigger project to propose the real legal text of a Free Trade Agreement between the UK and EU.

First, the proposed backstop needs to be replaced, with an alternative based on a basic Free Trade Agreement in goods and agri-food, with a chapter on Customs and Trade Facilitation, and Irish Border Facilitations, which would in due course become part of the ultimate comprehensive Free Trade Agreement which the UK and EU will seek to negotiate, with some additional provisions for regulatory cooperation, and stand-alone dispute settlement mechanisms. Our proposed backstop could last for a fixed period, say ten years – on any view long enough for a comprehensive Free Trade Agreement to be negotiated between the UK and EU. In other words, our backstop can function as a front-stop, should the need arise, unlike the EU’s, which gives them no incentive to release the UK from de facto EU control. Since the backstop is the ultimate permanent arrangement, there is no loss of negotiating leverage for the UK to remain in it, nor is it a threat.

Contrary to what the Government has claimed, this does not involve the use of “magical” new technology but existing customs facilitation procedures already in use across the world. It avoids a hard border – which in any event all sides have pledged to do – respects the Good Friday Agreement and removes the challenge to the territorial integrity of the UK posed by the creation of “UKNI” in the existing Withdrawal Agreement, aptly described as “a new country”. From the EU point of view, it enables a smooth UK withdrawal and avoids an attempt to exercise jurisdiction in the territory of a non-Member State.

We also believe that, if the current flawed and legalistic process is allowed to hit the buffers, there is an opening for a more political solution driven by European heads of state, since neither side wants a no-deal outcome. Naturally, the UK Government must prepare for no deal, since there is always the possibility of no deal, through no fault of the UK. The UK Parliament cannot control the actions of the EU and therefore for the UK Parliament to decree that there shall be no deal is pointless; it is also extremely damaging, as it tells the EU that the UK will accept any deal. We must become serious negotiators and understand that being prepared for no deal is a way of ensuring a better deal for both the UK and the EU.

We must also be prepared to push back against the fear and risk-aversion, and ask for what we want, presenting a draft Withdrawal Agreement to back it up. We have done altogether too much negotiating with ourselves.

From an EU point of view, any failure by the EU to reach a deal acceptable to its nearest neighbour, closest ally and largest third-country market will have enormously adverse political and economic consequences, within the EU and around the world. There are significant and powerful economic forces at play, and not all are in the EU’s favour. For example, one aspect of the EU’s very large favourable balance of trade with the UK – now seriously at risk – is the EU’s need to maintain its high market share in UK markets for its agricultural exports. The farm lobby is the most powerful in Brussels, and in Member States. The EU must know that no responsible UK government could, or would need to, allow no deal to mean food price inflation, and that we would have to either apply a third-country tariff of zero for certain agri-foods, or open the relevant trade quotas to other countries (on a first come, first served basis). Irish beef farmers, French beef and dairy, and Bavarian dairy farmers would lose market share almost instantly and this will have a massive impact on them. For the UK, lower food prices could well be the unexpected bonus of the rejection of the present Withdrawal Agreement.

While there will no doubt be those who say that what we are offering is not enough to save a very bad deal, there will also be those who say it is too much for the EU to accept. But our aims are straightforward: to put on the table the necessary changes to the Withdrawal Agreement, a concrete future framework for a trade agreement that builds on their offer to us and, shortly, the full text of such an agreement, specifically noting what the EU has already agreed in other contexts. Let us lift our eyes to a higher vision of what this relationship should look like, instead of the myopic approach all sides have adopted thus far. Let us also recognise that it is impossible to determine the full conditions of our withdrawal, without knowing much more about the future relationship. Indeed, that is the inherent illogic of the EU’s negotiating mandate, which is partly responsible for the current predicament, but that cannot politically bind us at this late stage.

Nonetheless, we have produced a concept of what the Alternative to the Withdrawal Agreement might look like. We strongly advise the Government to present this to the EU immediately, along with a clear framework of a Trade Agreement, the full legal text of which we will also shortly table. Since this builds on what has already been offered, there is very little reason for the EU to reject it. We badly need to show our peoples on both sides of the Channel and the Irish Sea that we have momentum and are moving towards a good resolution. We have a huge responsibility: future generations will not forgive us if we fail them.

As explained, the text we will shortly circulate essentially replaces the proposed common customs territory with a Free Trade Agreement and comprehensive customs and trade arrangements that can serve as the backstop, or if you prefer, front stop, in Ireland. Some changes may be necessary to the Political Declaration, in order to conform to our changes to the Withdrawal Agreement, but most of it can stand, as can much of the Withdrawal Agreement, for example citizens’ rights and financial matters, subject to the money being based on benchmarks and milestones related to progress on the free trade agreement. Some issues, such as Geographical Indications, belong in the future trading arrangements, rather than the Withdrawal Agreement. The UK must also be able to negotiate its WTO modification by itself without having to consult with the EU, and then be free to operate in the WTO as an independent player. We have also turned the non-regression clauses into the sorts of mutual disciplines you would see in a typical Free Trade Agreement and ensured that they are mutual. We have provided that the transition period may be extended by agreement but there is no need to provide for extension now. Deadlines in trade negotiations are important, and concentrate negotiators’ minds. We see no reason to prolong business uncertainty for years.

The changes we have outlined allow a deal to the benefit of all European citizens to be reached before 29th March 2019.

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Why Dover can handle a ‘no-deal’ Brexit

It is often claimed that a no-deal Brexit would cause chaos at UK ports, with long delays at critical bottlenecks such as Dover and motorways turned into vast lorry parks. Indeed, we are told that any weakening of our ties with the EU would inevitably disrupt supplies of time-sensitive goods, such as fresh foods and medicines, […]

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It is often claimed that a no-deal Brexit would cause chaos at UK ports, with long delays at critical bottlenecks such as Dover and motorways turned into vast lorry parks. Indeed, we are told that any weakening of our ties with the EU would inevitably disrupt supplies of time-sensitive goods, such as fresh foods and medicines, and cripple businesses that rely on complicated cross-border supply chains. Fortunately, all these warnings have more than a dash of ‘Project Fear’.

Let’s start, though, with the element of truth. There are some potentially valid concerns about the non-tariff barriers (NTBs) that would be erected if the UK exits in March 2019 without a deal. These include logistical barriers, such as delays caused by physical customs and regulatory checks, and additional administrative hurdles, including the need to comply with ‘rules of origin’ and new licensing requirements for vehicles and drivers.

Most attention has focused on Dover, which handles 17% of all UK trade in goods worldwide. According to evidence compiled by the House of Commons library, Dover processes up to 10,000 incoming and outgoing freight vehicles a day. Currently, 99% of these originate in the EU and are processed in around two minutes, but checks on non-EU trucks typically take 20 minutes. The UK Freight Transport Association has estimated that an additional two-minute delay, on average, could cause a 17-mile queue on both sides of the Channel.     

These risks obviously need to be taken seriously. Indeed, the Government is already beefing up contingency plans to keep the M20 flowing in the event of any future problems at Dover, and recommending that suppliers add to precautionary stocks of critical goods, including medicines. Car makers have also suggested that they might reschedule planned maintenance shutdowns to coincide with the period of maximum risk.

Nonetheless, fears that ‘no deal’ would result in substantial disruption at ports (or Eurotunnel) are exaggerated. The key point is that they assume a significant proportion of lorries crossing the Channel would be subject straightaway to the same checks as those from non-EU countries. This is very unlikely, for three reasons.

The first is legal. It has been argued (notably by Economists for Free Trade) that new UK-EU NTBs would be unnecessary, and even illegal under WTO rules, given that exports from both sides will still be made to the same standards immediately after the UK’s departure from the EU. Others have countered that some additional checks would still be required, or else the parties would be in breach of the WTO’s Most Favoured Nation principle. But there is at least broad agreement that checks could be limited. There is certainly no legal requirement to inspect every vehicle, or to carry out every check at the border itself. It is also not as if there are currently no checks at all.

The second is economic. Even French officials have stressed that it would be in their country’s own economic interests to minimise any additional delays. In particular, they have dismissed fears of a Calais ‘go-slow and suggested that as few as 1% of UK lorries would be subject to a physical check (my own crude calculation is that an additional two-minute delay, on average, would require at least 10% of UK lorries to be subject to a 20-minute check).

The third reason is practical, and may well be decisive. Put simply, neither the UK nor the EU has the physical infrastructure, or enough officials, to check every vehicle anyway, or even a significant proportion. In this respect at least, the lack of preparedness could actually be a blessing in disguise.

A more pragmatic approach could also help solve other problems. For example, in the absence of any alternative arrangements, UK haulage companies would no longer be able to operate in EU countries under existing EU rules. This is much the same as the problem facing the aviation industry: if no mitigating action is taken, ‘lorries cannot be driven’, in the same way that ‘planes won’t fly’.

However, the EU has already made a reciprocal offer to the UK in respect of air traffic rights and the validity of aviation safety certificates in the event of ‘no deal’. The EU has continued to take a tough line on road transport, but an important precedent has been set. A similar solution could presumably be found if existing rules on road transport would significantly disrupt trade from which both parties derive large economic benefits.

What’s more, any initial disruption should be short-lived. For example, border delays could be reduced in future by the sort of ‘maximum facilitation’ (MaxFac) proposals that many have already suggested as a means of reducing the costs of customs clearance. The recent parliamentary testimony from customs experts Hans Maessen and Lars Karlsson should be required reading here (and for those who still believe membership of a customs union is the only way to avoid a hard border in Ireland).

Crucially, too, any problems created by a ‘no deal’ in March 2019 do not have to be permanent. Leaving on WTO terms could simply be an alternative stepping stone to a comprehensive free trade agreement that would keep any additional frictions to a minimum, rather than the standstill ‘transition period’ and Irish backstop proposed in the current Withdrawal Agreement.

Of course, I’m not suggesting we should dismiss the concerns of UK businesses entirely. Leaving the EU in March without a deal would clearly create a lot of challenges. But there are also many good reasons why even the initial disruption at ports should be much less than feared.

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The Irish protocol in the withdrawal agreement rules out an independent trade policy

It seems fair to say that the draft withdrawal agreement agreed between negotiators and published this week has not been universally welcomed. In particular the Protocol on Ireland/Northern Ireland has been the source of much criticism. In a detailed briefing by the Institute of Economic Affairs, I described how, if it were to come into […]

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It seems fair to say that the draft withdrawal agreement agreed between negotiators and published this week has not been universally welcomed. In particular the Protocol on Ireland/Northern Ireland has been the source of much criticism. In a detailed briefing by the Institute of Economic Affairs, I described how, if it were to come into effect, this Protocol would effectively rule out an independent trade policy for the UK, and would throw up serious trade barriers between Great Britain and Northern Ireland.

It’s worth reminding ourselves of why this Protocol was thought to be necessary. Our government agreed in December last year to guarantee that there would be no physical infrastructure or related checks and controls at the border between Ireland and Northern Ireland. In order to achieve this they conceded that, unless they could put forward alternative solutions, Northern Ireland would stay in alignment with the rules of the customs union and single market in all areas necessary for north south cooperation, the all-island economy and protection of the Belfast (“Good Friday”) Agreement. It was also stated in the Joint Report that the UK would not allow new regulatory barriers between Great Britain and the United Kingdom. The EU’s interpretation of that was a draft agreement under which, “unless and until” other terms were agreed that would meet the objectives for the Irish border, Northern Ireland would remain in a customs union and regulatory area with the EU. This is what the backstop is.

The facilitated customs arrangement and common rulebook of the Chequers plan were an attempt to provide the alternative arrangement that would mean the backstop would never be activated. When Chequers was roundly rejected by the EU, and the Prime Minister declared after the Salzburg summit that no prime minister could accept the EU’s terms, the negotiators went back into their tunnel and reformulated the backstop so that Northern Ireland and the rest of the UK would be in the same customs territory, and Northern Ireland would retain EU regulations on goods “unless and until” a new agreement could be reached. Mrs May is now satisfied that this is something that a British prime minister can sign up to.

Some of us have long been convinced that keeping the Irish border free of infrastructure could be achieved by way of legal, technical and technological solutions. European customs experts Hans Maessen and Lars Karlsson have confirmed to the Northern Ireland Affairs Committee that this can be done. But the EU negotiators and the Irish government have been adamant that the requirements of EU law mean that only a customs union and regulatory harmonisation on goods can achieve this, as even with a free trade agreement with zero tariffs and quotas, the risk of goods that have not been duly declared for customs purposes or that do not meet EU regulations might cross the border cannot be tolerated. Except, it now transpires, for fish. Because under article 6 of the Protocol, fisheries and aquaculture products will be excluded from the customs union arrangements (and therefore fish caught by British and Northern Irish boats would be subject to tariffs) unless an agreement between the UK and the EU on access to waters and fishing opportunities is reached. But by the EU’s own reasoning, the exclusion of even one product would require a full customs border, to ensure that that product isn’t smuggled in undeclared. Now Irish government and EU negotiators could be forgiven for assuming that the British negotiators will concede on this as they have on almost everything else, and sign away fishing rights to the EU. But they might not, and then we would need a hard border wouldn’t we, and the Protocol would be for nothing? Or could it be, that for fish, as for everything else, it is possible to manage a customs border without physical interventions, and the EU is prepared to take the risk of having to do so in order to leverage access to UK territorial waters.

It is often overlooked that as well as being by far the biggest market for goods sent outside Northern Ireland  64% of goods brought into Northern Ireland come from Great Britain, with 12% from Ireland and 59% of its external sales are to Great Britain, as against 12% to Ireland. In seeking to preserve frictionless trade with Ireland, the Protocol, if it were to come into effect, would introduce costs and formalities for the vastly more significant trade within the UK. As former Brexit minister Suella Braverman noted in her resignation letter, customs professionals are clear that this could have been avoided. It’s time to start listening to them.

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