Brexit Briefing 16th August (Customs and Irish Border) by Edelman

WHAT NEXT FOR UK-EU CUSTOMS AND THE IRISH BORDER? Edelman

16 August 2017

Pawel Swidlicki Brexit Analyst Pawel.Swidlicki@Edelman.com In the last two days the Government has published two key Brexit reports: a ‘future partnership’ paper on UK-EU customs arrangements and a position paper on the Northern Irish border, two closely interlinked issues. The two papers reveal a familiar Brexit dilemma; how to balance maintaining the benefits of the current set-up – smooth trade in goods and a virtual Irish border – with seizing the benefits of ‘taking control’, namely the ability to strike new trade deals around the world.

WHAT HAS THE UK PROPOSED? The government has identified three key objectives as regards its post-Brexit trade and customs policy: •

ensuring UK-EU trade is as frictionless as possible;

•

avoiding a ‘hard border’ between Ireland and Northern Ireland; and

•

establishing an independent international trade policy.

There is a natural degree of tension between the first two objectives and the last one; seeking to preserve the status quo in terms of UK-EU trade will necessarily restrict the scope to pursue a fully independent trade policy, for example in areas such as tariff reduction and regulatory harmonisation. As such, the UK has tacitly accepted the EU’s argument that “frictionless trade is not possible outside the single market and customs union”, calling instead for an arrangement that “facilitates the freest and most frictionless trade possible.”

A TEMPORARY UK-EU CUSTOMS UNION Upon the UK’s exit from the EU on 29 March 2019 the UK will also leave the Customs Union; this is a legal inevitability. However, the government has proposed immediately putting into place “a new and time-limited customs union between the UK and the EU Customs Union, based on a shared external tariff and without customs processes and duties between the UK and the EU.” In simple terms, this entails the UK swapping the EU Customs Union for a new customs union with the EU (ala Turkey) with the UK continuing to apply the EU’s common external tariff. This would allow companies to operate as they do now without fear of a cliff-edge in March 2019, such as new WTO level tariffs or burdensome rules of origin, allowing the new arrangement to be worked out and implemented. The exact length is not specified, with the government saying this will be subject to further consultation and consideration. As with other aspects of the transition, the idea is for the new system to be in place by June 2022, the date of the next scheduled General Election, at the very latest. Would this allow UK to negotiate new FTAs? The paper states that “The UK would intend to pursue new trade negotiations with others once we leave the EU, though it would not bring into effect any new arrangements with third countries which were not consistent with the terms of the interim agreement.”

This is an absolutely crucial hinge point. Most Brexiteers, including International Trade Secretary Liam Fox, could live with such a compromise on the condition the UK could negotiate and sign new trade deals with other countries which could then come into force immediately once the transitional arrangement expires. However, there is no guarantee the EU will accept such an arrangement and given the somewhat totemic nature of these post-Brexit FTAs, if the EU were to explicitly prohibit such an option, the pressure within Tory ranks and the wider Brexit community for a no deal Brexit would grow.

TWO POSSIBLE OPTIONS FOR NEW ARRANGEMENT This is the vaguest section of the paper with the government presenting two potential broad approaches: 1. A highly streamlined customs arrangement between the UK and the EU. 2. A new customs partnership with the EU, aligning the UK’s approach to the customs border in a way that removes the need for a UK-EU customs border. Streamlined customs arrangement This is the more conventional approach for two close trading partners not in a customs union – although in this case the UK and EU are negotiating the imposition of new barriers, not the removal of existing ones. The paper notes therefore that while the government has studied existing precedents, “it is not seeking to replicate another country’s model and will pursue the approach that works best for the UK.” Essentially, this approach consists of a combination of administrative harmonisation, maximal procedural streamlining and data sharing. Examples include: •

negotiating a continued waiver from the requirement to submit entry and exit summary declarations for goods being moved between the UK and the EU,

•

membership of the Common Transit Convention (CTC), which simplifies border crossing for goods in transit,

•

negotiating mutual recognition of Authorised Economic Operators,

•

technology-based solutions for roll-on, roll-off ports, e.g. pre-arrival notification of consignments

This option is the more realistic, focusing as it does on minimising future costs. Nonetheless, it is still ambitious, requiring considerable hard and soft infrastructure to be put into place over the next few years and the government’s record at successfully delivering large scale technology projects on time and on budget is not encouraging. 16 August 2017

The second option is much more interesting and innovative, as it would the first of its kind in the world, with the paper conceding it is an “untested” model. Essentially, it would see the UK ‘mirroring’ the EU’s customs union with both sides collecting tariffs on each other’s behalf. It would require “a robust enforcement mechanism” to ensure goods covered by future UK but not EU FTAs stayed in the UK, with businesses responsible for tracking all the goods in their supply chains in order to claim refunds if the EU tariff were higher than the UK one. This option is worth exploring, although already a number of trade experts have claimed it will be fiendishly difficult to implement and enforce in practice, especially if UK and EU trade policy were to diverge considerably in future. Moreover, on the surface it would appear to benefit the UK more than the EU, with the UK continuing to benefit from frictionless trade with the EU in audition to striking new FTAs, and as such it is hard to see the EU agreeing to it.

PRESERVING THE STATUS QUO IN IRELAND The Government’s position paper on Ireland and Northern Ireland frequently stresses the uniqueness of the situation and sets out the following key objectives: •

Upholding the Belfast (‘Good Friday’) Agreement in all its parts (including the right to hold either or both British and Irish citizenship);

•

Maintaining the Common Travel Area and associated rights;

•

Avoiding a hard border for the movement of goods (including no border posts for any purpose); and

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Aiming to preserve North-South cooperation, including on energy.

and

East-West

The first and second objectives should prove relatively easy to secure, none of the parties involved wants to reverse the progress that has taken place since the GFA entered into force, indeed the EU made its preservation one of its key negotiating priorities. Likewise, it has stated that the CTA is compatible with the principles of EU law. Incidentally, claims that the CTA will undermine the UK’s attempts to reduce immigration post-Brexit (on the basis EU nationals will be able to enter via Ireland) are unfounded if the UK does not introduce entry visas for EU nationals. This would mean EU nationals still being able to enter the UK freely, they would just no longer enjoy automatic rights to live, work and access public services. It is the third (and to a lesser extent the fourth) objectives that will prove most challenging to achieve in practice, even with considerable good will.

Nature of future Irish border depends on several factors Whether or not the current virtual Irish border can be maintained will depend in part on the new customs arrangements, hence the relevance of yesterday’s paper on this point. It is perhaps for this reason that the second option, i.e. the ‘new customs partnership’ was put forward – despite its untested and unwieldy design, it represents the best way of maintaining an open border on the island of Ireland. Under the first option, i.e. the ‘highly streamlined customs arrangement’, even a high degree of technological innovation is unlikely to prevent some degree of friction creeping in – this is why Irish politicians and the nationalist community have up until now rejected this scenario. However, the customs arrangement is only one of several factors; as yesterday’s paper notes, “Customs is only one of the ways in which we control the movement of goods across borders, so achieving these objectives in full will depend on other elements of the deep and special partnership and trading arrangements we secure with the EU.” These include tariffs (we can expect both sides to maintain zero tariffs on manufactured goods but agricultural produce is a separate matter), rules of origin and product standards and regulations, currently under the remit of the EU’s single market which the UK will also leave. For example, despite the fact that Norway is not in the EU’s customs union, the fact that it is in the single market (via the EEA) means the Norway-Swedish border is relatively open. Indeed today’s paper notes that “regulatory equivalence on agrifood measures, where the UK and the EU agree to achieve the same outcome and high standards” could be one way of avoiding a hard border. However, given the EU’s desire to prevent the UK from becoming a ‘backdoor’ for non-compliant food (such as US chlorine-rinsed chicken) this will naturally reduce the scope for domestic deregulation and for regulatory harmonisation with other economies in future bilateral FTAs; an apt demonstration of the trade off between the UK’s Brexit objectives.

ROUND-UP OF UK AND EU REACTIONS On the domestic front, Labour’s Shadow Brexit Secretary Keir Starmer described yesterday’s customs paper as “incoherent and inadequate proposals designed to gloss over deep and continuing divisions within the Cabinet.” He added that the long-term options as “fantastical and contradictory proposals [which] provide no guidance for negotiators or certainty for businesses.”

16 August 2017

However, Labour’s own problems were exposed when in a series of interviews shadow Trade minister Bill Esterton was unable to articulate a clear position on what Labour believed the UK’s long-term customs arrangement ought to be. In fact, other Labour figures have welcomed the temporary EU-UK customs union - a victory for Chancellor Philip Hammond over proponents of a harder Brexit within Cabinet - as a step in the right direction. The Liberal Democrats’ Tom Brake argued that “these proposals will only delay the economic pain… We still face the prospect of more red tape for businesses, longer queues at our borders and higher prices for consumers once the transition comes to an end.” While Scottish First Minister Nicola Sturgeon tweeted that “Seems UK government is back to its daft 'have cake and eat it' approach to Brexit. They should commit to staying in single market and CU, period.” The DUP’s Arlene Foster said she welcomed “the commitment to a seamless border and movement of goods between Ireland and Northern Ireland” as well as the news that “the Government will not countenance any new border in the Irish Sea.” Worryingly however Sinn Fein leader Michelle O’Neill described the as “not compatible with the Good Friday Agreement, the economic interests of Ireland north and south or the democratically expressed wishes of the people.” As far as the other side of the debate is concerned, Brexitbacking Tory backbenchers have so far largely kept their council, perhaps waiting to see how the situation develops. However, other Leave voices have been strongly critical with Nigel Farage describing the proposals as a “betrayal” while former BCC Director General and current Leave means Leave co-chair John Longworth accused the government of “taking a defeatist attitude with regards to securing trade deals with non-EU countries.” Meanwhile, on the EU front, the Commission’s chief negotiator Michel Barnier tweeted that “The quicker UK and EU27 agree on citizens, settling accounts and Ireland, the quicker we can discuss customs & future relationship.” However, this stance ignores the fact that the Irish border and the future customs and regulatory systems are fundamentally linked. Of all the individual EU member states, Ireland is naturally the most affected by Brexit and in recent weeks Irish Taoiseach Leo Varadkar has been vocal in rejecting any solution which would hinder cross-border trade even if mitigated by new technology. Today Foreign Minister Simon Coveney adopted a softer tone, welcoming many of the government’s commitments but adding that “we don't have detailed answers on the border issues… There is no straightforward solution to this, if there was we would have heard it by now. This is going to require a unique political solution."

ANALYSIS AND CONCLUSIONS After months of obfuscation, we are finally seeing the UK fleshing out its Brexit negotiating position with a series of further position and future partnership papers expected in coming days and weeks. This is good news as it means negotiations – which a couple of weeks ago appeared to have stalled on several fronts – can progress. While the EU will continue to insist on making “sufficient progress” on the terms of withdrawal, the UK is right to say that the Irish issue in particular cannot be settled in isolation from the new relationship. Furthermore, despite grumbling about British exceptionalism as regards the transitory UK-EU customs union, given that not only Ireland but France, Belgium and the Netherlands, all of whom conduct large volumes of sea trade with the UK would be hit hard by a cliff-edge exit from the customs union, the EU also has an incentive to strike a deal. Nonetheless, there are still many unanswered questions – Brexit Secretary David Davis openly referred to this as “creative ambiguity”. In many ways, these papers are aimed just as much at a domestic audience as an EU one, stressing that the proposals will be subject to “wider dialogue with both business and other stakeholders ahead of negotiations [with the EU] in the autumn.” In particular there is an overriding sense that the UK is still grappling with the complex trade-offs and compromises discussed above and that many key points are still subject to a tug-of-war around the Cabinet table, most notably the length of the transition period and the extent to which the UK will be free to negotiate new FTAs during it. There is also a sense that many do not fully appreciate the extent to which even after the UK puts in place the new customs regime, keeping the UK-Irish border open will require regulatory convergence with the EU – this in turn will limit the UK’s ability to ‘fully take back control’. Notwithstanding Sinn Fein’s flat out rejection, there is genuine political will to find a solution to the Irish border issue – the challenge now will be to cobble together a package that balances avoiding a hard Irish border and trade friction more generally and Brexiteers’ desires for the UK to be able to pursue independent regulatory and trade policies. This will not be easy and it will require flexibility and compromise on all sides.

16 August 2017