Saturday, 29 December 2018

Trading under WTO

A common riposte to the WTO option is "no country trades purely on WTO terms". Often they point to the USA as an example of a country that does not have a Free Trade agreement (FTA) with the EU, but has numerous other agreements with the EU.  A search of the EU Treaties Database does indeed reveal 147 treaties associated with the USA. But how much do they improve upon "trading under WTO" ?

Multi-lateral Treaties

Of the 147 treaties listed, 85 are multi-lateral, that is to say international treaties with additional signatories beyond EU & USA, typically via international organisations. Many of these treaties do not relate to trade, e.g.: Euratom; UN treaties (Climate Change, Environmental, Transnational Organised Crime etc.); Fisheries conservation & management; World Health Organisation (WHO) etc.

A large number of multi-lateral treaties are with international organisations which form part of the framework of international treaties that constitute "trading under WTO" (and a post-Brexit UK will remain a party to such agreements), e.g.:
  • International Civil Aviation Organisation (ICAO)
  • International Plant Protection Convention (IPPC)
  • World Intellectual Property Organisation (WIPO) 
  • UNECE  - 1998 agreement on global technical regulations for wheeled vehicles & parts.
  • World Customs Organisation (WCO)
  • World Trade Organisation (WTO)
The EU treaties database also allows a search on "nature of agreement". There are 4 multi-lateral treaties listed as "trade" agreements:
  • Two multi-lateral trade agreements cover international co-operation to promote sustainable expansion of trade, especially for developing nations: Grains (Grains Trade convention 1995) and Coffee (International Coffee Agreement 2007) As such these treaties form part of the international framework which constitutes "trading under WTO".
  • Two multi-lateral trade agreements commit the EU, USA & other parties to amending their WTO schedules to eliminate tariffs on trade in Civil Aircraft (WTO pluri-lateral treaty with 30 signatories) and Multi-Chip Integrated Circuits (signed by members of  Government/ Authorities Meeting on Semiconductors). All WTO members will benefit from these tariff eliminations, including post-Brexit UK. Adjusting your own WTO tariff schedule is a defining characteristic of "trading under WTO".
Bi-lateral Treaties

There are 62 bi-lateral EU-USA treaties listed. Some are related to Euratom. Many do not relate to trade, covering co-operation on security, scientific / technological, legal assistance, education / vocational training etc.

A bilateral to coordinate energy-efficiency labelling of office equipment is listed under "technical harmonisation". This allows EU participation in the US's Energy Star programme, a voluntary scheme to provide customer information on energy efficiency of products. As such, this agreement does not provide improved trading terms or market access. In any case, this bi-lateral expired on 20 February 2018.

Two bi-laterals listed under "competition law" relating to positive comity, defining a process to determine which party should take enforcement actions in a competition law case. Again, these agreements do not provide improved trading terms or increased market access.

There are 20 "trade" bi-laterals listed, but many of these are essentially "trading on WTO terms" :
  • EU & USA agreement to modify their respective WTO schedules in order to eliminate tariffs on certain alcoholic spirits.
  • WTO dispute settlements (EU support for EU producers of Oil seeds; effects of EU preferential agreements in the Mediterranean region; cereals & rice; EU export refunds for pasta).
  • USA agreement to modified EU WTO schedule for tariffs & quotas following EU expansion (EU12 to EU 15 and EU15 to EU25) 
  • EU & US agreement to modify their respective Appendix I of 1994 Government Procurement Agreement (a WTO multi-lateral agreement).
  • Administrative co-operation to prevent diversion of substances to illicit manufacture of narcotics is listed as "trade" but is essentially co-operation on fighting crime.
  • Trade in Wine agreement (2006) provides rules on GI's (Geographical Indications) and labelling of wine. As such, this agreement regulates labelling of wine (and provides some commonality) but does not enable EU-USA trade in wine per se - clearly wine was traded freely between EU & USA prior to 2006.
All of which means that of the 147 treaties listed in the EU treaties database pertaining to USA, none of the multi-laterals and only a handful of EU-USA bi-laterals provide trade terms or market access over and above "trading under WTO", i.e. :
  • Agricultural Quotas: Modification of EU schedules following EU expansion refer to EU agricultural tariff rate quota adjustments. Most EU agricultural quotas are "erga omnes" (open to all), but some are identified as US country-specific (covering Beef/Veal, Cereals, Rice, Poultry, Pigmeat). There is also a specific agreement on varying Husked Rice Tariff according to volumes imported.
  • Sanitary Equivalence: (1999 & subsequent amendments). Although a few limited areas of equivalence have been established, USA meat/dairy is still subject to full third country levels of border veterinary inspections for live animals and animal products (see Border Inspection Post Manual page 30).  
  • Mutual Recognition Agreements (MRAs). The original 1999 MRA on conformity assessment covered  6 sectors, but to date only 2 are operational (EMC, Telecoms). A 2005 agreement provides for mutual recognition of equivalence in marine equipment (where USA certificates of conformity are interchangeable with EU certificates). 
  • Customs Co-operation: The original 1997 agreement provided for exchange of information & mutual assistance upon request. A subsequent agreement (2004) expanded this to cover the USA Container Security Initiative (CSI). The 2012 mutual recognition of trade partnership programmes ( i.e. EU Authorised Economic Operator (AEO) & U.S. Customs-Trade Partnership Against Terrorism (C-TPAT)) is the key agreement that provides practical benefits to importers/exporters, i.e. customs simplifications & trade facilitation.
  • Aviation. Probably the most significant EU-USA bi-lateral is listed under "transport" , i.e. the EU-USA Air Transport agreement (aka "Open Skies"). It is worth noting that a post-Brexit replacement UK-USA Open skies agreement has already been secured.


Analysis of the 147 treaties reveals only a handful of treaties provide improved trading terms or market access beyond "trading under WTO". Even then only to a limited extent. EU-US trade in goods is still subject to full WTO MFN tariffs (except for some agricultural quotas). Full third country regulatory barriers apply to trade in manufactured and agricultural goods, (except for three sectors covered by MRAs). Customs simplification is available but only to trusted traders and only since 2012.

Apart from the EU-USA Air Transport agreement, none of the 147 treaties provide for improved trade in services. However, the EU has granted the USA equivalence decisions regarding certain financial services (which simplifies compliance & prudential requirements), and a data protection adequacy decision (which allows transfer of personal data from EU without having to put legal safeguards in place).

The limited improvement on WTO trading terms for EU-USA trade (both goods & services) does provide pointers as to where UK will need to mitigate a "No Deal / WTO" Brexit. The good news is that there are mitigations for all these areas - which I will look at in subsequent  posts.

Thursday, 20 December 2018

Guest Blog - Economic Analysis of Single Market & Customs Union

Here's another thread from @DerrickBerthel1  (Derrick Berthelsen) - this time looking at economic analyses which attempt to calculate the benefit of single market & customs union membership for the UK.

1/ People are getting hot under the collar about economic forecasts when we all know how dreadful a record Economists have at forecasting - the only function of economic forecasting being to make astrologers or weathermen look respectable and all that.

2/ A much more sensible, and I would think less contentious way of trying to work out the potential effect on economic output of leaving the single market and customs union should be to look at how much economic experts calculate the UK has gained as a member of the SM and CU

3/ After all, analysing actual events that have already occurred should be a darn side easier than forecasting what could happen to millions of different variables in the future.

4/ There have been lots of reports on this, but the National Board of Trade in Sweden below is a great place to start as they compared over a dozen different analyses to see how much the single market and customs union has added to EU GDP.

5/ To quote the report’s author Erik Dahlberg “The single market has been a significant enabler for economic growth in Europe. Since the methodologies differ across various analyses, comparisons are not easily done, but 2-4 per cent seems to be in the ballpark.”

6/ However, the benefits have not been uniform.

7/ In its 2014 report The Bertelsmann Stiftung introduced a new method on how to account for the counterfactual scenario of ‘no single market’.

8/ Its central finding was that increased integration of one EU index point generates a 0.08% increase in economic growth.

9/ Using this figure, it compared the actual GDP per capita in 2012 to a counterfactual GDP per capita, assuming that each country’s European integration would have remained at its 1992 (pre-single market) level.

10/ It found that the single market had been most positive for Germany (+2.3%) but that the effect on the Greek economy had been negative (–1.3%) – no surprise there then.

11/ As for the UK, membership of the single market and customs union had benefited the UK by an additional 1.0% of GDP.
Not 1% per annum. 1% in total.

12/ That benefits have not been uniform across the EU should not come as a surprise. All analysis of the single market shows that the biggest benefit has been an increase in internal EU trade in goods.

13/ Indeed, the UK is unusual as a member of the EU because it exports more to non-EU than to EU countries.

14/ The UK is also the member state with the lowest trade integration in the single market for goods. (See EU internal market scoreboard)

15/ Plus, of course the UK is a much more service-based economy than the rest of the EU and as the EU itself admits there is no ‘single market in services’ in any meaningful sense of the term. (See Open Europe blog)

16/ So, if the single market and customs union have only added 1-2% to the UK economy at best. Why would economists forecast that in the long-term economic growth would fall much more than that?

17/ Sure, there may be some short-term disruption effects on growth, but in the long term, why should UK GDP lose more from leaving the single market and customs union than it gained as a member?

The actual economic FACT not FORECASTS suggests that leaving the SM and CU will have only a marginal effect on UK GDP in the long run and thus that this alone is not a good reason to fear even a No Deal Brexit

Tuesday, 18 December 2018

Guest blog - Brexit Economic Forecasts

In a recent blog post, I referenced some excellent Twitter threads from @DerrickBerthel1  (Derrick Berthelsen). I've been so impressed that I asked Derrick if he'd mind if I posted some of his threads on this blog. I'm delighted to say Derrick agreed.

Here's his thread in response to a tweet noting how Brexit economic forecasts tend to have lower GDP from lower immigration (i.e. a smaller population) and does not amount to lost GDP per capita.

1/ Precisely. I have looked at lots of Brexit economic models and in all a significant proportion of the forecast loss of GDP growth has come from lower immigration numbers

2/ For example, if we look at NIESR’s recent forecasts made for the People’s Vote

3/ It estimates that, on a Managed No Deal basis, UK GDP will be 5.5% lower by 2030 than it would have been had we stayed in the EU.

4/ However, its forecast for GDP per capita is only 3.7% lower - thus 1.8% of the lower growth comes from forecasts for lower immigration alone.

5/ NIESR informed me that the single biggest factor in the 5.5% (lower GDP) figure was their forecast for lower productivity from leaving the EU - the impact of lower productivity alone represents 3% of the 5.5% forecast decline.

6/ This means that just two variables – lower productivity and lower immigration are responsible for 4.8% of the lower growth forecast.

7/ Or look at it another way – the forecast for the loss in GDP driven only by the loss of single market and customs union access / increased friction is only 0.7%.

8/ This figure is logical as it broadly equates to the 1.0% GDP gain that the Bertelsmann Stiftung estimates the UK has gained from single market and customs union membership.
9/ Another example of this is Panmure Gordon’s model which forecasts UK GDP to be c.5% lower in 2030 than previous pre-Brexit forecasts.

10/ Simon French, chief economist of Panmure Gordon stated "This mainly hinges on a reduction in long-term net migration to 105,000 a year and sustained trade diversion through non-tariff barrier differentiation and heightened administrative burdens from a loss of customs union."

11/ What I think this illustrates is that the actual “guaranteed” economic effect from leaving the single market and customs union – the limited but nevertheless real increased trading friction and unwinding of some supply chains etc- is actually minimal. 1-2% at most.

12/ The rest of the forecast decline is a matter for future policy decisions

13/ For example. Immigration - lower immigration may well be a function of the Brexit vote but it is not a necessity of it. The British people may decide that lower growth is a price that they are prepared to pay for less migration.

14/ Or they may decide in a few years that now the UK has control of the numbers and can determine the type of immigration by skills rather than geography they are content with higher numbers.

15/ And as for Productivity. UK productivity is currently c.25% below the best of our G7 peers. (Link: ONS data)

16/ Leaving the EU and being able to make our own rules and regulations, trade policies etc will enable the UK to focus on policies designed to improve productivity and hence economic growth.

17/ Indeed, if we look only at AI & Robotics if the UK get's policies right here alone the effect would be huge especially as UK only just behind China & the US according to the Big Innovation Centre and Deep Knowledge Analytics report.
18/ In his October 2017 Government report, Professor Juergen Maier estimated that the “Fourth industrial revolution” could add over £455bn to the UK economy and create over 175,000 jobs if implemented correctly.
19/ PWC in its June 2017 report estimated that UK GDP will be up to 10.3% higher in 2030 as a result of AI – the equivalent of an additional £232bn.

20/ Accenture and Frontline Economics in their 2016 report estimate that AI will boost the UK economy by at least 1.4% by 2035

21/ The long-term economic impact caused by the additional trading friction from leaving the single market and customs union is not large (1-2%). Much more significant are the opportunities to the UK of getting our policy framework right as an independent state.

Sunday, 16 December 2018

What if No Deal is not that bad ?

For the last 3 years we have had numerous Government / Treasury / Civil Service economic forecasts of doom regarding Brexit, which have been proven hopelessly wrong regarding the post-Referendum period. One longer term forecast leaked earlier this year has been been used to undermine the case for a "clean" Brexit, with a lurid headline of 8% less GDP in a WTO scenario (see above).

In fact this is 8% less GDP by 2030, i.e. slower growth, not recession. But this figure is only arrived at by using grossly exaggerated assumptions for non-tariff barriers (NTBs) outside the Single Market & Customs Union. Let's have a looks at these numbers.


EU trade weighted average tariff is indeed 4.5%, but is just 2.3% for industrial goods (i.e. stripping  out agri-food). The UK trades at greater than 3:1 deficit with EU in agri-food, so in a WTO scenario the major impact would be on our consumption and imports. But there are plenty of countries who would jump at the chance to supply UK with tariff-free food, especially meat (where tariffs tend to be highest). The UK could solve its Tariff Rate Quota (TRQ) disputes at WTO by offering more generous TRQs to the relevant parties . So it seems to me the tariff impact of a WTO scenario would be significantly mitigated via agricultural quotas with third countries.

Customs NTBs

The figure of 5.6% for Customs Non-Tariff Barriers strikes many observers as high. A 2011 Government Paper on "Trade Facilitation" quotes "for the UK ... the estimated tariff equivalent of the time taken to trade across borders is around 4.2%" (page 7), based on trade with non-EU countries. 

But this figure includes inland transport, which is obviously a cost today for trade with the EU. As the paper also quotes " If inland transport costs are excluded, the TF costs are 2.3%", which is the cost that will be added to trade with the EU post-Brexit.  Note also that the 2.3% figure covers "Customs Clearance and Technical Control", i.e. border checks for health & safety, regulatory compliance etc are included.

The government paper also refers to a 2009 study of the clothing and footwear sector – a sector which accounts for around 5% of UK’s external trade, but around 30% of all Customs Declarations. The study provided some interesting observations on current trade barriers as an EU member (which we would have scope to improve post-Brexit):
  • complexity & difficulty of: EU tariff, Intrastat (reports trade within EU), complying with rules of origin and duty relief scheme.
  • One of the most effective ways of removing some of these regulatory barriers is to eliminate the tariff themselves, thus removing much admin as well as the tariff payment
  • many regulations affecting UK traders–around 93% of the overall burden - emanate from Europe, and it has proved very difficult to reform trade regulation at the EU level

Access & Regulation NTBs

Then we come to "access & regulation" barriers which have been estimated as a whopping 20.3% in a WTO scenario. This figure seems wildly overstated, especially as border regulatory checks is already covered in customs NTBs above.

As I covered in an earlier blog on the Common Rule Book, most of the gains from the single market comes from use of common standards (which of course we can maintain voluntarily) allowing a single design, manufacturing & assessment process for both UK & EU markets. The impact of leaving the single market then amounts to a one-off relocation of individuals/roles to fulfill the requirement for an EU/EEA based importer/representative, and a very low risk of border regulatory checks (already included in the Customs NTBs estimate).

Do significant barriers to services trade arise ? Financial Services have relocated a very small number of "front-office" jobs to EU related to Retail activities. Wholesale activities, where the City makes it's money, are unaffected. The great majority of business & legal services exports are via companies who already have an EU/EEA presence. The few hundred lawyers who need continued access to the EU Lawyers Directive are qualifying for the bar in Dublin. In short, the picture fits the consensus there is no significant single market in services.

Agri-food, specifically meat/dairy, is the sector that will face highest regulatory barriers, especially meat/dairy. Firstly, UK approved establishments have to be re-listed by the EU as third country establishments. After  that, meat/dairy exports will face border veterinary inspections. (100% paperwork checks, physical veterinary inspections according to product, some products at 50%). Of course these sectors attract the highest tariffs and so are already impacted by tariff barriers under the WTO option before considering the regulatory barriers. What this does show is that the main No Deal mitigation will need to be supporting meat/dairy exporters, diverting their produce to domestic markets while developing a long term plan.

The estimated size of the "access & regulation" barriers to trade with the EU would only make sense if the UK had completely de-regulated and/or switched to a completely different set of regulations (e.g. US regulations). Yet the government estimate has only minimal gains from de-regulation and a Free Trade agreement (FTA) w/ USA. This implies we would have completely overhauled our regulations for no gain - so why do it ? It is far more likely that divergence from EU regulations will be gradual and limited, thus minimising regulatory barriers to trade with the EU in the short to medium term.

GDP Impact

It seems to me that a tariff impact mitigated by TRQs with RoW agricultural suppliers, plus a realistic assessment of non-tariff barriers (based on the Government report), puts the equivalent tariff impact at about 7%, not 30.6% as claimed by the government forecast. That would translate to a GDP impact of about 1.5%.

It's also worth noting the Government estimate cites lower immigration resulting in 1.2% less GDP. Post-Brexit, immigration policy will be entirely for us to decide, so it is misleading to count this as a consequence of leaving the EU. Most people want "controlled" immigration focusing on high-skill, high-wage labour, which is hardly likely to make us poorer (quite the opposite). But of course increased population via mass migration means a larger economy, even if no-one is any richer.

A newcomer to twitter, Derrick Berthelsen, produced a sublime twitter threads on Brexit economic forecasts and how they are dominated by assumptions on immigration & productivity rather than direct trade impact from leaving single market & customs union (link). He followed this with a thread looking at historical economic data (link). He references the EU commission's own estimate (2% GDP gain averaged across all EU member states) and the Bertelsmann Stiftung study UK gaining just 1% from single market & customs liberalisation since 1992. Derrick also concludes impact from leaving single market & customs union as 1-2% at most. I thoroughly recommend reading these thread and following Derrick.

These forecasts assume reduced trade with EU is permanently lost economic activity, but in practice much of this trade/activity will simply be diverted to domestic and RoW markets. Ashoka Mody, visiting professor of international economic policy at Princeton University and former deputy director of the International Monetary Fund’s European and Research Departments, writes in the Independent:
The economics is straightforward. When trade barriers between the UK and the EU go up, British producers will sell less to the EU and will sell more within the UK and to the rest of the world. 
No trade economist believes that the long-term cost of this shift in sales patterns is any more than 0.5 per cent of GDP. Throw in 2 to 3 per cent of GDP as temporary disruption costs. Estimates higher than that are ad hoc.

What if No Deal is not that bad ? The Government estimates of trade barriers associated with the WTO option look seriously over-cooked, even comparing with pre-Referendum government information.  Using more realistic estimates the impact is only 1-2% GDP by 2030. And that is before allowing for mitigating effects of trade diversion, or gains from de-regulation or Free Trade Agreements. And it is still likely that a Free Trade Agreement would eventually be struck with the EU.

This I suggest completely changes the political calculations. If No Deal / WTO is not that bad, then surely it is not "extreme" ? In fact there are many positives and opportunities associated with the WTO option  - not least because it avoids the traps set in Article 50 negotiations and completely fulfils the EU Referendum mandate.

It seems to me (and many observers) that we are still seeing Project Fear being deployed. The establishment's real fear is not economic impact, it is fear that we will actually be fully free from the EU. As per the headline of Ashoka Mody's article in the Independent , we should "Ignore the Brexit scare stories - they have no basis in sound economics".

Monday, 10 December 2018

Worse than WTO

Theresa May's Withdrawal agreement  has been dubbed the "worst deal in history". Not least because of the NI backstop, which partitions the UK, locks us into a customs union, without an exit route. But that should not distract us from the other many and various unacceptable facets of the agreement:
  • Paying £39bn we do not legally owe, with no guarantee of a future trade agreement.
  • Covertly signing up for EU Defence Union, including yet more UK cash contributions.
  • Continued role for ECJ as final arbiter.
  • Conceding on "Level Playing Field" and  Geographical Indications with no guarantee of a future trade agreement.
  • Despite May's claims, the deal does not guarantee an end to EU Freedom of Movement,
  • etc. etc,
But it is strange to see some defend the deal on the basis it avoids the "cliff-edge" of leaving without a deal and trading on WTO rules. I can only assume they have not read and understood the terms of the backstop, which would leave UK in a much worse position than WTO

UK partitioned

The backstop annexes NI into "the" EU's customs territory, separated from the rest of the UK. It's hidden away under layers of reference, but it is clear when you analyse Article 15 of the NI protocol.
  • "the territory defined in Article 4 of Regulation (EU) No 952/2013" (this article in the Union Customs Code defines the territory of the EU Customs Union by listing the EU member states) 
  • "shall be read as including the part of the territory of the United Kingdom to which Regulation (EU) No 952/2013 applies by virtue of Article 6(2) of this Protocol." (Article 6(2) of this protocol identifies the Union Customs Code as applying to NI).
Article 6 of the NI protocol speaks of a "single customs territory". The same phrase is found in the EU-Turkey Customs Union agreement. But the backstop customs union comprises the EU customs territory (including NI, as per above) and the UK customs territory (excluding NI). NI is in "the" customs union, while GB is in "a" customs union. GB is only in the same customs territory as NI to the extent that Turkey is in the same customs territory as the EU member states.

Third country trade barriers

This is really a "bare bones" customs union between GB on one side and EU+NI on the other. So the GB-NI (and GB-EU) border will resemble the EU-Turkey border. Frictionless, it ain't.
  • An Irish Sea VAT & Excise border is formed by Article 9 of NI protocol, which makes NI subject to EU VAT & excise law.
  • Full third country customs controls (i.e. as per WTO rules) will apply to trade between the two parts of the "single customs territory", i.e GB-NI trade and GB-EU trade (Annex 3 Art 1 of NI protocol).
  • Full third country regulatory controls (i.e. as per WTO rules) on goods traded between the 2 parts of the "single customs territory". The only concession EU have offered is that they'll try and do GB-NI checks away from NI ports. (Article 7 of NI protocol).
The "bare bones" Customs Union provides tariff & quota free trade within the "single customs territory" (although at present fish & aquaculture is excluded). Proof of third country purchases and duties paid is required so that the exporting customs authority can issue a "wet stamped" movement certificate (Annex 3 Article 8 of NI protocol). So the movement certificate is not an electronic document and must be physically presented to the importing customs authority. Frictionless, it ain't.

How much benefit is tariff-free trade in agriculture when GB exporters will still be faced with the EU's steep regulatory barriers, i.e. SPS checks / veterinary inspections at the border (especially for  high tariff goods in meat/dairy sector) ? GB could of course reciprocate steep SPS barriers to imports of EU agricultural goods. Except that we depend on EU for most of our food imports and a "bare bones" customs union prevents us from sourcing tariff-free food from elsewhere in the world. What a ridiculous position to be in.

So all we really gain from a "bare bones" customs union is tariff-free trade in industrial goods, for which the EU trade weighted average tariff is just 2.3%. Which is outweighed by non-tariff barrier costs, not least the admin cost involved in the A.UK movement form.

Emasculated UK Trade policy

The "bare bones" Customs Union also means UK has to adopt EU's tariffs and trade defence measures. (NI protocol Annex 2 articles 3 & 4). We will have no independent trade policy and will be unable to agree our own FTAs. Nor will our exporters benefit from preferential access to third countries via EU's FTAs.

But - all third countries with an EU FTA will get preferential access to GB market without having to reciprocate. A permanent built in disadvantage for GB traders. How is Liam Fox going to persuade the 50+ countries with EU FTAs to roll them over to a GB bi-lateral when they will get preferential access to UK for free by virtue of the "bare bones" customs union ? This a ludicrous position to be in.

The idea that the "bare bones" Customs Union is uncomfortable for the EU is laughable. The EU bakes in its £100bn trade surplus, while preventing GB from seeking better trade terms elsewhere. The EU has all the leverage and none of the risk.

Worse than WTO

It amazes me that so many politicians who are scared of a so-called cliff-edge scenario in March 2019 seem to think the "bare bones" customs union backstop just 21 months later is perfectly acceptable. Exactly the same non-tariff barriers apply in both cases, mitigated only by saving industrial tariffs (averaging just 2.3%).

When you also take into account the partitioning of the UK and emasculation of UK trade policy, it is clear that the "bare bones" customs union backstop leaves us in a much worse position than reverting to WTO rules in March 2019. Not to mention the small matter of £39bn bill, EU Defence Union, ECJ supremacy, Level Playing field etc. that comes with May's deal. Added to that, May's deal prolongs the uncertainty indefinitely, which is toxic for business and for our politics / governance.

Nor is the backstop good for NI, given that 86% of NI's economy is based on trade within the UK internal  market. A further 6% is based on trade with the Rest of the World, so 92% of NI's economy does not rely on the EU/RoI. Major barriers to GB-NI trade makes no sense at all for NI economy.

It really does not matter whether the backstop is "temporary" or comes with an exit clause. May's deal is unacceptable and clearly the worst of all worlds -  and still does not avoid a cliff-edge. It is much the better path to take the initiative and revert to WTO terms in March 2019. We can chart a new course taking advantage of the freedom we gain (and spare £39bn cash). Most importantly, outside the customs union, we would retain the freedom to seek better trade terms elsewhere, which is what the EU fears most and hence is our best leverage for eventually reaching a mutually acceptable deal.

Friday, 23 November 2018

The NI border question

As we approach the Article 50 finishing line, the Northern Ireland (NI) issue still dominates. The Withdrawal Agreement agreed by May/Robbins still contains all the unacceptable elements of Barniers NI backstop proposal:
  • NI will be subject to EU laws/ECJ, which as Jim Nicholson (UUP MEP) writes removes NI democratic rights and probably breaches Article 3, Protocol 1 of the European Convention on Human Rights (ECHR).
  • Trade barriers are imposed on GB-NI trade, both regulatory checks (NI buys 70% of its food from GB, which will now face full veterinary / SPS checks) plus NI will also be inside "the" EU's customs union and territory, while GB is in "a" bare-bones customs union, creating a GB-NI customs border as per Turkey's border with the EU. NI will effectively become a third country.
  • Escaping the backstop is solely in the gift of the EU. To date EU have refused to accept or even discuss any option beyond NI staying single market & customs union. There is no escape route.
This directly contradicts the December Phase 1 Joint Report (see excerpts above) and as such should be rejected by the UK. In fact, it will be better to rethink the whole NI border question based on principles in the December declaration : whole UK leaving Single Market & Customs Union, UK-wide alignment, No GB-NI barriers except via NI democratic consent.

Single Market / Regulatory border

The EU's stated priority is to protect the integrity of its single market, i.e. to prevent incursion of products that do not meet its standards. At the point of UK's departure, UK will still be fully aligned on harmonised European product standards (CEN/CENELEC) and food safety standards (applied to both domestic food and food imported from third countries). In terms of sectors requiring pre-approvals (chemicals, pharmaceuticals, cars etc) product registrations with UK agencies will be transferred to EU27/EEA based agencies. While UK remains aligned on product/food standards is there really any risk to EU's single market ?

Barnier highlighted the need for checks on products. But again, while UK remains aligned on enforcement of standards (i.e.equivalent market surveillance and SPS inspection regimes), is there any need for additional checks ? Cross-border co-operation (both N-S and E-W) could be established under a UK-RoI bilateral, as provided for by Good Friday Agreement (GFA) Stand 3 para 10, so that the 2 jurisdictions can co-operate and trust each others checks. Is this any different in practice from Barnier's idea of dispersed checks / checks in the marketplace ?

The EU have also complained that a UK-wide backstop offers UK cherry-picked access to the Single Market. But a UK-RoI bilateral could limit such benefits to UK-Ireland trade. Checks would still apply on UK-EU26 trade and EU could monitor GB-Ireland trade flows at GB ports to ensure Ireland is not being used as a backdoor to the EU26 market. This would amount to a swiss-style equivalence agreement for trade in goods between UK & RoI only, while UK remains aligned on product standards and enforcement regimes.

UK divergence in any case is likely to be limited and gradual, so "managed divergence" would be a basis for continuing the UK/RoI arrangement. In many cases, clear product labelling / marking will identify divergent goods that can only be legally marketed in one jurisdiction. It is worth noting that the Swiss agricultural agreement allows swiss to import hormone beef (banned in the EU), subject to stringent labelling and controls on circulation, while still removing all EU-Swiss trade barriers in agriculture. In other cases, goods could be limited to GB and banned in NI, subject to NI democratic consent.

A joint mapping exercise identified 142 "actions" under the 12 areas of N-S co-operation established by the GFA. The extent to which this relies on common EU rules is not clear as the report has never been published. "Managed Divergence" could also cover these common EU rules. In practice, I  suspect divergence would largely have no impact on N-S co-operation or require only minimal change in form of co-operation - which of course can already arise today when EU introduces or modifies regulations.

Customs Union / Customs border

There has been a concerted attempt to establish a narrative that no technical solution exists to make an NI customs border invisible. Yet in the last week, there have been 2 separate customs experts presenting such solutions to the parliamentary committee on NI affairs :
Lars Karlsson (President of KGH Border Services; Former Director of World Customs Organisation; Deputy Director General of Swedish Customs and author of Smart Border 2.0), who proposes a solution based on best global practices, trade facilitation available via AEO/trusted trader schemes, and "technology-in-trucks".
- Hans Maessen, (former chairman of the Dutch association of customs brokers) who proposes a solution based on existing transit procedures and trade facilitation available in the Union Customs Code.

A May 2017 Irish parliamentary hearing on Brexit suggest Irish Revenue already operate to a "max-facilitation" basis with controls/checks away from the border and were thinking along similar lines for post-Brexit cross-border trade with NI:
  • advance lodgement of declarations used today & documentation checking via a digital platform (in line with EU's Customs 2020 plan for all-electronic customs paperwork) being explored.
  • vast majority of customs controls / checks at approved warehouses or trader premises, 
  • 82% of imports via AEO /trusted traders & expansion of AEOs (perhaps tenfold) to cover smaller traders expected
  • NI imports would not be diverted to a customs control point and Irish Revenue do not see the need for trade facilitation bays (as used on Norway-Sweden border).
In truth there are numerous ways to manage customs/tariffs without border checkpoints. Ultimately, it should be seen as simply adding another component to the existing "invisible" fiscal border for excise, VAT etc. It is worth noting that excise revenues are typically much larger than tariff revenues.

Policing Illegitimate Trade

Customs controls and checks are primarily to facilitate and regulate legitimate trade. We should not think of customs borders as hermetically sealed with every item crossing the border being checked. Illegitimate trade is tackled by intelligence led interventions, often directly in the marketplace rather than at the border. In Ireland today, cross-border co-operation between police and customs authorities tackle criminal gangs involved in activities such as excise smuggling, fake goods etc.

Technology can have a part to play in policing a customs border, but it is perfectly possible to have a "soft" customs border without adding new technology. Interestingly, ANPR cameras were installed in NI in 2010 to assist in policing smuggling. So these cameras are not monitoring every single  border crossing, but are being used to track suspicious lorry movements within NI, and will continue to be so used post-Brexit.


I am confident that a pragmatic "soft" border solution is possible, as described above. Contrary to some popular comment, WTO law does not require that UK erects a hard border, provided tariffs are applied consistently. But the EU's rigid "one-size-fits-all" border laws would mean RoI having to erect a hard border, if NI leaves the Single Market & Customs Union (which contradicts para 45 of the December Joint Report).

The problem is lack of political will and UK signing the Withdrawal Agreement is only going to permanently embed that. The UK cannot unilaterally deliver a "soft" border, and if rigid application of EU laws requires that EU/RoI erect a hard border, then that is a matter for them. In practice, it is more likely that "No Deal" will be the catalyst for EU & RoI to think more flexibly and practically about the NI border. Leo Varadkar has suggested an arrangement would be negotiated within 2-3 weeks.

The logic appears inescapable. The Withdrawal Agreement & NI backstop is a trap for the UK demanding permanent UK partition and vassalage. UK must reject these terms so that there can then be sensible and pragmatic discussions on a "soft" border solution.

Friday, 31 August 2018

What Northern Ireland thinks

Northern Ireland (NI) has become the central and defining issue for Brexit. The proposed NI backstop in the UK’s Withdrawal Agreement is likely to define and constrain the UK’s future relationship with the EU, or risk separating NI from Great Britain (GB) with a customs and regulatory border in the Irish Sea.

Sadly, the NI assembly has not been sitting for over 500 days, so NI democratic consent is missing from the whole debate over the NI backstop. Given that NI democratic consent is the cornerstone of the Good Friday Agreement (GFA), this is tragic and potentially a danger to peace.

So we are left with opinion polling to guage NI public opinion on this matter. Polling undertaken by Queens University Belfast was forwarded to me by a Remainer / Irish nationalist. The report was highly enlightening, but perhaps not in the way the sender intended.

NI/RoI border questionnaire

Firstly, let’s take a look at the questions that were asked regarding what would be acceptable for a future NI/RoI border.

Some of these questions are seriously eyebrow raising:
  • Military personnel at customs checkpoints ?
  • Travel across NI border: Produce passports; Log travel plans in advance; Photo taken, fingerprinting at the border ? The existing Common Travel Area (CTA) arrangements will remain unchanged and there is surely no realistic prospect of such restrictions.
  • Border checks that would add 30 minutes to your journey ?  Cars are not subject to border checks in NI/RoI today despite the existing excise border & associated smuggling. The same applies to Norway & Switzerland’s border with the EU - cars are generally allowed to pass subject to occasional spot checks for excise duty.
Does anybody seriously think these scenarios are going to happen ?  This smacks of scaremongering by those conducting the survey.

NI views on border with RoI

So lets look at the responses to these questions: 

Just 15% would find ANPR/CCTV cameras along the border “almost impossible to accept”. Not quite the level of opposition often portrayed. In any case, it is widely accepted that trying to cover every one of the 300+ crossing points with cameras is impractical - so the (low) level of outright opposition is a moot point. Existing cameras on main N-S road seems not to be a problem and will obviously stay.  Adding cameras to the handful of N-S roads used by freight might help in tracking legitimate freight movements. I suspect in a few years no-one will care about a few cameras on the handful of main N-S roads carrying freight. In any case, the current thinking is to put technology inside trucks, i.e. smartphone app + GPS tracking - making the concerns RE cameras & drones redundant.

The main finding of interest is the 40% who find "checkpoints with customs officials" almost impossible to accept. No surprise that there is significant opposition to a  “hard" border. Customs processing undertaken electronically with any required consignment checks undertaken away from the border (i.e. a "soft" border) would not require manned checkpoints at the border - so would not fall foul of this opposition.

NI views on border with GB

Responses on potential outcomes for an NI-GB border are revealing.

The first question shows about a third opposed to the idea that Free Movement of EU citizens should vary between NI and GB. In practice, post-Brexit UK will likely continue to offer visa-free travel to EU citizens post-Brexit, but residency & employment rights will be subject to an independent UK regime, applying equally in  GB & NI. Regarding Irish citizens, the CTA & 1949 Ireland Act will continue to apply.

The remaining 3 questions pertain to NI being in a separate regulatory, customs or jurisdictional regime to GB:
  • More than 40% find  it “almost impossible to accept” the European Court of Justice (ECJ) having jurisdiction in NI, but not GB. This is higher than the level of opposition to "checkpoints with customs officials" on the NI/RoI border. 
  • Almost half reject a different regulatory regime for NI which leads to trade barriers with GB. 
  • Even more striking is the almost 2/3 opposition to customs duty being applied on GB-NI trade, with over 60% of catholics opposed. An Irish Sea Customs border is a complete non-starter.
These findings ought to be a killer for the EU’s proposed NI backstop. The levels of opposition to the key tenets of the backstop (ECJ, Single Market/Customs Union in goods applying to NI only) are higher (much higher in the case of an Irish Sea Customs Border) than opposition to a “hard” NI/RoI border (i.e. customs checkpoints on the border).

The report finds lower opposition to customs checks at the NI-GB border (just under 30%) compared with customs checks at the NI-RoI border (40% opposition). But there is also recognition of the importance of trade with GB (which dwarfs Trade with a RoI or the rest of the EU), notably among the Catholic & Leave communities. The NI border question encompasses economic as well as national identity questions.


While it is generally accepted that customs checkpoints on the NI/RoI border are unacceptable, it is perhaps less well understood that placing NI in a separate customs, regulatory & jurisdictional regime (as per the EU’s proposed NI backstop) is even more strongly opposed by NI public opinion.

Of course Remainers will insist that the only way to resolve these concerns is for the whole UK to stay in the Single Market & Customs Union, a.k.a. BRINO (Brexit in name only). But it should be noted that the Withdrawal Agreement commits to an NI-only backstop and provides no guarantees of a future UK-EU agreement - the implied NI-GB Border ought to make the NI backstop proposal a non-starter.

As noted in the December phase 1 progress report, the UK is committed to no “hard” border with RoI (para 43), but that cannot be at the expense of the integrity of the UK, it’s internal market or NI’s place within it (paras 44 & 45). So consistent with NI public opinion, there is a need for a “soft “ border solution, i.e. NI outside the Single Market, Customs Union & jurisdiction of the ECJ, while avoiding customs checkpoints on the border with RoI. 

A “soft” border solution should be based on cross-border co-operation and pragmatic working arrangements, brokered via N-S co-operation under the GFA (as per my recent post. A solution that covers trade in goods (agricultural & manufactured) and accounts for differing customs/tariffs regimes. My next series of posts will examine how such a “soft” border could work.