Wednesday, 13 December 2017

Brexit Briefing - Customs

As part of a continuing series of posts examining the Single Market and Norway/Flexcit option (as expressed in a "Brexit Briefing" blog post by Pete North) this post will examine claims made regarding the Customs Union.

Customs Agreement

North refers to requiring a customs agreement in addition to Single Market membership. Which is a tacit admission that EFTA EEA does not address issues arising from leaving the EU’s Customs Union, as I covered in an EU Question blog post.
  • The EEA agreement does include 2 protocols on customs matters (Protocols 10 & 11), but these are just basic framework & mutual assistance agreements common to many EU customs co-operation agreements with 3rd countries.
  • As EFTA's web page on Customs Matters states: “The EEA is not a customs union, thus most of the activities in the customs field are not relevant to the EEA Agreement …. Norway and Switzerland were able to find simplified solutions through bilateral negotiations”.
  • Norway and non-EEA Switzerland have concluded Mutual Recognition Agreements under the EU’s Authorised Economic Operator (AEO) scheme, whereby authorised operators can benefit from simplified customs procedures and “fast-track” through customs controls. The EU AEO scheme is based on the WCO SAFE framework, which encourages all WCO members to enter into such mutual recognition agreements. The EU has number of AEO agreements with third countries.
  • Norway and non-EEA Switzerland have also concluded bi-lateral customs security agreements, relieving traders of the obligation to lodge an ENS declaration at the customs office of first entry
  • The Common Transit Convention is a key pan-european treaty which allows goods to move though territories with customs formalities suspended until the goods either reach their destination or are exported outside the territories of the signatories. Signatories include non-EEA Switzerland, Turkey and non-EU Balkan states..

EEA membership neither provides these arrangements, nor is EEA a pre-requisite for a customs agreement. Participation in the Single Market is only marginally more relevant to customs co-operation than participation in the Eurovision song contest.

Rules of Origin (RoO)

North suggests we need a customs agreement that deals with Rules of Origin (RoO). Rules of Origin (RoO) paperwork proves where a product originates from, based on where raw materials are sourced from or where substantive processing took place, in order to determine whether goods:
  • Qualify for a preferential tariff under a Free Trade Agreement (FTA).
  • Fall subject to Trade Defence Measures, e.g. products containing Chinese steel are subject to anti-dumping measures and hence a high tariff.
  • Count towards a Tariff Rate Quota, e.g. meat from New Zealand is subject to a lower tariff until a certain quantity has been imported, when a higher tariff applies.
North suggests we can avoid RoO by harmonising our tariff regime with the EU's Common External Tariff (CET). Clearly that is insufficient, we will also need to harmonise Trade Defence Measures and continue to share TRQ's with the EU.

Moreover, North has got very confused with regard to third country agreements, suggesting (wrongly) that the UK signing new FTA's with third countries risks higher rates of inspections to check compliance with single market product rules. As per the EU Blue Guide, importers will ensure manufacturers have fulfilled their obligations regarding conformity assessment – there is no constraint on where materials are sourced from. Manufacturers / importers with established track record of compliance will continue to be considered low-risk unless market surveillance feedback or other intelligence suggests standards have been breached.

The real issue is that goods from third countries might circumvent EU tariffs if shipped via the UK – which is precisely the point of RoO. It is also why to escape RoO, UK trade policy would have to be subordinate to the EU's trade policy. The UK would only be able to agree preferential trade with a third country in so far as it mirrors the EU's agreement. Moreover, the EU could sign new FTA's with third countries meaning that goods from said third country would have preferential access to the UK without reciprocal access for UK to the said third country market.

To avoid RoO, the EU would be trusting the UK to maintain its customs border in line with EU policy, preventing third country goods circumventing EU tariffs. The EU will likely demand continued oversight via OLAF (EU's anti-fraud body) and European Court of Auditors (ECA) and that the UK continues to send the bulk of import duty collected to Brussels.

Frictionless Border ?

Outside the Customs Union, import VAT also applies at the border (although importers can usually reclaim this). This could be avoided by staying in the EU's VAT union, which would mean the UK remaining fully subject to the EU’s VAT rules and a proportion of UK VAT being paid to the EU. Customs Declarations will also be required. Trade facilitation measures can reduce these administrative burdens (e.g. AEO scheme and Union Customs Code provides for monthly self assessment), but they are not eliminated.

It seems to me the only way to maintain the current “frictionless border” with the EU is to remain in the EU Customs Union, which in turn requires membership of the EU. Turkey, which has a partial Customs Union “with” the EU, still has a customs border where Customs Declarations, RoO, Import VAT all apply.

So a transition period that maintains the current border arrangements will require the UK to remain "effectively" in the EU by adopting the EU acquis in the areas of the Customs Union and Common Commercial Policy (not covered by EFTA EEA). The vital difference would be that the UK will regain competence to negotiate future trade agreements (both with the EU and third countries) while continuing to benefit from current trade arrangements with the EU and third countries. Which is why an Article 50 extension is not suitable for transition, as the UK would still be an EU member and would still not have competence to negotiate UK trade agreements.

A longer term arrangement shadowing the EU Customs Union seems infeasible. The EU has no such arrangements with any third country (including the EFTA EEA states). Continuing to forward a proportion of VAT and Import Duty to the EU, remaining subordinate to the EU's VAT and Trade policy would be in conflict with the Government's stated aims. The UK Government must make preparations in terms of customs infrastructure and trade facilitation to mitigate the impact of our inevitable departure from the EU Customs Union.

Thursday, 16 November 2017

Brexit Briefing - SPS Regulations

As part of a continuing series of posts examining the Single Market and Norway/Flexcit option (as expressed in a "Brexit Briefing" blog post by Pete North). this post will examine the claims made for EEA Sanitary & Phyto-Sanitary (SPS) regulations (i.e. regulations covering animal and plant health) and their relation to global standards.

WTP SPS Agreement

The WTO SPS agreement encourages the use of international SPS standards. Article 3.1 states "Members shall base their sanitary or phytosanitary measures on international standards, guidelines or recommendations". Article 3.4 identifies three organisations as having particular relevance:
UNECE also provide agricultural quality standards and is party to an agreement with Codex (the "Geneva Understanding") in order to avoid duplication of work. 

However, Article 3.3 of the WTO SPS Agreement provides a get-out: "Members may introduce or maintain sanitary or phytosanitary measures which result in a higher level of sanitary or phytosanitary protection than would be achieved by measures based on the relevant international standards, guidelines or recommendations".  

EU SPS Regulations

EEA SPS regulations make up 1,507 of the 5,584 EEA regulations in force, i.e. approximately 27% (as of 16th November 2017). It is true that the great majority of these SPS regulations are based on international standards (primarily from Codex and UNECE). However, as explained in Derrick Wilkinson's blog, the EU imposes severe restrictions or bans on a wide range of plant protection products (PPPs), veterinary pharmaceuticals (VPs) and biotechnologies.

This point has attracted media coverage recently: an EU Commission decision on Basmati rice, slashed allowable levels of the pesticide Tricyclazole (used for 30 years) to a hundredth of the current legal level; US Trade Secretary Wilbur Ross described EU regulations as "unscientific", referring to the ban on chlorine-washed chicken and also Genetically Modified Organisms (GMO).

Commenting on the speech by US Trade Secretary Ross,  Alan Beattie in the FT notes that the EU has lost several cases on food regulation at the WTO to the US, and also comments: "Brussels’ cautious interpretation of the “precautionary principle” retards growth and innovation and is exploited by protectionist lobbies. Its food regulations, which frequently disadvantage farmers in developing countries, often bear the marks of public prejudice and domestic lobbying rather than science."  

EU SPS Enforcement

The  WTO SPS agreement also covers Control, Inspection and Approval Procedures (Article 8 & Annex C). Unsurprisingly, the EU has erected a highly regulated system of food safety measures for imports from third countries (i.e. outside the single Market).

Products of animal origin (POAO), i.e. live animals and animal products including meat and dairy, imported from third countries require EU approval of the third country and establishments. Products must be accompanied by relevant veterinary certificates and imported via a nominated Border Inspection Post (BIP) where they are subject to:
(i) documentary check - health certificates and any accompanying laboratory test results;
(ii) identity check - container seals, packaging of the goods, labelling and health marking;
(iii) physical check - packaging will be opened, sight, smell, taste assessment (where appropriate), samples may also be taken for laboratory assessment. The frequency of POAO physical checks (governed by Commission Decision 94/360/EC) is:
▪ 20 per cent for meat and fish;
▪ 50 per cent for poultry meat, honey and dairy products;
▪ 1-10 per cent for inedible POAO, such as hay.

Non-animal products (i.e. plants and plant products) from third countries may be subject to import checks, determined on the basis of risk analysis. In addition, specific controls are applied to certain non-animal products originating from certain countries 
(i) Some products must have a phytosanitary certificate under Directive 2000/29/EC, guaranteeing they have been  properly inspected; are free from harmful organisms; and conform with relevant plant health regulations. 
(ii) Some products are classified as 'High-risk' products of non-animal origin under Regulation EC/669/2009. These products must be imported via a Designated Port of Entry (DPE) to undergo checks similar to those required for products of animal origin (i.e. documentary, identity and physical checks at a set percentage rate).

The  WTO SPS agreement encourages members to enter into equivalence agreements (Article 4), which can reduce non-tariff barriers for third countries. Switzerland copies all EU SPS regulations and has an equivalence agreement with the EU allowing all agricultural products to be traded under the same conditions as intra-EU trade. The EU recognises other third country regimes such as Canada and New Zealand as essentially equivalent and lower inspection rates apply.

By contrast, trade within the EU/Single Market is mostly exempt from these checks. EU SPS regulations are enforced via national agencies (Food Safety Agency (FSA) in the UK) who directly monitor establishments. Live animals must travel with a veterinary health certificate (although there are specific exemptions for horses). A limited number of plant products originating within the EU are also subject to health controls under Directive 2000/29/EC, requiring a "plant passport" once they have passed all EU checks.

Future UK-EU trade

Outside the Single Market, UK exporters will face third country barriers. Meat and dairy exports will be heavily impacted. However, given UK convergence with EU SPS regulations and the established track record of the FSA in monitoring UK establishments, an EU refusal to approve UK establishments and recognise equivalence in line with agreements enjoyed by other third countries (e.g. Canada) would constitute discrimination under WTO law.

Non-animal products should see little impact - while all third country imports may be subject to inspections based on risk analysis, there seems little reason to believe that EU member states customs authorities will suddenly deem UK products as high risk and divert resources away from inspecting known sources of risk.

An acrimonious "No Deal" impasse could see the EU could drag its heels on approvals and equivalence agreement.  But it should be borne in mind that since the UK is mirroring EU law, trade barriers will apply in both directions. The UK currently imports 3 times more than it exports to the EU in the agrifood sector. In any case, high tariffs in this sector would severely diminish UK-EU agrifood trade. UK response should be a mix of import substitution and pivot to global agricultural trade.

Executing such a pivot on agricultural trade (primarily meat & dairy) is not at all straightforward given the complex and interwoven nature of food supply chains. The UK would need (i) a carefully designed subsidy scheme to support farmers and facilitate switching of activity; (ii) lowering of agricultural tariff barriers (via TRQs and FTAs) and non-tariff barriers (liberalised SPS regime and equivalence agreements) with the rest of the world.


Contrary to claims made by supporters of Norway/Flexcit option, adopting EU SPS regulations is not just adopting global standards and we cannot influence EU SPS non-tariff barriers at a "global" level. As Alan Beattie put it in his FT article "product regulation is not global; international laws to constrain national rules are weak". US Trade Secretary Ross also made clear that Brexit presents us with a distinct choice in this sector.

We could stay inside the protectionist EU SPS regime which provides barriers to trade with the rest of the world, but avoids barriers in trade with the EU (primarily for live animal, meat & dairy products). This avoids adding another issue to the Irish border, but at present no solution seems to satisfy the EU/Ireland short of separating Northern Ireland from the UK.

Alternatively we can break out of the EU regime and trade freely with the rest of the world, while facing similar barriers to agricultural trade with the EU as other third countries. Many EU FTA's founder on EU protectionism in agriculture. Developing economies are locked out of the EU's market. A Swiss-USA FTA was abandoned because the Swiss are tied to the EU SPS regime and could not offer liberalisation on agriculture.

For me, breaking free from EU SPS regulations is the obvious choice. While a creative solution is needed for the Irish border, creative thinking is already needed to address many Irish border concerns beyond SPS regulations. The positive opportunities are simply too good to turn down.

Monday, 6 November 2017

Brexit Briefing - Technical Regulations

As part of a continuing series of posts examining the Single Market and Norway/Flexcit option (as expressed in a "Brexit Briefing" blog post by Pete North). this post will examine the claims made for EEA technical regulations and their relation to global standards.

EEA Technical Regulations versus Global standards

A central argument for the Norway/Flexcit option is the claim that EU/EEA regulations are increasingly based on global standards and since an independent UK would base domestic regulations on the same global standards, there is no point in leaving the Single Market. While this means the UK remains a "rule-taker" with respect to the EU, it is also claimed that the UK can use its new freedom in international organisations to shape global standards and so influence the EU/EEA regulations it is still subject to. A seductive argument, but is it true ?

EEA technical regulations make up 1,972 of the 5,591 regulations in the EEA acquis, i.e. approximately 35% (as of 6th November 2017). The EU's 2016 standards bodies report provides a measure of how aligned EEA regulations are with global standards: 58% of CENELEC standards cited in EEA technical regulations are identical to IEC standards; 24% of CEN standards cited in EEA technical regulations are identical to ISO.

The US Trade Department Report for 2016 provides insight to the EU's attitude to international technical standards. While in theory the EU allows producers to use international (non-EU) standards to demonstrate product safety, in practice it is prohibitively difficult and expensive. US exporters feel compelled to use harmonised European (EN) standards "...even if the U.S. products are produced according to relevant international standards providing similar or even higher safety levels."

The same report also illustrates that even the US has little influence over harmonised European (EN) standards  "..when a U.S. producer uses an EN it is likely using a standard that has been developed through a process in which it had no meaningful opportunity to participate. This is particularly the case for SMEs and other companies that do not have a European presence."

This reality is is in stark contrast to the claims of "global regulations" used to support the Norway/Flexcit option. EEA technical regulations are EU-centric rather than global and are not open to outside influence or directed by global bodies (if anything, the EU looks to upload its standards to ISO rather than the reverse). The EU erects barriers against use of recognised non-EU international standards. WTO TBT Agreement Article 2.4 (encouraging use of international standards) does not appear to be the redundancy notice for the EU's Single Market that Norway/Flexcit advocates suggest.

Continued UK participation in European standards organisations

BSI (British Standards Institute) aims to retain membership of CEN and CENELEC post-Brexit, even after leaving the Single Market (EFTA states including non-EEA Switzerland, EU accession states and recently Turkey are also members with voting rights). membership would provide the UK with a continuing voice and vote on European (EN) standards, but requires EN standards are adopted as national standards and any conflicting standards are withdrawn.

Similarly, UKAS (UK Accreditation Service) are aiming for continued membership of EA (European Accreditation) in addition to membership of global accreditation bodies ILAC and IAF. This would maintain recognition of UKAS as the UK National Accreditation Body and recognition of certificates issued by UKAS and and UKAS accredited organisations (i.e. UK Notified Bodies) throughout the EU.

However, both CEN/CENELEC membership criteria and EA membership criteria requires EU/EFTA membership, or candidate for EFTA/EU membership with established target date for accession. The UK has rejected EFTA membership and the Single Market, so continued UK membership of CEN/CENELEC and EA must be open to question.

Future UK-EU trade relationship

EEA membership or even just membership of CEN/CENELEC requires continued harmonisation with EU standards, without divergence.  However, being locked into EN standards prevents the UK from using or recognising alternative international standards - which in turn raises technical barriers with non-EU countries, notably the US. Nor are EN standards superior to other standards. For example, Andrew Chapman's blog post on Technical Barriers to Trade looked closely at anti-slip footwear regulation (EN ISO 13287:2012) and found evidence that the test is not a reliable indicator of the safety of footwear, so much so that the British Health and Safety Laboratory uses an alternative human-based ramp test.

Some argue that because the EU is our largest market (outside the domestic UK market), we must inevitably remain yoked to the EU's technical standards and regulations. But why not allow or recognise other international standards provided they meet the essential safety objectives ? Businesses focussed on the EU market will continue to use EN standards and demand the same from their supply chain, but other businesses may develop with a different focus. In some instances or sectors, the UK domestic market and/or overseas markets may exceed the value and demand of the EU market. It seems to me we should let the market decide which standards to use. While some commentators worry about  a lack of "regulatory coherence" countries such as South Korea (who have FTA's with both the EU and the USA) seem to be managing quite nicely.

Conformity Assessment is the main anxiety of Norway/Flexcit advocates. But as I explored in an EU Question blog post, this is easily navigable by using EN standards and an EU-based "importer". Some sectors have "pre-approval" requirements (e.g. pharmaceuticals, chemicals etc), but the solution is similar, with registrations to be held by a recognised EU based representative.  For the small number of manufactured products that required third party assessment, UK notified bodies can be used provided they have a subsidiary or sub-contract relationship with an EU-based body. Consignment checking is based on risk analysis and it is unlikely that products/manufacturers/importers with a good track record of compliance will suddenly face a higher inspection rate - even without a UK-EU agreement.

A Mutual Recognition Agreement on Conformity Assessment will allow UK-based Notified Bodies to continue to be recognised in the EU (and vice versa), without needing a sub-contract or subsidiary relationship (note that WTO TBT Agreement Article 6.3 encourages members to enter into MRA's on conformity assessment).  A regulatory co-operation agreement covering market surveillance would continue existing co-operation and assist targeting of consignment checking by customs authorities. Such agreements are common to FTAs and are found in CETA (Canada's FTA with the EU).

A Canada style FTA with the EU would seem to offer the best solution for technical regulations. Regulatory freedom from EU-centric technical regulations combined with agreements that minimise trade friction.

Wednesday, 1 November 2017

Brexit Briefing - How much EU law ?

As discussed in my previous post, I will be writing a series of blogs examining the claims made for the Single Market and explaining my thoughts on the Norway/Flexcit option, as expressed in a recent blog post by Pete North.

First up is the old chestnut, how much EU law are EEA states subject to. At present, EEA laws in force (5,594) compared with EU laws in force (20,849) is just under 27%.  But then looking at EU Directives that apply to EEA provides a figure of around 70%. Which tells us these numbers do not add to our understanding as Christopher Howarth discussed on his blog a couple of years ago.

Andrew Chapman also examined EEA law as a proportion of EU law in a May 2016 blog post, with a close look at a whole range of studies, including attempts to quantify impact across policy areas and weight the impact of different legislation. Chapman's conclusion feels about right to me : "For myself, I would say that under the EEA, we would have to adopt around half of EU law. Given our opt-outs from the euro, Schengen, and the area of Freedom, Security and Justice, I would say that we currently are required to adopt around, say, 80% of EU law. So, if we were to leave the EU, join EFTA, and remain in, or re-join the EEA, I would say that we would have to continue to adopt well over half, possibly getting closer to two-thirds, of what we currently adopt." 

Perhaps the only sensible way to look at this question is to consider what areas of governance we would be still subject to and what areas do we gain freedom.

The EEA agreement covers the "four freedoms" - goods, services, capital, and of course free movement of people. So the rules and regulations of all trade and commercial activity are dictated by the EU. This also applies to all trade with third countries, which makes it impossible to negotiate on the removal of non-tariff barriers with third countries. For example, Protocol 12 of the EEA agreement states that the EU will take the lead in negotiating Mutual Recognition Agreements (an important tool in removing regulatory barriers to trade) with third countries.

Well at least with EFTA EEA we gain freedom from the EU common external tariff. Except that the North/Flexcit vision is that we continue to align with the EU’s tariffs in an attempt to avoid the burden of Rules of Origin. This would also mean the UK is unable to sign new Free Trade Agreements. So much for an independent UK trade policy.

In addition to the four freedoms, the EEA agreement covers a number of flanking or horizontal policies. Adopting EU law in areas such as Consumer Protection, Environment, Health and Safety at Work, Labour Law, Equal Treatment for Men and Women is mandatory in order to trade under the EEA agreement.  EFTA EEA Governments have also taken the opportunity to sign up to (via EEA protocols) and spend taxpayers money on, all sorts of EU policies in fields as diverse as Civil Protection, Anti-Discrimination and Family Policy, Public Health etc.

Well at least with EFTA EEA we gain freedom from the Common Fisheries Policy and Common Agricultural Policy. Except that the North/Flexcit vision is that we would stay signed up to these policies for another 10 years or so, while we  design and implement new UK policies. Don't tell the farmers and the fishermen.

The EEA agreement does at least exclude the EU Charter of Fundamental Rights and Monetary Union. Although the UK already had opt-outs from these as an EU member. So no gains there.

Foreign Policy and Defence are not covered by the EEA agreement. But even as we prepare to leave the EU, the UK Government is surrendering Defence autonomy and signing up for EU Defence Union initiatives. This has not got the attention it deserves as many have been fooled into thinking this will not apply to the UK once we leave the EU. In fact, the Government is aiming for an on-going relationship inside the EU's Common Security & Defence Policy - the model for this type of relationship is none other than EFTA EEA state Norway's "second country" status..

Norwegian eurosceptics also complain that the EEA agreement increases in scope over time. It is not difficult to foresee the EU wishing to see "a level playing field across the Single Market" (code for centralised Brussels legislation) in areas like taxation and welfare benefits in the near future. The EU has already signaled it's displeasure at Ireland's low tax regime. Harmonised welfare benefits has been under discussion for some time, it seems likely that the EU will use calls for reform to free movement to pursue this agenda. The EU's article 50 negotiating guidelines require the UK to agree to "safeguards against unfair competitive advantages through, inter alia, tax, social, environmental and regulatory measures and practices". The EU agenda is crystal clear in these spheres.

I can see there may be a case for continuing with EU  law and ECJ rulings in a few isolated cases, aviation (to retain membership of ECAA) and Euratom being the two obvious examples. But the Norway / Flexcit option accepts huge swathes of EU law and it is difficult to see what new freedom it provides. It appears to have all the disadvantages of EU membership, minus the voting rights and "seat at the EU top table".

Nor would the Norway/Flexcit option seem to provide any reassurance in terms of avoiding further EU integration, given that: (i) the EU have already stated their intention for EFTA states to become "EU Associate Members" and replace the current EEA agreement and Swiss bi-laterals; (ii) Hard-core Remainers like Nick Clegg have already stated their aim of retaining Single Market membership as part of a long-term goal of rejoining the EU as associate members.

Do we trust our political class to resist moves to expand the scope of the EEA agreement ? To avoid signing up for all sorts of other EU initiatives via EEA protocols ? to avoid a stealthy transition from Single Market to Associate Membership at some point ?  I certainly don't, especially as May's Government seem to be lining us up for such a betrayal even as we are supposed to be leaving the EU - by delivering an "Establishment" Brexit. I can see little difference between the Ukraine model the Government seems to be seeking and the Norway/Flexcit model - both leave us subject to huge swathes of EU law and vulnerable to re-incorporation to "the project" of EU political union.

The more I look at Brexit, the more convinced I become that our future relationship with the EU must be based on a significant degree of separation - a CETA-based FTA plus military co-operation limited to NATO and some limited agreements on information sharing. Anything else leads us straight back to where we came from.

Monday, 30 October 2017

The Price of Freedom

Is there any hope that the message of the EU Referendum is getting through to our political and media Remain Establishment ? Leave voters were not thick, racist or misled - they voted to restore democratic self-government to the UK.

Moreover, since the Referendum, it has become abundantly clear that the EU is set on a course of full political union with control and governance fully centralised in Brussels. As ever, the cry heard from the EU is "more Europe". Laying bare such objectives has resulted in the phenomenon of Re-Leavers - reluctant Remain voters who now acknowledge that there is no "status quo" option and the UK simply cannot go where the EU is headed.

But then the pro-EU Establishment have never been honest about the political aims of the EU and have always tried to argue on economic grounds. Prior to joining the EEC in 1973, we were promised UK industry would sweep the world with a home market of 200m customers, yet by the time of the 1975 Referendum, we were economically diminished and could not possibly stand on our own two feet. Despite the salutary experience of the ERM in the early 1990's, by the turn of the century the pro-EU establishment were campaigning for the Euro, warning 3m jobs would be lost and UK financial services and car industry would be decimated.

So it is unsurprising that the Remain campaign was dominated by "Project Fear" and concerns over the impact of leaving the Single Market. One dire prognostication after another was rolled out, culminating in the Treasury's claim that the mere act of voting to leave the EU would trigger an immediate and painful recession - yet another totally discredited forecast.

The Referendum result suggests that the UK public have become immune to these tactics. When Philip Hammond opined on the EU Referendum that "no one voted to be poorer", he entirely missed the point. Leavers voted to be free, and if that comes with an economic cost, so be it.

But what is the economic cost of Brexit - the price of freedom from the EU ? While familiar commentators repeat their gloom-laden forecasts, there are alternative views. One recent paper by World Bank & UNCTAD economists suggested that in the event of a No Deal scenario, UK exports to the EU would drop by no more than 2% - a negligible impact. Even the IMF have revised their Armageddon level forecasts, suggesting slower growth but no recession in the next few years. To put context into the figures, "No Deal" forecasts on lost GDP tend to range range from 3-5% GDP, which is roughly £60-£100bn - coincidentally the size of EU divorce bill to be paid to secure a new UK-EU trade agreement. According to economic forecasts, deal or no deal, the price of freedom seems to be about the same.

Of course, economies and markets will always adjust to shocks such as Brexit. If trade with the EU becomes more expensive, trade and commercial activity will divert to the domestic economy and markets with the Rest of the World. In fact, the share of UK exports to the EU has already declined  from a high of 55% at the turn of the century to 43% today, less if the Rotterdam effect is taken into account.

Furthermore, a pivot away from an EU-centric economy is a necessity going forwards. The EU's share of the global economy is in decline (having halved from a high of 30%, even less once UK leaves). 90% of global growth will be outside the EU in future decades. The EU continues to suffer from the baleful effects of the euro and an anti-innovation regulatory regime. Leaving the EU is essential for our long-term economic prospects as well as for our freedom.

Economists for Free Trade go further and conclude that leaving what they view as the mercantilist EU / Single Market, designed to favour exports of  German manufacturing and French agriculture, will bring a 6.8% GDP gain amounting to £135bn.

Pro-EU commentators pour cold water on the global free trade opportunity provided by Brexit. Recently, pro-EU Sam Lowe claimed that NAFTA had only added 0.5% GDP, which he describes as "within rounding error". Yet the same commentators say it is an act of economic madness to leave the EU trade bloc. This of course ignores the obvious point that the EU is not simply a trade bloc, but also begs the question, how much value is the Single Market ?

In 2012, to commemorate 20 years of the Single Market, the EU commission published its own estimate that an average of 2% GDP had been added across the member states. To get to this figure, the commission ignored the downturn of 2008-12 and measured from the trough of 1992 to the peak of 2008. This period also coincides with the former Eastern Bloc economies experiencing high growth due to "catch-up" following decades of Communist rule. Furthermore, the UK was already developed and liberalised in 1992 and so would expect to gain less benefit than the average 2% across EU member states. So it is unlikely that the Single Market added 2% to UK GDP.

As well as leaving the Single Market, we will be leaving the EU's Customs Union, resulting in a new customs border with associated customs clearance and Rules of Origin (RoO). Open Europe has estimated this will add 4% to the transactional cost of trade resulting in a 1% impact to GDP.  Customs borders between EU states were removed at the introduction of the Single Market in 1992 (note that this does not apply to EFTA EEA states, who still have a customs border with the EU).  So in fact the optimistic estimate of 2% GDP gain from the Single Market since 1992 will include the removal of internal customs borders within the EU. Given that the 2% figure is likely over-estimated for the UK and Open Europe's estimate of 1% GDP for a customs border, the value of staying in the Single Market via EFTA EEA (which has customs borders) is of minimal value - perhaps 0.5%, the figure which Sam Lowe considers to be "in the rounding error".

The Single Market may not have added much value, but it has certainly curtailed our freedom and sovereignty. Norwegian euro-sceptics complain that the EU increasingly encroaches on their sovereignty via the EEA agreement and want a looser free trade agreement. It seems to me that the Single Market is another example of pro-EU establishment economic propaganda providing cover for political aims. To quote Jacques Delors on the founding of the Single Market: "Europe cannot attain political union ... unless it is in control of its economic destiny. That is why we need an organised economic area."  

But another question arises. If the Single Market has added so little value, how is it that leaving it will be such an economic  catastrophe ? Single Market advocates say that tariffs are not the issue and a simple free trade agreement is little better than No Deal. It's all about "non-tariff barriers". The argument seems to be that having become enmeshed in the EU's regulatory regime (for negligible economic gain), dis-entangling is so difficult it will create a shock and lasting damage to our economy.

Single Market advocate Pete North has recently published a blog post laying out his thinking on this point as a basis for a parliamentary briefing he has been asked to submit, covering Flexcit memes that I am very familiar with. The Norths deserve credit for leading the debate on non-tariff barriers, which is what initially attracted to me to Flexcit. Unfortunately, they refuse to countenance or engage with any alternative views or perspectives and instead double-down on their apocalyptic view of life outside the Single Market. As I explored further and learnt more, I found myself questioning the impartiality and accuracy of the North's claims. So I want to take the opportunity to respond to the blog post and write up my own perspective.

While Pete North has written up his thoughts in one (albeit relatively lengthy) post, he can give the impression of detail while glossing over complex points. So I will probably need a lot of blog posts to respond. I hope to examine the paradoxical claim that the Single Market has added little value but is somehow too expensive to leave. In essence, I want to explore the price of freedom from the EU and its regulatory union / Single Market.

Wednesday, 25 October 2017

An Establishment Brexit

Assuming Theresa's May's recent overtures and concessions, combined with further capitulation requested by the EU, eventually results in meaningful discussions on the "framework of the future relationship" - what kind of deal is the UK Government seeking ?

It has been reported that May will not permit a cabinet discussion on this topic until the New Year, such are her fears over cabinet rifts. Meanwhile there continues to be speculation about whether it will be a Norway, CETA or swiss model or some variant of these. But could it be that the model has already been decided upon, and that actually the Government seeks to base its model on another country - namely Ukraine ?

Arch-federalist Andrew Duff has been pushing the idea of Ukraine's association agreement as a model for Brexit for some time. Note some of the phrases he uses:
"At the heart of the association agreement is a deep and comprehensive free trade area (DCFTA) .... requires ... approximation with the EU acquis ... The UK will only have to keep that technical and regulatory equivalence"
"very important provisions for future political cooperation in the field of justice and home affairs as well as foreign, security and defence policies."
Now note language used by May in her Article 50 notification letter:
"deep and special partnership that takes in both economic and security cooperation ....cooperation in the fight against crime and terrorism"
"a bold and ambitious Free Trade Agreement between the United Kingdom and the European Union. This should be of greater scope and ambition than any such agreement before .... both sides have regulatory frameworks and standards that already match."
Both Duff and May talk of a deep free trade agreement and refer to maintaining regulatory equivalence. Ukraine's DCFTA includes an Agreement on Conformity Assessment and Acceptance of Industrial Products (ACAA) which requires "relevant Ukrainian sectoral and horizontal legislation, institutions and standards have been fully aligned with those of the EU". This is not "mutual recognition" - this is one-way traffic, an export of EU law to Ukraine. Rumours abound of the UK government seeking a Swiss option, which Brexiteers see as a trap. A UK Treasury spokesman is reported to have said "a Swiss-style arrangement would give legal sovereignty but in reality would ensure Britain never really diverges from European regulation". This doesn't sound like taking back control.

The areas of justice and home affairs were under Theresa May's remit in her time at the Home Office. Britain had secured a full opt-out from around 130 Justice and Home affairs measures in the Lisbon treaty of 2009. In 2013, May opted back in to 35 of these measures, including the infamous European Arrest Warrant. It seems likely May will again choose to opt-in to EU Justice and Home affairs measures - even as we leave the EU.

But most worrying are the references to security and defence co-operation. Ukraine's agreement states "The Parties shall intensify their dialogue and cooperation and promote gradual convergence in the area of foreign and security policy, including the Common Security and Defence Policy (CSDP)". VeteransForBritain have tweeted that the UK Government has now signed on to six EU Defence Union measures since November 2016, all of which pave the way for a Single European military capability, including a post-Brexit UK.

The UK Governments stealthy commitment to EU military union throws light upon a statement made by Theresa May in her Article 50 notification letter:
"We want to play our part in making sure that Europe remains strong and prosperous and able to lead in the world, projecting its values and defending itself from security threats.  And we want the United Kingdom to play its full part in realising that vision for our continent"
This appears to be an unambiguous statement from a UK prime minister promising that UK defence and security capabilities will be seconded to the political and security goals of Europe - and it is obvious that in this context, Europe means the EU. Even as we are supposed to be leaving the EU, May's government is actively delivering UK defence autonomy into the hands of the EU - even though concern over an EU military union was a major factor in the Leave Referendum victory.

The leak of a draft paper prepared by the Foreign Ministry in Berlin seems to confirm the nature of this proposed relationship:
"a broad partnership that includes “at a minimum” the fields of foreign and security policy; fighting terrorism; cooperation on criminal justice; agriculture and fisheries; energy; transport, and especially air transport; research and digital issues."
"the degree of access to the EU’s single market conditional on the extent to which the U.K. is prepared to adhere to regulatory norms. Even where the U.K. agrees to common rules, there can be no “cherry-picking” that gives the U.K. a competitive advantage"
Duff has described an association agreement like Ukraine's as the best the UK can hope for. Duff has also suggested that "the difficult part of an association agreement will be trade policy, especially in services" and "any half-decent new relationship with the EU will come at a price to HM Treasury that might not be much lower than the UK’s existing net contribution to the EU budget". He's hardly selling it to us is he?

Combined with the EU's demands regarding the "divorce bill", citizen rights & ECJ oversight, customs border in the Irish Sea, "safeguards against unfair competitive advantages through, inter alia, tax, social, environmental and regulatory measures and practices"  - this all adds up to very bad deal, as discussed in my previous post on this blog.

So why are we on this trajectory ? It may be tempting to think that this is due to the General Election result which weakened Theresa May. But May's Government has been signing up to the EU Defence Union since November of 2016. The "deep and special partnership" rhetoric pre-dates the disastrous General Election.

I suspect the problem is that a Remain-supporting Prime Minister who does not really believe in Brexit, along with a Remain-dominated Cabinet and Parliament have been charged with delivering Brexit. The vacuum of ideas left by May's vision-less leadership is filled by a group-think civil service geared towards the Brussels status quo - they are more than happy to draw on whatever Brussels proposes. The end result is an "establishment Brexit" - Brexit in name only which leaves us even more enmeshed in "the EU project", with less freedom of manouevre and no influence.

This is of course political ineptitude of the highest order. The Tories got to their highest vote share in a generation on the back of being trusted with Brexit. They will never be forgiven by Leave voters for the betrayal of an "establishment" Brexit. Nor will they pick up support from Remain voters who will ask (rightly) why did we reject membership with some influence if we are to still so tightly bound to the EU ?

The Government and the country are in need of bold leadership to make a success of Brexit. Instead Brexit is entrusted to the Remain establishment who will deliver a dire "establishment Brexit". Change is needed - and quickly.

Sunday, 24 September 2017

Bluffing with an empty hand

Theresa May's use of the phrase "No deal is better than a bad deal" in her Lancaster house speech was seen by some as an "unnecessarily provocative".

I never understood this. If we say "we will not leave without a deal", EU hears "a superficial deal will do, they're not really leaving". If we are not willing to say "No Deal" at any point, we will eventually say Yes to every EU demand. We will be casting ourselves upon the mercy of the EU- not a quality the EU is known for. A guaranteed "bad deal" scenario.

1) The full 100bn exit bill will be extracted, with no offset from any EU assets.

2) EU expats in the UK will be granted full EU freedom of movement and citizen rights, with ECJ jurisdiction and enforcement.

3) The EU will insist upon a border in the Irish Sea, with Northern Ireland having special status within the single Market and Customs Union - in effect separating Northern Ireland from the UK.

4) The EU's negotiating objectives insists upon "safeguards against unfair competitive advantages through, inter alia, tax, social, environmental and regulatory measures and practices". The EU's current grip on social, environmental and regulatory law will not be relaxed, and control will be extended further to cover taxation.

5) The EU have already demanded they retain current fishing access in UK territorial waters. Combined with the same SPS regulations and likely same laws over shoals crossing boundaries, we will have left the CFP in name only.

6) The EU will demand we follow all SPS regulations for agriculture. While we will be outside the CAP subsidy scheme, the EU will regard any divergence from current policy as "unfair competition". We will be in CAP in all but name.

7) Somewhat out of the public eye, the UK Government has signed up to 5 EU Defence Union initiatives since November (see Veterans for Britain  twitter feed and web site). With May's unconditional commitment on security, likely to be bound via an association agreement, we are being de facto signed up to Juncker's EU Army.

8) Foreign Policy. I also expect May's association agreement to encompass foreign policy co-ordination and commitment to the EU's foreign policy aims. It will be impossible to distinguish this from the current position under the EU's Common Foreign Policy.

9) Human rights law. At present we already have pro EU MP's demanding that May sign up to the EU's Fundamental Charter of Human Rights. I expect May's association agreement to also contain similar commitments. So much for repealing Blair's Human Rights Act or establishing a British Bill of Rights.

10) Contributions. Well at least we won't be paying £10bn per annum nett to the EU, you may think. Don't bet on it. The EU will extract commitments to funding EU agencies and bodies and also for generous grants to poorer states in the EU. I doubt there will be any significant savings at all.

11) Four Freedoms and homogeneity of EU law. The EU have repeatedly made clear that the four freedoms are indivisible. Nor are they going to let us diverge from EU law and participate in the Single Market. The EU's negotiating objectives state they will "effectively protect its autonomy and its legal order, including the role of the Court of Justice of the European Union." At the end of August, Michel Barnier stated UK requests were "simply impossible" as the EU must protect the integrity of the single market.  Barnier again emphasised this on the eve of May's Florence speech 
"It is not – and will not – be possible for a third country to have the same benefits as the Norwegian model but the limited obligations of the Canadian model. And naturally, any agreement must respect the regulatory autonomy of the EU, as well as the integrity of its legal order."
12) Free Trade Deals. Leaving the Customs Union will enable Britain to set and negotiate trade tariffs. But if we opt to retain single market benefits, which means full regulatory harmonisation (as discussed above the EU will not compromise on this), then we will be unable to secure meaningful trade deals on regulations and non-tariff barriers. The major obstacle for many trade partners is the EU's restrictive SPS regime, which blocks agricultural trade. The proposed Swiss-USA FTA foundered on this point. African farmers are excluded from EU market primarily by regulations and non-tariff barriers. If UK financial services remain bound by the EU's particularly restrictive interpretation of global finance regulation frameworks, there is no scope for liberalising trade in this sector with the Rest of  the World.

I think the above is the epitome of a bad deal. It will cost a huge amount of money and will leave us even more enmeshed in and under the control of, the EU. We will no longer have a voice in shaping the direction of the organisation which we would still be shackled to. EU expats in the UK will have legal rights over and above UK citizens enforced by the ECJ. The integrity of the UK is threatened by the EU's Irish border demands. Apart from tariffs there are no gains - we will have less freedom in all economic areas.

Surely the UK Government cannot sign up to anything like this, be it a Norwegian EEA deal or a Canadian FTA? Surely "No Deal" is better than this deal ? Yet that is exactly the trajectory the Article 50 talks are taking us. Why is this ? Lack of leverage. Contrary to May's rhetoric, it appears no preparations have been made for a No Deal scenario.

A report by the BBC's Christopher Cook concluded "government is not behaving like it is really preparing for No Deal - and the EU27 can surely see it.". Dominic Cummings has tweeted how failure to prepare for No Deal is a historic unforgivable blunder - it is hard to disagree. James Arnell, a partner at Charterhouse, in an article for Conservative Home, laments the lack of progress to date and calls on Brexiteer MPs to provide an ultimatum to Mrs May and her government to "demand a proper Brexit plan which is deliverable with or without the cooperation of Brussels".

The failure to prepare for "No Deal" is criminally negligent. May has been bluffing with an empty hand. A disastrous approach which has undermined Britain's negotiating position.  The Government must act urgently to revitalise the government machinery for delivering Brexit. Above all, with just 18 months to go,  a "No Deal" contingency plan should have been prepared and already in the process of implementation. Bureaucratic inertia and delay can be tolerated no longer.

Saturday, 16 September 2017

Flexcit reality check

Simon Nixon's recent Times article "Norway option is not the long term answer to the problems posed by Brexit", drawing heavily on Jean-Claude Piris's article for E!Sharp magazine, has caused a flurry of discontent among proponents of the EFTA EEA option.

Most notably unhappy are Flexcit supporters who propose a permanent EFTA EEA option which they believe can then be amended/reformed to meet our Brexit objectives. I was a Flexcit supporter, until the scales gradually fell from my eyes - a process that started spring 2016 and completed after the Referendum. For me the Nixon/Piris article covered some (of the many) issues I discovered in my journey away from Flexcit.

Freedom of Movement

The EEA Agreement encompasses the EU's "four freedoms", including Free Movement of People. This is often seen as the Achilles heel of the Norway / EFTA EEA option.

Article 112 of the EEA agreement states that where "serious economic, societal or environmental issues arise",  safeguard measures can be used, limited to "what is strictly necessary in order to remedy the situation". Flexciteers claim that these could be used "unilaterally" by Britain to limit freedom of movement. Liechtenstein is quoted as an example of an EFTA EEA country that has imposed immigration quotas via Article 112 safeguard measures.

In 1995, prior to Liechtenstein's EEA accession, the EEA Council recognised that Liechtenstein was a "small inhabitable area of rural character with an unusually high percentage of non-national residents and employees" and effectively pre-authorised the use of safeguard measures assuming no other solution was found. Liechtenstein did not act unilaterally.

As Piris points out that there is no precedent for "unilateral" action, and Britain can hardly expect to gain similar free movement concessions as a tiny, rural, land-locked micro-state like Liechtenstein. Should Britain take the unilateral route, it will be subject to "rebalancing measures"  by other EU/EFTA states under Article 114 of the EEA agreement, i.e. retaliatory measures such as limiting Britain's access to the Single Market by suspending the Financial services passport for example (as suggested on Steven Peers' EU Law Analysis blog).

Still Pay, No Say?

Inevitably there are complaints that the article simply repeats the "still pay, no say" mantra from the Remain campaign. Nixon states that EEA members "contribute to the EU budget". Strictly speaking, Norway pays for participation in EU agencies and selected EU programs, as well as directly funding poorer Eastern bloc EU states via the EEA and Norway grants system. However, it is true to say that without such payments, Norway would not participate in the Single Market. EEA will come with a price tag.

Norway does have "a say" over EU law applying to the EEA agreement - early consultation when EU legislation is first presented to EU Council and observer status on committees. But at best, this is similar to Britain's current status minus voting rights - it cannot be considered an improvement.  

Nixon/Piris point out that post-Brexit Britain could not expect more say over EU law than Norway - no special rights of consultation, recognition of differing British standards, opt-outs on certain legislation. This would put Norway's nose out of joint (whose vote we would need) and more importantly undermines the fundamental EEA principle of homogeneity.

In any case, a key reason for Brexit was the undemocratic nature of the EU and the largely unfettered legislative power of the EU Commission.  How much say Norway has compared with Britain as an EU member state is rather a moot point - it's negligible in either case. We're leaving the EU because we didn't buy the "influence" argument.  The problem with the Norway option is it still leaves us subject to EU legislation.

EEA democratic reform ?

Optimistic EEA supporters (Flexciteers) suggest the EEA could be reformed to create a more democratic "single market of equals" and even devolve legislative power to other intergovernmental organisations. Nixon/Piris scotch that idea -  the ECJ has previously struck down earlier versions of the EEA agreement that gave too much influence to non-EU states.  If anything, the EU might seek to lash the EEA even tighter to EU law. 

Flexciteers cite UNECE WP.29 (world forum for harmonisation of motor vehicle regulations) as an example of the EU ceding legislative power to UNECE. The truth is that this forum has been the basis of European vehicle regulations since 1958 - with many EU member states involved on their own initiative. In 1998, the EU became a contracting party, and required EU member states to sign up to UNECE regulations the EU negotiates and agrees (but allowing member states to retain their own initiative in regulations not covered by EU agreement with UNECE). Since then, the EU has steadily increased its control over member states and now claims sole competence to speak and vote on behalf of member states at WP.29, giving it a block vote of 28, (soon to be 27). Rather than ceding power, the EU has executed a power grab over member states and now has a dominant position in WP.29. 

Juncker's recent "state of the Union" speech stated "trade is about exporting our standards, be they social or environmental standards, data protection or food safety". EU power is centred on its acquis (body of law) and it's ability to impose its acquis on others. Can anyone seriously believe the EU is going to cede legislative power? EFTA EEA is primarily a mechanism for extending EU law to EFTA states - the only reform the EU will be interested in will be to strengthen its grip.

This is precisely my fear regarding Flexcit - in seeking reform of EEA, the EU response will be to simply dust off the Verhofstadt/Duff Associate Membership plan. EEA states becoming associate members will get voting rights in EU law applying to them, but at the price of accepting this EU law having direct effect and primacy in national legislation - as per EU membership.  Verhofstadt/Duff tellingly describe EU associate membership as a "parking place for those states not yet ready for full integration".

EEA is not a given for Britain

The crucial observation by Nixon/Piris is that far from being a ready-made, off-the shelf Brexit option (as Flexciteers have claimed in the past), British membership of the EEA would face a number of immense political obstacles.

  • As a matter of process (Brussels does love its process), Britain has to leave the EU first, then apply to join EFTA and re-join the EEA.
  • The application to re-join EEA will be "mixed competence", requiring unanimous ratification by all EU states and regional parliaments, so is potentially vulnerable to a regional veto (as per CETA and Wallonia).
  • Unanimous consent from the EFTA EEA states is also required. Norway's consent cannot be taken for granted. Norway's position as EEA top dog will be taken by Britain. Norway's political class is pro-EU and still harbours ambitions to join the EU - they will be very ambivalent about Britain joining the EEA.
  • All of this means that a transition arrangement is needed just to achieve the EFTA EEA option.

It's unsurprising that supporters of the EFTA EEA option are critical of Nixon/Piris. They will argue that failure to invoke Article 127 of the EEA agreement (1 years notice to quit) means Britain automatically retains full Single Market Membership (although I dismissed this idea in an earlier post and Lawyers for Britain have also written a good critique). They will insist that the Liechtenstein option must be applicable for Britain (despite plenty of critiques, including a very good critique from Civitas). They will continue to believe that Britain can opt-out of troubling legislation, despite the fact that the EEA is founded upon homogeneity of law (EU law at that).

But Piris cannot be dismissed so easily. As a former director-general of the EU Council’s legal service, he is not lacking in knowledge or expertise.  Even if you think his view slanted, it is highly likely that his thinking represents Brussels thinking. The EU believes Britain cannot automatically retain Single Market membership. Are supporters of the EEA option proposing we will fight and win a legal challenge against the EU on this point ?

It follows that EU agreement is needed to make the EFTA EEA option feasible and so the EU will dictate the terms. The EU is not going to let Britain drive a coach and horses through the four freedoms and homogeneity. The EU is smart enough to head off any such attempts via counter-measures already in the EEA agreement and if need be by extracting additional commitments from Britain via the Article 50 Withdrawal treaty.

Supporters of the EEA option and Flexciteers tend to call other Brexiteers "fantasists". Yet it seems Flexcit is the biggest fantasy of all - the notion that we can shape the EEA to whatever we want. This is why I describe the Nixon/Piris article as a reality check for Flexcit. The only EFTA EEA option on offer will be "as-is" - continued EU law and free movement of people. The only reform on offer will be further entanglement via EU associate membership. It is time to ditch the Flexcit fantasy.

Friday, 1 September 2017

Barnier on Mutual Recognition

The press conference speech by Michel Barnier following the third round of Article 50 negotiations  sparked plenty of confusion and debate, in particular the following comments:
".. protecting the EU legal order and protecting the integrity of the Single Market are core principles of my mandate. The UK decided to leave the European Union. The UK government decided to leave the Single Market and the Customs Union. We respect this sovereign decision. The Single Market, the EU capacity to regulate, to supervise, to enforce our laws, must not and will not be undermined by Brexit.
The UK wants to take back control, it wants to adopt its own standards and regulations. But it also wants to have these standards recognised automatically in the EU. That is what UK papers ask for. This is simply impossible. You cannot be outside the Single Market and shape its legal order."
Further to that, Barnier said some of the recent British proposals showed “a sort of nostalgia in the form of specific requests which would amount to continuing to enjoy the benefits of the single market and EU membership without actually being part of it”.

What does he mean ? Several alternative interpretations have been discussed:

1) The initial response was that Barnier was ruling out mutual recognition, despite the fact that the EU has mutual recognition agreements with numerous third countries. These agreements recognise third country Conformity Assessment Bodies (CABs) as competent to test products against EU standards  (and vice versa) and issue certificates of conformity.

Agreements on conformity assessment do not imply or require regulatory harmonisation - each party will maintain different standards and regulatory regimes. There is no recognition of each other's standards, merely a recognition of CAB's in each others territory. This means exported products undergo an assessment against relevant third country standards for export to the said third country, which is separate and different from the assessment undertaken for the domestic market.

2) It was then suggested "automatic mutual recognition of *divergent* regulations & standards" was the issue. But it's not clear the UK Government has suggested or is asking for such a thing. Certainly, there will be cases where the UK seeks mutual recognition of equivalent regulations with the EU - in line with existing EU-third country precedents.

The most obvious case is  agriculture / SPS regulations. Switzerland has an agriculture equivalence agreement with the EU which waives all border inspections for EU-Switzerland trade in agriculture. Although not in the single market, Switzerland informally harmonises its SPS regulations with the EU's. The EU also has agricultural equivalence agreements with other third countries (e.g. Chile, New Zealand) who are not fully harmonised with EU SPS regulations, but the EU has deemed the third country SPS regime sufficiently equivalent to allow much lower rates of border inspections.

In a recent paper on Data Protection, the UK Government has indicated it will seek to build on "adequacy" provisions in the EU's Data Protection law. The EU Commission can deem third country data protection standards are "essentially equivalent" to EU standards - countries such as Argentina,  Israel, New Zealand, Switzerland, Uruguay already have "adequacy" agreements with the EU.

It seems clear to me that Britain is seeking equivalence agreements based on existing EU-third country precedents. Of course, these require a continued close alignment or harmonisation of regulations - divergence will cause some or all of the agreement benefits to be lost. As far as I can see this is fully understood and I see no evidence that Britain is trying to circumvent that principle.

3) A clue to another possible explanation is in Barnier's reference to "recent UK papers / proposals". "Continuity in the availability of goods for the EU and the UK" was published by the UK Government on 21st August, effectively responding to the EU's paper  "Goods placed on the Market under Union law before the withdrawal date" published 28th June 2017.

The EU paper limits continued free movement of goods to those placed on the single market before the withdrawal date.  Market authorisations (for biocidal, plant protection and medicinal products) will need to be transferred to another competent national authority (i.e. within EU territory). Market surveillance co-operation and exchange of relevant information will cease on withdrawal date (with a case made for continued communication on goods already placed on the market).

The UK paper also proposes continued free movement of goods placed on the single market before the withdrawal date, But the paper also suggests business should not have to repeat compliance activities undertaken prior to exit. Type approvals, certificates and registrations issued prior to exit should remain valid. This is no small matter. Transferring authorisations on medicinal products to an EU-based authority is an expensive business (fees start at  approx. €280,000 per product) . Existing Car type approvals may be at risk, with a cost of £500,000 per model to re-test. The paper emphasises this proposal is set in the context of a smooth transition to a future relationship with the EU.

Here I think we see the heart of the problem. Although Article 50 calls for the withdrawal agreement to be concluded "taking account of the framework for its future relationship with the Union", statements from Barnier and the EU (on mutual recognition and availability of goods etc.) are based on application of EU law to Britain as a third country without any UK-EU agreements in place. It is as if Barnier/EU view the future relationship as no relationship at all. The EU stance to Britain is leave first, paying your exit bill, and then we may consider some trade arrangements.

However, while the EU cannot be compelled to enter into a Free Trade Agreement (FTA), it will be a lot harder to refuse requests for mutual recognition agreements.  The EU is a signatory to the WTO TBT agreement and Article 6.3 "encourages" members to enter into agreements on conformity assessment. Similarly, WTO SPS Agreement Article 4 "encourages" members to enter into agreements on agriculture and SPS measures. Also, WCO (World Customs Organisation) recommend members enter into AEO mutual recognition as part of its SAFE Framework (see page 28 of WCO SAFE Framework 2012 and section 5.5 on page 54 of WCO SAFE Framework 2007).


Claims that Britain is trying to enjoy the benefits of the Single market after it has left seem wide of the mark to me. Britain is seeking mutual recognition and equivalence agreements based on existing EU-third country precedents and is clearly seeking a smooth transition. Barnier is ignoring the EU's commitments to removing trade barriers in various international treaties and its own treaty. Moreover, such agreements will be of mutual benefit: protecting EU supply chains reliant on UK goods and protecting EU traders who export to the UK; costs for market authorisations and type approvals will apply in both directions.

Responses to Barnier's comments ranged from Hard Brexiteers saying "walk away now" to the usual Remain suspects praising  Barnier/EU and condemning Davis/Britain.  Portugal's former Europe Minister Bruno Macaes tweeted that Barniers' comments contradict the EU's position on trade:
  • For years the EU has stated that the "advantages" of the EU's single market can be enjoyed by third countries, as part of a more "Global Europe". 
  • In negotiations with the US for TTIP the goal was "frictionless" trade, which Barnier deems impossible for the UK.
  • Mutual Recognition is on the table in EU trade deals and is included in CETA, yet Barnier rules it out of future UK-EU relationship.

For myself, I think Barnier's comments are another manifestation of the impasse on exit bill versus trade talks arising from the EU's strict sequencing. Open Europe's Pieter Cleppe takes the view that the EU will have to start talking about trade soon - I hope he is right.

Wednesday, 30 August 2017

There is no Mandate for EFTA EEA

As I wrote in a previous blog, "You could be forgiven for thinking the question over the Single Market had been settled." But unfortunately, we now see claims that the Referendum campaign did not provide a mandate to leave the Single Market being revived (again).

1) Pretending that the Referendum campaign did not discuss leaving the Single Market has been categorically debunked, not least in Andrew Neil's demolition of Open Britain's James McGrory.  It is insulting the public's intelligence to suggest that this was not understood. Since the Referendum, we have had the Lancaster House speech, the Conservative and DUP General Election manifestos, the Queens speech based on those manifesto commitments and a vote against Chukka Umunna's Single Market amendment by 322 to 101 - all committed to leaving the Single Market.

2)  Even worse, we then have the argument that voters don't have enough understanding of the EU or Single Market to understand the effects of leaving. This of course is exactly the line of argument used by Remain refuseniks who wish to reject or overturn the Referendum. The same argument used by MacMillan and Heath to get us into the EEC in the first place while concealing the loss of sovereignty involved. The same argument used for decades afterwards as EU treaty after EU treaty was signed without consulting the British public. It amounts to the metropolitan elite and political class saying "its all too complex for you, we know best".

3) The same people who propagate this view of voters are remarkably quick to seize on polling that suggests public support for the single market (the same single market voters apparently do not understand). A Comres poll for the BBC in July 2016 is quoted as showing 66% think retaining the Single Market should be a priority for the Government. Except upon examination, this is actually 66% support for "maintaining access to the single market so Britain can have free trade with the EU". Free Trade access to the Single Market is completely different from being inside the Single Market with all its associated restrictions - as voters and pollsters well know.

A more accurate view of public sentiment is provided by the YouGov Poll of August 2016, which compared the Norway EFTA EEA model with a Canadian Free Trade Agreement (FTA) model. The majority view was that the Norway model was not a good deal and was not seen as respecting the result of the Referendum.

Rather like those arguing over Article 127 of the EEA Agreement, EFTA EEA supporters are making a disingenuous case on "mandate" rather than making a positive case for the EFTA EEA option, precisely because they don't believe people will freely choose EFTA EEA over an FTA. In fact they tend to argue against other options and then defend the EEA option as being "not as bad as you think". Here's a quick preview of the EFTA EEA arguments I've seen:

1) The original case made for EFTA EEA was the 2-year Article 50 deadline - an "off-the-shelf" interim or transitional arrangement was needed to avoid a disastrous cliff-edge scenario and buy time to negotiate a full settlement - a case I argued during the Referendum. But even EFTA EEA supporters now admit that  EFTA EEA is a destination, not a transition.

2) The sacrifice of sovereignty is justified by reduced marginal cost of trading with the EU. But what is this cost of leaving the Single Market and is it outweighed by the impact to domestic economy, trade with rest of the world - never mind the sovereignty sacrifice? If marginal costs to trade with the EU is the over-riding factor, then why not have a Customs Union? Why not stay in the EU? Why not join the Euro (which would eliminate currency exchange costs)? Why not join Schengen (which eliminates the cost of passport checks at the border)?

3) Claiming the EEA agreement is really just a sophisticated FTA based on mutuality and co-operation. In reality, the EEA is founded upon the principle of homogeneity and is designed to export EU single market law to the EFTA EEA states - primarily as a prelude to full EU membership. Wanting the (supposed) advantages of harmonisation while cherry-picking elements to disagree with is very much "cake and eating it" territory - it won't wash with the EU.

4) Claiming EEA safeguard measures can provide us with the same sovereignty over immigration control as a third country. The best rebuttal of this I have seen is an article by Christian Stensrund for Civitas .The EU have been crystal clear regarding the indivisibility of the four freedoms. If the EU wanted to soften this line to accommodate Britain, they would have done so during the negotiations with David Cameron. Even if the claim were true, by itself this does not make EFTA EEA superior to a third country option.

5) EFTA EEA allows Britain to pursue its own trade policy. This is true for tariffs, but lack of regulatory freedom would prevent Britain from negotiating on regulations and non-tariff barriers with third countries - which is where the value of modern free trade agreements lies. EEA Protocol 12 exemplifies this - the EU has sole initiative to negotiate Mutual Recognition Agreements (MRAs) - EFTA EEA states can only make parallel agreements harmonised with the EU MRAs.

I could (and probably will in subsequent posts) go into much more detail on why the case for EFTA EEA is flawed and disingenuous. But I will end this post by emphasising that far from there being no mandate to leave the single market, there is in fact no mandate for the single market. It is for those proposing EFTA EEA to make a compelling case as to the advantages of a permanent EFTA EEA settlement - something they have singularly failed to do so far.

Saturday, 26 August 2017

The Myth of Global Regulations - SPS Measures

In a previous post, I looked at the claim made by supporters of the EFTA EEA option that the EU's technical regulations were simply a "rubber stamp" of global regulations and concluded:
  • There are no "global" regulations, just international standards which are voluntary and only have legal force when implemented in binding regulations in national (or EU) legislation - giving scope for "gold-plating" and regulatory barriers to trade. 
  • The EU's regulations are not fully harmonised with international standards bodies recognised by the WTO. In particular, only 24% of European CEN standards cited in EU law are identical to ISO standards.
  • The EU adopts a protectionist regulatory stance: refusing to recognise international standards that provide equivalent or higher safety levels;  insisting on withdrawal of existing regulations and replacement with European standards in trade relations with third countries - effectively exporting the EU acquis and shutting out other international trade.
A similar story is seen with respect to Sanitary & Phyto-Sanitary (SPS) regulations - i.e. regulations covering animal and plant health. The WTO SPS agreement encourages the use of international SPS standards (Article 3.1), in a similar manner to WTO TBT agreement Article 2.4 and international technical standards. The WTO recognises three international SPS standards organisations:
Codex is also party to an agreement with UNECE (the "Geneva Understanding") to avoid duplication and adopt each others standards where they overlap. Between them, Codex and UNECE provide a large proportion of  international food safety standards.

SPS regulations are cited as the best example of how EU regulations are essentially "global". There are no hard and fast figures available, but it does seem likely that the great majority of the EU's SPS regulations are based on international standards (primarily from Codex and UNECE). Tabloid claims regarding barmy Brussels laws on curvy cucumbers and bent bananas turn out to be international standards with a sensible, trade facilitating purpose behind them.

There are notable exceptions to the EU's acceptance of international standards though. The EU's resistance to Genetically Modifed Organisms (GMO) has held back scientific and agricultural development in Europe and resulted in WTO rulings against the EU from cases brought by US, Canada, Australia, New Zealand. Argentina, Brazil, India and Mexico.

But even though the majority of EU SPS regulations are based on international standards, there is still significant scope for barriers under the WTO SPS Agreement. In particular Article 3.3 allows circumstances where members can introduce SPS measures resulting in a higher level of protection than international standards.

As Derrick Wilknson explains in his blog, there is a wide range of plant protection products (PPPs), veterinary pharmaceuticals (VPs) and biotechnologies, that are severely restricted or banned in the EU. Although international standards have been agreed on maximum allowable residue limits for the PPPs and VPs on food,  the actual limits enforced vary significantly from jurisdiction to jurisdiction.

The recent publicity over "chlorinated chicken" is also informative. The USA puts chicken carcasses through a disinfectant chlorine wash to prevent salmonella. This is a perfectly safe procedure and there is no Codex, UNECE or other international standard prohibiting this. In fact prepared salads sold in the EU are often subjected to a chlorine wash. The EU does not regard the chicken chlorine-wash as unsafe - nevertheless imports of US chicken to the EU are blocked.

The EU's regulatory approach is based on the "precautionary principle" and a "farm-to-fork" approach to secure food safety throughout the supply chain - rejecting the US use of disinfectants. It has been claimed that the EU's approach is a superior form of food safety control, although recent salmonella outbreaks across the EU have rather undermined that claim. What is clear that the EU's approach creates a major non-tariff barrier to trade in agriculture with non-EU nations.

Packaging regulations also provide a major non-tariff barrier for agricultural exports. Combined with onerous rules of origin, they restrict African countries exporting to the EU despite benefiting from a zero-tariff rate for Least Developed Countries (LDC's). Canadian exporters complain that meat exports to the EU require the EU's own health mark on a tamper proof belt applied in the processing plant.

The fact that the EU's SPS regulations are based primarily on international standards from Codex and UNECE does not prevent regulatory barriers to trade.  Choosing the EFTA EEA option means permanently adopting the EU's particular SPS regulations, with all the barriers and protectionism that brings. The claim that EU SPS regulations are simply a "rubber stamp" of global SPS standards is a myth.