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.

Conclusion

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.

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

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.

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.

Tariffs

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.

Conclusion

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".

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.

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.

Conclusion

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.

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.

Conclusion

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.

Breaking the impasse (part 3) - Respect the Good Friday Agreement

There's a lot of tosh spoken about the Good Friday Agreement (GFA), including by our own prime minister Theresa May. There is no reference to an all-island economy. There is no commitment to avoid a customs border. There is no mention of customs at all. The only commitment on borders is the removal of military installations (completed some years ago).

Principle of Consent

However, the GFA does establish the "principle of consent" for the people of Northern Ireland (NI) :

"acknowledge that while a substantial section of the people in Northern Ireland share the legitimate wish of a majority of the people of the island of Ireland for a united Ireland, the present wish of a majority of the people of Northern Ireland, freely exercised and legitimate, is to maintain the Union and, accordingly, that Northern Ireland’s status as part of the United Kingdom reflects and relies upon that wish; and that it would be wrong to make any change in the status of Northern Ireland save with the consent of a majority of its people;"

Some (nationalists) have argued that NI leaving the Single Market & Customs Union is a change in the status quo which breaches the principle of consent. But the actual wording in the GFA (see above) is clear that the principle of consent applies to "Northern Ireland’s status as part of the United Kingdom", not to NI's status with respect to the EU or the Republic of Ireland (RoI).

The EU's current NI-only backstop proposes NI remains part of the EU's Single Market and Customs Union (for goods only) subject to ECJ jurisdiction, creating a customs, regulatory and jurisdictional border with Great Britain (GB). This clearly separates NI from GB in order to facilitate close ties with RoI. While this is not a full constitutional sundering of NI from GB, it is an obvious weakening of NI's place in the United Kingdom and its internal market, which ought to require the consent of an NI majority.

No Deal, No Hard Border

So the GFA does not prohibit a "hard" NI/RoI customs border, nor would the GFA principle of consent (of NI majority) apply to such a border. Nonetheless, all parties see the sense in avoiding a hard NI/RoI customs border.

The UK Government has steadfastly insisted it will not install infrastructure to create a hard border under any circumstances. It has been recently reported that "a working group of senior UK government officials is being convened to devise ways to keep the Irish border free of customs checks and police even if there’s no withdrawal agreement". EU President Juncker & Irish Taoiseach Leo Varadkar have both confirmed that in a "No Deal" scenario, there would be "no physical infrastructure and customs checks on the Border". So even in a No Deal scenario, no-one is going to erect a hard border.

So how would "No Deal, No Hard Border" work ? Quite simply, both sides will collect tariffs/duties and apply customs controls away from the border:

• Importers will be audited and required to submit regular accounts of trade (as they are today for VAT-based INTRASTAT returns used to collect intra-EU trade statistics)
• Market surveillance will check goods placed on the market for regulatory compliance. Even today there is regulatory divergence between North and South where UK specifies more stringent safety tests on top of EU's harmonised CE standards (e.g. fireworks, sofas etc), meaning some products that are legal in the South may be illegal to market in the North.
• Intelligence-led customs/police interventions will target contraband and counterfeits (as per today) and sources of non-compliant goods.

The GFA emphasises and promotes cross-border co-operation between the two jurisdictions (emphasising that there is a North-South jurisdictional border). Specifically, the GFA establishes a North-South ministerial council with designated areas of co-operation. Building on existing strong cross-border co-operation will be crucial to achieving "No Hard Border":

• Sanitary & Phyto-Sanitary (SPS), i.e .animal and plant health, is already designated as an area of co-operation under the North-South ministerial council and could provide the basis for an all-Ireland SPS inspection regime. 
• Co-operation on market surveillance (spot checks on goods on the market for regulatory compliance) is currently covered via membership of the Single Market, but post-Brexit should be covered under GFA cross-border co-operation.
• Joint police/customs interventions are undertaken today against smuggling (contraband, counterfeits, avoiding excise duty etc.). 

GFA as basis for NI customs border agreement

If there is to be an agreement on the NI customs border, it seems logical to establish a North-South customs border management body, building on existing cross-border co-operation. This body would be democratically accountable to the two political jurisdictions (North and South), using existing political infrastructures, i.e. the North-South Ministerial Council and British-Irish Council established under the GFA.

Incorporating an NI/RoI customs border agreement into the GFA would also bring other benefits :

• WTO will be able to recognise the politically sensitive NI/RoI border as an exception to WTO MFN non-discrimination (which might otherwise require the EU and UK to keep all their borders as open as NI/RoI "No Hard Border"). 
• Most importantly, the principle of NI consent becomes central. NI could voluntarily choose to align with RoI in the interests of "No Hard Border", or NI could choose to decline such alignment, if the result is an NI-GB hard border that significantly impacts trade.

The UK should support NI in whatever arrangements it chooses to make with RoI, for example if NI consents to "technical checks" on goods crossing the Irish Sea in order to facilitate "No Hard  Border" with RoI. NI goods could still enter GB without checks on the basis that UK Government trusts its own (NI) inspectors (both market surveillance and SPS). In fact, as a "cherry-on-top", GB could offer to accept RoI goods without checks, by virtue of UK (NI) inspectors involvement in North-South border management bodies. Such an offer would be on the express understanding that it does not extend to EU-26 goods.

The EU should also regard the NI border as an exception, delegating control fully to RoI with freedom to make arrangements via GFA institutions/bodies to achieve "No Hard Border". Provided such arrangements prove sufficiently robust, the EU should leave customs border arrangements to the players on the ground rather than insist on a rigid application of EU customs law. As a safeguard, the EU could impose "technical checks" on goods crossing the Celtic Sea (i.e. between RoI and France/EU-26), if any concerns arise and persist over integrity Single Market / Customs Union integrity.

The EU should also allow RoI to recognise NI as "equivalent" with RoI via North-South border management bodies, which would allow NI manufacturers and economic operators (in aligned sectors) to be recognised as operating within the single market. The Swiss are recognised as equivalent in much the same way via EU-Swiss joint committee - without requiring direct application of EU law or ECJ jurisdiction. Such an offer would be on the express understanding that such equivalence does not extend to GB manufacturers and economic operators.

The major hurdle to this approach is the current suspension of Stormont and power sharing arrangements. The opportunity to shape the debate around the future border arrangements should be incentive to resume Stormont's government. At the very least, Stormont should be convened for the specific purpose of addressing the customs border and/or a North-South border management body should be instituted. Any parties unwilling to participate would sacrifice the right to a voice.

Conclusion

Despite the tosh spoken about the GFA, it is the EU's NI-only backstop proposal which threatens the status of NI within the United Kingdom and its internal market and so threatens the GFA settlement. No self-respecting UK Government should even contemplate signing the Withdrawal Agreement while it mandates economic and judicial borders within the UK.

In fact, the GFA does not mandate "No Hard Border" for NI/RoI. However, via the GFA, NI consent can be expressed and cross-border co-operation enhanced to manage a "soft" NI/RoI border. The withdrawal agreement should be revised to put the GFA and NI consent front and central.

In short, instead of weaponising the GFA and the NI customs border issue, it's high time politicians respected the GFA and built an NI customs border solution based on it.

Breaking the impasse (part 2) - Ditch the Common Rule Book

The Brexit negotiations appear stalled, with much confusion over the issue of alignment with EU rules and a proposed Common Rule Book. Michel Barnier has consistently made clear the choice facing the UK: we can either be inside the single market and follow all the rules, without dividing the 4 freedoms, so including free movement of people (i.e. Norway), or we can be outside the single market and free from the obligations of the single market (i.e. Canada).

A pre-requisite for Single Market participation is adopting the EU's Single Market Rule Book, or EEA acquis. Theresa May's proposed Common Rule Book is in reality the EEA acquis, minus some elements (services, free movement of people) that she hopes to exclude. Ultimately, the EU will insist on all the rules being included. It is also clear that in seeking a Common Rule Book, May is negotiating to stay in the Single Market, despite her repeated promises to the contrary. If we simply wish to trade with the Single Market, as per Canada, a Common Rule book is not required.

The leaked DExEU alternative proposes broad regulatory equivalence as an alternative to Single Market harmonisation and Common Rule Book, based heavily on the Swiss model. However, the EU have repeatedly stated they regret agreeing the Swiss model (agreed as an EEA alternative while the Swiss application for EU membership still stood) and the EU will not offer this model to anyone else, least of all a departing UK. In any case, the EU's measure of equivalence is barely distinguishable from full harmonisation. The Conservative Brexiteers have gone up a blind alley with this approach.

The main trade gain comes from using common standards. A UK product designed, manufactured & tested to harmonised European CE standards for the UK market can also be marketed in the EU/EEA  market without needing a separate design, manufacturing or assessment process. But of course, an independent UK can voluntarily choose to recognise and use harmonised European CE standards, without membership of the Single Market.

So the question arises - what are the gains from a Common Rule Book / Single Market membership  over and above the use of common standards ? Does being outside the Single Market for goods mean other expensive or insurmountable barriers to trade ? I'll try to answer that question with an overview of the impact of leaving the Single Market on UK goods.

Manufactured Goods - Conformity Assessment

As I described in a previous blog, all manufactured products conforming to EU harmonised CE standards are afforded "presumption of conformity" by EU legislation, whether the manufacturer is based in EU/EEA or third country outside the single market.

For the vast majority (~95%) of manufactured products covered by EU  harmonised regulations, the manufacturer certifies the product, issues a Declaration of Conformity (DOC) & affixes the CE label. A minority (~5%) require certification by an independent EU/EEA based Certification Assessment Body (CAB). The mitigation for this is straightforward:
● UKAS (UK Accreditation Service) is applying to retain membership of  EA (European Accreditation), so that UKAS accreditation will continue to be recognised by the EU.
● A Mutual Recognition Agreement (MRA) on Conformity Assessment would allow UK based CAB's and their certificates to be recognised by the EU (and vice-versa).

● In any case, UK-based CABs can use subsidiary/subcontract relationships with an EU-based CAB to allow their certificates to be recognised in the EU/EEA (and vice-versa).

The primary difference for third country manufacturers is the need to use an EU/EEA-based importer - who holds the declarations of conformity / technical file and acts as a contact point - but is not responsible for conformity assessment. Companies who have a subsidiary, office or even an individual based in the EU/EEA can act as their own importer. The end customer can act as importer. Shipping/Warehousing companies, agents etc. all offer importer services. It's not onerous.

Outside the Single Market, goods will become subject to regulatory checks at the border. Checks are determined on the basis of risk assessment, and even today EU-UK trade is subject to risk assessment and checks for contraband and counterfeits. Overall rates are low (just 1% of third country goods entering RoI are subject to checks) mostly checking paperwork or container seals / labels - only a very small number of consignments are subject to opening and physical inspection. Attention is focused on known sources of risk, e.g. counterfeit goods from the Far East. Non-compliance with standards is mostly identified via market surveillance (not at the border), which then feeds back as intelligence into customs risk assessment for future consignments.  The risk of increased border checks for regulatory non-compliance (as opposed to deliberate counterfeits and fraud, which is already checked today) is negligible, especially for established and trusted traders.

Highly Regulated Sectors.

Some sectors are more highly regulated, requiring product pre-approval via an EU agency. In her Mansion House speech, Prime Minister Theresa May identified 3 such key sectors : Chemicals, Pharmaceuticals, Aviation.

In the Chemicals & Pharmaceuticals sectors, the impact of leaving the single market is transferring approvals/authorisations to an EU/EEA based agency via an EU/EEA based individual (while manufacturing can remain in the UK) e.g.
●REACH registrations via an "Only Representative"
●BPR (Biocidals) product authorisations via an "Authorisation Holder"
●BPR (Biocidals) product suppliers via a "Representative"
●Pharamaceutical products via a "marketing authorisation holder"
●Pharmacovigilance (batch quality control and monitoring of pharmaceuticals for adverse affects) via a "Qualified Person for Pharmacovigilance" (QPPV)

Standard third country MRAs (as enjoyed by Swiss, Canada, Australia, New Zealand, Japan etc) can mitigate barriers in Chemical & Pharmaceutical sectors:

● MRA on Good Manufacturing Practice (GMP) would allow Pharamacovigilance to be undertaken in the UK territory and simply signed off by the EU/EEA-based QPPV (and vice versa) - waiving re-testing of products on import.
● MRA on Good Laboratory Practice (GLP) would allow mutual acceptance of data generated in the testing of chemicals, which means approvals in both regimes can refer to the same lab tests.

In the aviation sector the EU Parliament Proposal (paras 31 & 32) exhibits a strong desire for a bi-lateral agreement on air transport and aviation safety, "in the interest of the passengers, air carriers, manufacturers and workers' unions", based on "similar agreements with other third
countries". The UK would need to adopt EU aviation safety law & ECJ rulings (as for example Turkey's "working agreement"). UK's Civil Aviation Authority (CAA) would then retain the right to issue EASA certifications of air-worthiness. Swiss-style observer status at EASA may also be a possibility. In time, CAA will recover capacity and a mutual recognition agreement with EU may then be more appropriate (as per USA, Canada).

Car industry

The Car industry is also a vital sector where product pre-approval applies. The UK's Vehicle Certification Agency (VCA) issues whole car type approvals which allow a model to be marketed throughout the Single Market

EU vehicle regulations are increasingly driven via UNECE WP.29, an international forum for harmonisation of automobile regulations. UN International regulations annexed to the UNECE 1958 Agreement provide mutual recognition of car component type approvals (even without any UK-EU agreement). UN Global Technical Regulations annexed to the 1998 agreement allow mutual recognition of regulatory equivalence for car components (included in EU's Free Trade Agreements  (FTAs) with Korea, Japan & Canada). This removes regulatory barriers for car components (where covered by UNECE regulations), and UNECE approvals can substitute for elements of the EU's whole car type approval.

What is missing is the continued recognition of VCA's whole car type approval outside the single market. Is there scope for a form of "working agreement" (as per the aviation sector) to allow VCA to continue issuing EU recognised whole car type approvals ? I think so:
● EU has tabled regulatory co-operation on vehicles for talks on the future trade agreement.
● Korea, Canada, Japan do not have national bodies for vehicle certification in any case. Whereas the Swiss do and the EU-Swiss MRA provides for mutual recognition of whole car type approvals in return for adoption of relevant EU regulations.
● At EU's behest, UNECE is developing Regulation 0 to provide for international whole car type approval. So EU is already actively planning to extend mutual recognition of approvals beyond the EU/single market.
● UK's VCA has also issued approvals for some EU and third country car manufacturers. Why should they be punished and denied EU market access ?
● UK's VCA would need to continue commitment to UNECE WP.29 and adopt EU regulations / ECJ rulings where UNECE has not (yet) legislated. In time UNECE regulations (including Regulation 0 on whole car type approval) will replace all EU car regulations.
● UK exports 800k cars to EU but imports 2.3 million from EU every year. Who loses by erecting a huge trade barrier in this sector ?

Agriculture

EU Sanitary & Phytosanitary (SPS) regulations provide a very high barrier to agricultural trade for third countries outside the Single Market. Third country meat/dairy imports face veterinary checks at Border Inspection Posts: 100% documentary/identity checks; varying percentages for physical inspections (50% for some products).  EU agricultural equivalence agreements with third countries allow for lower rates of physical inspections  (e.g. Canada 10%, New Zealand 2%).  The Swiss have harmonised their SPS regulations with the EU and are deemed to be part of the EU/EEA SPS regime, with no border checks required for Swiss-EU/EEA trade.

The EU's SPS regulations are particularly protectionist. They require UK to apply the same protectionist measures to third countries (as discussed in a previous blog here), ruling out FTAs with USA (chicken etc), India (Basmati rice etc), Liam Fox's hope of joining the TPP and a host of others. Scientific research & development in GMO is blocked. A WTO ruling/fine against the EU's ban on Canadian beef will be served on the UK if we keep EU SPS rules after leaving the EU. We are currently a captive customer for EU agricultural products, with a 3:1 trade deficit.

It is clear to me that we will be much better served leaving the EU's SPS regime. UK-EU trade will face border veterinary inspections in both directions, so UK meat/dairy exports to EU would be diverted to the domestic market. We can quickly strike agricultural equivalence & Tariff Quota agreements w/ Australia, New Zealand, Canada, Commonwealth states, South  America etc - removing tariff and non-tariff barriers to these alternate (and generally lower priced) non-EU suppliers. Subsidies (Green-box etc) & use of quotas should be deployed to protect the UK meat/dairy sector through a transition. But ultimately, we will end up in a much better place and secure more trade globally on the back of it.

Conclusion

In the manufacturing sector, there will be some relocation of individuals/roles to fulfill the requirement for an EU/EEA based importer/representative, but some EU/EEA individuals/roles will also relocate to the UK - a one-off adjustment but not a long term issue. The risk of extra border checks for regulatory compliance is negligible. Breaching the EU law/ECJ red line in the car & aviation sectors is a small price to pay and in time the need for EU jurisdiction in these sectors will pass. In the agriculture sector, there is a clear case for breaking free from the EU's protectionist SPS rules in the interests of consumers and greater trade opportunities globally.

We are likely to broadly continue using harmonised European CE standards in any case, so reaping the benefit of a single design, manufacturing & assessment process for both UK & EU markets. But outside the Single Market, we are free to diverge as and when it makes sense to do so - in full consideration of the interests of our domestic economy and global trade. We would also be free from the EU's indivisible 4 freedoms and free movement of people. This would make negotiaing and maintaing a new relationship much easier and cleaner. In short, we should ditch the Common Rule Book and become a fully independent and sovereign third country - like Canada.

The fly in this ointment is the NI border, which I will look at in my next blog.

Breaking the impasse (part 1) - Backstop as a Stopgap

The Brexit negotiations appear stalled, stuck on the thorny question of the Irish border. The EU and UK are at loggerheads over the EU's current backstop proposal, which even the supine Mrs May said "No UK prime minister could ever agree", and there appears to be no agreement in sight.

However, my reading of the  Phase 1 Agreement and NI Protocol in the Draft Withdrawl Agreement suggests that the EU has  already (if unwittingly) agreed to a backstop that is: (1) UK-wide, (2) Cherry-picked, i.e. covers free movement of goods only (excludes services) ; (3) excludes EU free movement of people, (4) temporary until a "soft" border solution is implemented. In other words, the backstop provides a UK-wide stopgap to a full agreement and solution.

Firstly, let's consider the general commitments made by the UK regarding NI in the Phase 1 Agreement:

1. Avoid a "hard border, including any physical infrastructure or related checks and controls" (para 43). Not, as commonly mis-reported, a commitment to no border. There are already checks required today against counterfeits, contraband and to police the existing excise border. The logical interpretation is that controls or checks will be undertaken away from the geographical NI-RoI border.
2. Protect "the integrity of the UK internal market and Northern Ireland's place within it" (para 45). The same paragraph also confirms that the "UK leaves  the  European  Union's  Internal  Market and Customs Union" - emphasising again that the UK commitment is simply to avoid a hard border, not avoid any border at all.
3. Preserve the 1998 Belfast / Good Friday agreement, especially North-South & East-West co-operation (para 48). Note that:

• The 1998 agreement quite explicitly clearly refers to two distinct jurisdictions (each side to remain accountable to the Assembly and Oireachtas respectively). Cross-border co-operation exists precisely because there are two distinct jurisdictions, each with their own legal and constitutional order. The 1998 agreement neither creates nor requires a single all-Ireland jurisdiction.

• Contrary to much uninformed commentary, the 1998 Agreement says nothing about customs borders. It refers to borders only in the context of removing military & security infrastructure, which is not going to be reinstated due to any future trading relations.

Secondly, let's consider the specific commitments made regarding a backstop in the Phase 1 Agreement, which is intended to deliver the above general commitments in the absence of any other agreed solutions with the EU:

1.  "UK will maintain full alignment" (para 49) - the backstop does not just apply to, or for, Northern Ireland - the whole UK is encompassed.
2.  "with those rules of the Internal Market and the Customs Union ..." - i.e. not all rules. The backstop is clearly based on "cherry-picking".
3. "The UK will ensure that no  new  regulatory  barriers  develop  between  NI and  the  rest  of  the  UK, unless ...  the  NI   Executive   and   Assembly   agree   that   distinct arrangements  are  appropriate  for  NI." The backstop must not create any new barriers to GB-NI trade and cannot imply an Irish Sea border, unless NI voluntarily decides to diverge from GB.

Thirdly, let's consider what are the selective " rules of the Internal Market and the Customs Union" that apply to the backstop ?  The NI Protocol in Draft Withdrawl Agreement  (chapter III) defines a common regulatory area:

1. Article 4, covering Free Movement of Goods implies being inside the EU's Customs Union. References to  Regulation (EU) No 952/2013 require : Common Customs Tariff (i.e. Common External Tariff and preferential rates of EU's FTA's) must be applied to imports; ports will be subject to EU customs law and oversight.
2. The section on free movement of goods also includes EU laws on goods, agriculture & fisheries, single electricity market, environment, North-South co-operation, State Aid.
3.  Article 8 lists the areas of North-south co-operation as:  environment, health, agriculture, transport, education & tourism, as well as energy, telecommunications, broadcasting, inland fisheries, justice & security, higher education & sport. In other words many of the areas are not covered by EU laws on trade or are outside EU competence.
4. Article 2 covers free movement of people, which refers to the UK/RoI Common Travel Area (CTA) and not to EU's rules on free movement.
5.  Article 11 states the "Court of Justice of the European Union shall have jurisdiction".

It should be noted that much of the Draft NI Protocol is in un-highlighted text (indicating it is not yet agreed by UK and EU) most notably the jurisdiction of Court of Justice of the European Union. The only items highlighted in green (indicating UK & EU agreement) are Free movement of people (via CTA) and North-south co-operation. The State Aid clause is highlighted in yellow (indicating UK & EU agreement in principle). Nonetheless, the Draft NI protocol clearly outlines a single market and customs union in goods only, without EU free movement of people (agreed as covered by continuation of the Common Travel Area (CTA)).

Fourthly, let us consider how the Phase 1 Agreement and Draft NI Protocol make clear that the backstop is not meant to be a permanent arrangement:

1.  Phase 1 agreement para 46 states that commitments made for the unique circumstances on the island of Ireland will not pre-determine the outcome of wider discussions on the EU-UK future relationship.
2. Phase 1 agreement para 49 states the UK intention to address unique circumstances of Ireland via the overall UK-EU FTA, or via solutions specific to the island of Ireland - with the backstop only applying if no solutions have been agreed
3. NI protocol article 15 states that the protocol (including backstop) will cease to apply if a subsequent UK-EU agreement addresses the unique circumstances in Ireland.

Given the  Phase 1 Agreement calls for (i) UK-wide "full alignment" and (ii) commitment to integrity of UK internal market (and NI's place within it) - the logical interpretation is that the EU have signed up to a UK-wide goods-only backstop without EU freedom of movement, that is only temporary in application. The EU may not like the implications of what they have agreed, but if they renege on their commitments to date, then what chance is there we can reach any kind of workable agreement ?

The current impasse has arisen because the EU insist the backstop can only apply to NI (which contradicts the phase 1 agreement) and because they show no interest in addressing the NI border issues via a UK-EU FTA or specific solutions (in effect they want and expect their version of the backstop to be permanent). At the same time, the EU believe (not without foundation) that the UK Government are trying to leverage the NI border issue to gain a permanent UK-wide Swiss-style regulatory equivalence and customs alignment deal. While such an outcome may be sought by the likes of Philip Hammond, it is not acceptable to Leavers, Re-Leavers, or the EU.

It seems to me that the only way out of this impasse is for both sides to agree a backstop that is temporary - essentially a stopgap - to allow time to implement a permanent "soft" border solution for the NI border. Such a stopgap will also allow businesses & customs authorities in both UK and EU to fully prepare for UK outside the Single Market & Customs Union. The stopgap arrangement should be written into the Withdrawl Agreement in unambiguous terms:

1. Stopgap agreement should be unpalatable in equal measures to both sides. That way both sides have an incentive to move on from the stopgap to a full and final agreement. 
2. The UK could concede on ECJ jurisdiction and some continuing payments for the period of the stopgap.
3. The EU should concede on a UK-wide goods-only arrangement without EU's Free Movement of People rules for the period of the stopgap - as per what has been agreed already in Phase 1 and Draft Withdrawl treaty. The UK government should stand firm on free movement, despite hints May would like to compromise on this.
4. A definition of (including proposed timescales) and commitment to a "soft" border solution in NI, together with a break or sunset clause so that the stopgap does not simply extend forever.

It is now crucial that all parties consider and agree how an overall UK-EU FTA and special solutions for Ireland can provide a "soft" border solution for Ireland. As you may expect, I have some thoughts on how these arrangements may work - but that is a topic for another post.

A Brexit Turkey (part 3) - Customs Union is not a Brexit solution

Some bad ideas seem reluctant to die. The Institute of Directors (IoD) have published a "partial" Customs Union proposal (based on Turkey's Customs Union agreement with the EU), primarily to eliminate preferential Rules of Origin (RoO) in UK-EU trade.

In my previous post, I discussed how  preferential RoO are far from insurmountable. How significant are the costs associated with preferential RoO ? Open Europe assumed leaving the EU Customs Union would add 4% to cost of trade transactions (RoO costs & customs admin) leading to a 1% loss of GDP. Other studies suggest RoO adding less than 2% to transaction costs. One detailed study suggests RoO is a one-time cost that does not increase with increased volume of transactions.

A Customs Union seems a very blunt instrument to use, especially as trade with 3rd countries would still be subject to RoO. Are there other ways to address this issue ?

Rule of Origin Solutions

Blockchain technology has been touted as a way to simplify the administration & auditing of complex supply chains, hence minimising RoO administration costs. However, as promising as this technology may appear, we are probably a decade away from fulfilling this potential.

A recent paper examined preferential RoO for the Food & Drink Federation, a sector which makes particular use of global supply chains:
- Five case studies are examined, identifying challenges provided by use of non-local content in qualifying for tariff-free trade via preferential RoO.
- Both Pan-European Mediterranean (PEM) RoO and CETA RoO are compared for each case.
- The first case study is UK wholemeal bread, which uses flour milled in the UK from grains sourced from UK, US and Canada: PEM RoO require grains to be sourced entirely locally;  CETA RoO limits non-local grains to 20% by weight of final product. Otherwise the EU tariff of 9% would be payable on exports to the EU.

Some context is required here: 

- Bread is primarily produced and consumed locally: 85% of wheat used by UK flour millers is home-grown, with most of the imports from Canada; UK domestic sales amount to £3.5bn per annum ("Bakery & Snacks"). 

- By contrast, UK bread exports to the EU amounted to just £87.5m for the first 9 months of 2016, i.e. ~£117m per annum ("BakeryInfo"). 

- The UK runs a massive trade deficit with the EU across the whole food and drink sector (Food & Drink Federation statistics).

The Food & Drink Federation paper makes a number of suggestions for addressing these RoO issues, which could also apply to others sectors:
- Allow 10% non-originating product content without losing originating status (already provided in PEM RoO, under article 5.2 (a) );
- Full bi-lateral cumulation in EU-UK trade so that EU content counts as local in UK exports to EU and vice versa - almost certain to be part of an UK-EU FTA;
- Full diagonal cumulation with EU FTAs, e.g. so that UK, EU and Canada can count each other's content as local in trade between themselves;
- Exempt Least Developed Country (LDC) origin content in UK-EU trade so that LDC content counts as local
- Exempt products / content where EU & UK have same MFN tariffs. i.e. count products as local where there is no risk of trade diversion arising from different MFN tariffs - a form of halfway house to the UK governments customs partnership concept);
- Allow origin to be determined on final value OR weight criteria (protects products where local processing adds high vale to a premium product);
- Simplify RoO documentation.

Another approach would be to abandon preferential RoO in favour of simpler non-preferential / Most Favoured Nation (MFN) RoO (as suggested by Hosuk Lee-Makiyama). Non-preferntial RoO typically determines origin on the simple basis of where last substantive processing was performed, rather than where inputs are sourced :

"... the world trading system could do without preferential rules of origin. Preferences can be granted on the basis of most favoured nation (MFN) rules of origin anyway. Empirical literature suggests that, if the purpose for enacting preferential rules of origin was to facilitate commerce or promote inward investment, then their implementation has in practice defeated the purpose. Beneficiaries of preferences often prefer to trade using MFN rules of origin, rather than going though cumbersome procedures to show that they can ‘benefit’ from preferential rules. Thus, in the end, preferential rules of origin are neither necessary for preferences to be granted, nor have they facilitated trade or investment. Our policy recommendation for the negotiators of the Harmonized Working Programme (HWP), which aims to establish common rules of origin for all WTO members, is to also decide to outlaw preferential rules of origin. "   Abstract from "The case for dropping preferential rules of origin" by Edwin Vermulst and P. Mavroidis 

Adopting amended or simplified RoO for UK-EU trade will of course be entirely dependent on EU agreement, which may not be forthcoming. Is there perhaps a more simple and radical way to avoid preferential RoO ?
- IoD's contention is that (i) preferential RoO is a significant trade barrier (ii) tariffs on manufactured products and processed foods are in any case low - so low that they offer no leverage in securing trade agreements with third countries.
- This actually chimes with arguments for "Unilateral Free Trade" as proposed by Economists for Britain, who argue that we should ignore preferential FTAs and instead unilaterally lower tariffs - favouring UK consumer interests (including  manufacturers sourcing inputs) over producer interests. Preferential RoO is removed as a consideration for all imports and exports. Attention can then be focused on removing regulatory / technical barriers to trade.
- Unilateral Free Trade offers a way to eliminate preferential RoO, without requiring EU agreement. If as IoD and others argue, tariffs are sufficiently low to not be an issue, why chase preferential trade deals - even with the EU ?

Partial Customs Union & Irish border 

IoD claim that a partial Customs Union like Turkey's would help alleviate issues with the Irish land border. But Turkish experience does not support this argument, with long lorry queues at the Turkey-Bulgaria border. A number of issues arise:
- Basic agricultural goods are excluded from the Turkish Customs Union and require full customs clearance is still required for these goods. Meat / dairy constitutes a significant portion of UK / RoI trade.
- An A.TR movement form must be presented at the Turkey-EU border, declaring all customs formalities have already been completed.
- Turkey is outside the EU's VAT union, so import VAT is also payable at the border. Does the IOD intend for UK to remain in the EU's VAT union as well ? (meaning UK could not cancel the "tampon tax" or eliminate VAT on household energy bills for example).

Conclusion 

The IoD's proposed "partial" Customs Union would not remove the need for a customs border.

The IoD's argument for "partial" Customs Union rests entirely on RoO. RoO does not provide an insurmountable barrier. RoO administrative costs are subject to debate, appear low and may be negligible beyond an initial cost.

A "partial" Customs Union would only avoid RoO for trade with the EU - any preferential trade with third countries (including other European countries such as EFTA  members) would still require preferential RoO.

A "partial" Customs Union would not allow an independent UK trade policy, and will keep the UK tied into an EU-centric trade policy. This is counter to UK's strategic interests. The UK runs a huge trade deficit with the EU, whereas UK trade with the Rest of the World is broadly in balance. UK exports to the Rest of the World have grown and overtaken UK exports to the EU, mirroring the EU's diminishing share of global GDP.

There are other ways to mitigate the impact of RoO. The worst case is that some supply chains may be repatriated to the UK - given the huge trade deficit the UK has with the EU, this may be no bad thing.

Ironically,  Unilateral Free Trade offers a way to eliminate preferential RoO, without requiring EU agreement. If as IoD and others argue, tariffs are sufficiently low to not to be an issue, why chase preferential trade deals - even with the EU ? Perhaps a hybrid solution could be adopted - eliminate tariffs where UK has no domestic industry to protect (e.g. tropical fruits !) and also for inputs to manufacturing (e.g. car parts would be zero-rated), but retain higher-rated EU tariffs for key sectors / finished products to use as leverage in trade agreements (e.g. retain 10% tariff on finished cars, ~40% tariffs for meat etc.). The UK could then seek to negotiate FTA's to eliminate these high rated tariffs using non-preferential / MFN RoO.

In short, we should reject  the IoD's proposal to keep the UK locked into a 19th century Zollverein Customs Union, designed primarily to promote European political integration. As Brexit solutions go, the IoD's proposal is a real turkey.

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Posts in this series:

A Brexit Turkey part 1 - No UK Trade Policy

A Brexit Turkey part 2 - Are Rules of Origin insurmountable ?
A Brexit Turkey part 3 - Customs Union is not a Brexit solution