Friday, 23 February 2018

A Brexit Turkey (part 1) - No UK Trade Policy

Some bad ideas seem reluctant to die. Leaving the EU Customs Union has been stated government policy since Theresa May's Lancaster House speech, confirmed by the 2017 General Election manifestos and several parliamentary votes. Earlier this month, Theresa May again confirmed that the UK would not be part of any Customs Union with the EU after Brexit. Yet now we have the Institute of Directors (IoD) putting out a report with yet another Customs Union proposal.

The Turkey model

The IoD proposal is essentially the "Turkey" model, "a" customs union bi-lateral agreement with the EU. This has been dismissed as a Brexit option on many previous occasions because of the glaring problems of the Turkey model:
  • Described as a "partial" Customs Union, in reality this covers all industrial and processed food goods, i.e. substantially all goods except basic agriculture products (meat, dairy etc.).
  • The tariff rates for these goods are set by Brussels. Turkey has to sit out discussions at WTO/GATT on tariff reductions.
  • Turkey does not benefit from any EU Free Trade agreements (FTA), but third countries who have an FTA with the EU gain tariff free access to Turkey, without offering any reciprocal access to Turkey. Turkey considered ending its Customs Union agreement at the prospect of the EU sealing an FTA with the USA (the now defunct TTIP).
  • Turkey is obliged to harmonise with EU trade policy and negotiate FTA's with third countries to match EU FTA's. Unfortunately, a number of third countries have refused to negotiate with Turkey, as they already have tariff-free access to Turkey by virtue of their FTA with the EU.
So much for an independent trade policy. The Turkey model would leave control of trade policy in the EU's hands. The EU will effectively be able to sell tariff-free access to the UK without any involvement or reciprocal benefit for the UK. Why would any third country bother negotiating with the UK when tariff-free access would be obtained by negotiating an FTA with the EU ? For that matter, why would countries like South Korea agree to grand-father their existing EU FTA into a UK bi-lateral FTA when it can get tariff-free access to UK for nothing ?

This issue of FTA asymmetry prompted the EU and Turkey to start negotiating with 3rd countries in parallel. In one case, (Malaysia), Turkey has sealed an FTA ahead of the EU (EU-Malaysia talks stalled over a dispute) - meaning Malaysian goods have tariff-free access to the EU by trans-shipping via Turkey.  The EU is aiming to address FTA asymmetry via an upgrade to the Turkey Customs Union agreement which will provide Turkey with observer status at EU FTA negotiations.  But the relationship is still clearly based on Turkey following the EU's lead on FTA's.

So it is difficult to see how the EU would grant the UK freedom to negotiate its own FTAs while in a customs union. Would the EU tolerate an UK-USA FTA that meant USA had tariff-free access to the EU market without the EU getting tariff-free access to the USA ? Of course not.  

Trade in Services

The IOD sugarcoat their "partial" customs union proposal by pointing out areas where the UK would be free to negotiate - tariffs for basic agricultural goods and more interestingly services.  However, the freedom to negotiate on services is hardly an argument for a customs union, as such freedom also comes with an FTA or the WTO option. It is in fact an argument against the Single Market - which would tie our hands on services regulation. Is this a tacit admission of defeat in the argument for retaining single market membership ?


Conclusion

The proposed Customs Union with the EU would be far worse for trade policy than EU membership, where at least the UK benefits from EU FTA's and has a vote. A Customs Union does not confer freedom to negotiate on services, that only comes by leaving the single market (which the IOD have opposed).

So what is the argument for a Customs Union ? IOD rest their case on Rules of Origin (RoO), which I will examine in my next post.
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4 comments:

  1. Another good article Paul. The IoD's paper is deeply misleading in several respects.

    In particular, it skates over the fact that for such an arrangement to 'work' in practice i.e. deliver 'seamless' trade, the UK would have to be completely compliant with EU regulations as well. It is that behind the border compliance that is the real basis of the current 'open' border for goods.

    The idea that we could do big things on services when having nothing to offer on the goods side is highly unrealistic as well, and they must know this.

    And then we come to rules of origin, which Allie Renison seems to be obsessed by. The idea that it's worth being in a customs union, with all its downsides, just to avoid RoO costs is pretty extraordinary. These costs for most large firms are going to be really small.

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  2. Thanks. And I aim to get onto RoO in next post ....

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  3. Paul, do you think that observer status is what Labour have in mind with their customs union proposal of February 2018 - which is conditional upon the UK having 'a say' in EU trade deals? Observer status is completely useless when any major national economic interests are at stake, it seems to me.

    Andrew

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  4. I think Labour are trying to con the public into thinking that we could have a meaningful say in EU trade policy - probably based on the proposed upgeade for Turkey's CU providing observer status. It's purely tactical of course - I'd be surprised if the likes of Starmer & Gardiner really believe this. Some (like Lady Nugee) seem to think we will still be in "the" Customs Union, including the Common Commercial Policy, so we nefeit directly from EU FTAs - that of course is only possible for member states - although a future "associate membership" of the EU could provide such a model.

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