Co-operation versus Harmonisation

One of the enduring myths around Brexit is the claim that to trade with the EU we must accept the rule of EU law.

This is not a new line. Peter Shore gave the speech of his life in the 1975 EEC Referendum campaign in which he observed that the aim was the "transfer of our whole democratic system to others" while pouring scorn on the idea that Australia would allow its laws to be set by Japan or Canada would allow its laws to be set by USA, just because they trade with each other.

The modern variant has it that we must continue to abide by the Court of Justice of the European Union (CJEU) and adopt EU laws  - accepting supra-national harmonisation to retain the benefits of frictionless trade inside the single market. Firstly, this assumes the single market is the fount of all prosperity when as Andrew Lilico has noted, even the EU Commission suggest that at best, it added just 2% to GDP in 20 years.  Secondly, this assumes there is no way to remedy non-tariff barriers trading from outside the single market.

A twitter tread by international trade lawyer Robert McDougall describes the difference between regulatory harmonisation and regulatory co-operation, contrasting the EU's single market with Canada-USA trading relations (echoing Shore's 1975 speech) :

• Regulatory harmonisation affects the whole economy. 
• Regulatory co-operation can help export industries and preserve domestic policy autonomy
• Canada seeks regulatory co-operation via NAFTA, but would not accept EU-style regulatory harmonisation with US.

This week the Governments Brexit paper on Enforcement & Dispute Resolution provided some clues as to the post-Brexit role of EU law and the CJEU.  Pre-existing CJEU rulings will be copied into UK law as part of the Repeal Bill and will also be referenced to interpret language/concepts deriving from EU law - which is broadly seen as un-contentious. But the Government also leave open the possibility of future CJEU rulings being "taken into account" where both parties "seek to avoid divergence" - or in other words remain harmonised.

Pro EU supporters think this has handed them a victory and we are set to remain harmonised with large swathes of EU law in an EFTA-EEA like relationship. As I mentioned in my previous blog post, I can see the relevance of this for certain sectors for a transitional or interim arrangement, e.g. aviation / Single Skies. But some have suggested we will remain permanently enmeshed in EU law, citing Data Protection as the prime example where Government has already conceded this. So the Government's latest Brexit paper on Data Protection (published Thursday 24/8/17) is particularly relevant.

In fact, the Government's data protection paper proposes a UK-EU model based on:

• regulatory co-operation between the UK’s Information Commissioner’s Office (ICO) and EU regulators (paras 4, 22, 24-6, 44).
• partnership between UK and EU as global leaders in data protection (paras 3, 4, 21, 22, 24, 41, 42).
• mutual recognition & respecting UK sovereignty (paras 22, 29, 43, 45).

The paper suggests a UK-EU partnership could be based on the adequacy provisions built into the EU's data protection laws (paras 4, 22, 23) and provides a lengthy discourse on the how adequacy facilitates data flows with third countries (paras 32-41) :

• The EU Commission scrutinises third country domestic legislation/practice and compliance with relevant international standards, to ascertain whether data protection standards are "essentially equivalent" to EU standards (para 35). 
• 12 adequacy decisions have been issued the under the 1995 Directive, including Argentina,  Israel, New Zealand, Switzerland, Uruguay (para 37).
• Partial adequacy decisions cover only certain sectors of the economy and have been made with Canada (where PIPED act applies) and USA (where EU-US Privacy Shield applies). (para 38)
• New EU Data Protection legislation also contain adequacy provisions and provide more detail on the the the adequacy decision process (para 39).
• Starting from a position of 100% alignment with EU data protection laws, there is no good reason to believe the UK would not be deemed "essentially equivalent". (paras 2, 4, 16, 27, 30, 41)

All of which sounds a long way from the rigid harmonisation of the EFTA EEA model. The proposed UK-EU model based on partnership, co-operation and mutuality is in stark contrast to the one-way direction of EU law implied by EFTA EEA (see also para 47 of the Governments Dispute Resolution paper).  Dominic Raab saying that the UK and EU will keep half an eye on each others courts seems an accurate description. UK sovereignty is protected and if EU data protection develops in a particularly onerous way, "partial" adequacy would allow UK-EU data exchanges to be covered while allowing divergence for UK domestic and other UK-international data flows.

So perhaps those pro-EU supporters championing harmonisation have misunderstood the Government's proposals - either that or we are in violent agreement about the nature of future UK-EU relations. Either way, I'm very happy with the Government's approach - they have chosen co-operation over harmonisation.

Governments Brexit Dispute Resolution paper - something for everyone

The Governments latest Brexit paper "Enforcement and dispute resolution - A FUTURE PARTNERSHIP PAPER" has been published (23rd August 2017) and seems to contain something for everyone.

The first point I would make is that paper discusses the need for enforcement and dispute resolution with respect to both the withdrawl agreement and the future partnership (paras 13 & 65) - we are not just talking about transitional arrangements.

Much of the speculation around the paper has centred on the role of the Court of Justice of the European Union (CJEU) and the EFTA Court as a possible model or alternative.

Role of CJEU

The paper is crystal clear that that  leaving the EU will bring an end to the direct jurisdiction of the Court of Justice of the European Union (CJEU) (paras 1,6). Rights and obligations arising from UK-EU agreements will be enforced in the UK by UK courts - and enforced in the EU by EU courts.  (para 22).

It is also made clear that the CJEU cannot be the arbitrator for resolving disputes over UK-EU agreements (paras 29, 67).

However, the paper suggests CJEU rulings may still be relevant. For those provisions in UK-EU agreement that "replicate language which is identical in substance to EU law", it may be agreed that:

• terms should be interpreted in line with relevant pre-existing CJEU rulings. (para 43);
• on-going co-operation should take account of relevant future CJEU rulings  (para 46);
• disputes on interpretation can be referred to the CJEU (para 55) if all parties agree (para 58).

Despite couching statements in cautious language, it is clear that the Government accepts CJEU rulings will have a continued role to play. Indeed the Government confirms that the Repeal Bill will give pre-existing CJEU rulings the same status as UK Supreme Court rulings (para 45).

It is highly likely that the UK-EU agreements will include language / concepts borrowed from EU law, for example citizens rights may be described in terms of existing EU law. It is perfectly reasonable that those terms are only fully understood in the context of CJEU case law in force at the time of the agreement. It is also clear that future CJEU changes to the meaning of EU citizens rights cannot be deemed to have been part of the understanding at the time of the agreement. This can be seen as a "static" arrangement.

What is more intriguing is the the prospect of future CJEU rulings having application.  The paper suggests this would apply where both parties agree that divergence in interpretation should be avoided - citing an example of continued close co-operation with EU agencies. This can be seen as a "dynamic" arrangement.

EFTA Court

Despite all the media noise , the paper only refers to the EFTA Court twice:

• The EFTA Court (formed in 1993) enforces and interprets EU laws (or more accurately, the relevant subset of EU laws applicable to the EEA agreement) within the EFTA EEA states (para 21).
• Article 105 of the EEA agreement requires constant review of CJEU and the EFTA Court case law in order to identify and address any divergence (para 48).

The paper also notes that the EU will not not allow itself to be bound by any external arbitration panel, including the EFTA Court, on interpretation of EU law (paras 19,38). It is interesting to see how jealously the EU guards the primacy and sovereignty of it's own institutions ! 

The paper cites EFTA Court as one of numerous examples of dispute resolution and is clear that no commitment has been made to any of these examples - in fact the solution may combine a number of these elements (para 30). Other examples cited include:

• Joint Committees (as per EEA agreement, NAFTA)
• Arbitration models in Free Trade Agreements (CETA, EU-Vietnam, Moldova/Ukraine Association Agreements, New Zealand-South Korea)
• WTO’s dispute settlement system

So what is the Government proposing?

The paper is notable in lacking firm commitments to anything much, aside from the commitment to ending direct jurisdiction of the CJEU. 

This allows people to read into the paper what they want to see. Arch-Remainer Ian Dunt, commented that the paper was "good stuff" but also seems convinced that this paper opens the way for using the EFTA Court and EFTA EEA membership.

For myself, I still think a 3-judge arbitration panel (as used in CETA & Association agreements) is a more likely solution than use of the EFTA Court.

What is substantial for me is the discussion of how future CJEU rulings may be "taken into account" where the UK and the EU wish to avoid divergence in interpretation. Of course "avoiding divergence" is just another way of saying "harmonisation". This seems a very strong hint that in a number of cases/sectors the UK Government intends to continue harmonising with EU law and CJEU rulings - along the lines of EFTA EEA harmonisation.

I can see there will be a need for this in the first instance for sectors like aviation, where harmonisation of EU aviation safety law is a pre-requisite for continued participation in ECAA (European Common Aviation Area) / Open Skies. This could suffice for transition while a permanent solution is agreed and implemented. I've seen other areas suggested as requiring harmonisation, including medicines regulation, data protection, Europol, Euratom etc. 

While it seems unlikely that Ian Dunt will get his wish to see the UK harmonise all Single Market laws, some harmonisation will continue past March 2019. The unanswered question is just what limits in scope and duration will apply to continued harmonisation. This is where we must hold the Government to close scrutiny.

Tariffs, Rules of Origin, Cumulation & Anti-Brexit scare stories

Another day, another Brexit scare story. Today, I saw a "Proffessor of European Politics" (we can guess which side of the Brexit debate he is on) retweet an article from Bloomberg press (a famously anti-Brexit outlet) worrying that British cars may not have enough British content to qualify for tariff-free trade.

Current trade pacts generally require exporters to prove that 50 to 60 percent of a product’s components are from the originating country to avoid tariffs. But U.K. cars are now just 44 percent British-made on average, according to the Automotive Council.

Of course, this assumes anti-Brexit scare stories that the EU will not offer Britain a Free Trade agreement (FTA) are false. We also have to ignore Remain telling us that "tariffs are not important, it's non-tariff barriers that matter" and conclude that Remain think tariffs are important after all.  But crucially, the article fails to understand  a key element of trade agreements and rules of origin - that of "cumulation".

Typically the EU's trade agreements with third countries include "bi-lateral cumulation" - which means that components from each party to the trade agreement count towards the meeting the minimum "originating" content threshold. In the EU-South Korea FTA, EU + South Korea content is considered local in meeting the minimum "originating" threshold (55% for cars). So if Britain and EU conclude an FTA with bi-lateral cumulation, EU content is added to Britain's 44% to see if the minimum threshold (probably 60%) is met.

In fact, it is more likely that Britain would remain part of the Pan European Mediteranean (PEM) Cumulation Zone as part of any Free Trade agreement with the EU. The PEM convention provides "diagonal cumulation" across the EU, all EFTA states, the Faroe Islands, Moldova, various Balkan and Mediterranean African countries. This could be thought of as multi-lateral cumulation rather than bi-lateral cumulation in that content from multiple parties to the agreement count towards  "originating" content threshold - encouraging complex and distributed supply chains spanning the cumulation zone.

There is also a question over what happens with the various EU-third country FTA's. Britain will likely want to grand-father the existing FTAs into new UK-third country bi-lateral FTAs. However, that would mean UK bi-lateral cumulation with South Korea for example would only allow UK+South Korea content to count as "originating" - EU sourced content would not count towards the threshold. Moreover, UK content would not count as "originating" in EU-South Korea trade, wit the possible consequence that European and South Korean manufacturers will move supply chains away from Britain.

However, the recent announcement on a future EU-Japan FTA provides the solution in discussing "extended cumulation". What this means is that where the EU and Japan have FTAs with a common third country, content sourced from that third country also counts as "originating" in meeting the minimum content threshold. If the UK seals FTA's with EU and Japan which include "extended cumulation", then UK+EU+Japan content will count as originating in all trade the UK has with EU or Japan. On that basis, the UK should seek to include "extended cumulation" when grand-fathering existing EU FTAs, (e.g. a UK-South Korea FTA based on EU-South Korea FTA)

Of course the other way of attacking the "minimum originating content threshold" problem is to ensure British cars have a higher British-made content. It is worth noting the phrase "UK cars are now just 44 percent British made..." in the Bloomberg article, suggesting we have experienced decline over a period of time. In fact concerted and successful efforts have been made to increase the British-made content of British cars from a percentage in the low 30's at the turn of the century. The car industry, notably Nissan, are also lobbying the government for further funding to grow the UK supply chain.

But of course, if Remain complaints that tariffs don't matter are true, the easy solution is just to pay the tariffs and avoid rules of origin altogether. We could then source 90% of a car from China, India or anywhere else in the world, stick a British badge on it, export it to the EU and face a tariff of 10% (which is within the margin of £-€ exchange rate fluctuations).

It is worth noting that EU tariffs in most industrial sectors are much lower than the 10% tariff for finished cars. So complaints from Remain supporters that tariffs are unimportant in industrial goods are broadly correct - and given the hassle rules of origin provide, the value of a tariff-free trade agreement is limited. Ironically, in this respect,  Remain supporters align with Brexit economists proposing Unilateral Free Trade !

But no matter how inconsistent their stance, no matter what mitigation's, solutions or facts are provided - it seems the anti-Brexit crowd will not stop trying to find something to scare us with.

The Philosophy of Free Trade

It is fair to say that IEA's latest paper "A trade policy for a Brexited Britain" took a bit of a battering. Unfortunately the paper makes some fundamental errors in arguing that Britain will keep zero-tariff access to the EU market by default.  Under WTO MFN (Most Favoured Nation) rules, by default Britain will face the EU's common external tariff.

This is a shame, because the paper read wells as a philosophical case for classically liberal free trade. We are reminded that Adam Smith's great insight was that consumers should be prioritised over producers. Tariffs are recognised as a self-harming import tax that increases consumers prices and input prices for manufacturing. Free trade reduces market distortion and brings greater efficiency & productivity. Workers move up the value chain and increase their earnings. Trade should be correctly understood as a mutual benefit, not erroneously viewed as a zero-sum game - protecting producer interests is ultimately counter-productive.

Hence international trade negotiations should be based on promoting the consumer interest and confronting producer protectionist instincts, rather than attempting "tit-for-tat" exchange of concessions. While Multilateral Free Trade (MFT) is the ideal, Unilateral Free Trade (UFT) can still bring considerable benefits - Hong Kong and Singapore are cited as successful modern examples of UFT.

Critics will say that nowadays non-tariff barriers are the main concern, not tariffs. Actually, the IEA paper agrees, stating (on page 10): "But tariffs have come down over the years and non-tariff barriers are now much more important." I suspect what really irks the critics is the IEA identifying regulatory harmonisation as the source of many non-tariff barriers. Personally, I found myself in broad agreement with the points made.

Modern trade deals are attempts to harmonise all sorts of regulations beyond trade. The 5,000 pages long TPP is described as "weighed down by numerous non-trade provisions aimed at appeasing non-trade special interests". Historically, trade was seen as a means to open and strengthen friendly ties between countries - allowing for an exchange of ideas and development of mutually beneficial policies in other areas. Withholding trade as a means to impose policies on third countries seems to be fundamentally illiberal to me.  Surely, a more liberal way to achieve these policy goals is via international treaties and organisations (e.g. ILO for labour regulations, UNEP for environmental regulations etc.) - which are based on consensus and willing opt-in, not compunction.

Moreover, I wholeheartedly support mutual recognition over regulatory harmonisation. Harmonisation creates "one-size-fits-all" regulations with all the attendant problems. Rather than avoiding a "race to the bottom", the result is often "lowest common denominator". Enforced homogeneity leads to a higher risk of catastrophic failure - think Irish potato famine for an example of how disastrous homogeneity can be.

By contrast, mutual recognition allows a choice of regulatory regimes and regulatory competition - allowing room for innovation and discovery of best practice and cost effectiveness. This will always beat regulations imposed in a "top-down" manner by regulators with limited information/experience and subject to capture by special interests. Philosophically, this is a choice between the wisdom of technocrats versus the wisdom of crowds - between central planning and a dispersed and diverse market approach.

Moreover, mutual recognition allows countries with differing regulatory regimes to still enjoy the benefit of trade. Mutual recognition agreements by definition are an agreement to recognise that regulatory objectives have been met via a different routes. Furthermore, use of recognised international standards (as per WTO TBT agreement article 2.4) allows the for recognition of regulatory equivalence. I would also emphasise that regulatory co-operation to minimise non-tariff barriers is an important aspect of a trade relationship.

Unfortunately, the EU does not seem to follow a philosophy geared to free trade. Brussels is the perfect example of a plutocratic ivory tower bureaucracy.  Its secretive lobbying system all too often falls prey to special interests - ranging from the German automobile industry (emissions  scandal)  to well-heeled executives of NGO's (Non Government Organisations).

The EU Single Market is essentially a regulatory union, enforced by supranational regulatory harmonisation handed down from Brussels. The EU acquis is exported as a means of extending Brussels control - it has precious little to do with trade liberalisation.

Worse still, the often EU insists on harmonisation in its trading relationships with third countries. Typically, the EU requires harmonisation well beyond trade, straying into areas like human rights and demanding political action as a price for trade. Where does this end ?  In the future will the EU start insisting on specific social policies as a pre-requisite to enjoying tariff-free Camembert ?

Critics of the paper are right to point out that the EU does not get to choose over whether to apply tariffs to Britain as a third country. But it is also true to say that a straightforward agreement to continue zero tariffs takes no real negotiation and Britain will be happy to agree. Even with respect to non-tariff barriers, Britain starts from a position of 100% harmonisation and there is no good reason why  the EU should not agree Mutual Recognition or Equivalence. Indeed, international treaties to which the EU is party "encourage" members to enter such agreements.

Britain will adopt a Free Trade philosophy - the key question is does EU want to join in ?

Thoughts on UK Governments "Future Customs Arrangements" paper

Some thoughts on the Governments "Future customs arrangements" paper published yesterday (Tues 15th August 2017).

Firstly, we should note that the paper deals just with issues associated with a new customs border: customs declarations, tariffs/Rules of Origin and routine customs controls for UK/EU trade.  For all those complaining that that this ignores issues arising from regulatory barriers - note that this paper states (para 24) these will be covered in a subsequent report.

Much of the paper is familiar territory which I've covered in detail on my EU Question blog:

• A repatriated trade policy where UK seeks continuity of existing trade agreements and replicates the EU's WTO schedules; 
• A new customs border mitigated by streamlined customs processes and requiring an interim period to implement new infrastructure / systems / processes; 
• A customs agreement with EU is required to carry over existing arrangements (e.g. mutual recognition of Authorised Economic Operators (AEOs), Common Transit Convention, (CTC) continued exchange of data/information etc. ) and implement an interim customs arrangement based on mirroring the EU's external tariff and third country agreements.

While inside the EU, the UK applies the EU's external tariff and makes use of the EU's FTAs with non-EU countries (while being unable to agree it's own independent FTAs). Thus all imports from outside the EU undergo routine customs control, paying relevant EU duties, when crossing into EU territory (including UK customs border). Once customs formalities have been cleared, the goods than move freely throughout the EU without the need for further customs formalities.

The interim customs agreement will seek to extend current customs arrangements - the UK will replicate the EU's external tariff and not implement any new FTA's concluded under the UK's newly independent trade policy.  To completely mirror the current situation, diagonal cumulation will be required - allowing distributed supply chains to continue to benefit from tariff-free trade. The EU's proposed FTA with Japan includes proposals for "extended cumulation", i.e. extending cumulation (hence tariff-free supply chains) to third countries where the EU and Japan have tariff-free arrangements in common.

Of course, it is possible that the EU will agree new FTA's to which the UK will not be party (having left the EU). In that case, the UK will probably have to provide tariff-free access to the EU's new third country trade partner without any guarantee of reciprocated tariff-free access for the UK to the third country in question. The best re-assurance against this is that it is an unlikely scenario, given the EU's famed inability to conclude FTA's quickly.

"A new customs partnership with the EU"

The interim customs arrangement breaks down once the UK implements any new FTA's which the EU is not party to.  The Governments paper includes a radical proposal of "A new customs partnership with the EU" to address the issue raised by new UK FTA's. Imports would be separated into 2 customs streams:

• Imported goods destined for consumption in the EU will be charged the normal tariff (as per the external tariff and FTAs that UK and EU have in common) - essentially a continuation of current arrangements; 
• Goods imported under a new UK FTA that are destined to be consumed in the UK will qualify for tariff-free access.

In short, this proposal seeks to avoid the burden of proving that a product has sufficient local content/input under Rules of Origin to qualify for tariff-free UK-EU trade. Instead, goods will be deemed to qualify for tariff-free UK-EU trade provided there is assurance that any content obtained via UK's independent FTAs has had the relevant EU tariff levied.

Companies with complex supply-chains are anxious to avoid the complexities of Rules of Origin (RoO) and have much to gain from this proposal. The UK's annual goods export to the UK amounts to £122 billion, of which £38 billion (over 30%) is content originally sourced from outside the UK (see update at bottom of post). Not only can RoO result in a significant administrative burden, (estimated as equivalent to a 4% tariff by Open Europe), but also some current supply chains may not qualify for tariff-free trade under the complex rules around product content and origin.

Smaller businesses focussed on trade with the EU would also wish to avoid the administrative burden of customs formalities and RoO. The impact on marginal costs may well be enough to make exporting / importing uneconomical. This is particularly relevant for companies operating across the Irish border on an "island of Ireland basis".

This proposal will need a "robust enforcement mechanism" to reassure the EU that goods imported from the UK do not contain goods that have evaded the EU's tariff (i.e. goods imported to the UK tariff-free via one of the UK's independent FTAs). The Governments paper suggests either a"tracking mechanism" where imports to the UK via a new UK FTA are tracked until they reach an end user, or a "repayment mechanism" where all goods are charged the higher of EU or UK tariff on entry to the UK, but traders reclaim the excess paid for goods when sold to an end-user in the UK.

It is possible to see similarities with current customs processes such as transit (where goods are securely transported across national borders with customs formalities suspended until the final destination is reached) and inward processing (which provides relief from import duties for goods that are imported solely for incorporation into a product to be re-exported). It may even be possible to implement this proposal as a trade facilitation available to trusted/accredited traders whose accounts and supply chain management would be subject to audit - this is similar to some ideas proposed for companies operating across the Irish border.

This proposal is an attempt to benefit from customs union membership for current trade and add the benefits of new UK FTAs for UK consumers.  EU traders will also benefit in avoiding disruption to UK trade and the proposal has the potential to be applied to other trusted third countries - the EFTA states would be obvious candidates given the volume of EFTA-EU trade and their status as highly developed economies. Theoretically, the concept of "extended cumulation" could be replaced with this approach - so that where partners have FTA's in common, low-friction customs-union style trade could be enabled.

However, it is difficult to see the EU accepting such a proposal lightly. It would not be unreasonable for the EU to demand that import duties levied by the UK are forwarded to them - certainly for goods imported via new UK FTA's that are destined for consumption in the EU - possibly for all imports in a continuation of the current customs union regime. Nor is it difficult to envision the EU rejecting this proposal as simply another British attempt at "having our cake and eating it too".

Agreements & Timing

The biggest issue with the proposed new customs partnership is perhaps time. Negotiating such an agreement with the EU and implementing the required enforcement mechanisms is not likely to be quick.

Moreover, the Government paper also emphasises the need to be ready for "every eventuality", including the failure to agree a negotiated settlement with the EU. Brexit at end March 2019 is just over 19 months away. The EU's continuing insistence on its rigid negotiating sequence of settling the exit bill before discussing future trade agreements puts this deadline in severe peril.

As such, preparations for March 2019 must be the priority. Is the UK Government progressing with streamlining the customs process (new infrastructure / systems / processes) ?  The Government paper suggests that the new Customs Declaration Service (CDS) is on track to deliver by January 2019 - I along with many commentators remain sceptical. Are UK importers / exporters preparing for routine customs controls and Rules of Origin ? Are the UK Government and business blithely assuming an interim customs agreement will be reached ?

There is also public concern that any interim agreement could turn into a permanent agreement - with UK Government and business eternally delaying the issues associated with leaving the EU's Customs Union. It seems to me the Government needs to actively demonstrate the UK's readiness for March 2019 in order to strengthen it's negotiating position.

Of course, if no negotiated settlement is reached with the EU and no FTA is agreed, then tariff-free trade with the EU will end - at which point the complexities and costs of Rules of Origin are moot - importers will simply have to pay the tariff. As I discussed in detail on my EU Question blog "Tariffs & Origin", tariffs in most sectors outside agriculture are actually quite low. Finished cars are one of the highest tariffs for manufactured goods at 10%, but car components typically have much lower tariff rates. Furthermore, "inward processing" can avoid impact on complex supply chains, e.g. where car parts or part-finished cars are shipped across the channel multiple times in the manufacturing process - only the tariff on the finished car will apply.

It may just be that the path of least resistance ends up being acceptance of tariffs offset by lower currency and lower taxation for UK exporters - combined with some repatriation of supply chains (a process that is already underway in the UK car industry). Unless of course, the UK Government & EU are able to make headway on trade and customs arrangements - but we are fast running out of time for that - UK Government and business really do need to be prepared for every eventuality.


Update: (17/08/2017):
This post originally stated "The UK's annual goods export to the UK amounts to £122 billion, of which £38 billion (over 30%) is content originally sourced from Asia, America and the rest of the world."  Having been prompted to check this figure and finding the source (Credit Suisse research quoted in a uk business insider article), the £38 billion figure seems to apply to UK exports to the Eu that were of all non-UK origin, including the EU.

The uk business insider article also points out that "many of the raw materials that go into the $158 billion (£121.9 billion) worth of UK-made goods exported to the EU are likely sourced overseas too". So, there would appear to be no clear figures on non-UK or non-EU content of UK exports to the EU.

The Myth of Global Regulations - Technical Standards

One of the recurring memes of those who support an EFTA EEA option for Britain is that even though we are still obliged to adopt all the EU's single market regulations (the EEA acquis) these are primarily "global" regulations and the EU is merely a "redundant middleman".

The 1994 WTO Technical Barriers to Trade (TBT) Agreement is cited, especially Article 2.4,

2.4    Where technical regulations are required and relevant international standards exist or their completion is imminent, Members shall use them, or the relevant parts of them, as a basis for their technical regulations except when such international standards or relevant parts would be an ineffective or inappropriate means for the fulfilment of the legitimate objectives pursued, for instance because of fundamental climatic or geographical factors or fundamental technological problems.

Three organisations are identified by the WTO as central to international standards harmonisation, which are mirrored by three European Standardisation Organisations (ESOs) officially recognised by the EU Commission as a platform to develop European standards. These European organisations recognise the primacy of their international counter-parts and have committed to using international standards wherever possible:

• CEN (European Committee for Standardization) co-operates with International Standardization Organization (ISO) under the 1991 Vienna Agreement.
• CENELEC (European Committee for Electrotechnical Standardization) collaborates with IEC (International Electrotechnical Commission) under the 1996 Dresden Agreement and 2016 Frankfurt AgreementAgreement.
• ETSI (European Telecommunications Standards Institute) are party to a Memorandum of Understanding with ITU (International Telecommunication Union).

It is claimed that WTO TBT Article 2.4 is "the redundancy notice for the EU's version of the Single Market", with EU law increasingly replaced by international standards - meaning that we can stay in the EU's single market but influence and control the  EU's single market regulations at a "global" level. This is a seductive argument (I fell for it for a while), but it does not stand up to scrutiny:

1) There is a big difference between voluntary standards and binfing regulations. Technical Regulations may be "based" on voluntary international standards and are implemented in national legislation (or for EU/EEA member states, EU legislation). It is national (or EU) legislation that makes regulations mandatory within the respective national (or EU/EEA) territory. There is no such thing as international or global regulations. The detailed implementation of national regulations also provides scope for gold-plating and regulatory barriers - even when the regulations are based on international standards.

2) European standards are not fully harmonised with international standards. The EU's 2016 standards bodies report suggests that while CENELEC standards are closely aligned with IEC standards (72% of CENELEC standards are identical to IEC standards with a further 22% of CENELEC regulations based on IEC standards), just 32% of CEN standards are identical to ISO standards. Moreover, the proportion of European standards "cited or intended for citation in the OJEU " indicate a lower level of international harmonisation within EU regulations: CENELEC - 58% identical to IEC, further 15% based on IEC, CEN - 24% identical to ISO).

3) The EEA acquis covers more than technical standards. As of 14th August 2017, Technical Regulations form 1905 of the 5500 EEA laws in force - about a third. The EEA'sVeterinary & Phyto-Sanitary measures are covered by the WTO Sanitary & Phyto-Sanitary (SPS) Agreement in the same way as Technical Standards are covered by the WTO TBT agreement. Some other areas of the EEA acquis (environment, energy, transport, health & safety etc.) may draw upon international conventions, but these are voluntary frameworks upon which the EU adds much detail . Areas such as Freedom of Movement are very much EU sourced laws.

4) Adopting a recognised international standard is not enough to guarantee market access - as the USA have found in trying to sell into the EU's single market.  The US Trade Department Report for 2016 highlights significant foreign barriers to U.S. exports - and is illuminating on various barriers the EU erects (pages 139-178). The opening pages cover how the EU creates technical barriers to trade - I've highlighted 2 main points regarding European standards (i.e. CEN, CENELEC & ETSI):

• While EU regulations theoretically allow other (non-European) standards to be used to meet the essential requirements of EU regulations, in practice the process for demonstrating this is so arduous and unreliable that "U.S. producers often feel compelled to use the relevant EN" (i.e. CEN standard) "...even if the U.S. products are produced according to relevant international standards providing similar or even higher safety levels."
• The EU also promotes adoption of European standards in third countries, often requiring withdrawl of existing standards as a condition for assistance, affiliation or trade - providing a commercial advantage to EU manufacturers. "The withdrawn standards can be international standards that U.S. producers use, which may be of equal or superior quality to the European regional standards that replaced them. U.S. producers thus must choose between the cost of redesigning or reconfiguring the product or exiting the market." 

Britain is currently 100% harmonised with EU technical regulations so will not suddenly face technical barriers experienced by US producers.  Continued use of CEN, CENELEC and ETSI standards and affixing the CE mark will provide "presumption of conformity" for UK exporters under EU legislation (the route taken by US producers) .

Britain is also likely to stay a member of the three ESO's (CEN, CENELEC & ETSI). This may require Britain to adopt at least associate membership of EFTA, but EFTA states get a voice and vote on these organisations and consensus is sought for all decisions. Even outside the Single Market, Britain can still influence European standards. 

The downside of membership of these ESO's is the requirement to adopt European standards as national standards and prohibition from taking individual initiative on standards. In the longer term, Britain may wish to move away from being limited to purely European standards. Recognising international standards that meet or exceed essential objectives, will remove barriers to trade with third countries (e.g. US). This provides for a more open domestic market and the possibility for some British producers to focus on domestic and third country markets over EU markets.

It is clear that the EU's technical regulations are not simply a "rubber-stamp" of international standards. If Britain stays in the EEA it will remain shackled and subservient to the EU's particular regulations and moreover will contribute to exporting the EU's regulations via any third country trade agreements - we will be passive agents for the expansion of the EU's regulatory empire. Alternatively we can choose to be open to wider international standards, removing technical barriers and expand trade globally. The idea that we would be simply following "global" regulations via the EEA is a myth.

Trouble at ports ?

An enduring scare story regarding Brexit concerns exports of manufactured and industrial goods to the EU becoming subject to inspections at ports - resulting in massive delays, tailbacks and claims that literally all trade will stop (Anna Soubry during the Referendum campaign).

Validity of conformity Assessment Certificates

This story seems to originate with an argument regarding how the USA manages to export to the EU without a Free Trade Agreement (FTA). Those proposing the WTO-rules option claim that exports simply have to meet EU regulations.  The counter claim was that products must be shown to meet the regulations via a process of "conformity assessment" - and that actually the USA has a Mutual Recognition Agreement (MRA) which means its certificates of conformity are recognised as valid. Without an MRA, conformity certificates would not be recognised, British exports would face an insurmountable barrier and trade will come to a grinding halt.

This seemed a compelling argument to me at the time. The EU has indeed concluded MRA's with many trading partners that it does not have an FTA with - and FTA's typically include a section on mutual recognition of conformity assessment. But over time, as I investigated and learnt more, I've come to realise this argument is false.

For a start, it is worth recognising that the EU-USA MRA is very limited, covering just 2 sectors. Essentially, it lists certified assessment bodies (CAB's) in the USA recognised as producing valid certificates for EU regulations (and vice versa). In fact, the MRA has rather fallen in to disuse and is not being regularly updated. Yet, the EU and USA still successfully trade manufactured and industrial goods. How can this be ?

Many Certified Assessment Bodies operate internationally and have subsidiary or sub-contract relationships in other territories. So an American-based CAB can assess conformity against EU regulations on behalf of an EU CAB with which it has a subsidiary or sub-contract relationship. The certificate of conformity is then deemed to be held by the CAB inside EU territory and so is recognised as valid, without the need for an MRA.

However, only a small number of sectors (those with high health and safety risks) require conformity assessment to be undertaken by a CAB. For most products "self-certification" by the manufacturer is sufficient under EU regulations. Manufacturers based outside the EU must lodge their certificates with an "importer" based inside EU territory. The importer could be a subsidiary, a shipping company, or an agent - the burden is not onerous and many EU-based operators are already established to offer this service to non-EU manufacturers.

Risk Assessment & Consignment Checking

Once the first scare over conformity assessment certificates had been mollified (notably by @andrewchapman50  on his "Door to Freedom" blog), the story shifted. Customs Authorities undertake risk assessment to target inspections on consignments most likely to fraudulent, criminal or non-compliant. Outside the Single Market, the new scare was that British exports would be seen as a new (and therefore risky) source of imports and would be subject to high rates of inspection.

In fact, even while we are in the EU, consignments are subject to checks based on risks of criminal or fraudulent activity. Imports from outside the Single Market are also assessed for risk of regulatory non-compliance. Currently as an EU member state, British customs authorities inspect just 4% of non-EU imports (mostly paperwork checks with less than 1% requiring physical checks), for imports from countries that are not in regulatory harmonisation and including high-risk sources in Africa & East Asia.

National Customs Authorities make their own decisions on risks & consignment checking. So we are asked to believe that on Brexit day-one, hard-pressed Customs Authorities will divert their limited time and resources to inspect imports that caused no concern just the day before ? This seems unlikely given: (i) British exports track record of compliance; (ii) Day one, Britain has 100% regulatory harmonisation (iii) continued co-operation between national authorities (notably Britain & France). In fact, this scare story has now been reduced to saying that if Britain diverges significantly from EU regulations in the future, we *may* then be subject to higher rates of inspection.

Britain as a third country

For most UK exporters of manufactured goods, the implication of Britain as a third country outside the Single Market, is simply the use of an EU-based "importer". For those sectors requiring third-party certification, CAB's are typically international with links inside the EU.

Some more highly regulated sectors require product registration via an EU-based representative rather than a straightforward "importer".  For example: Under REACH regulations, chemical products must be registered through an EU-based "Only Representative" ; Cosmetics products must be registered on the Cosmetic Product Notification Portal via an EU-based "responsible person";  Pharmaceuticals and medicines must be registered with the European Medicines Agency (EMA) via an EU-based "qualified person". But as with the role of "importer", non-EU companies can use a subsidiary or sub-contract relationship with an EU-based operator and many EU-based operators are already geared to provide such services to non-EU manufacturers.

In certain sectors, the EU require that a third country regime of testing and inspection is "equivalent" to the EU's. For example: an equivalence agreement on Sanitary & Phyto-Sanitary measures would allow continued agricultural trade without border inspections (see my previous post); third country legislation and controls for Active Pharmaceutical Ingredient's (API's) must be approved as "equivalent" to the EU regime (Commission Implementing Decision 2013/51/EU).

So some preparation prior to Brexit is required by exporters (in both Britain and the EU). In certain sectors, Britain will need EU agreement - to carry-over existing product registrations or recognise regulatory equivalence.  Given the impact on trade in both directions, Britain's existing regulatory equivalence and the EU's commitments to removing trade barriers in various international treaties and it's own treaty, there is no good reason for the EU to refuse - even if the Article 50 talks founder on matters such as the "Brexit Bill" or citizen's rights. Unless as I've said before, you believe the EU to be self-harming, mad and bad.

Beware the catastrophists

So if you come across someone banging on about conformity assessment and EU regulations complaining "Eee lad, there'll be trouble at ports", don't worry too much. It's probably just a grumpy Yorkshireman looking for an audience.