A Brexit Turkey (part 2) - Are Rules of Origin insurmountable ?

Some bad ideas seem reluctant to die. The Institute of Directors (IoD) have published a Customs Union proposal (based on Turkey's Customs Union agreement with the EU), which as discussed in my last post, would result in the UK having no control over tariffs or Free Trade agreements (FTAs).

Rules of Origin (RoO)

So what is IoD's argument for a Customs Union ? Essentially it comes down to preferential RoO (Rules of Origin). Outside the Customs Union, assuming an FTA is agreed with the EU, UK exporters will be required to prove goods are substantially sourced or manufactured locally in order to qualify for preferential tariffs (so importing a product from a third country like China and sticking a UK badge on it does not qualify for preferential tariffs !).

The IOD suggest that many exporters fail to take advantage of preferential rates in FTAs, deterred by the cost/complexity of preferential RoO. To avoid the complexity, they simply pay the tariff. The inference is that a UK-EU FTA would see companies failing to utilise the FTA and incurring tariffs - a problem avoided by a customs union with the EU.

However there are plenty of grounds for questioning this rather simplistic narrative:

• IOD cite a literature review of RoO and utilisation of FTAs. However the review itself contains statements such as “Research on RoO, however, is in its infancy “ ... “studies on FTA usage are very limited in scope" etc.  
• IOD cite a survey of their own members suggesting low use of preferential rates in third country FTAs. But a recent report on utilisation of EU FTAs published by UNCTAD found utilisation at 66% by EU member states and 90% by third countries exporting to the EU market. 
• Commenting on the UNCTAD report, Lucian Cernat (Chief Economist, DG Trade European Commission) suggested information / assistance to SMEs would help EU exporters better utilise FTAs. This echoes UK research by Peter Holmes & Nick Jacob (Sussex University) finding "a substantial minority of firms are unsure of how RoOs work and the options available to firms for compliance."
• IOD cite an EU assessment of Turkeys CU stating the following RE costs of RoO:  "Based on empirical evidence that third country exports still use preferences even when EU duties are low (in the range of 2% to 3%), it has been decided to retain a conservative cost of 2%". 
• The research by Holmes & Jacob also suggests that cost of compliance with preferential RoO was not as costly as previously thought, with much of the cost being an up-front investment to upgrade/set up systems.

RoO & Car Industry

IOD raises concerns for the car industry, quoting Japan's message to the UK & EU: "the introduction of inconvenient rules of origin could delay and increase the costs of logistics operations, which would have a significant impact on business operations".

Even from this snippet, it is plain to see that Japan's concern is with logistics and speed through customs clearance, rather than the cost of RoO compliance. This is even clearer when the full context is examined, where Japan requests that the UK & EU "maintain the simplified customs clearance procedures between the UK and EU, especially the framework for the mutual recognition of AEOs ... Changes in customs clearance procedures for exports to the UK and the application of complicated procedures due to the introduction of inconvenient rules of origin could delay and increase the costs of logistics operations".

Japan also raise the issue of achieving RoO content thresholds when supply chains are distributed across the EU. They request that cumulative RoO apply in future UK-EU27 trade, which means components/processing sourced from either the UK or EU-27 count as "local" in the RoO determination - such "bi-lateral cumulation" is standard practice in FTAs. The fact that Japan raises cumulation indicates they are not requesting or expecting a future UK-EU customs union.

RoO & Chemicals Industry

IOD also raise concerns over the impact of RoO on the UK chemicals industry. Steve Elliott, Chief Executive Officer, Chemical Industries Association, in evidence to a House of Lords Committee described RoO as : “a substantial level of bureaucracy ...  in our case there could be several stages of synthesis involved … would clearly outweigh the benefit of duty-free sales”. (Tariffs for chemicals are typically around 6%).

The EU, EFTA and various other Balkan, African and Middle-Eastern states are signed up to Pan-Euro-Mediterranean (PEM) preferential rules of origin, which state that :

• Chemical products (Harmonised System chapters 28-38) are "sufficiently processed" to qualify as local origin if non-local content is below a given threshold (varies by material but typically 40% or lower of product value). 
• Products incorporating non-local content that have been "sufficiently processed" count as 100% local when subsequently used as input to manufacturing another product. 
• PEM rules also allow for "Accounting Segregation" to cater for use of interchangeable stocks of local and non-local material as input in manufacturing a product.

75% of UK chemical imports are from the EU, suggesting that most inputs to UK chemical manufacturing will be of UK or EU origin, hence qualifying as local origin under bi-lateral cumulation as part of an EU-UK FTA. UK chemical products will likely meet the RoO threshold to qualify for preferential rates.

So determining whether a product qualifies as local origin depends on knowing the source and cost of inputs to the manufacturing process - i.e. the core business processes of supply chain management and accounting. Where non-originating materials are used in the chemical industry, they would have to be tracked through several stages of processing - but tracking & auditing use of materials in the manufacturing process is surely standard practice ?

60% of UK chemical exports are to the EU. Hence 40% are to the rest of the world - is none of this via preferential RoO ? Switzerland has an FTA with the EU and is a non-EU destination for UK chemical exports - is no advantage taken at all of preferential rates ? It is also worth noting that Switzerland has a successful chemical / pharmaceutical industry (larger than the UK's) integrated into European supply chains - despite the fact that Switzerland is outside the EU Customs Union and so faces preferential RoO barriers.

It is hard to believe that the UK chemical industry makes no use of preferential RoO or is incapable of doing so. If third countries like Switzerland make use of preferential RoO for chemicals, then the UK chemical industry should take a leaf out of their book, make a one-off investment to upgrade systems to cater for RoO in order to utilise current third country FTAs as well as a future UK-EU FTA.

Conclusion

The argument that low FTA utilisation proves RoO is too burdensome is contradicted by the high utilisation reported by UNCTAD, and observations by Holmes/Jacob and Cernat that advice / information on RoO would boost exporters use of FTAs.

Indeed, IOD themselves state: "Rules of origin are not insurmountable for business – indeed they currently apply to trade with a number of existing countries outside the EU." If companies invest in systems to provide RoO compliance for third country FTAs (an increasing proportion of UK exports), then RoO compliance for EU trade is a relatively small additional step.

A customs union with the EU cannot be justified by RoO. I will examine alternative arguments and alternative options to a Customs Union in my next post.

--0--

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

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.

--0--

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

End of Project Fear ?

Will we ever see an end to Project Fear ?

At the height of the EU Referendum campaign, George Osborne's Treasury produced a report predicting that even the act of voting to Leave the EU would cause immediate economic disaster. Even arch-Remainer Kenneth Clarke has poured scorn on these Treasury figures.

Even EU officials in Brussels believe Project Fear is overdone, as Nick Gutteridge (Brussels reporter) observed: "I’m yet to speak to a single EU diplomat or official who thinks the economic fallout for the UK from Brexit will be anywhere near as bad as many British commentators predict." Even in Brussels, the expectation is a CETA plus outcome and no Brexit recession.

There is a problem at the root of Project Fear - it is an attempt to argue that a marginal increase in cost of trade with the EU trumps all other concerns (political & economic), even when exports to the EU account for just 10% of UK economy. This is exactly the same argument made for the euro - "10% of our economy depends on EU, 3m jobs at risk" . Allegedly, the UK retaining the £ would result in the City & UK car industry decamping en-masse to the EU to escape the cost of currency exchange in UK-EU.  Some 15-plus years on, it is clear that these economic forecasts were pure bunkum.

Of course, any forecast over a timescale of 15-years will almost certainly be proved wrong. Yet, in recent weeks we have seen leaked Treasury forecasts, suggesting UK GDP could be 8% lower over a 15 year timescale due to Brexit, paraded as "facts" by Remain supporters.

It should also be noted that this forecast of 8% does not imply a recession, rather it is a forecast of slower growth, i.e. 1.5% per annum rather than 2% per annum in coming decade or so, so an economy worth ~£2tn at start of a year will only increase by ~£30bn instead of ~£40bn over that year, so that each year economic activity is ~0.5% GDP or £10bn lower than the counter-factual scenario.  Interestingly, UK membership of the EU also costs ~0.5% net per annum, i.e. ~£10bn economic activity taken out of ~£2tn UK economy and diverted to activity in Brussels or other EU member states. 

It's not clear whether the Treasury forecasts have allowed for the gain from ending UK's net EU contributions in their forecasts. But it is interesting to compare the Remain campaign description of these 0.5% per annum contributions as a small price to pay for the economic benefits we get in return (as in a £70bn per annum trade deficit with the EU).

Given UK exports to the EU account for just 10% of UK GDP, the forecast 8% loss of GDP is equivalent to losing 80% of our exports to the EU. While there will be a marginal increase in cost of trade with the EU, but this does not mean that UK exports to the EU will effectively cease - just as marginal costs arising from rejecting the euro did not mean the loss of 3 million jobs.  By contrast, a 2017 paper by World Bank & UNCTAD economists suggested UK exports are "price inelastic" and that in the event of a No Deal scenario, UK exports to the EU would drop by no more than 2% - a negligible impact.

The Treasury also forecast that a Free Trade Agreement (FTA) with the USA would provide only 0.2% GDP gain over the same timescale. The USA economy is larger than the EU27 and with all the trade benefits of EU membership, UK exports to EU27 are about 3 times larger than UK exports to the USA. Yet the Treasury forecast suggests a GDP impact from Brexit and reduced EU trade would be some 40 times larger (not 3) than GDP impact of an FTA with USA. The Treasury forecast seems to assume that trade with the EU is uniquely beneficial to UK growth.

Historical data does not support this assumption that EU membership has been uniquely beneficial:
- In 2012, to commemorate 20 years of the Single Market and removal of internal customs borders, the EU Commission published a report claiming a 2% GDP gain (averaged across the member states). Even that figure is inflated, as the economic downturn from 2008 onwards was ignored.
- A similar study by European (and generally pro-EU) think tank Bertelsman concluded that the UK had only gained 1% GDP (with Germany the winner with a gain of 2.3% GDP).
- In the same period 1992-2012, the UK economy grew by 67%. The introduction of the Single Market & removal of Customs Borders within the EU barely registers.

Economies and markets will always adjust to shocks such as Brexit. Trade and commercial activity will divert to the domestic economy and markets with the Rest of the World. In fact, there is a strong case that the UK needs to pivot away from an EU-centric economy:
- The EU's share of the global economy is in decline (having halved from a high of 30%, less once UK leaves).
- As even the EU Commission concedes, 90% of global growth will be outside the EU in coming decades.
- The share of UK exports to the EU (as opposed to the rest of the world) has steadily declined from a high of 55% at the turn of the century to 43% today, less if the Rotterdam/Antwerp effects are taken into account.
- UK trade with the EU has shown a persistent and widening trade deficit, whereas UK trade with the Rest of the World is broadly in balance.

All of which is a long way round to saying overblown economic scare stories, which have no foundation, take no account of other gains, ignore the 90% of economy that does not export to the EU - are pure distraction.  As we well know, the decision to leave the EU was to restore national self-Government & reject a future as a mere province in the Brussels bureaucratic empire. The whole sorry story of our entanglement with the EU has been attempts to deny the true aims of the EU coupled with Project Fear (right back to 1975 Referendum). June 23rd 2016 was the end of that.

Brexit Briefing - Customs

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

Customs Agreement

North refers to requiring a customs agreement in addition to Single Market membership. Which is a tacit admission that EFTA EEA does not address issues arising from leaving the EU’s Customs Union, as I covered in an EU Question blog post.

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

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

Rules of Origin (RoO)

North suggests we need a customs agreement that deals with Rules of Origin (RoO). Rules of Origin (RoO) paperwork proves where a product originates from, based on where raw materials are sourced from or where substantive processing took place, in order to determine whether goods:

• Qualify for a preferential tariff under a Free Trade Agreement (FTA).
• Fall subject to Trade Defence Measures, e.g. products containing Chinese steel are subject to anti-dumping measures and hence a high tariff.
• Count towards a Tariff Rate Quota, e.g. meat from New Zealand is subject to a lower tariff until a certain quantity has been imported, when a higher tariff applies.

North suggests we can avoid RoO by harmonising our tariff regime with the EU's Common External Tariff (CET). Clearly that is insufficient, we will also need to harmonise Trade Defence Measures and continue to share TRQ's with the EU.

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

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

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

Frictionless Border ?

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

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

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

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

Brexit Briefing - SPS Regulations

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

WTP SPS Agreement

The WTO SPS agreement encourages the use of international SPS standards. Article 3.1 states "Members shall base their sanitary or phytosanitary measures on international standards, guidelines or recommendations". Article 3.4 identifies three organisations as having particular relevance:

• Codex Alimentarius established by FAO (Food and Agriculture Organisation of the UNO) and the World Health Organization in 1963 to develop harmonised international food standards. 
• OIE (Office International des Epizooties) intergovernmental organisation responsible for improving animal health worldwide, established by an international agreement in 1924
• IPPC (International Plant Protection Convention) an international agreement on plant health.

UNECE also provide agricultural quality standards and is party to an agreement with Codex (the "Geneva Understanding") in order to avoid duplication of work. 

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

EU SPS Regulations

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

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

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

EU SPS Enforcement

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

Products of animal origin (POAO), i.e. live animals and animal products including meat and dairy, imported from third countries require EU approval of the third country and establishments. Products must be accompanied by relevant veterinary certificates and imported via a nominated Border Inspection Post (BIP) where they are subject to:

(i) documentary check - health certificates and any accompanying laboratory test results;

(ii) identity check - container seals, packaging of the goods, labelling and health marking;

(iii) physical check - packaging will be opened, sight, smell, taste assessment (where appropriate), samples may also be taken for laboratory assessment. The frequency of POAO physical checks (governed by Commission Decision 94/360/EC) is:

▪ 20 per cent for meat and fish;

▪ 50 per cent for poultry meat, honey and dairy products;

▪ 1-10 per cent for inedible POAO, such as hay.

Non-animal products (i.e. plants and plant products) from third countries may be subject to import checks, determined on the basis of risk analysis. In addition, specific controls are applied to certain non-animal products originating from certain countries 

(i) Some products must have a phytosanitary certificate under Directive 2000/29/EC, guaranteeing they have been  properly inspected; are free from harmful organisms; and conform with relevant plant health regulations. 

(ii) Some products are classified as 'High-risk' products of non-animal origin under Regulation EC/669/2009. These products must be imported via a Designated Port of Entry (DPE) to undergo checks similar to those required for products of animal origin (i.e. documentary, identity and physical checks at a set percentage rate).

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

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

Future UK-EU trade

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

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

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

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

Conclusions

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

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

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

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

Brexit Briefing - Technical Regulations

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

EEA Technical Regulations versus Global standards

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

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

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

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

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

Continued UK participation in European standards organisations

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

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

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

Future UK-EU trade relationship

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

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

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

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

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

Brexit Briefing - How much EU law ?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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