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17 January 2019

Dr Peter Holmes, Reader in  Economics at the University of Sussex, Director of Interanalysis and Fellow of the UK Trade Policy Observatory

Since the Government’s defeat in the House of Commons, there has been a flurry of comments, notably from Steve Baker arguing that Mrs May’s deal can be replaced by some form of Free Trade Agreement.

One must immediately point out that the treaty basis of the Withdrawal Agreement does not include a long-term trade agreement. This can only be negotiated after Brexit. But even if it could be negotiated now, it would not solve the problem of the Irish Border. The UK and the EU in both the Good Friday Agreement and the Dec 2017 joint statement committed themselves not merely to barrier-free trade in goods with no hard border in Ireland, but to the preservation of an All-Island Economy.

Border controls are needed between countries other than those in the EU’s single market for numerous reasons, including ensuring correct payment of taxes but predominantly for ensuring that goods seeking to avoid tariffs at the border are genuinely entitled to cross duty-free. If there is a complete customs union, all goods legally imported into one partner can move duty-free into the other – as there are a common external tariff and some mechanism for allocating tariff revenue – so there is no need for customs checks as such at the border.

If there is only a free trade agreement (FTA) there must be checks on the origin of goods crossing the border in order to establish whether they come from third countries and therefore are not tariff-free. There are customs checks for this purpose at the Norway-Sweden border and the EU-Turkey border, even though there is an arrangement called a Customs Union between the EU and Turkey. This is because many types of goods are excluded and there is provision for anti-dumping duties in exceptional cases.

In addition, and equally important, border checks are needed to ensure that imported goods conform to the importing country’s technical rules.  Within the EEA (EU + Norway, Iceland and Liechtenstein) all parties are legally obliged to ensure full compliance with EU mandatory standards, including food health rules, and very importantly, adhere to a mutually recognised system for “Conformity Assessment” certification. The EU is insistent that there must be checks in place if the UK wishes to have a separate regulatory regime.

Not every cross-border transaction needs to be physically checked. Much of the paperwork for these processes can be completed electronically and some checks can be done away from the border. However, there must still be provision at the border for checks to verify that paperwork and substantive compliance is in order. The EU has protocols for sample checks at borders. Only a small percentage of non-food items need to be checked but a high proportion of food items do need to be checked, which is a crucial point in the Irish border issue.

It is frequently suggested that a proposal by former Swedish customs chief, Lars Karlsson, already allows new technology to replace all physical border checks. But most analysts read his paper as requiring some border infrastructure and his latest statement appears to confirm this. However, it does not matter what folks at UKTPO or those we debate with think about Mr Karlsson’s plan, but rather what the EU thinks since they would have to agree to accept a technological solution. And so far, they have not.

Whilst a Customs Union would ease goods trade between the EU and the UK, as there would be no tariffs to pay, it would still be necessary to perform document and physical checks to ensure compliance with standards and the collection of VAT (see our animated video “The Customs Union: The Fiction of ‘Frictionless’ Trade”). It follows from this that to avoid border controls in Ireland there must be both a Customs Union and single market arrangements in goods between the north and south of Ireland. Therefore, the UK and the EU agreed that until such time as, yet unknown, technology allows monitoring without a physical inspection of what goes across the border, there has to be an arrangement such as the proposed Backstop.

Arguments in Parliament that call into question the UK’s willingness to continue with a backstop-type arrangement make the other side even more insistent that it must be a legally-binding commitment. That is part of the Withdrawal Agreement which the EU has reaffirmed that it is not prepared to re-open.

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The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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3 Comments

  • John Newton says:

    Timely article.
    The author correctly concludes that single market arrangements for goods will be required between NI and the Republic, but that would not be sufficient.

    They would need to extend also between NI and the rest of the UK; or put another to avoid customs checks between the UK and EU in general and thus a hard border involving checks within the island of Ireland, requires UK equivalent CU obviating rules of origin checks + continuing regulatory alignment with SM rules for goods with the EU(plus agreement on road haulage service agreements): Jersey in shorthand.
    The UKTO in common with informed commentators generally have neglected to highlight that the WA backstop diverged from that agreed in December 2017, and involves the UK needing to accept separate regulatory treatment of a constituent part of the UK, which should never have been accepted, as it will never be politically acceptable. It is also an unreasonable requirement on the part of the EU: would France accept separate regulatory treatment of Corsica?

    Of course Brussels will retort that the UK should have chosen Norway-plus as its preferred destination, but we are where we are, and that could be where we end up if no Deal is to be avoided. It would provide a cleaner option than Jersey, and avoid the loss of market access for services, while polling evidence suggests that the majority of the public would swallow it if it meant resolution of Brexit deadlock. Loss of control over migration could be too much for some MP’s and it is difficult to conceive it being taken on board by May given her fixation on migration.

    The current EEA arrangement allows some divisibility of the four freedoms insofar it does not involve a CU. On a needs-must basis the EU could and should bend on that in the final lap if instead a Chequer Mark 2 based on Jersey ended up the last option standing capable of securing a parliamentary majority.

    Parliament now has be guided by the facts and evidence to allow hopefully come to a conclusion that fits the facts.

  • Julian Price says:

    However, it does not matter what folks at UKTPO or those we debate with think about Mr Karlsson’s plan, but rather what the EU thinks since they would have to agree to accept a technological solution. And so far, they have not.

    I do have a sneaking suspicion that EU’s seeming intransigence, coupled no doubt with stupidity on the UK side of the negotiations, has deliberately prevented serious discussion, because possible solutions, such as the ones referenced in your excellent article, seem to me to have been rejected out of hand.

    “Non”, as General de Gaulle said. “No, no, no” as Mrs Thatcher said. And now we have the same negativity concerning the border issue, especially from the EU side. “It’s impossible”, the EU says in unison. All the possible solutions are “unworkable”, they all say.

    But why?

    What’s specifically wrong with these proposals? Everyone agrees to maintain a common biosecurity zone in the island of Ireland, including for chlorinated chicken. We’re not about to join Schengen. Drug smugglers and fraudsters will continue to face similar punitive laws on both sides of the border, hopefully. So what exactly is the problem with the AEO or trusted trader schemes? Is it just a problem with cigarettes? Are there any other problematical goods?

    Answer get we none, just “non”, and that the EU side definitely needs the backstop, and that amendment to the Withdrawal Agreement is impossible, and that the backstop must remain in force potentially until the year 2099.

    To my mind, insistence on maintaining that there can’t be a unilateral exit from the backstop whilst also refusing adequately to answer the likes of Mr Karlsson, is prima facie evidence of bad faith.

    But maybe I’m missing something? Hence, many thanks to you for your excellent articles. I’ll certainly keep on reading them!

  • Howard Levene says:

    Isn’t it amazing, business have solutions but government don’t seem to listen or maybe more importantly can’t keep up with the technology available to solve this issue.

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