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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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January 17th, 2019

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30 November 2018

L. Alan Winters CB, Professor of Economics and Director of the UK Trade Policy Observatory, Dr Michael Gasiorek, a Senior Lecturer in Economics at the University of Sussex and Peter Holmes, Reader in  Economics at the University of Sussex both fellows of the UK Trade Policy Observatory.

  • We welcome the Government’s estimates of the economic consequences of alternative Brexits. They are way overdue.
  • The modelling was very competently done.
  • But the assumptions made tended to favour the Government’s preferred position over other alternatives.

On Tuesday, the UK Government released a set of cross-Departmental estimates of the possible economic costs of different Brexit options. They were based on the Government’s own modelling, which uses a technique known as a Computable General Equilibrium modelling and is based on the Global Trade Analysis Project (GTAP) consortium’s world model and dataset. The aim is to model (very approximately) the important linkages in an economy over a medium to long-term horizon and to assess the possible impact of changes in trade policy on the economy. (Short-term modelling, over a five year period, was simultaneously released by the Bank of England, but we do not discuss it here). The modelling approach is relatively standard, has been applied competently and honestly and produces results fairly much in line with other studies of the impact of Brexit.

This blog highlights some of the trade-related aspects of the modelling exercise and its results. As with all modelling, the main issues concern the assumptions that users input into the model rather than the model itself. (more…)

November 30th, 2018

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16 November 2018

Alasdair Smith is an Emeritus Professor of Economics at the University of Sussex and is a member of the UK Trade Policy Observatory.

The UK Cabinet has signed off the draft EU Withdrawal Agreement (WA) and the Political Declaration (PD) about the future UK-EU trade relationship. The WA has had such a rocky reception in the Conservative Party that the future path of decision-making is a bit uncertain, but it is likely that these documents will also be agreed by the EU summit later this month. The decision-making then passes one way or another to the UK Parliament. Politics has dominated this week’s debates, but decisions need to be informed by economic assessment. Let’s consider the economic costs and benefits of the choices which Parliament will have to make.

(more…)

November 16th, 2018

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Photo of Emily Lydgate19 September 2018

Dr Emily Lydgate is a lecturer in Law at the University of Sussex and a fellow of the UK Trade Policy Observatory.

In its Chequers White Paper, the UK government has proposed that, in order to facilitate a frictionless border, it will operate a dual customs regime known as a Facilitated Customs Arrangement (‘FCA’). By replacing rules of origin checks at the EU-UK border with internal monitoring, the FCA requires firms to establish ‘robustly’ the destination of their products to ensure that correct duties have been applied, and then, if they wish, to seek rebates if they have been overcharged. Past UKTPO blogs have addressed logistical challenges and strategic downsides of this ‘Fantastically Complicated Alternative’ (see also Does the Chequers Agreement provide any steps to Brexit heaven?)

But would it be compatible with the rules of the World Trade Organization? The precise details of the FCA’s operation remain unclear. Barring a dispute, it’s not possible to settle the question definitively, but the FCA does prima facie pose a risk of WTO non-compliance. We presume that the UK government has undertaken some analysis of this, and that it covers (at least) the following issues. (more…)

September 19th, 2018

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Image of Alan Winters23 July 2018

L. Alan Winters CB is Professor of Economics and Director of the Observatory and Julia Magntorn is Research Officer in Economics at the UKTPO.

There is much to digest in the White Paper on The future relationship between the United Kingdom and the European Union and much to clarify. This blog is devoted entirely to trying to understand the Facilitated Customs Arrangement (FCA) that aims to deliver frictionless trade in goods between the UK and the EU after Brexit.

The FCA matters because trade that is ‘as frictionless as possible’ with the EU is now accepted by nearly everyone as desirable and has been characterised by much of business as essential. It also matters in the short term, however, because it is the UK government’s offer to the EU on how to ensure that there is no border between Northern Ireland and the Republic. Without a solution to this latter problem there will be no Withdrawal Agreement and no transition. (more…)

July 23rd, 2018

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12 July 2018

Rorden Wilkinson is Professor of Global Political Economy and Deputy Pro-Vice-Chancellor at the University of Sussex and a Fellow of the UK Trade Policy Observatory. Charlotte Humma is Research Communications Manager at the Business School and Business Manager at the Observatory.

Standards and technical regulations are likely to be the most significant—and potentially contentious—obstacles to a UK-US trade deal according to leading trade experts.

Published today our latest briefing paper states that the UK faces a challenge in whether it stays with EU regulation, moves towards the US approach or tries a pick-and-mix approach of its own. (more…)

July 12th, 2018

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9 July 2018

Dr Michael Gasiorek is Senior Lecturer in Economics at the University of Sussex and Managing Director of InterAnalysis. He is a Fellow of the UKTPO.

In good part, the answer depends on the extent to which this agreement moves on from the Government’s previous position, is feasible, is credible, and is acceptable to the EU. It also depends on whether it will be acceptable to the Conservative party, which the resignations of David Davis and Boris Johnson throw into serious doubt.

In this blog, I focus on one aspect of this –  the extent to which the “facilitated customs arrangement” (FCA), which is central to the agreement notionally reached at Chequers, is substantively different from the previous idea of a “New Customs Partnership” (NCP). (more…)

July 10th, 2018

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Image of Alan Winters9 July 2018

L. Alan Winters CB is Professor of Economics and Director of the Observatory.

The (three page) Chequers Statement is a remarkable political sticking plaster. Coupled with some robust politics it appeared to have kept the Cabinet unified for a few more days, although now even that goal has been missed.

This note is not about the politics, but about the technical aspects of the Statement which is replete with ambiguities and wishful thinking (or worse). The White Paper, if it arrives on time, may resolve some of these ambiguities, but that is far from clear, given the political imperatives that Mrs May feels must guide her actions. (more…)

July 9th, 2018

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06 July 2018

Dr. Minako Morita-Jaeger is is an international trade policy consultant and a Visiting Fellow of the UK Trade Policy Observatory

Exactly a year ago today, the EU and Japan agreed the EU-Japan Economic Partnership Agreement (EPA) in principle. Subsequently, at the end of August that year, the UK Prime Minister Theresa May and the Japanese Prime Minister Shinzo Abe agreed to work quickly to establish a new bilateral economic partnership based on the final terms of the EU-Japan EPA when the UK exits the EU. The UK Government currently wishes to roll over existing EU trade agreements, including the EU-Japan EPA. But does rolling over make sense? From the UK point of view, it is obvious that rolling over the Agreement reflects neither Brexit campaigners’ promise of building a ‘Global Britain’ nor UK sovereignty of its own trade policy. From the Japanese perspective, rolling over the EU-Japan EPA does not make sense either because a symbolic arrangement cannot reflect economic realities. (more…)

July 6th, 2018

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Image of Alan Winters05 July 2018

L. Alan Winters CB is Professor of Economics and Director of the Observatory.

Two years in and the Cabinet is still squabbling over the UK’s trade relationship with Europe. Among the options most discussed, if not most likely to occur, are

  • The Jersey option – arrangements to provide conditions equivalent to the customs union and the Single Market in goods;
  • Mrs May’sthird way’ customs partnership – where the UK collects EU-level tariffs at the border and rebates them only if UK tariffs are lower and firms can prove that the goods did not leave the UK. Until the UK can convince the EU that the technology to do the latter will actually prevent the leakage of lower-taxed goods into the EU, this is effectively the ‘customs union’; and
  • Unilateral free trade – ‘no deal’ followed by the immediate abolition of all UK tariffs.

This blog does not assess the relative merits of these arrangements, but notes that they share a common flaw: they ignore 80 percent of the British economy! The more successful 80 percent, in fact – the services sectors, in which the UK has a manifest comparative advantage (see below). The advocates of these plans gloss over this difficulty by claiming that the UK can negotiate services trade agreements both with the EU and with other countries. But this is easier said than done. (more…)

July 6th, 2018

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