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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