11 October 2017

Dr Michael Gasiorek is Senior Lecturer in Economics at the University of Sussex and Director and  Managing Director of InterAnalysis

Reading the Government’s White Paper on trade, and the Customs Bill on future customs arrangements, together with Monday’s statement from the Prime Minister seemed like a Groundhog day moment.  In other words, this is somewhere we have been before – repeatedly.

So let’s recap: Soon after the Brexit referendum, the UK government laid down four red lines: leaving the jurisdiction of the European Court of Justice (ECJ); the ability to have an independent trade policy; restrictions on the mobility of EU workers; and control over budgetary payments to the EU. This has since been serially reaffirmed notably in the February 2017 White Paper on trade, the August 2017 White Paper on customs arrangements, and again repeated in the two White Papers released on Monday 9 October on trade policy and customs arrangements respectively; as well as in the Prime Minister’s statement on the same day. Indeed much of the text in the earlier White Papers reappears almost word for word in what was published on Monday. Groundhog day.

Indeed, on the face of it, the government has been consistent with regard to the red lines. It has repeatedly argued that it did not want to apply the EU’s existing arrangements with non-EU countries, but was seeking a new set of arrangements which would reflect a new ‘special’ arrangement between the UK and the EU. The government has also previously (consistently) indicated that it is possible that we may end up with no deal. Once again that was reaffirmed on Monday in the Customs Bill and by the PM. Groundhog day.

So why does there appear to be so much unease about the UK government’s position and so many column inches devoted to the no-deal contingency planning?

Several reasons:

1. As stated earlier “on the face of it”, arguably, the government has been consistent. However, the difficulty is that since the referendum, on an almost continuous basis, there have been highly mixed Brexit messages from different members of the government concerning continued membership or not of the single market, membership of a customs union with the EU (not the EU customs union), the jurisdiction of the ECJ, and even on how EU migration will be handled in future. Added to which, political in-fighting in the Conservative party is worrying for the UK and its trading partners, notably the EU.

2. Monday’s White Papers on Trade Policy and the Customs Bill (re)affirmed the government’s desire for: (a) trade between the UK and the EU to be as frictionless as possible; (b) no hard border between the UK and Ireland; (c) the creation of an independent trade policy. Take the White Paper on trade policy: The trade policy objectives (transparency and inclusivity, rules-based, boosting trade, supporting poverty reduction in developing countries, consistency with the industrial strategy….) are all potentially laudable. However, there are (at least) two reasons for disquiet. First, there is still a considerable lack of practical detail as to how those objectives are to be achieved, with whom, with what effect, as well as what are the challenges and obstacles to be overcome. Secondly, and perhaps more importantly, there is a marked lack of prioritisation – which of the objectives is/are the most important and why and where is attention being focused?

3. The Customs Bill has raised the issue of a no-deal scenario much more explicitly than previously. Despite some of the reaction in the press, there really should not be any surprise that the government is preparing for that contingency. It would be irresponsible of the government not to be, and indeed it could be viewed that the Cameron administration was irresponsible in not planning for the vote to leave the EU. There are, however, some legitimate concerns arising from this.

• First, there is the clear implication that the prospect of a no-deal scenario is being used to put pressure on the EU, where no UK budget contributions leaves a hole in the EU’s budget. This is a risky negotiating tactic, and telling the EU that the ‘ball is now in their court’ reflects the lack of trust in the negotiations and may not go down well with Brussels, leading to the EU position becoming more entrenched. At the end of the day, the pay-offs from a no-deal are worse for the UK. That and the triggering of the time-delimited Article 50 means that the UK is in a weaker negotiating position. On the other hand, the UK’s possible budget contribution is one of the few levers it does have in the negotiations, and raising the prospect of no deal may engender a more positive response from Brussels.
• The second concern is why such a statement was being made now? It is hard to avoid the conclusion that it is because there is a growing realisation in the government that the cliff-edge scenario is not just a possibility, but a real danger. This is because of the slow pace of progress, in turn, and in good part, driven by the time taken to sort out the UK’s strategy and detailed position.
• The third concern is that where the February 2017 White paper stated that “Our aim is to establish our schedules in a way that replicates as far as possible our current position as an EU Member State”^[1], in contrast, the Customs Bill states that “ the level of this [ie the UK’s] duty would be decided by the government, and set out in secondary legislation before the UK leaves the EU” ^[2]. This raises the possibility that the UK might be considering not replicating the EU MFN tariffs, which in turn may complicate the UK’s position in the WTO, and potentially opens up a range of further complications which will be time-consuming.

4. The Trade White paper, the Customs Bill call and the Prime Minister’s statement all call for an implementation period. In some respects, this is a step forward. Previously this was referred to as ‘interim arrangements’, and now it is an ‘implementation period’. Yet, an implementation period suggests that there is an agreement which needs implementing. It is not conceivable that such an agreement could be in place. So really this is about a transition period. The Customs Bill suggests that this could be achieved through a “new and time-limited customs union between the UK and the EU Customs Union”. The government has proposed that there should be a ‘no change’ period after March 2019 during which the UK is outside the EU but under the same business conditions. As well as having agreed the final settlement, this would appear to mean signing a new Customs Union agreement with the EU and also negotiating a new equivalent of the EEA also for just 2 years to avoid regulatory barriers. Even if both parties were willing to agree to this, it is far from clear that this is remotely feasible in the timescale. See Holmes, Szyszczak and Winters for a fuller discussion.

It would also require in some way replicating (grandfathering) all the existing free trade agreements which the UK is part of, and where the rules of origin allow the UK to continue to sell in the EU market and in the FTA partner markets on the same terms as before. This too is far from straightforward and involves more than simply cutting and pasting existing agreements. See blog by Gasiorek and Holmes.

5. Closely related to the preceding, the White Paper repeatedly offers stakeholders the opportunity to engage with the governments’ developing trade policy with requests for feedback by early November. Once again, this leads to two concerns.

• First, clearly active engagement with stakeholders is “a good thing” and to be welcomed. But the referendum decision was 15 months ago – that is when much more active and coordinated engagement with stakeholders could have started to take place. Of course, this is not to say that the government and civil servants have not been engaging at all with stakeholders. Yes, this has been happening to a greater or lesser degree depending on the Department and the unit. However, the overwhelming impression has been one of a government which is relatively closed to outside engagement and of a lack of coordination with regard to that engagement.
• The second concern is that the government is asking for stakeholders’ views but is offering little of its own analysis and perspectives in return – other than the relatively broad statements such as in the White Paper, or detailed questions as in the Customs Bill. This is not because the government is not working on these issues – but because it appears too anxious to share any of the detailed thinking not just with stakeholders, but also with other government departments. There are countless position papers and analyses being written within cross-cutting or overlapping departments and units, but mum’s the word. This is a mistake. Of course, not everything can be made public but the government could do a lot more to coordinate its activity internally, and to share its thinking externally.

Having said all of the preceding it is important to remember what the Brexit referendum means: the UK has to negotiate its divorce from the EU, negotiate a new trade deal with the EU, negotiate or re-negotiate all of the existing trade deals that the UK is currently a part of as a member of the EU with over 50 countries, and the UK desires to negotiate new trade deals with new countries.

To put it mildly, this is a very big ask, and it is therefore easy to criticise. Clearly, the government and the civil service have put a lot of work and thought into possible ways forward, and the White paper and Customs Bill are not devoid of sensible objectives, suggestions, or questions.  Equally, the government has clearly moved away from the hard-line no-deal is better than a bad deal position and seems more ready than previously to listen to views and to consult. This is important and is to be encouraged. Stakeholders, researchers and analysts have much to offer. The more this can be a dialogue, the better.

The artifice of the Groundhog day story line, was that time was suspended – the characters could live in their repeated reality which gave them time for mistakes, and then to sort out all the problems… leading to a deep and special relationship between the main protagonists.  The reality here is that we do not have that artifice, and to use the well-worn phrase, in the Brexit negotiations the clock is ticking. So the lack of change between Monday’s documents and the earlier version is not really reassuring.  If anything it is more worrying as it brings the cliff-edge closer. If, in Theresa May’s words, a Canada style free trade agreement

“would represent such a restriction on our mutual market access that it would benefit none of our economies”,

what does that say for the cliff-edge scenario which appears to be getting closer? This reinforces the argument that there should be serious consideration of the idea of requesting an extension to the Article 50 deadline, controversial as that would be on all sides.

 

References

^[1] Paragraph 9.18, “The United Kingdom’s exit from and new partnership with the European Union”

^[2] Paragraph 5.27, “Customs Bill: legislating for the UK’s future customs, VAT, and excise regimes”

 

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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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