A healthy dose of ambition and innovation for UK trade after Brexit

A healthy dose of ambition and innovation for UK trade after Brexit

The UK has stepped its Brexit preparations up a gear with an ambitious proposal for a “best of both worlds” customs arrangement with the EU after Brexit. In a paper published today, the Government sets out two possible post-Brexit scenarios. The first is a streamlined customs arrangement which would maximise technological and remote customs procedures to ensure highly simplified customs procedures with the EU, along the lines of what most are expecting after Brexit.

The second is more surprising and consists of an innovative proposal for a new customs partnership with the EU, which would involve the creation of a parallel customs system in the UK where goods destined solely for the EU would continue to move freely into the EU as they do now, while the UK would set its own independent trade policy for UK imports and exports for all other goods from the rest of the world.

While both scenarios satisfy the basic objectives for the UK to be in control of a fully independent trade policy while minimising disruption to UK-EU trade, it is the second option that is particularly eye-catching as it would offer a win-win scenario for the UK alongside a ready solution to the Irish border issue, although it is of course not without its challenges, both in terms of domestic implementation and in terms of the Brexit negotiations themselves.

In the wake of the predictable response from the EU that it will not discuss customs and a future relationship until its “divorce terms” on citizens’ rights, a financial settlement, and – illogically – the Irish border, are resolved, it is worth stressing that this is specifically not a UK negotiating position paper. It makes more sense to view it as the Government’s attempt to set out two alternative visions for a post-Brexit customs system and engage with businesses and other stakeholders – on both sides of the Channel – and their views on the best ways to make each system work.

The EU is fully at liberty to continue parrotting the same old lines about the sequencing of the negotiations, but that should not preclude the UK initiating a serious and sensible conversation with the businesses on both sides who – unlike the massed ranks of unaccountable EU functionaries and politicians – actually have a stake in the outcome of Brexit, and in good enough time for these scenarios to be implemented effectively.

However, it is this issue of time which has been the main issue exercising Brexiteers – specifically the proposal for a transitional period, in which the UK anticipates forming a temporary customs union with the EU for a short period of time after Brexit itself, which would essentially maintain the status quo until the new system is ready to be implemented. Below, we look at both proposals in detail, as well as addressing the issue of a transition.

Streamlined Customs Arrangement

There is essentially nothing new in this proposal – this has clearly been the trajectory that the Government has been on since Theresa May confirmed that the UK would be leaving the Customs Union in her Lancaster House speech in January. However, what it does do is spell out in somewhat more detail how the Government intends to maximise the use of technological solutions to minimise the friction at the UK-EU border.

For the most part, this is just an acceleration and extension of broader advances in customs procedures that would be taking place anyway regardless of Brexit, now given the added impetus of a looming potential customs frontier with the EU. The vast majority of customs checks on rest of world (RoW) goods already take place remotely rather than physically at borders, so under this scenario it is largely a case of intensifying these efforts with regards to UK-EU trade, rather than reinventing the wheel.

The paper outlines various mutual recognition and waiver schemes which negate the need for physical customs checks, alongside technical measures such as number-plate recognition. Most of these schemes already exist, such as the Authorised Economic Operators scheme, which currently accounts for 60% of UK imports and 74% of UK exports, according to a recent House of Lords report.

The Government is also already in the process of rolling out a new IT system, the Customs Declaration Service (CDS), which is intended to become operational in January 2019, barring any delays. This reflects the EU’s new Union Customs Code, introduced last year, while in theory the CDS should be relatively adaptable to whatever future arrangements the UK and EU settle upon.

The advantage of this approach is that it should not require high level political compromise from the EU – it is essentially the baseline scenario for future customs arrangements. Streamlined customs procedures are clearly strongly in the interests of business on both sides of the Channel (and indeed the Irish Sea), so even if the UK and the EU cannot ultimately agree on a comprehensive free trade deal for after Brexit, this should not be an impediment in itself to agreeing on smooth and streamlined customs procedures, even if tariffs end up being levied on the goods themselves.

Should the talks break down to such a degree that even agreement on minor issues like mutual recognition of authorised traders is impossible, the paper does make clear that the Government will be prepared for the eventuality that it needs to implement “standalone customs, VAT and excise systems”, treating EU trade in the same way as RoW trade. However, it also commits to maximum flexibility from the UK on the Irish border should this eventuality arise, putting the ball in the EU’s court concerning the “processes on the other side of the border” and their constraints under the “relevant requirements of EU law”.

New Customs Partnership

Those who have been calling for more creativity and ambition from the UK side in the negotiations should firmly welcome the UK’s other proposal for a unique new customs partnership with the EU. As the Government’s paper readily admits, it is an unprecedented customs model which throws up a number of challenges, but the many upsides it would deliver if implemented successfully would very much outweigh any costs involved in putting it into place.

Essentially, the proposal would implement two parallel customs systems in the UK, with one exclusively for goods moving on to and from the EU, alongside the UK’s trade and customs agreements with the rest of the world, which the UK would have full control over. This would very much represent a “best of both worlds” option, where those parts of the UK economy directly involved in EU trade would be able to continue essentially unaffected, while the rest of the economy could be opened up to the benefits of Brexit.

Over 30% (£38bn out of £122bn) of the UK’s annual goods exports to the EU are not goods originating directly in the UK but goods from Asia, America and the rest of the world, which are exported first into the UK before being re-exported to their final destinations elsewhere in the EU. Under this system, the UK would mirror the EU’s external customs policy on goods destined for EU27 member states, meaning that once they had cleared initial customs checks in the UK, there would be no need for further checks on their onward transit to the continent, eliminating potential delays at Dover and elsewhere.

Meanwhile, goods whose final destination is the UK would be subject to the UK’s independent trade policy, allowing them to be imported directly to the UK under whatever WTO schedules the UK sets or trade deals it negotiates after Brexit. UK consumers could therefore reap the benefits of lower food prices and lowered duties on other imports, while the integrity of the EU’s external customs border would be maintained.

Products would be clearly labelled and tracked to ensure the correct customs regime was applied, while UK businesses exporting directly to the EU would continue to abide by the EU’s regulations and standards, as they obey other countries’ regulations and standards when exporting to any other country in the world.

This proposal is particularly pertinent to the issue of maintaining an open Irish border, with this parallel customs regime eliminating a huge number of the hurdles to maintaining the border as it is. Ireland itself would benefit hugely, with 80% of its road-freight exports to the rest of the EU travelling over the UK’s “land bridge” via Holyhead and then Dover. The alternatives of direct ferries from Dublin to Cherbourg or Zeebrugge involve at least a doubling of journey time.

So if this customs partnership is such a win-win, why might it be problematic? The first issue, as with all of the negotiations is politics. Such a proposal is undoubtedly also a win-win for the EU, simplifying procedures hugely for EU businesses while ensuring minimal disruption to EU imports and the Republic of Ireland. Nonetheless, the EU may see it as the UK winning just a little bit too much if they fall into the trap of viewing Brexit as a zero-sum game, and object to the proposal on the grounds that it is “cherry-picking” or may help the UK do “too well” relative to the EU after Brexit.

Secondly, it should be stressed that this a proposal for a customs arrangement with the EU, not a free trade deal. This customs partnership would be contingent on an underlying free trade deal on goods between the UK and the EU, which is far from certain in itself. Again, this will be a question of whether the EU chooses to prioritise its political interests over economic concerns.

On the domestic side, there are a number of logistical and compliance issues which the Government acknowledges. The paper states highlights the need for a “robust enforcement mechanism that ensured goods which had not complied with the EU’s trade policy stayed in the UK”, pointing to a tracking mechanism or a customs repayment mechanism as potential solutions. It also references issues around rules of origin and supply chains which would need to be explored further in discussions with the EU itself.

While the paper is keen to stress that this is an “untested” proposal, and emphasises that the Government is “keen to explore this approach with businesses and other stakeholders to understand the practical complexities involved in making it work”, these challenges should not preclude serious attempts to engage with what could ultimately be an effective long-term solution to the UK’s post-Brexit customs relationship with the EU, even if it ultimately proves to be too complicated to implement.

Transitional period

However, the paper has drawn a mixed response from Brexiteers, not over the substance of the customs proposals, but over its commitment to a transitional period in which the UK will aim to essentially replicate existing EU Customs Union arrangements in a temporary customs union deal, where Britain would continue to implement the EU’s Common External Tariff on goods for a period of up to three years after Brexit.

This would preclude the UK from implementing new trade deals with other countries around the world which involved the reduction of tariffs for the duration of the transitional period, a prospect which has raised alarm on the grounds that Britain will not be able to make the most of Brexit unless it strikes while the iron is hot.

However, while Britain would not be able to implement trade deals in this period, the UK would not be prevented from negotiating trade deals in preparation for the day it switches over to the new system. There is also a strong argument that the UK would be able to formally sign the deals and ratify them in Parliament during this period, providing they did not come into force until after the UK drops the Common External Tariff. Trade deals which dealt exclusively with non-tariff barriers and other non-tariff issues could potentially even be implemented during a transitional period providing they did not contravene the terms of any transitional agreement.

Ultimately, Brexiteers should avoid falling into the trap of letting the perfect be the enemy of the good. With a clean but smooth Brexit looking increasingly within reach, there is little to gain from trying to destabilise the major aspects of the process due to disagreements over a matter of a couple of years, particularly given how remote a prospect Brexit has looked at all for many of the decades of the UK’s membership of the EU.

Forcing businesses to change customs regimes twice in a very short space of time, and particularly when a standalone UK customs system would likely be rather undercooked in March 2019, will not be a good way of maintaining business and public confidence in the process of Brexit as a whole. Such disruption may well be short-lived, but it is still unnecessary if there are reasonable alternatives on the table, as the paper attempts to offer.

Far better would be for all sides to engage with the big picture issues explored in the paper, helping to shape the national conversation of what will and what won’t work for the UK after Brexit, instead of squabbling over timings or continuing to question whether it will happen at all. Fundamentally, the success of Brexit will be determined by the place we arrive at the end of it, not by the precise number of months it takes us to get there.