There are perfectly workable alternatives to the demeaning transition as proposed by the EU

There are perfectly workable alternatives to the demeaning transition as proposed by the EU

The European Union’s proposals for the UK’s transition period make grim reading. They are the sort of terms which might be imposed by a victorious power in war on a defeated enemy. They are not terms which any self-respecting independent and sovereign country could possibly agree to, even for an allegedly limited period.

Apparently, we must agree to implement every new EU law while having no say or vote; and we shall not be allowed to conclude trade agreements, even to roll over existing agreements which the EU has with other countries so that they continue to apply to us, without the EU’s permission. We must abide by the rulings of a foreign court on which there will no longer be any British representation.

Apparently, an outrageous and demeaning proposal by the Commission that the UK should be subject to extra-judicial sanctions under which the EU could suspend market access rights is now to be “re-worded”. But that would still leave the UK extremely vulnerable to damaging new rules being imposed on us during the transition period by processed in which we would have no vote and no voice. As reported in the Telegraph last week, the EU has plans to use these powers in order to launch regulatory “raids” on financial institutions on British territory and to make rules which will damage the competitiveness of the UK’s financial services industry.

But quite apart from the totally unacceptable terms for the transition period itself which are being proposed by the EU, the EU is seeking to use the transition period deal as a lever to secure damaging long term commitments from the UK. The most damaging of these is the EU’s attempt to lever the Irish border issue in order to force the UK to act as a long term captive market for EU goods exports by pressing for legally binding text that would force us into a long term obligation to comply with EU tariffs and regulations on standards of goods, on the specious ground that it is impossible to have an open border without all tariffs and regulations being the same.

There should be no doubt that being required to follow either EU tariffs or EU standards on goods would be a total disaster for the UK. It would make it difficult or impossible to conduct an independent trade policy, and to negotiate trade agreements with non-EU countries. How could we expect any significant trading partner to be willing to enter into an agreement with us, if we tell them that we cannot grant mutual recognition to their own goods standards because our own are permanently regulated by the EU? And how can subordinating the UK to the vassal status of taking rules on which we have no vote possibly be compatible with the British people’s vote to take back control of our laws and our courts?

What is the alternative?

One alternative if the EU persist in offering these unacceptable terms is to walk away from a deal with the EU altogether. That is possible; but there is another way. That is to walk away from the transition arrangement, but still to pursue a longer term trade agreement with the EU.

The main argument for the transition is that it would provide certainty for businesses in good time before we leave the EU in March 2019, enabling them to avoid taking steps to prepare for a “no deal” exit from the EU. But that argument is becoming thinner and thinner. The EU has confirmed (as predicted by Lawyers for Britain) that there will be no legally binding commitment by the EU to there being a transition period until the whole exit agreement has been legally signed and ratified. This cannot be sooner than a month or two at most before March 2019.

And even the comfort which might be given by a non-binding political agreement on the transition is being pushed further and further back. It has already been delayed by the slipping of the timetable on the phase 1 deal; it is now being deliberately delayed by the Commission as an exercise in putting negotiating pressure on the UK; and the problems with its terms mean that the idea of tying in all up by March 2018 are optimistic in the extreme.

So the expected benefit to be received from having a transition deal has already been seriously degraded.

So it is time to ask again what benefit we would actually get from the transition arrangement to set against its undoubted costs, and to ask whether we actually need this transition arrangement at all — particularly when to secure it we would need to submit to humiliating and damaging terms. I am convinced that we do not need it, and that there are perfectly workable alternative arrangements which can be put in place to maintain the flow of trade in goods and services in both directions for the period after March 2019 until a trade agreement with the EU can be put in place.

What is the reason for the transition arrangement?

The reason for seeking the transition period was explained in the Prime Minister’s Florence speech in September 2017. It is because the EU, at least according to its own interpretation of its constitutional powers, cannot conclude a trade agreement with the UK until after it has become a non-member State. Hence, and even assuming the terms of a post-exit trade deal between the UK and the EU are agreed in principle before we leave, the actual conclusion and ratification of a detailed trade agreement would take some time after that.

For the EU to conclude and ratify such an agreement would need, among other things, a resolution of the European Parliament approving the deal. Further, it is claimed that such an agreement would require signature and ratification by each Member State individually as well as by the EU itself. If this is indeed the case, ratification could be prevented or at least delayed by national politics and national constitutional requirements, such as the requirement in Belgium that the Parliament of Wallonia would need to approve it.

But this assessment is too pessimistic. It is true that if the entire post-exit relationship between the UK and EU were to be bundled into a single huge, humungous legal agreement, it would be very complex and would take a long time both to agree and ratify. But this is completely unnecessary. No doubt the UK and the EU would wish that the various elements of the future relationship be negotiated as a package at the overall political level. But that package could be implemented via a number of different individual legal agreements each with its own appropriate ratification process.

This means that a stripped-down, simplified Free Trade Agreement between the UK and the EU could be agreed, ratified and put into force rapidly. It could readily be drafted so that it did not include any element of Member State (as distinct from EU) external competence, and ratified and put into force if the right incentives are there within a month or two of the exit date in March 2019. The ECJ’s formal Opinion (Op 2/15 of 16th May 2017) in the Singapore Trade Agreement case has made it clear the EU’s own powers to conclude trade and trade related agreements, without needing Member State inclusion, are very wide indeed. In that Treaty, only certain investor protection clauses were held to be within Member State competence: such refinements would not be needed in order for a workable EU-UK trade agreement to be put into force, even assuming that they would be needed at all in the long term.

How to bridge the gap?

So how would the gap be bridged? This gap might, optimistically, be a month or two, but the arrangements should be structured so that trade in goods and services can flow in both directions without interruption for a longer period, if negotiations or the ratification process were to drag out for longer than expected.

Unfortunately, hysterical, lurid and evidence-free metaphors have been allowed to proliferate that if an agreement is not in place by March 2019, then the UK “will crash out over the cliff into the abyss”. To be clear, I am not advocating that we simply walk away from the negotiations and have no agreement or working relationship at all with the EU. What I propose is that we should employ other mechanisms than the transition period to achieve reasonably smooth flow of trade.

Customs and tariffs

The first area to be addressed is what will happen to customs arrangements and tariffs? It should be appreciated that it will be necessary to operate customs controls between the EU and the UK after exit, regardless of whether or not we conclude a free trade agreement (FTA) with the EU. If we have no FTA, then customs authorities will collect tariffs on goods flowing in both directions. If we have an FTA, the customs will let through goods which originate in the EU or the UK without tariffs, but will still collect tariffs on goods which originate outside the Free Trade Area.

But modern customs controls do not entail opening up every cargo and rummaging through it at a border post. On the contrary, most customs clearance is now conducted via electronic pre-clearance procedures, while so-called Authorised Economic Operators are trusted to operate customs rules and self-declare appropriately, subject only to spot inspections to secure compliance in the same way as for internal taxes such as VAT.

Operating such modern streamlined customs procedures between the EU and the EU after we leave will not only be sensible for both parties, but will be a matter of legal obligation as from March 2019 both on the EU and the UK under the WTO Trade Facilitation Agreement.

One aspect of the proposed transition agreement is that the EU and UK would not operate customs controls between themselves, but in return the UK would bear the heavy price of being required to follow slavishly the EU’s external tariff and non-tariff controls on goods coming in from outside the EU. No evidence has been produced by anyone that it would need an additional 2 years (i.e. 3 years from now) in order for to set up the necessary customs systems. Such claims are absolutely absurd: why should it need over four and a half years from the referendum to put in place these basic administrative procedures? Further, such claims are in conflict with evidence given by HMRC to select committees on a number of occasions that HMRC has solid plans in place to operate customs controls as from March 2019 if needed.

Under the alternative to having a transition period, tariffs would kick in for a limited period from the end of March 2019 until an FTA with the EU — which could be a simplified agreement pending the later conclusion of a more elaborate one — is brought into force. If the essential terms of the deal are concluded before exit day in March 2019 then that should not take much time at all, and the EU in particular will have a strong incentive to make rapid progress in implementing it because of the large amount by which EU goods exports to the UK exceed UK exports to the EU.

The cost of these tariffs on goods exported from the UK to the EU under the EU’s common external tariff has been calculated in a detailed in a paper published by Civitas and will amount to about £5.2 billion per year.

This cost would be borne partly by UK exporters and partly by consumers in the countries of importation, depending on competitive forces in the markets concerned. The part year cost of these tariffs if an FTA is brought into force rapidly would be very limited. Even if there was some glitch and it took longer, the cost of these tariffs is entirely sustainable for the UK. Even assuming that most or all of this ongoing cost were to fall on the UK economy, to put it in perspective it is less than half of the current running net budget contribution made by the UK to the EU. The cost is therefore affordable, whether it is for a month or two or whether it goes on longer.

The other side of the equation is the tariffs which the UK would levy on EU imports. The same Civitas study calculates that were the UK to replicate the EU’s current external tariffs, about £12.9 billion of tariffs per year would be levied on goods coming from the EU into the UK.

The reason why this figure is so much higher than the figure for EU-levied tariffs is twofold. First, the absolute volume of the EU’s goods exports to the UK is much higher than our exports to them, given our huge bilateral trade deficit with the EU. Secondly, the EU’s exports to the UK are heavily concentrated within high tariff sectors such as cars, clothing and agriculture.

However, this does not mean that we should replicate the EU’s external tariffs in the way assumed in the Civitas study. Such a policy choice would be entirely irrational – indeed madness – for the reasons I shall explain.

Let us take the example of oranges, a high tariff product (the tariff was increased to 16% in October 2016). There is no production of oranges in the UK and therefore no domestic industry to protect. At the moment therefore the British consumer can buy Spanish oranges tariff-free, but must pay 16% tariffs on oranges imported from the rest of the world. What possible good is there in imposing a 16% tariff on oranges imported from Spain as well as from the rest of the world, so ensuring that food prices in the UK will be jacked up? On the contrary, the rational move is to zeroize the tariff on oranges, both from the EU and the rest of the world. Under WTO rules a member is not allowed to charge different levels of tariffs on goods from different countries, but is free to reduce its tariffs below the maximum levels set by its WTO Schedule.

The purpose of our interim tariff policy should not be to impose damage on the EU economy and exporters for the sake of it, particularly where such steps would also damage consumers in this country. Instead, the objective should be to keep trade flowing as freely as possible and to benefit our own consumers and economy. This means that we should in general scrap tariffs on products where the UK has little or no domestic production, giving huge benefits and an immediate ‘Brexit dividend’ to lower income families.

It has been argued that some industries with highly integrated supply chains would be hit hard if tariffs were imposed between us and the EU. In the interim scenario we are looking at we could not stop the EU imposing tariffs on inward moving goods — indeed, under WTO rules until an FTA came into force, the EU would be obliged to levy whatever is its standard external tariff on imports from the UK.

But it does not follow that the UK is obliged to or should levy tariffs on goods going in the opposite direction. For example, in the car industry the UK could zeroize tariffs on car components. As required by WTO rules, the tariffs would be made zero on components from the EU and also at the same time on components from the rest of the world. Far from damaging the car industry in the UK, such a scenario would boost the competitiveness of the UK car industry by allowing car plants based here to source components from the EU at the same cost as before, but also to source components from the rest of the world more cheaply than at present.

Non-tariff controls (standards)

A further important issue is that of non-tariff controls on the movement of goods based in compliance with standards. This is an issue which affects the EU’s (and our) trade with non-EU countries. There are therefore existing mechanisms in place which need deploying and applying to UK-EU trade to permit the continued free flow of goods.

In almost all areas, the EU has existing powers to recognise both the standards and the “competent authorities” (relevant regulatory authorities) of non-Member countries as complying with the standards necessary for importation of the goods concerned into the EU. In general, such powers of recognition are delegated to the EU Commission, which can enact the necessary regulations itself without the need for legislation to go through the Council of Ministers or the European Parliament. One of many examples of how this system works can be seen in Commission Regulation (EC) No 798/2008 of 8th August 2008 “laying down a list of third countries, territories, zones or compartments from which poultry and poultry products may be imported into and transit through the Community and the veterinary certification requirements.”

Since the UK is at present wholly aligned with EU rules and procedures in all areas, there should be no difficulty in the Commission granting necessary recognition to UK standards and UK regulator authorities so as to allow cross-border trade to continue.

As regards imports to the UK, the Repeal Bill will repatriate existing EU laws, substituting UK national authorities in place of the Commission where necessary. Under those repatriated laws, it will be possible for the UK to grant corresponding recognition to the EU.

There is no reason at all to think that the EU will be difficult about this mutual recognition process. First, the EU has a strong self interest in mutual recognition of standards because of the much larger volume of goods which it exports to the UK as compared with UK imports to the EU. Secondly, as a back up, the EU will be under a binding legal obligation under the WTO Agreements to grant such recognition, in the absence of valid objective reasons for not doing so.

The EU’s existing third country recognition powers extend, although in a more patchy way, to services as well as goods. In the financial services area, the Commission has powers to grant and has granted recognition of “equivalence” to the financial regulation regimes of non-EU states. Again, the UK would readily be able to grant corresponding recognition to incoming providers of services from the EU. Further, the UK would be able to, and should, go further and deploy “intelligent unilateralism” in granting rights where it benefits the UK economy to provide services to EU-based entities, whether or not the EU grants corresponding rights to British-based entities.

A good example of such “intelligent unilateralism” is the Bank of England’s announcement that it will continue, even if there is “no deal”, to permit branches of EU banks to continue to operate in the UK without requiring them the set up and capitalise a UK-based subsidiary. Such a regime should clearly be applied to an interim period between Brexit day in March 2019 and the date when a Free Trade Agreement can be brought into force.

It can justifiably be said that such interim arrangements would be somewhat ad hoc, and at risk of being varied or withdrawn in the event of changes to UK and/or EU regulations in the relevant fields. Indeed, more robust arrangements for the granting and withdrawal of mutual recognition of standards or equivalence for both goods and services should be included in the UK-EU FTA. However, as a working arrangement to keep trade flowing freely for a limited period in the mutual interests of both parties, it should be quite adequate.

Financial terms

One aspect of the Florence deal proposed by the Prime Minister was that the UK should continue to pay very large sums into the EU budget. This however was explicitly linked to the conclusion of a satisfactory trade agreement.

It is important to understand that none of this money is legally owed in international law (see Analysis of the UK’s potential financial liabilities by Charlie Elphicke MP and myself). Receiving these vast sums of money to which they have no legal entitlement is therefore a huge benefit to the EU. It is also pretty remarkable that a country should be will actually to pay money for the privilege of entering into a trade agreement under which it expects to continue to have a massive bilateral trade deficit. However, given that the offer has been made, it will be difficult to retract the offer now if we do wish to proceed to a free trade agreement with the EU.

But there is a serious problem with linking the payment of this money to the transition arrangement as currently proposed. The problem is that the UK will have to shell out the cash before a concluded trade agreement is delivered. Indeed, the whole arrangement provides a perverse incentive to the EU to spin out the conclusion of a trade agreement in order to continue to milk the UK for funds and lock down our economy in the vassal-state transition regime, under which EU goods and services are artificially protected in the UK market against third country competition, for as long as possible.

By contrast, if we dispense with the transition period, the money would only begin to be paid once a satisfactory trade agreement was actually concluded. In the mean time the EU would have the consolation of collecting the £5.2 billion per annum customs duties on imports from the UK as discussed above. However, the full payments would only flow as from when the FTA was concluded, providing an additional incentive for the EU to conclude an FTA as soon as possible and to keep goods and services flowing freely in the mean time.


The transition period proposal is a huge hammer intended to strike a relatively small nut. That nut is the actual arrangements (tariff and non-tariff) bearing on the flow of goods and services between the UK and the EU. The transition period arrangements however spread far beyond that limited area, and will encompass the whole UK economy, our internal law making powers, and our external trade with other countries as well. Further, it would extend in this blanket way for “about 2 years”, even though there is no objective need for such a long period of time in order for businesses or officials to adjust to post-exit trading conditions.

The proposal which has been made by the UK is a very generous one, involving making payments to the EU of vast sums of money over many years which we do not legally owe. That proposal was put forward in the expectation that the transition period arrangements would be treated by the EU as a joint project entered into out of mutual interest in securing the continuity of our relationship, and during which the parties would treat each other with mutual respect.

Instead, the EU’s proposals for the transition period exhibit the complete absence of any respect for the UK and seek to treat us as a defeated and conquered country, pathetically supplicating them for favours.

It is therefore now time to tell the EU politely that it will not be possible for us to go forward with the transition period on the terms they propose, and that both parties must prepare for the UK to leave the EU on 30th March 2019 without a general transition period. However, we will still look for a long term and extensive FTA, and pending its conclusion will pursue the arrangements set out above to ensure the smooth flow of trade in goods and services in the mean time.