House of Commons Debate on Post-Brexit Customs Arrangements

Briefing prepared ahead of the House of Commons debate on post-Brexit Customs Arrangements.

Contents

Top Lines 1

Background. 1

Impact of Leaving the Customs Union. 2

Economic impact 2

Sectoral impact 3

Non-tariff costs 3

Ports and infrastructure. 3

Northern Ireland. 4

The Government’s Trade Agenda. 4

UK trade with Europe. 4

Benefits of new trade deals 5

Impediments to signing new trade deals 5

Existing trade deals with third countries 5

 

Top Lines

 

  • With less than six months to go before the Brexit deal is supposed to be agreed, Ministers are still fighting over which of their two discredited customs proposals to persist with.
  • The Prime Minister’s favoured ‘customs partnership’ model seems to have no friends on any side of the Brexit debate. It has been branded “crazy” by Boris Johnson and is described as “magical thinking” by the EU.
  • But the Brexiters’ own favoured scheme, the so-called “maximum facilitation” option, has also been dismissed by the EU and simply won’t work. Philip Hammond rightly told the Brexit Cabinet sub-committee that it would not "resolve the need for a hard Irish border".
  • These unworkable proposals should be ditched in favour of full participation in both the Customs Union and the Single Market – both of which are vital for protecting the UK economy and for avoiding a hard border in Northern Ireland.
  • It is only right that when the terms of the Government’s Brexit deal are clear later this year, we have a People's Vote so the public can express a view on whether it is good enough.

Background

 

  • The UK and the EU agreed three options on Northern Ireland in the joint report on Brexit signed in December. Option A was that a solution would be found in the wider deal, option B was a bespoke arrangement and option C the backstop solution of full alignment of regulations on both sides of the border in the event of talks breaking down. However, there is disagreement over what this would mean in practice, with the UK having rejected the EU’s draft legal text.
  • Having reached a deal on both the withdrawal and transition agreements, British and EU officials opened talks on the future relationship on Wednesday 18 April. However, the talks are being held up by failure to reach agreement on the question of the Irish border. Negotiations on the Irish question will continue over four rounds of talks in May and June before a crunch EU summit on 28-29 June.
  • In its position paper on customs last August, the Government set out two proposals for a future relationship in an attempt to avoid the imposition of a hard border:
    • A streamlined customs arrangement (‘max fac’), which is based largely on technological   
             solutions and trusted trader schemes with the aim of making the border ‘as frictionless
             as possible’.
    • A customs partnership, which would involve the UK collecting tariffs on the EU’s behalf
             for goods intended for countries in the EU customs union. The UK would also apply its
             own tariffs for goods intended for the UK market.

Having failed to reach agreement on their preferred customs proposal, the Cabinet Brexit committee has divided into two groups to consider the two proposals.

  • Both proposals have been widely discredited, and last month the Telegraph reported the Government’s plans had been subjected to “a systematic and forensic annihilation” by EU negotiators.[1] On 15 May 2018, Ann Linde, Sweden's Europe Minister, said: “Michel Barnier said [to foreign ministers] that the two British proposals the Cabinet is disagreeing about - none of them are realistic. So he thinks it’s unnecessary to fight about it, as none of them are realistic, no matter which one they choose.”[2]

 

Impact of Leaving the Customs Union

Below is a summary of key arguments against leaving the Customs Union. A longer analysis can be found in the APPG on EU relations report on the subject, drafted by Open Britain.

 

Economic impact

  • The UK’s current annual goods trade with countries within the Customs Union is £466 billion.[3]
  • Leaving the Customs Union could cost the UK an estimated £25 billion every year until 2030, according to the Brexit Secretary’s Special Adviser, Raoul Ruparel.[4]
  • The cost of new tariffs alone could be at least £4.5 billion per year for UK exporters, according to research conducted by The Independent.[5]
  • Analysis by HMRC suggests new customs checks could increase the cost of imported goods by up to 24%.[6]

 

Sectoral impact

  • Automotive sector: The Society of Motor Manufacturers and Traders (SMMT) are calling for continued membership of the Customs Union, warning that leaving the Customs Union and trading with the EU on World Trade Organisation (WTO) rules would see a 10% tariff on vehicles and an average 4.5% tariff on car components. According to SMMT analysis, tariffs would push up the cost of the average car by £1,500.[7] Honda have recently warned that “outside of the Customs Union, there is no such thing as a frictionless border”.[8]
  • Agriculture sector: Leaving the Customs Union would increase food costs if tariffs became applicable. The National Farmers Union (NFU) have described such a scenario as being “absolutely disastrous”.[9] Research from Rabobank has shown that the price of imported food into the UK could rise by as much as 8%, a cost which could be passed on to consumers.[10]
  • Pharmaceuticals sector: The Association of British Pharmaceutical Industries (ABPI), has called for free trade with the EU “equivalent to those of a full member of the Customs Union”.[11]
  • Chemicals sector: The Chemical Industries Association (CIA), have said that “the best way to guarantee no adverse disruption to business and trade during a transition period, and to guarantee only one adjustment before reaching a final agreement with the EU, is to seek to retain our existing membership of the Single Market and Customs Union”.[12]
  • Shipping sector: The UK Chamber of Shipping have warned the UK faces an “absolute catastrophe” if it fails to ensure a “frictionless and seamless” border at Dover and other ports.[13]

 

Non-tariff costs

  • Leaving the Customs Union could see UK companies having to comply with high levels of new bureaucracy and additional costs. Meeting the EU’s requirements on Rules of Origin alone would add significant extra burdens to businesses in terms of time, effort and money.[14]
  • IT systems will need to be upgraded and improved and the UK will find itself in the position of having to deal with a huge increase in the number of traders making customs declarations, from the current 141,000 to 273,000. This would include approximately 132,000 traders making customs declarations for the first time.[15]
  • The National Audit Office estimates the number of customs declarations per year increasing from 55 million to 255 million if the UK leaves the Customs Union.[16]

 

Ports and infrastructure

  • Infrastructure improvements will be required at ports to deal with the potential increase in the number of vehicles carrying EU goods, which will need to be parked at ports to await clearance, rather than “driving straight through” as is currently the case.[17]
  • Britain’s ports are currently not equipped with the physical infrastructure or parking bays required to deal with this level of checks on freight entering and departing the UK. This could lead to gridlock around busy UK ports like Dover and Holyhead and could damage the trade in perishable goods.[18]
  • At some ports, including Dover, as much as 99% of traffic relates to trade with the EU.[19]
  • James Hookham, deputy chief executive of Britain’s Freight Transport Association, has said: “If you add an average of two minutes to customs processing, you get a 17-mile queue [from Dover] almost back to Ashford. Another four minutes takes the queue back to Maidstone, six minutes back to the M25, eight minutes and you are up to the Dartford crossing and Essex.”[20]
  • An example of the potential consequences of delay at ports was demonstrated in July 2015 when a strike by French ferry operators resulted in huge delays and traffic jams in Kent and the activation of ‘Operation Stack’.
  • A recent IfG report notes that the requirement to implement Operation Stack in 2015 resulted in businesses losing £21 million in stock and the economy in Kent losing £1.5 million a day.[21]

 

Northern Ireland

  • The UK’s membership of the Customs Union is essential for the maintenance of the currently invisible border between Northern Ireland and the Republic of Ireland.[22] The lack of customs checks and border posts is crucial to the economy of Northern Ireland and the Republic alike, and has profound historical significance.
  • The Irish Foreign Minister has said that leaving the Customs Union is “incompatible” with avoiding a return to a hard border on the island of Ireland.[23]
  • An estimated 177,000 lorries, 208,000 vans and 1.85 million cars now cross the border every month. Around 30,000 people cross the border each day.[24]
  • There are concerns that leaving the Customs Union, and the subsequent creation of different customs regimes between the UK and Ireland, will create incentives for increased smuggling across the Irish border.[25]
  • In its position paper on customs last August, the Government set out two proposals for a future relationship in an attempt to avoid the imposition of a hard border:
    A streamlined customs arrangement (‘max fac’), which is based largely on technological   
           solutions and trusted trader schemes with the aim of making the border ‘as frictionless
           as possible’. This would not meet the Government’s promise of having no physical
           infrastructure at the border.
       2. A customs partnership, which would involve the UK collecting tariffs on the EU’s behalf
           for goods intended for countries in the EU customs union. The UK would also apply its
           own tariffs for goods intended for the UK market. The intention is that there would be no
           customs border between Northern Ireland and Ireland, though the reality is that the
           proposal is unworkable, and there is no way of avoiding a hard border without also staying in
           the Single Market. 

 

The Government’s Trade Agenda

 

UK trade with Europe

  • The EU is, by some distance, the UK’s largest trading partner. In 2016, it was the destination for some 43% of UK exports in goods and services.[26]
  • This is largely due to the frictionless-nature of trade within the Single Market and the Customs Union. It is also a matter of simple geography – Europe is on our doorstep.
  • In addition, the EU has nearly 40 trade deals with more than 65 countries around the world covering a further 15-17% of UK trade in goods, according to the University of Sussex UK Trade Policy Observatory.
  • The EU has trade deals in place with more countries than the US (20), China (23) and Australia (19) combined.

 

Benefits of new trade deals

  • Many of the countries often talked up as targets for future free trade agreements are on the other side of the world, eg, Australia accounts for just 1.7% of UK exports, India 1.7%, Indonesia 0.2% and New Zealand 0.2%.
  • The Government’s own secret analysis shows that they believe new free trade deals will add between 0.2% - 0.7% to UK GDP, compared to a 5% hit from leaving the Single Market.[27]
  • The long-term benefits of a free trade deal with the US are said to be between 0.1% - 0.3%. This is despite the repeated claims by ministers that a free trade deal with the US is the great prize of Brexit.
  • According to analysis by NIESR, the estimated increases in trade from free trade agreements with Australia, Brazil, Canada, China, India, Indonesia, New Zealand and the US would be less than 5%. By contrast, leaving the Single Market will be associated with a long-term reduction in total UK trade of between 22% and 30%.[28]
  • In its latest Economic and Fiscal Outlook, the OBR predicted that export growth will slow this year and flatten off altogether by 2022 “as growth in UK exports eases and Brexit weighs on the UK export market share.”[29] They also anticipate that imports will slow due to Brexit.[30]
  • Sir Martin Donnelly, former Permanent Secretary at the Department for International Trade, has described leaving the Single Market and Customs Union to seek new trade deals as “like giving up a three-course meal for the promise of a packet of crisps in the future.”[31]

 

Impediments to signing new trade deals

  • Trade deals take many years to negotiate – an analysis by the Peterson Institute for Economics found that it takes the US on average more than 3.5 years from beginning trade talks with a country to implementing the agreement.[32]
  • Big countries with large markets have the whip-hand in negotiations. For example, the Switzerland-China trade deal signed in 2013 gives China immediate access to Swiss markets but Switzerland has to wait 15 years for access to Chinese markets.[33]
  • In talks with the US, negotiators will demand that the UK lowers its environmental and food standards and accepts products like hormone-treated beef, GM crops and chlorinated chicken.
  • US Commerce Secretary Wilbur Ross said in London last year that any deal with Brussels to maintain European standards and regulations might “hinder development of a closer post-Brexit US-UK relationship”.[34]
  • US healthcare companies will again lobby for the right to bid for NHS contracts.[35]
  • During the TTIP negotiations, legal advice showed the NHS was not protected, and the Prime Minister has declined to rule out putting it on the table.[36]


Existing trade deals with third countries

  • The Government has failed to explain how the UK will replicate trade agreements the EU has with more than 65 countries around the world by March 2019.
  • Rolling over these FTAs will need to be done by March 2019 because their application to the UK lapses as the UK leaves the EU. But no country has agreed to simply roll over these deals, and some have requested changes to the terms.
  • Renegotiation will be complicated because of Rules of Origin, clauses tied to services sectors and investment flows, and because of issues to do with mutual recognition and tariff-rate quotas.
  • For more information about this see this paper from the UK Trade Policy Observatory.[37]

 

 

 

[1] https://www.telegraph.co.uk/politics/2018/04/19/exclusive-eu-rejects-theresa-mays-brexit-irish-border-solution/

[2] https://www.irishtimes.com/news/world/uk/may-invites-conservative-mps-to-briefings-to-discuss-brexit-1.3495759

[3] https://www.oxera.com/Latest-Thinking/Publications/Reports/2017/Brexit-ports.aspx#_ftn1

[4] https://www.theguardian.com/politics/2016/oct/11/government-adviser-leaving-eu-customs-union-uk-25bn

[5] http://www.independent.co.uk/news/business/news/brexit-latest-cost-uk-leaving-eu-without-trade-deal-exports-negotiations-david-davis-a7325326.html

[6] https://www.thetimes.co.uk/edition/business/brexit-customs-checks-could-land-uk-with-24-price-rise-q7d8sslnl

[7] https://www.smmt.co.uk/wp-content/uploads/sites/2/1207-SMMT-position-on-UK-Brexit-negotiations.pdf

[8] https://www.theguardian.com/politics/2017/nov/14/honda-uk-warns-mps-of-consequences-of-leaving-eu-customs-union

[9] http://uk.businessinsider.com/hard-brexit-nfu-national-farmers-union-disastrous-agriculture-minette-batters-2017-1

[10] https://www.theguardian.com/business/2017/mar/29/brexit-fruit-vegetable-prices-uk-eu

[11] http://www.abpi.org.uk/our-work/library/industry/Documents/UK-EU-Steering-Group-Report.pdf

[12] https://www.cia.org.uk/news/details/Government-making-transition-too-complicated-says-top-manufacturing-exporter

[13] https://www.theguardian.com/politics/2017/apr/12/catastrophe-looms-at-ports-after-brexit-shipping-industry-warns

[14] https://publications.parliament.uk/pa/ld201617/ldselect/ldeucom/129/129.pdf

[15] https://www.nao.org.uk/wp-content/uploads/2017/07/The-Customs-Declaration-Service-Summary.pdf

[16] https://www.nao.org.uk/wp-content/uploads/2017/07/The-Customs-Declaration-Service-Summary.pdf   

[17] https://publications.parliament.uk/pa/cm201719/cmselect/cmhaff/540/540.pdf

[18] https://www.theguardian.com/uk-news/2017/feb/20/post-brexit-customs-gridlock-could-choke-uk-trade-experts-warn

[19] https://publications.parliament.uk/pa/cm201719/cmselect/cmhaff/540/540.pdf

[20] https://www.ft.com/content/7ff7c97c-b33c-11e7-a398-73d59db9e399

[21] https://publications.parliament.uk/pa/cm201719/cmselect/cmhaff/540/540.pdf

[22] http://www.bbc.co.uk/news/uk-northern-ireland-42015406

[23] http://www.bbc.co.uk/news/uk-northern-ireland-41990220

[24] http://bruegel.org/2017/06/brexit-and-the-future-of-the-irish-border/

[25] https://news.sky.com/story/brexit-fuels-smuggling-fears-on-the-irish-border-11041595

[26] https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/timeseries/l7d7

[27] https://www.parliament.uk/documents/commons-committees/Exiting-the-European-Union/17-19/Cross-Whitehall-briefing/EU-Exit-Analysis-Cross-Whitehall-Briefing.pdf, p 14.

[28] https://www.niesr.ac.uk/blog/will-new-trade-deals-soften-blow-hard-brexit

[29] Ibid, p 74

[30] Ibid p 74

[31] https://www.theguardian.com/politics/2018/feb/27/uk-economy-at-risk-outside-single-market-warns-former-trade-chief

[32] https://www.weforum.org/agenda/2016/07/how-long-do-trade-deals-take-after-brexit/

[33] http://www.cbi.org.uk/business-issues/brexit-and-eu-negotiations/eu-business-facts/10-facts-about-eu-trade-deals-pdf/

[34] https://www.theguardian.com/business/2017/nov/06/trump-ross-says-uk-us-trade-deal-eu-brexit-chlorinated-chicken

[35] http://www.independent.co.uk/news/uk/politics/liam-fox-food-chicken-challenge-video-chlorine-washed-food-standards-brexit-us-trade-deal-a7858206.html

[36] http://www.independent.co.uk/voices/chlorine-washed-chicken-liam-fox-trade-deal-us-ttip-deregulation-a7860706.html

[37] Ibid.