Henry Newman is Director of Open Europe.
On Tuesday, the Government published a position paper on customs policy after Brexit. The paper provides some greater clarity about what our borders will look like in 2019, but also leaves unanswered many questions.
At present the UK is in the EU’s Customs Union by virtue of our EU membership. Think of the Customs Union as the equivalent of the blue channel, which you can push your suitcase-laden airport trolley through on arrival back into the UK from an EU holiday. The Customs Union allows goods to pass between EU member states without check or hindrance. Because all states within it impose a Common External Tariff, the same duties are raised on goods brought into any EU state. Equally, all EU states negotiate and agree trade deals collectively – through the Common Commercial Policy – so if a deal is struck to lower tariffs, it applies to all 28 EU members.
The Government has confirmed that at the end of the Article 50 process, in March 2019, we will leave the Customs Union. That is the right decision and one which was largely fudged in the Prime Minister’s Lancaster House speech. The paper proposes a transitional like-for-like arrangement, without specifying how long that period ought to last. Again that’s a sensible proposal, not least because the Government hasn’t moved fast enough to make the necessary preparations, such as enhancing the requisite IT systems and ensuring the right customs officials are in place, which leaving the Customs Union will require.
At the end of the transition, which ministers have separately confirmed will be complete by the next general election in 2022, the UK will be fully outside the Customs Union. This is significant as much had been made over previous weeks about the potential for the UK to form ‘a’ customs union with the EU, in a similar manner to Turkey, even if it left ‘the’ EU Customs Union. That option is now clearly off the table after 2022. The Turkish model, or another half-in half-out arrangement would not suit the UK long-term and it’s welcome that this has been ruled out. This means the UK will be able to sign its own trade deals and to alter its tariff regime.
The Government proposes two possible models for future UK-EU customs arrangements. One is maximum co-operation and customs facilitation, what the Government calls a “highly streamlined customs arrangement”. This would entail the UK and the EU removing as much bureaucracy as possible, and using technology to minimise barriers to trade. There are already various precedents for this model. The Canada-EU trade agreement, CETA, includes extensive customs co-operation as does the proposed Japan-EU trade deal.
The alternative proposal is a new customs partnership with the EU. This would be a much more innovative approach, which the Government acknowledges is both “unprecedented” and “untested”. Under this model the UK would not be in a Customs Union with the EU but it would impose the EU’s tariffs – the Government calls this “mirroring”. Because the UK “mirrors” the EU’s duties, the hope is that this “would remove the need for the UK and the EU to introduce customs processes”. Crucially, the Government hopes to be able to differentiate its own tariffs from those of the EU, and to refund any difference between the EU’s tariffs and the UK’s, but only for goods which remain in the UK.
Open Europe considered this idea of mirrored tariffs – we called it a parallel tariffs model – in our report Nothing to Declare, back in the spring. The idea has been kicking around Whitehall for a while, variously attributed to Treasury officials or to Sir Jeremy Heywood himself. But whoever thought of it, Philip Hammond seems to have become quite attached to it. I suspect that its inclusion in this position paper was a Treasury request. It’s time to let it go. It’s a classic example of a policy that’s too clever by half. It would be fiendishly difficult to negotiate with the EU, potentially legally challengeable, and nightmarish to administrate, burdening both business and Government, as well as enforcement agencies with a huge potential for abuse. There are obvious domestic political difficulties (which the paper skates over) because presumably the UK would be required to continue to send to Brussels a large proportion of the duties our customs collect.
The proposal of mirroring tariffs results from the noble concern that we should do as much as possible to protect our current trading arrangements with the EU. But protecting the status quo needs to be balanced against the cost of limiting our ability to trade beyond the EU, and creating significant new burdens. The best arrangement is for the UK and EU to agree a deep trading partnership with eliminates tariffs and provides for minimal customs arrangements with almost invisible borders – Guy Verhofstadt is wrong to call this a “fantasy”. There are plenty of countries with deep and complex trading arrangements without a formal customs union, and the UK and EU can look to these.
Within Europe, Norway and Switzerland are outside the Customs Union but trade freely with the EU. Canada and the USA use technology to minimise their customs bureaucracy, while Australia and New Zealand have eliminated bureaucracy for low-value traded goods. The EU is agreeing precisely these sort of arrangements with distant trading partners such as Canada and Japan, so the UK should aim for an even tighter arrangement. There are of course particular complexities associated with the Irish/Northern Irish border, which is covered by a separate Government paper published yesterday, but those are not insurmountable.
Despite its limitations, it’s welcome that the Government has produced this paper, the first in a series of position papers expected this month. It’s been six months since the Prime Minister’s Lancaster House speech and more detail was long overdue. The simple fact of agreeing these papers within Government is important in that they force decisions to be taken which had previously been delayed and deferred. Even if the papers suggest multiple options they move the debate forward and provide clarity. Outlining proposed options allows critics and commentators, to raise objections and the Government to respond. There’s also the politics of the negotiation to consider – while it can make sense to avoid revealing one’s hand too soon, there’s also a lot to be gained from writing a first draft. The onus is now on the Commission to respond, with the framework for the debate here set by the UK.