Dr Graham Gudgin is Policy Exchange’s Chief Economic Adviser. He is a visiting Professor at the University of Ulster and Chairman of the Advisory Board of the Ulster University Economic Policy Centre.
Remaining within the Customs Union would give the UK tariff free access to the EU without any border controls. Unlike a free trade area, in the Customs Union the UK would be bound by the common external tariff, and would maintain border controls for goods coming from non-EU countries. The UK would also need to align its commercial and labour regulations with the EU. The common external tariff means that the UK would have no power to arrange its own trade agreements with non-EU countries such as the USA or China.
Moreover, there is a potential asymmetry in trade with third countries with which the EU has existing FTAs (including Canada and South Korea). The UK might have no tariff-free access to these countries, but those countries would have automatic tariff-free access to UK markets as part of the EU Customs Union. Turkey is one example of a country outside the Single Market which is within the customs union. Turkey’s membership is partial, applying to industrial goods, but not agricultural goods or services.
Many companies advocate remaining within the Customs Union in order to have frictionless access across the EU boundary. Freedom from tariffs is not the main issue for most sectors other than food production, since tariffs for many industrial goods are under five per cent. More important is the inconvenience of border controls and administration, especially for sectors like cars with complex just-in-time production chains. Major importers like John Mills Ltd on the other hand take the view that the difficulties are minor.
The Government’s proposals, Ireland’s proposals, and Parliament
Pressure is also increasing in Parliament where some take the view that a vote to remain within the Customs Union is now possible. To some extent, MPs are reflecting the lobbying of industrial firms, but the Irish border is a frequently cited additional factor. Here, the Irish Government has demanded that there be essentially no border, while the UK Government has committed itself to avoiding a so-called hard border. The UK proposals in a position paper last August involved electronic customs procedures with trusted trader arrangements for large firms and customs exemptions for small traders.
The UK proposals were rejected by the Irish government and the EU, and a fudged compromise was agreed in paragraph 49 of the Joint Progress Report of last December. It is unclear whether the reference to regulatory alignment in this report refers only to Northern Ireland as some believe, or to the UK as a whole. The Progress Report also states that nothing is agreed until everything is agreed, but it seems that the EU intend to nail down this commitment in a legally binging form before proceeding to talks about trade. This would treat the December agreement as something of a stop-gap which is now being set aside in favour of stronger conditions for moving onto talks on trade. This indicates the seriousness with which the border issue is being taken by the Irish, fully backed at this stage by the EU27.
The strategy of the Irish Government and the EU27 appears to be effectively to force the UK into the Customs Union with UK-wide regulatory alignment, despite denials of this by Simon Coveney, the Irish Government’s Foreign Minister. Membership of the Customs Union would remove much of the need for border controls in Ireland, but at a cost of limitations on the freedom of action of the UK over trade and regulations. It is unclear whether there would still be a problem of imports from non-EU countries into the EU via the UK.
All of this makes it unlikely that a border in Ireland can be completely ignored, although the evidence is that the undertakings in the Joint Progress report are not constraining the options being considered by the Brexit Cabinet Committee. Of course, a border already exists for excise duties, currency and illegal immigration. All of this is currently handled without physical border posts, although vehicle number-plate recognition cameras are already in place on the major crossing points. There is a significant current level of smuggling involving a need for surveillance and intervention by customs officials and police on both sides of the border. None of this has been a political issue, and presumably a continuation of this level of border activity would also not provoke a political crisis.
The British position is that almost any trade agreement with the EU could be accommodated without border posts or border infrastructure other than cameras. Even the cameras could in principle be located away from the border itself. While existing cameras are not attacked, it is possible that the heightened sensitivities over Brexit could lead to some damage to cameras even if there was no other physical infrastructure to attack. Alternatives to cameras include drones, which are currently used on the US-Canada border. There may also be scope to monitor goods trade via GPS technology located with the HGVs carrying goods across the border.
The EU policy report
Together with the (uncontroversial) Common Travel Area, these arrangements could mean that the UK was able to agree a Canada-plus free trade agreement, and still fulfil its promise of avoiding a hard border. The feasibility of the British proposals is supported by a recent report from the EU’s Policy Department for Citizens Rights and Constitutional Affairs within the Directorate General for Internal Policies. The report suggests that electronic border controls are feasible, and recommends a set of best practice arrangements based on existing arrangements on the US-Canada and Norway-Sweden borders and between Australia and New Zealand. The report:
‘identifies international standards and best practices and provide insights into creating a smooth border experience. The technical solution provided is based on innovative approaches with a focus on cooperation, best practices and technology that is independent of any political agreements on the UKs exit from the EU and offers a template for future UK-EU border relationships’.
‘By introducing customs and government border procedures in an innovative and constructive way, there are also benefits for governments and society, including from a safety and security perspective. Instead of looking at Brexit as primarily as a task of minimizing the damage to trade and the movement of people, it could be seen as an opportunity to re-design the border concept and to operationally test a new model on the NI-Ireland border that also conceptually – with modifications – could be used also on the other borders to between EU and UK and potentially as a best practice for other EU external borders.’
It is to be assumed that a free trade arrangement of some description will be agreed, since this is very much in the interests of both the UK and the EU. This is particularly in the interests of the Republic, whose agricultural exports depend heavily on free access into the UK. High EU tariffs on meat and dairy products would, if reciprocated by the UK, make Irish food exports uncompetitive in UK markets, especially if the Euro remains at its post-referendum high relative to sterling.
Northern Ireland would survive a ‘no-deal on trade’ scenario, since any loss in food exports to Ireland and the rest of the EU could be offset by higher sales into Great Britain replacing the newly uncompetitive exports from the Republic. Some disruption to cross-border production chains, especially in dairying, would occur in Northern Ireland but would soon be overcome.
The problem of the Irish border is thus much less serious that many people have claimed. Attempts to force the UK into the Customs Union are unnecessary to meet its aims. A calm and co-operative approach can deliver an outcome satisfactory to all. The task now is to move swiftly to a free trade agreement, and then to implement electronic and other border arrangements to avoid any physical controls at the border.
This article is a cross-post from Policy Exchange’s blog.