Bernard Jenkin is MP for Harwich and North Essex, Chair of a Select Committee, and Chair of the Steering Committee of the European Research Group of MPs.
Here are five tests which must apply to any customs arrangement which the Government negotiates with the EU:
- Will the UK have regulatory autonomy so that it can fully execute an independent trade policy?
- Will the UK be able to sign meaningful free trade agreements which are compliant with WTO rules?
- Will the jurisdiction of the European Court of Justice over the UK be brought to an end?
- Will substantial UK contributions to the EU budget be brought to an end?
- Will the UK be able to improve its own regulatory environment and lower tariffs in any area of its choosing?
If the Government adopts the so-called ‘new customs partnership’ (NCP), I am afraid the answer to each of these questions is “No”.
The Government says it is clear that the UK is not going to be in any kind of customs union. There is absolutely no reason why we should be once we finally leave. Most countries are not in the EU or any customs union, and they are not disadvantaged. Some of them, large and small, export a far higher proportion of their GDP across conventional customs frontiers than we do, despite our access to the EU via the Customs Union. Many export to the EU, like Japan and the United States, because the EU agrees product recognition and standards with them. But they are not in a customs union.
In the referendum, the British people chose to “take back control”. That means leaving the Customs Union and taking back control over our domestic regulation and product standards. This is not some arbitrary red line invented by a few MPs. Being outside any customs union is intrinsic to “taking back control” over our laws, borders, money, and trading relations with other countries.
We can have a frictionless border between Northern Ireland and the Republic of Ireland, via the ‘maximum facilitation’ proposal the Government is keeping on the table, if the EU and the Irish Republic stop being destructive. This proposal is not some novel invention, like the NCP. It reflects what other national customs authorities around the world are widely seeking to achieve, and is the direction of travel of the WTO itself. It is therefore achievable in the context of Brexit.
Indeed, it used to be the policy of the previous Irish Government under Enda Kenny. In May last year, Niall Cody, Chair of the Irish Revenue, told a Dáil Committee in Dublin:
“I am practically 100 per cent certain we will not be providing new trade facilitation bays. We are not looking at this type of traditional customs point.”
“…the scepticism around IT solutions: you always have to be very careful of who you are listening to and what’s their various different vested interests.”
“Now the way the customs works, it provides for simplified procedures: Authorised Economic Operators in which the checking is done on goods at the destination point. It’s not brought somewhere to have the checks carried out.”
“We have look at the analysis of the figures. A lot of it is construction materials and of course there’s the agri-food; but you’re not looking at something that’s going to distort the EU market.”
Jon Thompson, the Chief Executive of HMRC, said the same kind of thing to Parliament here in London. So Theresa May is being perfectly reasonable to insist that there is no need for new infrastructure at the border. And if we stand firm, the EU and the Irish government will have to be sensible about this. Their insistence that they will have to put new infrastructure at the Northern Ireland border is about politics and the negotiation, not about their going ahead with their threats.
However, the Government is still considering an NCP with the EU. NCP creates wholly novel administrative and regulatory challenges for business and government for which there are no precedents. It would prevent the UK from adopting an effective independent trade policy. It fails to remove the need for customs checks, unless the UK also agrees to regulatory alignment, over which the EU would insist that the European Court would have the final say, and so it fails to achieve regulatory autonomy. It would impose restrictions on the UK which are fundamentally similar to the current Customs Union arrangement between the EU and UK, but without all of its benefits. Other of our potential trade partners are likely to react against it and it will prevent the UK from concluding WTO compliant trade deals, or from improving our own regulatory environment.
Keeping it on the table is causing unnecessary delay, preventing both the Government and business from implementing plans for Brexit, so when it finally proves unworkable and unacceptable to the EU the decision to adopt NCP will effectively be a decision to stay in a customs union with the EU.
The NCP would, in theory, permit different tariffs for goods depending upon whether their final destination is the UK domestic market or the EU. This would be extremely complicated and difficult to operate, and its costs are as yet unquantifiable. NCP would also require the EU and the 27 Member States to agree to impose reciprocal arrangements on their businesses and customs authorities, mutatis mutandis. Goods imported by the EU but destined for the UK would have to be treated as a UK import and be eligible for the UK tariff rate, not treated as an EU import. In order for rules of origin and customs declarations to be waived, the EU would demand control over the effectiveness and operation of the rebate mechanism. It is hard to envisage an agreement that would both command mutual confidence and be workable.
The administrative burden of this system would mean low real uptake of UK tariff rates. Exporters to the UK would need their customers in the UK to pay EU tariffs, then try to claim them back. Our trade partners would be deterred from agreeing mutual tariff reductions by their having to pay EU tariff rates up-front. The UK would have less negotiating leverage over a potential trade partner’s trade barriers and behind-the-border regulatory barriers. EU quotas make the problem yet more complex. Only large corporates could afford to carry the significant administrative burdens of this system. SMEs would not bother.
Crucially, this option also frustrates UK regulatory independence. Border controls do not only deal with tariffs, but also with non-tariff controls such as health and safety, product standards and other regulatory requirements. Most UK importers would be unable to show that their non-EU imports are UK- not EU-destined. Thus the EU would be likely to require importers and manufacturers to maintain their product standards in compliance with EU regulation, and the EU would insist on European Court oversight.
The EU would also want to see measures to prevent the potential for leakage of UK imports, which are designated for the UK, into the EU across a non-customs frontier. The main purpose of the NCP is the customs-free circulation of goods between the UK and EU-27. This could not be achieved without the EU demanding regulatory alignment with the EU. So NCP would end up substantially the same as a full customs union, with regulatory obligations reflecting most of the Single Market acquis.
Equally offensive, the UK would continue to be a substantial tax collector for the EU, just as we are now. The UK is a major net contributor to the EU because we import a large proportion of our GDP, and import tariffs are deemed to be the EU’s “own resources”. Under NCP, the UK would continue to make a substantial net contribution to the EU budget, because goods imported at the EU tariff rate would be payable to the EU as an EU, not a UK, import.
Where importers did not identify imports as UK consumed, the tariffs collected would belong to the EU. The EU would no doubt require oversight of this system, because, as now, they do not collect any tariffs payable between the EU and the UK for imports coming from outside the EU. The EU would demand compliance with rulings of the European Court, which would ultimately determine how much the UK had to pay. It would be hard to pretend this was much different from the present EU “own resources” claim on UK customs revenues as now. This would continue an unjustified UK net contribution to the EU budget. Any form of customs union means collecting tariff revenues into a common pool. Once UK firms begin applying EU tariffs (because of the alternative burdens), the UK, as now, would be in disproportionately disadvantaged as now, because the UK trades a higher percentage of its GDP than any other major EU Member State.
But the regulatory question is perhaps the most fundamental. Regulatory alignment not only means the UK does not “take back control”, but would mean other countries cannot negotiate advanced trade deals with the UK, which require the UK being able to diverge its regulation away from the EU’s. The result will be that negotiations would be pretty fruitless with the UK’s main target countries.
The need for regulatory alignment of the NCP voids the agreement that the Cabinet has already struck at Chequers that the UK would be able to diverge its regulatory system from the EU system. It is difficult to understand the purpose of gaining Cabinet unity over a specific trade negotiating objective if the Government then overrides that Cabinet decision.
The UK’s main target countries, including the US, have been clear about this. Already, Wilbur Ross, the US Commerce Secretary, has warned that without the UK being able to diverge from EU regulations, it will be unable to sign an FTA with the US. Steven Ciobo, the Australian trade minister, has said that he would like to see an Australia-UK FTA by December 2020, and the trade ministers of many TPP-11 countries have noted their desire to see the UK accede to the TPP, but, given that they regard an NCP and customs union as analogous, Julie Bishop, the Australian Foreign Minister, has made it clear that if the UK has a customs union with the EU, Australia could not negotiate a trade agreement with the UK.