Lord Lilley is a former Secretary of State for Trade & Industy and for Social Security.
The highly unpopular provisions in the Prime Minister’s draft Withdrawal Agreement that could keep the UK indefinitely in the EU Customs Union are driven not just by a pointless attempt to avoid a hard border between the UK and EU in Ireland, but by fears that they will impose costs, cause delays, disrupt supply chains and undermine economic growth.
Those fears are unnecessary, for many of the problems ascribed to leaving the EU’s Customs Union are imaginary and most of the rest are exaggerated.
References to “customs paperwork” having to be “checked at the border” after Brexit conjure up visions of lorry drivers filling in forms which are then laboriously checked against their loads, causing delays and queues. In fact, virtually all customs declarations are made electronically ahead of arrival at a port; most consignments are cleared within seconds of arrival; a tiny percentage are physically checked as a result of risk assessment by HMRC computers or intelligence information; and such checks may be carried out away from the border at an importer’s premises or warehouses.
Most checks relate to dutiable goods, drugs or illegal immigrants and are made on the basis of risk or intelligence information. HMRC do not expect any of these risks to increase or new risks to emerge as a result of Brexit so they will not require more checks than at present. The same is true for checks of food, plants and animals. In any case they will ‘prioritise flow over compliance’ to prevent congestion.
It is often assumed that there are no border procedures or checks on trade with the EU at present. Yet, in fact, companies have to report their transactions with EU countries separately in their VAT returns; pay duty on tobacco and alcohol (which yield far more revenue than tariffs would in the event of ‘no deal’); they may be searched for illegal drugs or immigrants; drivers must show their passports; and companies of any size must submit details of their intra-EU trade to Intrastat. All but the latter (which will be replaced by customs declarations) will continue post-Brexit and constitute the major element of border compliance.
The claim that WTO rules require checks to be made at the border is also incorrect. Checks of customs declarations are carried out electronically and physical checks often made at importer’s or exporter’s premises. Even the Union Customs code, which requires agri-food checks at border inspection posts ‘in the vicinity of the border’ allows them to be as far as 40 kilometres inland. This is particularly important for avoiding infrastructure and checks at the Irish border.
Just-in-Time supply chains do not operate exclusively within the EU. Indeed, a fifth of components imported by UK motor manufacturers come from outside the EU, and their timely arrival is just as essential to the reliable operation of assembly lines. They are subject to customs procedures that do not cause the problems supposed to be likely when applied to future imports from the EU.
Surveys of research literature show that free trade areas – e.g. NAFTA – are more ‘trade creating’ than the EU customs union. Businesses in Switzerland, Norway and other EEA countries are not complaining about completing customs declarations, let alone calling to convert their free trade arrangements into a customs union. This may be because they welcome the free trade agreements their countries have been able to negotiate which would not be possible within a customs union. The Swiss have FTAs with countries whose combined GDP is three times that of the FTAs negotiated by the EU.
Although Switzerland and Norway have fewer checks on product compliance because they comply with EU single market rules the customs declarations required at their borders with the EU are similar to those that will be required at the UK border and they too have to comply with rules of origin.
Of course, we should endeavour to minimise the cost of compliance with customs procedures. But as the Chair of the European Logistics and Customs Association has said: “All the ingredients to ensure a smooth exit process of the UK from the EU and which allow almost frictionless tradeafter the exit, are already available [in the Union Customs Code].” So we do not need to negotiate simplified customs procedures.
The HMRC estimate of the cost of completing customs declarations is an order of magnitude larger than actual costs incurred by companies and reported by the Swiss authorities. The HMRC figure is based on the charges by customs agents for large consignments of complex products. It ignores the fact that over two-thirds of businesses complete their own declarations because it is cheaper and that for the small repeat consignments that characterise UK/EU trade the cost of replicating declarations is negligible compared with the cost of the initial declaration.
Official estimates of the cost of complying with rules of origin are even less defensible. They are based on outdated and irrelevant studies of trade between underdeveloped countries and the USA or the EU. A more recent authoritative study by the WTO shows that, except for infrequent consignments, the costs of complying with rules of origin are ‘negligible’ – they do not even wipe out a 1% tariff preference. Moreover, the new REX system – which the EU has agreed to extend to the UK post Brexit – further simplifies the procedure for declaring origin.
A particular concern has been fear that lengthy delays at ports and consequent congestion on motorways will disrupt plants dependent on Just-in-Time supply chains (JIT). As explained, HMRC do not expect more checks on imports from the EU post-Brexit and will prioritise flow over compliance. The fear is, however, that delays – either deliberate or through lack of preparation – on vehicles arriving at Calais from the UK will cause a back-up of vehicles extending back over the channel and up the UK motorway system, interfering even with supplies coming in the opposite direction. Deliberate delays would be a breach of three treaty commitments (the original WTO treaty, the Trade Facilitation Agreement (FCA) and the Lisbon Treaty requiring the EU to behave in a neighbourly fashion towards adjacent states). Of course, legal redress would take time but ports in Belgium and Holland are eager to take trade away from Calais.
Moreover, queues resulting from problems at Calais are not unknown. Operation Stack has had to operate on 211 days since 1998 and did so for 23 almost continuous days in 2015 with delays of 35 hours. Yet JIT plants appear to have managed since none were reported halting production.
It is natural that businesses contemplate the worst possible consequences in the event of the UK leaving without an agreement – due to lack of preparation combined with hostile non-cooperation by the EU. Sadly, some commentators present these scenarios as if they represent what would be a permanent situation post-Brexit, when most such problems are not merely unlikely but, if they happen at all, essentially temporary.