The latest in an ongoing parade of possible “solutions” for the UK’s post-Brexit relationship with the EU came late last week from my former colleagues at the Institute of Directors. The proposal is for what the IoD calls ‘a bespoke, partial customs union with the EU’ – a so-called ‘customised Brexit’.
As ever, there’s a bit of confused and confusing language being flung around, so it’s important to be clear. While the report refers to ‘a continued customs union’ and ‘the continuation of a customs union’, which might give the (mistaken) impression that what is being talked about is simply staying in the current EU customs union, what they’re in fact proposing is a Turkey-style relationship: a new arrangement which would see the UK implement the EU’s Common External Tariff for ‘industrial and processed agricultural goods’, but not for other sectors of the economy.
The supposed rationale for this approach is that it would balance risks (new barriers to existing trade) and opportunities (the power to open up new trade). However, it would be an error to see the proposal as a genuine balance of those two concerns. In practice, it would lean very heavily to the former, sacrificing the vast bulk of new opportunities to trade with the world, in return for some chance of preserving current exports to the EU.
The IoD is keen to avoid the added cost for British companies of Rules of Origin on their manufactured goods and processed foods, a potential additional cost for exporters to the EU which would not be eliminated by a standard Free Trade Agreement.
The problem with trying to avoid that cost is that doing so fully requires the UK to submit its market to the Customs Union. That means implementing EU tariffs, including protectionism against many products from many parts of the world, implementing EU regulations, and surrendering the chance to negotiate our own Free Trade Agreements with countries outside the EU.
The report hopes to find a middle way with its proposal for only a ‘partial’ customs union. By applying it to industrial and processed agricultural goods, they hope to save the more valuable industries, for which Rules of Origin could be particularly costly, from added paperwork. Meanwhile, the author claims, it would still ‘allow the UK to pursue an independent trade policy’ by leaving other sectors out of the arrangement.
The key question is therefore this: if such an arrangement was to cover all manufacturing and processing industries, what would it leave out?
The answer is that it would leave us with services, which are not currently part of the EU’s Customs Union anyway, and raw agricultural produce. The report describes these as ‘large swathes of [the UK’s] wider external commercial policy’, but in practice it means cutting out the heart of any trade strategy.
As the IoD and others are normally keen to tell us, Free Trade Agreements historically have tended not to extend to services, but the services industry is particularly important for the UK economy. To persuade target markets to open up their trade to our services, the UK must have something to offer them in return, as in any negotiation.
For many countries that would mean liberalising our imports of – you guessed it – their manufactured goods. And yet the IoD’s partial customs union would strip us of the right to negotiate on the import of those very same items. Instead, UK negotiators would be left dangling the far more limited carrot of opening up imports of raw, unprocessed agricultural produce.
That means drastically reducing the leverage of any UK trade negotiation with the developed and fastest developing nations, the places where the bulk of global GDP currently is and where even the EU admits the bulk of global growth is expected to take place in the coming decades. It also means removing the very industries where that new growth is likely to happen from UK trade policy, and therefore from any future FTAs.
That would not leave the UK with ‘an independent trade policy’ or ‘large swathes’ of much at all – it leaves us asking the giants and boom-towns of the world economy to open up to UK services, in return for us buying their grain, veg and beans. The people we would be talking to will want to easily sell the things that are developing their economies beyond agriculture and lifting their people into wealth – their cars and computers and fridges – and the UK will have to say “that’s up to Brussels, we can’t negotiate on that”. Just like now.
Meanwhile, the UK, as an implementer of the EU’s Common External Tariff but not a member of the EU, would bear the competitive risks but not the exporting upsides of any new EU trade deals. That means that if the EU did eventually get round to finalising and implementing a trade deal with the United States, for example, then such a deal would open up the UK’s markets to American imports but there would be no reciprocal access for British exporters – and, of course, the EU would be negotiating entirely for the export interests of its Member States, not with regard to the tag-along UK. The same would go for the EU’s chosen barriers to external trade; we would be subject to the tariff choices of a body that is habitually protectionist at best, and which would be prioritising continental industries, not British ones. We would be implementing someone else’s trade policy, not designing and championing our own.
That imbalance of access, and lack of control, brings obvious risks. One trade policy specialist described it about 18 months ago as follows: “Technically speaking Turkey does do its own trade deals. It just gets screwed when [the] EU does its own.” Those are the words of Allie Renison, the author of this very same IoD report. The fact that even the proponent of this policy thinks such a relationship would mean we “get screwed” when the EU signs its own trade deals – and that our supposed ‘independent trade policy’ would only exist “technically speaking” is not a very promising sign.
The legal ramifications of a Turkey-style partial customs union go beyond losing a great deal of meaningful and useful control over our own trade policy, too. As part of the deal, Brussels requires Turkey to implement EU regulations and laws on the sectors that fall under the arrangement. There is no apparent reason why the EU would accept a looser deal in the case of the UK – so that would mean EU law continuing to hold sway in quite large sections of the economy.
Furthermore, if there is a dispute about whether such regulations are followed – or whether the Common External Tariff is being implemented correctly – which body would be in charge of judging compliance with these EU laws? Why, the European Court of Justice, of course. So another fundamental principle of restoring democratic control would be compromised.
In summary, that means the ‘compromise’ being proposed would sacrifice control of essential elements of UK trade policy, restrain the freedom to negotiate meaningful trade deals, require the UK to implement EU tariffs on many key imports, keep major industries entirely under the power of EU law, and retain the authority of the ECJ over various parts of our laws and national life.
The IoD suggests that the pill could be sweetened by the prospect of an accompanying ‘wide-ranging free trade agreement’ with the EU. Perhaps it could, but the Turkish example does not bode well for the negotiating position of a country that has placed itself in such an imbalanced relationship already.
While the report talks vaguely of ‘momentum on both sides’ for a Turkey-EU FTA, the fact is that this supposedly ‘interim’ transitional arrangement has been in place for 23 years, and talks stalled long ago. The EU has little desire or incentive to progress them, and, in the IoD’s words, for Turkey ‘moving away from a customs union arrangement with the EU is not an option because of the threat this would pose to its manufacturing industry’.
That sentence was included, I assume, to imply that such an arrangement is popular – but in fact it illustrates the danger of such a poor deal. Disempowered, subservient to EU law and trade policy, Turkey is trapped in an uncomfortable limbo which it dare not escape. If this deal has such an effect on the country for which it was designed, the prospects for a country in an entirely different situation which enters into it for temporary convenience are not great.
It’s not unreasonable to ask for what benefit such a bad deal is proposed. The prospect of Rules of Origin on EU exports is evidently worrying for many businesses, and understandably so. But that burden already applies to trade with much of the rest of the world, and that is precisely where our trade is growing. ‘Rules of origin are not insurmountable for business’, the report says – and yet rather than find ways to surmount them, it advocates bearing a huge opportunity cost in order to simply mitigate their impact on a portion of current trade.
It is peculiar to say the least to see the IoD – a body which has traditionally argued for global free trade, and for the reform and improvement of bad laws and inefficient bureaucracy – suggest that the UK should surrender most of the trading opportunities of Brexit rather than argue that the Rules of Origin system itself should be drastically improved. It’s the type of response one might more usually expect from the CBI, privileging the avoidance of disruption to current vested interests over the entire existence of potential future business.
This debate takes place against the backdrop of a general expectation in Westminster that a vote of some sort on future customs union is coming. The exact proposition could take various forms – requiring the UK (impossibly) to stay in the EU Customs Union at the most extreme, or something like the IoD’s proposal at the theoretically feasible if practically undesirable end of the scale.
Despite plenty of talk about Cabinet talks, there are still several different views within Government on the question. Some ministers believe an acceptable compromise could be reached, and even some Leave-supporting ministers might reconcile themselves to a fudge if they felt it unavoidable. Others, however, are deeply unhappy about the idea of selling out key opportunities and principles of Brexit. Friends of David Davis are of the view that he might well resign in such a circumstance, and he very well may not be alone.
There are three things the Government can do.
It can decide that it would lose a vote – that there isn’t a majority for being outside the or a customs union – and try to pick a model it prefers. As discussed above, that is very costly: politically, democratically, and in terms of the lost economic opportunities.
Or it can try to defeat an amendment on its own terms – helped, perhaps, if the pro-EU MPs tabling it overplay their hand and try to require the UK to stay in the full EU customs union. Effectively that would be a gamble that there isn’t a majority for the specific type of customs union being proposed.
Or, finally, the Prime Minister could make such a vote into a question of confidence. Vote for customs union, and the Government falls. That would be a judgement that while there might not be a majority for leaving customs union, there is emphatically not a majority for another general election. Would Tory rebels dare to inflict such a defeat?