Thursday, 7 June 2018

The Brexit myth of no-strings frictionless trade

Chris Giles in The Financial Times

Take a wooden pallet and stick two sets of mundane goods on to it — Chinese plastic cutlery and British cuddly toys. As it trucks towards Dover, ask yourself the following question: how will this consignment enter the EU after Brexit? 

The answer is more complicated than you think, but serves as a simplified guide to the costs and benefits of different future trading models. British MPs, preparing to debate these matters next week, might want to take note. 

Today, there are no checks. When a good is in free circulation for sale in the UK, that also applies in every other EU country. Under an antagonistic “no deal” Brexit, the consignment probably would not make it to France, such would be the chaos at ports. The question is what deals can be struck, between these two extremes, to ease the flow. 

Both the EU and UK want to strike a free-trade agreement. This would eliminate the 4.7 per cent tariff on stuffed toys, but there would still be customs declarations to fill in and many other checks in addition to a 6.5 per cent tariff on the Chinese kitchenware. A free-trade agreement is far from friction free. And for Britain to secure this deal, the EU has insisted it must accept “level playing field” conditions, preventing the UK from undercutting EU standards in competition, state aid and many other regulatory areas. 

So, I am sorry to tell the Tory Brexiters: the promised bonfire of regulations will not ignite under a “free trade” deal. (And sorry, too, Labour Brexiters, but your nirvana of state-subsidised industries will also not fly.) 

How about getting rid of more friction by joining a customs union with the EU? This would avoid the complicated burden for business of proving the cuddly toy was indeed of British origin and the tariffs on the cutlery. But it would not do much to lower other frictions at the border. For the lower business burden, Britain would give up its right to an independent trade policy in goods with countries outside the EU. 

A greater border simplification would come from a legal commitment to align UK regulations with the EU for all industrial goods. It would eliminate the risk that goods would be stopped at the border with demands to see whether the requisite approvals conform with EU regulations. The downside is Britain would become a rule-taker. 

Our consignment is more tricky than simple industrial goods, however. Because people lick plastic cutlery and there is a history of contaminants in Chinese imports, special rules apply to the vast majority which come into the EU via the UK. To be allowed to enter Calais, we would have to pre-notify the French authorities at least two days in advance, declare that our cutlery met EU standards and at least one in 10 consignments would have to wait days for a lab test to verify its safety. 

That is not the end of the new border checks. If the goods had been loaded on any old pallet, we would also face the likelihood they could not enter the EU because wood packaging was not compliant with ISPM15 international standards which ensure it is pest free. 

The only way to avoid such onerous checks on plant, food and animal hygiene would be to become a rule-taker in these special regulations — as Switzerland and Norway have done. 

But our pallet would still not be allowed to cross before value added tax was paid on the consignment. Officials would do a paper or physical check that the contents in the truck matched the customs declaration. To avoid this burden, Britain would have to join the EU VAT area and follow the relevant European tax law with EU judicial oversight. 

Of course, our truck and driver still would be stuck at the port unless Britain also signed a transport services agreement, allowing lorries and drivers to operate on the continent. Brussels has already said such an agreement would require “a strong level playing field” on regulatory harmonisation, with effective enforcement mechanisms. 

This is the choice. Technology can help lower border barriers, but even for a relatively simple consignment, frictionless trade is available only with the full list of agreements alongside the lost sovereignty outlined above. Even then, the combination would almost certainly fall foul of the European Commission’s “no cherry picking” clause, requiring Britain also to concede to freedom of movement and payments to the EU budget. 

Once politicians accept these trade-offs we can start a serious discussion of what Brexit means and whether we still want it. Rather than prevaricate, it is time to admit to the public that there is no magic solution which maintains frictionless trade with the EU and allows the freedom to be “Global Britain”.

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