The December 2017 interim withdrawal agreement (the draft Article 50 divorce treaty) requires Northern Ireland (NI) – specifically – to stay in regulatory and customs alignment with the EU. This to avoid a hard border between the two Irelands, which is an accepted red line for both the EU and the UK.
It would, however, create a customs border in the Irish Sea, unless the UK continued to remain in the Customs Union (CU) and Single Market (SM) past the transitional period posited to end in December 2020. Both end-states have been consistently rejected by Mrs May. The horns of her dilemma are thus. To escape them, beginning with her Mansion House speech, she initiated a process involving the loosening of some-stated red lines, even if almost imperceptibly, such as conceding that continuing to participate in EU agencies will involve some measure of at least indirect European Court of Justice (ECJ) jurisdiction.
Her slogan that ‘Brexit means Brexit’ was displaced by a more nuanced approach that, in effect, simply recognized the inevitable: that any agreement would require from both sides some measure of pragmatism and compromise, not least from the UK, which would suffer the most from a disorderly ‘no deal’ exit.
At the same time, with the resignations of Damien Green and Amber Rudd, her erstwhile deputy and home secretary, respectively, she lost her ‘soft’ Brexit majority within the Cabinet Brexit sub-committee. As time ran out for the UK to present a coherent package of proposals to Brussels that could stand even the remotest chance of being progressed to agreement with the EU no later than December, she finally took the plunge and convened a Cabinet awayday at Chequers on the last day of June and provided it with a firm brief to agree and produce such a package.
That it duly did without too much apparent discord. Initial impressions, however, were deceptive, insofar that within three days, the prime minister’s Brexit and Foreign Secretary resigned. It soon became apparent that Mrs May will struggle to get any subsequent agreement based on the package – as formalized in a Brexit White Paper (the white paper) published nearly a month later in mid-July – through parliament, as hard-Brexiteer opposition on her backbenches to it hardened.
The purpose of this post is to consider the details of her package as set out in the white paper in detail sufficient enough to allow any assessment to be made of its likely fate, with a particular focus on the Facilitated Customs Agreement (FCA).
The white paper outlines a future ‘economic partnership’ with the EU, including:
• A common rulebook for goods including agri-food limited to (the relevant rules) those necessary to provide for frictionless trade at the border (avoiding customs and other inspections);
• On-going UK harmonisation with such necessary and relevant EU rules, when approved by Parliament or by the devolved legislatures;
• Continuing participation by the UK in EU agencies that provide authorisations for goods in highly regulated sectors – namely, the European Chemicals Agency, the European Aviation Safety Agency, and the European Medicines Agency – with the UK accepting their rules and contributing to their costs;
• The phased introduction of a new Facilitated Customs Arrangement (FCA) that would remove the need for customs checks and controls for goods traded between the UK and the EU as if they were within a combined and new customs territory, but where the UK could set its own tariffs for trade with the rest of the world (ROW);
• The negotiation of sector-specific arrangements for services and digital, providing regulatory freedom outside EU rules for the UK’s services-based economy;
• UK to be no longer bound to the Common Commercial Policy (CCP), the Common Agricultural Policy (CAP), and the Common Fisheries Policy;
• Freedom of movement (FOM) to end, to be replaced by a negotiated migration policy covering UK and EU nationals.
Trade in services, therefore, which accounts for over 80% of UK output, although less than half of its current exports, will no longer be subject to EU single market regulation. This, the government accepts, will involve ‘some’ loss of market access to the EU for the largest segment of the economy: it follows that net economic loss can only be avoided if that is offset by an increase in service exports to the ROW, noting that such service exports are not really constrained by EU membership at present.
The UK Parliament could post-exit refuse to implement new regulatory standards and requirements decided in Brussels pertaining to goods, but with the knowledge that adverse economic consequences could follow. That would make any such freedom, however, very much an unappealing Hobson’s choice: a yes, of course you are free to leave, but beware that you will need to dodge the bullets in the process type of choice.
More fundamentally, the separate treatment of goods and services that lies at the heart of the package, presupposes that the EU will concede the divisibility of its cherished four overarching freedoms of capital, goods, services, and people in an arrangement with a third-party (the UK) that has chosen to leave its club.
Leaving aside these first-order obstacles or issues, the actual design – as sketched out in the white paper – of the FCA appears to require a leap of faith on the part of the EU for it to be accepted, at least without substantive modification during the negotiation phase. Such a process of modification will require May to further blur her red-lines, including a continuing role for EJC jurisdictional oversight over the operation and interpretation of the agreed regulatory alignment, probably to the point of her accepting that it must continue in a binding form – regulated by processes that the EU can control – until alternative permanent arrangements can be agreed and put in force, perhaps many years down the road.
A dispassionate analysis indicates that the FCA cannot really run; yet the alternative prospect of ‘no deal’, however, could serve to concentrate minds on both sides of the Channel for sufficient fudge to be shovelled on it for a vague version of a withdrawal agreement and accompanying political declaration to be presented to parliament close to the wire.
Will the facilitated customs arrangement (FCA) fold of its own contradictions?
In June a Government technical note on a temporary customs arrangement, set out most of the government’s stall as to what the FCA would entail. On the insistence of David Davies, the then-Brexit secretary, this temporary arrangement was strictly time-limited to end no later than December 2021, after coming into force when the implementation (transition) period in December 2020, whereas the white paper, published in July after the Chequers agreement and Davis’s resignation, wisely avoided such prescriptive time-limiting.
Indeed, to suppose that a comprehensive Free Trade Agreement (FTA) or other ‘permanent customs arrangement’ replacement to the ‘temporary’ FCA could be negotiated and put in place by 2021 was incredible; based on the experience of the less ambitious Canadian CETA agreement with the EU, such a replacement could even exceed six years to finalise, although it can be expected that efforts will be made to shorten that gestation period. The white paper is also indeterminate on the relationship of the FCA to any future replacement arrangements. This, again, is sensible; these will only begin to take shape after the UK formally exits the EU.
The FCA is offered rather as a temporary arrangement that would prevent the need for a discriminatory and fragmentary NI backstop to come into play, once the transition period ends in 2021. The alternative of a border in the Irish Sea is, of course, unacceptable to both the UK government and parliament. It follows that the FCA cannot be strictly time-limited while it remains an interim arrangement put into place to avoid a hard NI border: it will need to remain in place until alternative replacements are agreed and put in place, whenever they are. The FCA would hardly be worth the candle, in any case, for either party, if it was to be the temporary short-lived arrangement that it sometimes touted to be.
In terms of the mechanics of how it will work, the FCA will replicate existing EU customs union (CU) processes to allow the UK to collect the full the correct EU common tariff (CET) for imported goods deemed destined for EU27 countries, before remitting it back to Brussels. Goods imported from non-EU (ROW) countries – but deemed for domestic consumption – would alternatively attract a UK-set dedicated domestic tariff (presumably lower than the CET tariff, in most cases).
The white paper expresses the hope that this dual-tariff combination would facilitate the greatest possible trade with the EU and the ROW. The flow of goods between the UK and EU, particularly those involving deep and inter-connected supply chains (engine made in Germany, gearbox in Italy, car in UK etc) would remain unimpeded. The UK, at the same time, would be freed to strike new independent trade deals.
It also supposes that the correct EU or UK tariff will be applied and paid ‘up-front’ ‘up to 96%’ of the time, reducing the need for non-EU imports to be either tracked within the UK and/or the tariff to be adjusted retrospectively, to just 4% of occasions.
Trade experts have already cautioned that this appears an optimistic hope that is not evidence-based. A forensic analysis by the UK Trade Observatory, for example, Decoding the Facilitated Customs Arrangement , points out the stated or implicit assumptions that the white paper appears to rely upon to derive that figure, are heroic. Most notably, ‘trusted traders’ or Authorised Economic Operators (AEOs), as they will be known, will be responsible for the importation of 100% finished goods and of 81% of the remaining total of intermediate goods (those used as inputs into finished goods) imported from non-EU countries that, as such, will be subject to either the CET or the UK tariff when the transition periods ends in December 2020.
The EU CET tariff on finished or consumption goods, such as on foodstuffs, can be expected to be appreciably higher relative to what the UK will freshly set for imports from non-EU countries destined for domestic consumption once the FCA comes into operation as envisaged in January 2021. A strong incentive would therefore exist where the UK duty was levied – especially where the imported goods in question could easily be broken down and distributed in small loads, for them to be deemed as destined for domestic consumption or use and then split up into smaller lots, once they enter into the UK jurisdiction area. They could then be trans-shipped to the EU, whether across the NI border or other UK borders with the EU, with the dishonest trader or other agent profiting form the difference between the domestic UK and EU tariff.
Some batches of intermediate goods could be also split up to evade correct payment of duty, for the same reason. In short, the existence of the dual-tariff will therefore tend to encourage agents of ROW countries to import goods and re-export to them to the EU via the UK to secure the benefit of a lower domestic tariff: the bigger the difference, the bigger the potential trading arbitrage profit, and the bigger the incentive to cheat.
The white paper’s implicit assumption that approved or trusted traders will never levy the wrong duty, whether that is due to commission, to negligence, to the dishonesty of other agents, or to simple error, preventing any consequent loss of revenue to the EU – or related loss of trading advantage to EU27 members, is, to say the least, implausible, therefore. The EU chief negotiator, Michel Barnier, in his initial public response to the white paper cites that precise real fear as shedding doubt on the workability and acceptability of the FCA. That it would allow the UK, as a non-member third-party, to collect tariffs on behalf of EU outside its legal structures and purview, and that it would involve added bureaucracy and thus additional costs for the EU to monitor, was likewise cited.
Barnier also indicated that although agri-food and pesticide inspections will not need to be undertaken at the border (material to the NI border context, where border food and animal-based traffic is significant), they will still need to be subject to EU rules and regulation. This would appear to rule out any real progress on a replacement UK-US trade deal involving a departure from EU food standards. The scope for significant new trade deals with the ROW seems to be limited largely to services. And even these are likely to be limited in scope for a variety of reasons, including the unwillingness of potential partners, such as India, to grant greater service access to the UK in the absence of UK concessions, such as visa liberalisation for their nationals.
But, in any case, it remains unclear, however, why the EU should give the UK – a state that has chosen to leave its ‘club’ and become a non-member third-party – special customs arrangements that add complexity and associated scope for error and confusion, in a way that is contrary to the efficient operation of both its CET and CCP, while allowing that same country to continue to benefit from existing, and to retain an input into new, FTA’s agreed between the EU and the ROW.
With respect to the harmonization of future UK and EU rules to the extent that such harmonisation is necessary for continuing ‘frictionless’ trade in goods between the UK and EU to proceed consistent with the NI backstop, the EU can be expected, as a minimum, to insist on interpretation and enforcement mechanisms that give the final say to its own institutions, most particularly the ECJ, rather than rely on the proposed institutional joint-committee structure that the white paper proposes; to do otherwise would risk the UK diverging from EU rules to the detriment of its members’ interest,without adequate or timely recourse.
Besides, the mood-music coming from, not only from Barnier and the European Commission, but also from key political leaders, continues to march to the tune that the four freedoms of the single market – goods, services, capital, and people – are both inviolable and indivisible.
A trite and an obvious observation, perhaps, but something must give if deadlock and a disorderly UK exit is to be avoided. Exactly what will depend upon whether the respective EU and the Conservative government ‘red-lines’ remain inviolable in strict practice and, if not, the extent to which both are willing to fudge them – or allow them to be flexibly applied – to secure the wider end of putting a negotiated deal together that could be offered to the UK parliament with at least some prospect of success.