Sunday, 20 August 2017

The Philosophy of Free Trade

It is fair to say that IEA's latest paper "A trade policy for a Brexited Britain" took a bit of a battering. Unfortunately the paper makes some fundamental errors in arguing that Britain will keep zero-tariff access to the EU market by default.  Under WTO MFN (Most Favoured Nation) rules, by default Britain will face the EU's common external tariff.

This is a shame, because the paper read wells as a philosophical case for classically liberal free trade. We are reminded that Adam Smith's great insight was that consumers should be prioritised over producers. Tariffs are recognised as a self-harming import tax that increases consumers prices and input prices for manufacturing. Free trade reduces market distortion and brings greater efficiency & productivity. Workers move up the value chain and increase their earnings. Trade should be correctly understood as a mutual benefit, not erroneously viewed as a zero-sum game - protecting producer interests is ultimately counter-productive.

Hence international trade negotiations should be based on promoting the consumer interest and confronting producer protectionist instincts, rather than attempting "tit-for-tat" exchange of concessions. While Multilateral Free Trade (MFT) is the ideal, Unilateral Free Trade (UFT) can still bring considerable benefits - Hong Kong and Singapore are cited as successful modern examples of UFT.

Critics will say that nowadays non-tariff barriers are the main concern, not tariffs. Actually, the IEA paper agrees, stating (on page 10): "But tariffs have come down over the years and non-tariff barriers are now much more important." I suspect what really irks the critics is the IEA identifying regulatory harmonisation as the source of many non-tariff barriers. Personally, I found myself in broad agreement with the points made.

Modern trade deals are attempts to harmonise all sorts of regulations beyond trade. The 5,000 pages long TPP is described as "weighed down by numerous non-trade provisions aimed at appeasing non-trade special interests". Historically, trade was seen as a means to open and strengthen friendly ties between countries - allowing for an exchange of ideas and development of mutually beneficial policies in other areas. Withholding trade as a means to impose policies on third countries seems to be fundamentally illiberal to me.  Surely, a more liberal way to achieve these policy goals is via international treaties and organisations (e.g. ILO for labour regulations, UNEP for environmental regulations etc.) - which are based on consensus and willing opt-in, not compunction.

Moreover, I wholeheartedly support mutual recognition over regulatory harmonisation. Harmonisation creates "one-size-fits-all" regulations with all the attendant problems. Rather than avoiding a "race to the bottom", the result is often "lowest common denominator". Enforced homogeneity leads to a higher risk of catastrophic failure - think Irish potato famine for an example of how disastrous homogeneity can be.

By contrast, mutual recognition allows a choice of regulatory regimes and regulatory competition - allowing room for innovation and discovery of best practice and cost effectiveness. This will always beat regulations imposed in a "top-down" manner by regulators with limited information/experience and subject to capture by special interests. Philosophically, this is a choice between the wisdom of technocrats versus the wisdom of crowds - between central planning and a dispersed and diverse market approach.

Moreover, mutual recognition allows countries with differing regulatory regimes to still enjoy the benefit of trade. Mutual recognition agreements by definition are an agreement to recognise that regulatory objectives have been met via a different routes. Furthermore, use of recognised international standards (as per WTO TBT agreement article 2.4) allows the for recognition of regulatory equivalence. I would also emphasise that regulatory co-operation to minimise non-tariff barriers is an important aspect of a trade relationship.

Unfortunately, the EU does not seem to follow a philosophy geared to free trade. Brussels is the perfect example of a plutocratic ivory tower bureaucracy.  Its secretive lobbying system all too often falls prey to special interests - ranging from the German automobile industry (emissions  scandal)  to well-heeled executives of NGO's (Non Government Organisations).

The EU Single Market is essentially a regulatory union, enforced by supranational regulatory harmonisation handed down from Brussels. The EU acquis is exported as a means of extending Brussels control - it has precious little to do with trade liberalisation.

Worse still, the often EU insists on harmonisation in its trading relationships with third countries. Typically, the EU requires harmonisation well beyond trade, straying into areas like human rights and demanding political action as a price for trade. Where does this end ?  In the future will the EU start insisting on specific social policies as a pre-requisite to enjoying tariff-free Camembert ?

Critics of the paper are right to point out that the EU does not get to choose over whether to apply tariffs to Britain as a third country. But it is also true to say that a straightforward agreement to continue zero tariffs takes no real negotiation and Britain will be happy to agree. Even with respect to non-tariff barriers, Britain starts from a position of 100% harmonisation and there is no good reason why  the EU should not agree Mutual Recognition or Equivalence. Indeed, international treaties to which the EU is party "encourage" members to enter such agreements.

Britain will adopt a Free Trade philosophy - the key question is does EU want to join in ?

Wednesday, 16 August 2017

Thoughts on UK Governments "Future Customs Arrangements" paper

Some thoughts on the Governments "Future customs arrangements" paper published yesterday (Tues 15th August 2017).

Firstly, we should note that the paper deals just with issues associated with a new customs border: customs declarations, tariffs/Rules of Origin and routine customs controls for UK/EU trade.  For all those complaining that that this ignores issues arising from regulatory barriers - note that this paper states (para 24) these will be covered in a subsequent report.

Much of the paper is familiar territory which I've covered in detail on my EU Question blog:
  • A repatriated trade policy where UK seeks continuity of existing trade agreements and replicates the EU's WTO schedules; 
  • A new customs border mitigated by streamlined customs processes and requiring an interim period to implement new infrastructure / systems / processes; 
  • A customs agreement with EU is required to carry over existing arrangements (e.g. mutual recognition of Authorised Economic Operators (AEOs), Common Transit Convention, (CTC) continued exchange of data/information etc. ) and implement an interim customs arrangement based on mirroring the EU's external tariff and third country agreements.
While inside the EU, the UK applies the EU's external tariff and makes use of the EU's FTAs with non-EU countries (while being unable to agree it's own independent FTAs). Thus all imports from outside the EU undergo routine customs control, paying relevant EU duties, when crossing into EU territory (including UK customs border). Once customs formalities have been cleared, the goods than move freely throughout the EU without the need for further customs formalities.

The interim customs agreement will seek to extend current customs arrangements - the UK will replicate the EU's external tariff and not implement any new FTA's concluded under the UK's newly independent trade policy.  To completely mirror the current situation, diagonal cumulation will be required - allowing distributed supply chains to continue to benefit from tariff-free trade. The EU's proposed FTA with Japan includes proposals for "extended cumulation", i.e. extending cumulation (hence tariff-free supply chains) to third countries where the EU and Japan have tariff-free arrangements in common.

Of course, it is possible that the EU will agree new FTA's to which the UK will not be party (having left the EU). In that case, the UK will probably have to provide tariff-free access to the EU's new third country trade partner without any guarantee of reciprocated tariff-free access for the UK to the third country in question. The best re-assurance against this is that it is an unlikely scenario, given the EU's famed inability to conclude FTA's quickly.

"A new customs partnership with the EU"

The interim customs arrangement breaks down once the UK implements any new FTA's which the EU is not party to.  The Governments paper includes a radical proposal of "A new customs partnership with the EU" to address the issue raised by new UK FTA's. Imports would be separated into 2 customs streams:
  • Imported goods destined for consumption in the EU will be charged the normal tariff (as per the external tariff and FTAs that UK and EU have in common) - essentially a continuation of current arrangements; 
  • Goods imported under a new UK FTA that are destined to be consumed in the UK will qualify for tariff-free access.
In short, this proposal seeks to avoid the burden of proving that a product has sufficient local content/input under Rules of Origin to qualify for tariff-free UK-EU trade. Instead, goods will be deemed to qualify for tariff-free UK-EU trade provided there is assurance that any content obtained via UK's independent FTAs has had the relevant EU tariff levied.

Companies with complex supply-chains are anxious to avoid the complexities of Rules of Origin (RoO) and have much to gain from this proposal. The UK's annual goods export to the UK amounts to £122 billion, of which £38 billion (over 30%) is content originally sourced from outside the UK (see update at bottom of post). Not only can RoO result in a significant administrative burden, (estimated as equivalent to a 4% tariff by Open Europe), but also some current supply chains may not qualify for tariff-free trade under the complex rules around product content and origin.

Smaller businesses focussed on trade with the EU would also wish to avoid the administrative burden of customs formalities and RoO. The impact on marginal costs may well be enough to make exporting / importing uneconomical. This is particularly relevant for companies operating across the Irish border on an "island of Ireland basis".

This proposal will need a "robust enforcement mechanism" to reassure the EU that goods imported from the UK do not contain goods that have evaded the EU's tariff (i.e. goods imported to the UK tariff-free via one of the UK's independent FTAs). The Governments paper suggests either a"tracking mechanism" where imports to the UK via a new UK FTA are tracked until they reach an end user, or a "repayment mechanism" where all goods are charged the higher of EU or UK tariff on entry to the UK, but traders reclaim the excess paid for goods when sold to an end-user in the UK.

It is possible to see similarities with current customs processes such as transit (where goods are securely transported across national borders with customs formalities suspended until the final destination is reached) and inward processing (which provides relief from import duties for goods that are imported solely for incorporation into a product to be re-exported). It may even be possible to implement this proposal as a trade facilitation available to trusted/accredited traders whose accounts and supply chain management would be subject to audit - this is similar to some ideas proposed for companies operating across the Irish border.

This proposal is an attempt to benefit from customs union membership for current trade and add the benefits of new UK FTAs for UK consumers.  EU traders will also benefit in avoiding disruption to UK trade and the proposal has the potential to be applied to other trusted third countries - the EFTA states would be obvious candidates given the volume of EFTA-EU trade and their status as highly developed economies. Theoretically, the concept of "extended cumulation" could be replaced with this approach - so that where partners have FTA's in common, low-friction customs-union style trade could be enabled.

However, it is difficult to see the EU accepting such a proposal lightly. It would not be unreasonable for the EU to demand that import duties levied by the UK are forwarded to them - certainly for goods imported via new UK FTA's that are destined for consumption in the EU - possibly for all imports in a continuation of the current customs union regime. Nor is it difficult to envision the EU rejecting this proposal as simply another British attempt at "having our cake and eating it too".

Agreements & Timing

The biggest issue with the proposed new customs partnership is perhaps time. Negotiating such an agreement with the EU and implementing the required enforcement mechanisms is not likely to be quick.

Moreover, the Government paper also emphasises the need to be ready for "every eventuality", including the failure to agree a negotiated settlement with the EU. Brexit at end March 2019 is just over 19 months away. The EU's continuing insistence on its rigid negotiating sequence of settling the exit bill before discussing future trade agreements puts this deadline in severe peril.

As such, preparations for March 2019 must be the priority. Is the UK Government progressing with streamlining the customs process (new infrastructure / systems / processes) ?  The Government paper suggests that the new Customs Declaration Service (CDS) is on track to deliver by January 2019 - I along with many commentators remain sceptical. Are UK importers / exporters preparing for routine customs controls and Rules of Origin ? Are the UK Government and business blithely assuming an interim customs agreement will be reached ?

There is also public concern that any interim agreement could turn into a permanent agreement - with UK Government and business eternally delaying the issues associated with leaving the EU's Customs Union. It seems to me the Government needs to actively demonstrate the UK's readiness for March 2019 in order to strengthen it's negotiating position.

Of course, if no negotiated settlement is reached with the EU and no FTA is agreed, then tariff-free trade with the EU will end - at which point the complexities and costs of Rules of Origin are moot - importers will simply have to pay the tariff. As I discussed in detail on my EU Question blog "Tariffs & Origin", tariffs in most sectors outside agriculture are actually quite low. Finished cars are one of the highest tariffs for manufactured goods at 10%, but car components typically have much lower tariff rates. Furthermore, "inward processing" can avoid impact on complex supply chains, e.g. where car parts or part-finished cars are shipped across the channel multiple times in the manufacturing process - only the tariff on the finished car will apply.

It may just be that the path of least resistance ends up being acceptance of tariffs offset by lower currency and lower taxation for UK exporters - combined with some repatriation of supply chains (a process that is already underway in the UK car industry). Unless of course, the UK Government & EU are able to make headway on trade and customs arrangements - but we are fast running out of time for that - UK Government and business really do need to be prepared for every eventuality.


Update: (17/08/2017):
This post originally stated "The UK's annual goods export to the UK amounts to £122 billion, of which £38 billion (over 30%) is content originally sourced from Asia, America and the rest of the world."  Having been prompted to check this figure and finding the source (Credit Suisse research quoted in a uk business insider article), the £38 billion figure seems to apply to UK exports to the Eu that were of all non-UK origin, including the EU.

The uk business insider article also points out that "many of the raw materials that go into the $158 billion (£121.9 billion) worth of UK-made goods exported to the EU are likely sourced overseas too". So, there would appear to be no clear figures on non-UK or non-EU content of UK exports to the EU.

Monday, 14 August 2017

The Myth of Global Regulations - Technical Standards


One of the recurring memes of those who support an EFTA EEA option for Britain is that even though we are still obliged to adopt all the EU's single market regulations (the EEA acquis) these are primarily "global" regulations and the EU is merely a "redundant middleman".

The 1994 WTO Technical Barriers to Trade (TBT) Agreement is cited, especially Article 2.4,
2.4    Where technical regulations are required and relevant international standards exist or their completion is imminent, Members shall use them, or the relevant parts of them, as a basis for their technical regulations except when such international standards or relevant parts would be an ineffective or inappropriate means for the fulfilment of the legitimate objectives pursued, for instance because of fundamental climatic or geographical factors or fundamental technological problems.
Three organisations are identified by the WTO as central to international standards harmonisation, which are mirrored by three European Standardisation Organisations (ESOs) officially recognised by the EU Commission as a platform to develop European standards. These European organisations recognise the primacy of their international counter-parts and have committed to using international standards wherever possible:
It is claimed that WTO TBT Article 2.4 is "the redundancy notice for the EU's version of the Single Market", with EU law increasingly replaced by international standards - meaning that we can stay in the EU's single market but influence and control the  EU's single market regulations at a "global" level. This is a seductive argument (I fell for it for a while), but it does not stand up to scrutiny:

1) There is a big difference between voluntary standards and binfing regulations. Technical Regulations may be "based" on voluntary international standards and are implemented in national legislation (or for EU/EEA member states, EU legislation). It is national (or EU) legislation that makes regulations mandatory within the respective national (or EU/EEA) territory. There is no such thing as international or global regulations. The detailed implementation of national regulations also provides scope for gold-plating and regulatory barriers - even when the regulations are based on international standards.

2) European standards are not fully harmonised with international standards. The EU's 2016 standards bodies report suggests that while CENELEC standards are closely aligned with IEC standards (72% of CENELEC standards are identical to IEC standards with a further 22% of CENELEC regulations based on IEC standards), just 32% of CEN standards are identical to ISO standards. Moreover, the proportion of European standards "cited or intended for citation in the OJEU " indicate a lower level of international harmonisation within EU regulations: CENELEC - 58% identical to IEC, further 15% based on IEC, CEN - 24% identical to ISO).

3) The EEA acquis covers more than technical standards. As of 14th August 2017, Technical Regulations form 1905 of the 5500 EEA laws in force - about a third. The EEA'sVeterinary & Phyto-Sanitary measures are covered by the WTO Sanitary & Phyto-Sanitary (SPS) Agreement in the same way as Technical Standards are covered by the WTO TBT agreement. Some other areas of the EEA acquis (environment, energy, transport, health & safety etc.) may draw upon international conventions, but these are voluntary frameworks upon which the EU adds much detail . Areas such as Freedom of Movement are very much EU sourced laws.

4) Adopting a recognised international standard is not enough to guarantee market access - as the USA have found in trying to sell into the EU's single market.  The US Trade Department Report for 2016 highlights significant foreign barriers to U.S. exports - and is illuminating on various barriers the EU erects (pages 139-178). The opening pages cover how the EU creates technical barriers to trade - I've highlighted 2 main points regarding European standards (i.e. CEN, CENELEC & ETSI):
  • While EU regulations theoretically allow other (non-European) standards to be used to meet the essential requirements of EU regulations, in practice the process for demonstrating this is so arduous and unreliable that "U.S. producers often feel compelled to use the relevant EN" (i.e. CEN standard) "...even if the U.S. products are produced according to relevant international standards providing similar or even higher safety levels."
  • The EU also promotes adoption of European standards in third countries, often requiring withdrawl of existing standards as a condition for assistance, affiliation or trade - providing a commercial advantage to EU manufacturers. "The withdrawn standards can be international standards that U.S. producers use, which may be of equal or superior quality to the European regional standards that replaced them. U.S. producers thus must choose between the cost of redesigning or reconfiguring the product or exiting the market.
Britain is currently 100% harmonised with EU technical regulations so will not suddenly face technical barriers experienced by US producers.  Continued use of CEN, CENELEC and ETSI standards and affixing the CE mark will provide "presumption of conformity" for UK exporters under EU legislation (the route taken by US producers) .

Britain is also likely to stay a member of the three ESO's (CEN, CENELEC & ETSI). This may require Britain to adopt at least associate membership of EFTA, but EFTA states get a voice and vote on these organisations and consensus is sought for all decisions. Even outside the Single Market, Britain can still influence European standards. 

The downside of membership of these ESO's is the requirement to adopt European standards as national standards and prohibition from taking individual initiative on standards. In the longer term, Britain may wish to move away from being limited to purely European standards. Recognising international standards that meet or exceed essential objectives, will remove barriers to trade with third countries (e.g. US). This provides for a more open domestic market and the possibility for some British producers to focus on domestic and third country markets over EU markets.

It is clear that the EU's technical regulations are not simply a "rubber-stamp" of international standards. If Britain stays in the EEA it will remain shackled and subservient to the EU's particular regulations and moreover will contribute to exporting the EU's regulations via any third country trade agreements - we will be passive agents for the expansion of the EU's regulatory empire. Alternatively we can choose to be open to wider international standards, removing technical barriers and expand trade globally. The idea that we would be simply following "global" regulations via the EEA is a myth.

Thursday, 10 August 2017

Trouble at ports ?


An enduring scare story regarding Brexit concerns exports of manufactured and industrial goods to the EU becoming subject to inspections at ports - resulting in massive delays, tailbacks and claims that literally all trade will stop (Anna Soubry during the Referendum campaign).

Validity of conformity Assessment Certificates

This story seems to originate with an argument regarding how the USA manages to export to the EU without a Free Trade Agreement (FTA). Those proposing the WTO-rules option claim that exports simply have to meet EU regulations.  The counter claim was that products must be shown to meet the regulations via a process of "conformity assessment" - and that actually the USA has a Mutual Recognition Agreement (MRA) which means its certificates of conformity are recognised as valid. Without an MRA, conformity certificates would not be recognised, British exports would face an insurmountable barrier and trade will come to a grinding halt.

This seemed a compelling argument to me at the time. The EU has indeed concluded MRA's with many trading partners that it does not have an FTA with - and FTA's typically include a section on mutual recognition of conformity assessment. But over time, as I investigated and learnt more, I've come to realise this argument is false.

For a start, it is worth recognising that the EU-USA MRA is very limited, covering just 2 sectors. Essentially, it lists certified assessment bodies (CAB's) in the USA recognised as producing valid certificates for EU regulations (and vice versa). In fact, the MRA has rather fallen in to disuse and is not being regularly updated. Yet, the EU and USA still successfully trade manufactured and industrial goods. How can this be ?

Many Certified Assessment Bodies operate internationally and have subsidiary or sub-contract relationships in other territories. So an American-based CAB can assess conformity against EU regulations on behalf of an EU CAB with which it has a subsidiary or sub-contract relationship. The certificate of conformity is then deemed to be held by the CAB inside EU territory and so is recognised as valid, without the need for an MRA.

However, only a small number of sectors (those with high health and safety risks) require conformity assessment to be undertaken by a CAB. For most products "self-certification" by the manufacturer is sufficient under EU regulations. Manufacturers based outside the EU must lodge their certificates with an "importer" based inside EU territory. The importer could be a subsidiary, a shipping company, or an agent - the burden is not onerous and many EU-based operators are already established to offer this service to non-EU manufacturers.

Risk Assessment & Consignment Checking

Once the first scare over conformity assessment certificates had been mollified (notably by @andrewchapman50  on his "Door to Freedom" blog), the story shifted. Customs Authorities undertake risk assessment to target inspections on consignments most likely to fraudulent, criminal or non-compliant. Outside the Single Market, the new scare was that British exports would be seen as a new (and therefore risky) source of imports and would be subject to high rates of inspection.

In fact, even while we are in the EU, consignments are subject to checks based on risks of criminal or fraudulent activity. Imports from outside the Single Market are also assessed for risk of regulatory non-compliance. Currently as an EU member state, British customs authorities inspect just 4% of non-EU imports (mostly paperwork checks with less than 1% requiring physical checks), for imports from countries that are not in regulatory harmonisation and including high-risk sources in Africa & East Asia.

National Customs Authorities make their own decisions on risks & consignment checking. So we are asked to believe that on Brexit day-one, hard-pressed Customs Authorities will divert their limited time and resources to inspect imports that caused no concern just the day before ? This seems unlikely given: (i) British exports track record of compliance; (ii) Day one, Britain has 100% regulatory harmonisation (iii) continued co-operation between national authorities (notably Britain & France). In fact, this scare story has now been reduced to saying that if Britain diverges significantly from EU regulations in the future, we *may* then be subject to higher rates of inspection.

Britain as a third country

For most UK exporters of manufactured goods, the implication of Britain as a third country outside the Single Market, is simply the use of an EU-based "importer". For those sectors requiring third-party certification, CAB's are typically international with links inside the EU.

Some more highly regulated sectors require product registration via an EU-based representative rather than a straightforward "importer".  For example: Under REACH regulations, chemical products must be registered through an EU-based "Only Representative" ; Cosmetics products must be registered on the Cosmetic Product Notification Portal via an EU-based "responsible person";  Pharmaceuticals and medicines must be registered with the European Medicines Agency (EMA) via an EU-based "qualified person". But as with the role of "importer", non-EU companies can use a subsidiary or sub-contract relationship with an EU-based operator and many EU-based operators are already geared to provide such services to non-EU manufacturers.

In certain sectors, the EU require that a third country regime of testing and inspection is "equivalent" to the EU's. For example: an equivalence agreement on Sanitary & Phyto-Sanitary measures would allow continued agricultural trade without border inspections (see my previous post); third country legislation and controls for Active Pharmaceutical Ingredient's (API's) must be approved as "equivalent" to the EU regime (Commission Implementing Decision 2013/51/EU).

So some preparation prior to Brexit is required by exporters (in both Britain and the EU). In certain sectors, Britain will need EU agreement - to carry-over existing product registrations or recognise regulatory equivalence.  Given the impact on trade in both directions, Britain's existing regulatory equivalence and the EU's commitments to removing trade barriers in various international treaties and it's own treaty, there is no good reason for the EU to refuse - even if the Article 50 talks founder on matters such as the "Brexit Bill" or citizen's rights. Unless as I've said before, you believe the EU to be self-harming, mad and bad.

Beware the catastrophists

So if you come across someone banging on about conformity assessment and EU regulations complaining "Eee lad, there'll be trouble at ports", don't worry too much. It's probably just a grumpy Yorkshireman looking for an audience.

Tuesday, 8 August 2017

The dishonest case for the EEA


You could be forgiven for thinking the question over the Single Market had been settled. But apparently, some people want to argue the Single Market is nothing to do with the EU.

Their contention is that Britain's Single Market membership, rights and obligations arise from the the 1993 EEA agreement. They are pinning their hopes on Article 127 of the EEA agreement - requiring at least one years notice to quit - as meaning that leaving the EU does not remove Britain from the EEA agreement and hence the Single Market. The EU-supporting think-tank British Influence have launched a legal challenge on this basis.

Their argument over the source of Britain's single market rights and obligations is of course nonsense. Margaret Thatcher signed the Single European Act in 1985 to set in train the harmonisation of laws via Qualified Majority Voting to create the EU's internal market. John Major signed the Maastricht treaty in 1992 which introduced the concept of EU citizenship and rights, which combined with subsequent EU legislation form the EU's Freedom of Movement laws we know today.

The 1993 EEA Agreement simply extended the EU's internal market to the EFTA states - it did not grant rights and obligations to Britain. It takes but a moment's thought to see this clearly. Had Britain not signed the Single European and Maastricht treaties, we would not have been in the Single Market. Had Britain not signed the 1993 EEA agreement, Britain would still be in the Single Market - but it would be a smaller Single Market in absence of the EFTA states.

The EEA agreement creates a two-pillar structure, with EFTA EEA institutions on the one side and EU institutions on the other side and joint bodies to administer and operate the EEA agreement. The EEA Council and EEA Joint Committee ensures homogeneity between the EU and the EFTA EEA states by applying EU laws to the EFTA states and harmonising the judgements of the ECJ and the EFTA Court. There is no EU member state participation in any of these institutions - it is purely an interface between the EU's institutions and the EFTA EEA states. The EU is represented by the rotating EU Council presidency and the European External Action Service (EEAS) - essentially the EU Commission's foreign affairs and diplomatic arm.

It seems self-evident that the EEA agreement is bipartite between on the one hand the "EFTA States" and on the other hand ‘"The Commission and the EC Member States" (Article 2 of the EEA agreement). So it follows that Britain is only a Contracting Party to the EEA agreement by virtue of being an EU Member State and not in its own right. In fact, the Deputy Secretary-General of EFTA has suggested that the EU will likely serve formal Article 127 on Britain's behalf.

Failure to invoke article 127 of the EEA agreement, would not amount to Britain remaining a participant in the Single Market. Post-Brexit, the EU's single market laws will no longer have direct effect in Britain. As a non-EFTA member, Britain will be outside the EEA institutions, meaning there is no mechanism to apply and enforce EEA law (the EU's Single Market laws) in the UK. Moreover, many articles in the EEA agreement are specific in applying only to EU or EFTA states, e.g. Article 28: “Freedom of movement for workers shall be secured among EC Member States and EFTA States”.

Even if it is established Britain is a contracting party to the EEA agreement in it's own right, Britain would only be a party to those areas which fall under EU member state competence. Most of the EEA agreement falls under EU competence, hence most of the obligations and rights are exercised by the EU on member states behalf. Any EEA agreement rights and obligations that fall to Britain outside the EU are minimal and do not amount to Single Market membership.

The legal challenge launched by British Influence aims to force a parliamentary vote on invoking Article 127 of EEA agreement, in hope that a coalition of MP's will vote against. Such a scenario would not retain Britain's Single Market membership - it would simply leave a constitutional and legal void. And these people accuse Brexiteers of inviting chaos !

They also channel the disingenuous Gina Miller in claiming they just wish to see due Parliamentary process. Of course Remain argued that Britain never lost sovereignty as Parliament was required to pass each EU treaty - which they did without legal challenge and with most MP's following the party line. Which simply emphasises that the Leave vote was a vote for government by popular consent and a vote against the political establishment who ignored the public and signed away centuries of self-government that was not theirs to give away.

Finally, there is a galling claim that there is no mandate to leave the Single Market. Despite this being the major topic and clearest dividing line in the EU Referendum campaign. Despite Prime Minister Theresa May's Lancaster house speech making clear the intention to leave the Single Market. A commitment contained in both Conservative & DUP manifestos - and in a slightly weaselly way, the Labour manifesto. A manifesto commitment subsequently included in the Queen's Speech - which Parliament endorsed by voting down Chuka Umunna's amendment to keep Britain in the Single Market & Customs Union by a margin of 322 to 101. By contrast, the Liberal Democrats promise of a second Referendum and retention of Single Market membership made no electoral impact. Quite simply, there is no mandate to stay in the Single Market.

The recourse to legal action over Article 127 seems to me an entirely dishonest approach. To retain Single Market membership, Britain will have to apply to re-join via EFTA. As I have discussed previously, EFTA EEA is a destination, not a transition and opens the path to the Remain long-game of re-joining the EU as an associate member. The Article 127 campaign group are effectively demanding the Government set aside its manifesto commitment and instead pursue permanent EFTA EEA membership (or seek a major EEA treaty change to accommodate non-aligned Britain - which is an arduous process and highly unlikely to be entertained).

Moreover, this approach smacks of the establishment once more over-riding rather than seeking public consent.The UK public support the Government's stated aim of a Free Trade Agreement- it is for those who seek EEA / Single Market membership to make a compelling argument for their case  - not seek a back-door approach to subverting public consent.

Sunday, 6 August 2017

In defence of IOD & Allie Renison


The Institute of Directors (IoD) are the latest to jump in to the "transition" debate, with their paper "Bridging the Brexit Gap" written by Allie Renison, IoD's head of EU and trade policy. Renison has come under attack from Leave supporters Jago Pearson and John Longworth, describing her report as pro-Remain propaganda, advocating remaining in the EU and being a direct attack on democracy.

Are Pearson / Longworth right ? I don't think so - the report reads as a pragmatic case for transition:

1) The IOD agree with the Government that current membership of the Customs Union and Single Market is "neither practical nor desirable."  

2) The report states "there will eventually be some increase in transactional costs to trading with and doing business in the EU". That's fair enough there will be trade-offs in Brexit. Leaving the Customs Union clearly brings additional trade cost (in both directions)  in terms of Rules of Origin, routine customs declarations and processes. Regulatory divergence over time will add  to costs of trade and business. We will have looser relationship with the EU in exchange for greater freedom at home and in trade with the Rest of the World.

3) The case for transition is made with the aim of "allowing both companies and government infrastructure the necessary time to move towards our longer term objectives." There is now greater public awareness of the need for technology and infrastructure development needed to mitigate the impact of introducing a new customs border. Similarly replacing current regulatory arrangements centred on EU agencies will take time and investment. These actions will minimise the disruption to business activity and also minimise the additional transactional costs.

4) Most importantly, the report defines transition as a "bridging period during which the UK and EU would negotiate the technical detail"  based on "new regulatory cooperation outlined in the withdrawal agreement's framework for future relations". In other words, the future relationship is agreed in outline during Article 50 and implemented in detail during transition.

The report also discusses transition options. Extending Article 50 is "politically very contentious" (that's an understatement !). EEA is "contingent upon our EU membership" according to legal consensus (so the UK will need to negotiate re-entry) and in any case does not address the issue of a new customs border. A transitional customs agreement will delay a new customs border - and the report makes useful points on: Transit, VAT and Intrastat returns, a joint UK-EU customs cooperation committee, a dedicated Brexit trade contact group and continued participation in the EU’s Customs Policy Group.

Unfortunately, the impact of  Free Trade Agreements (FTAs) on a customs arrangement is not covered. During an interim customs agreement, the UK will be unable to implement any new FTAs. EFTA membership, which requires members to adopt/harmonise EFTA's FTAs, is also incompatible with a customs arrangement - another problem for those advocating EFTA EEA as transition.

The remaining transition covered is "prolonging the EU acquis", which offers several positives: "far more comprehensive and likely simpler to negotiate with the EU"; "easier to apply time limitations to"; "allow for the phased implementation (or phased reduction in application)" (my emphasis).  The "prolonging the EU acquis"option was explicitly floated in the EU Council's negotiating directives, but with a rider that "existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures must apply",  meaning full and direct application of ECJ jurisdiction.

Nonetheless, phased implementation/reduction so that transition is a step-by-step process of leaving the EU is crucial point - otherwise what we have is an interim arrangement with another cliff-edge at the end. Combined with some ideas borrowed from Dr Simon Usherwood's blog "How to achieve a new UK-EU deal" my own thoughts on a possible transition model are:

  • UK commits to applying EU acquis during transition
  • EU commits to respect UK transitional status in new EU decisions/law.
  • UK will dis-apply sectors of EU acquis as replacement arrangements are implemented.
  • Sunset clauses should be agreed and implemented.
  • Dispute resolution mechanism: 3-judge panel - UK  + EU + mutually agreed neutral judge.
  • A standing EU-UK committee. 
A major issue is how to make such a transitional arrangement binding, as discussed in the "parallel sources" article referenced by the IOD report. My own thought would be to write into the Article 50 withdrawl treaty the outline and timetable for a full Free Trade Agreement (i.e. based on WTO GATT Article 24.5), along with institutional arrangements (as described above) which will  become the institutions governing the new trading arrangement at the end of the transition period.

But to return to my original premise, I think it is a complete mis-characterisation to represent the IOD paper as anti-Brexit. While I believe Allie Renison was a Remain supporter in the EU Referendum, she and the businesses she represents accept Brexit as a reality and are committed to making Brexit work. Here are just 2 of her recent tweets (of many) that support this :
"I can't believe I have to keep saying this. #Brexit doesnt have to be a disaster. Many battles still to be won on how we do it. Carry. On."
"To the people saying we should just not #Brexit, you either try and shape it or let it be shaped for you. Former is beyond unconstructive."
In short, Allie is a classic Re-Leaver, she is on-board with the fact that we are leaving the EU and wants to make it a success, especially as part of her role of representing IoD members. That's all we Leavers could ask for. She has a growing media profile and is gaining influence, and so can play an important part in making Brexit work. We can debate her and provide constructive challenges to the ideas she proposes, but we must realise that she and many other Re-leavers are on our side now. Let's leave the wailing and gnashing of teeth to the small but vocal minority of Remain voters who are die-hard refuseniks. We've got work to do.

Friday, 4 August 2017

Encouraging reports from Brussels



For those of you who don't know who Martin Selmayr is, he is Jean-Claude Juncker’s chief of staff - a Brussels heavyweight and a true believer in the project of political union. Selmayr is regarded as the power behind the throne in the Brexit negotiations and some British and European politicians fear he wants to poison the Article 50 talks and impose harsh terms on Britain. So when Selmayr comments "good analysis" on a Brexit article by Simon Nixon for the Times, it is worth paying attention to the article. Here are the main points I picked up on from Nixon's article:
  1. EFTA EEA cannot possibly be a transitional or interim arrangement, it is far too complicated and time consuming to arrange. 
  2. EFTA EEA does not address the "cliff-edge" of leaving the Customs Union (as I covered in a series of posts on my EU Question blog).
  3. The only plausible transitional deal is a "standstill", essentially an extension of existing terms which under WTO rules (GATT Article 24.5) any such interim deal is time-limited.
  4. Once Britain leaves the EU in March 2019, there is no easy way back - a fresh application (under Article 49) would be needed and would require commitment to the Euro and Schengen.
Nixon also complains of British indecision and its impact on the ticking clock of Article 50 : "what is the UK proposing to transition to?", "Mrs May doesn’t have long to make up her mind" in choosing between an EEA-type relationship or a Free Trade Agreement (FTA).  Nixon reminds us of the need for "sufficient progress ... on resolving outstanding questions over citizens’ rights"  before UK and EU can start discussing their future relationship in October.

An anti-dote to Nixon's pessimism on Article 50 progress can be found in Pieter Cleppe, whose "Don’t believe the bad news about Brexit" article for CapX suggests solid progress:
  1. Rights of EU citizens in UK: agreement was reached on 50 per cent of issues in just 3 days.
  2. Dispute resolution via a 3-judge panel (one UK, one EU, one mutually agreed neutral chairman) - proposed by David Davis in opposition to ECJ oversight - is supported by Germany and numerous EU officials.
  3. David Davis statement that "the UK has obligations to the EU" has opened the way for meaningful discussion on the so-called Brexit bill.
  4. Talks have opened on “wider separation issues” including trade in goods, Euratom, police and security cooperation.
Cleppe, like Nixon, also refers to media complaints over British indecision over the future relationship and believes the choice is between the Norwegian model (EEA) and a Swiss/Canadian model (bi-lateral FTA).  

I find this question mark over destination surprising. May's government has consistently made clear it wants a deep & comprehensive free trade agreement and will leave the customs union and the single market. An EEA destination seems to have been ruled out.

Wolfgang Munchau agrees, tweeting "Efta/EEA membership is not what Hammond is seeking. Nor is EU keen on this option. Time has moved on."  Munchau's euro-intelligence blog expands on this "Theresa May could have signalled in her Article 50 letter .. that the intention of the UK is to negotiate EEA membership after Brexit. But she didn’t. And a parliamentary bill supported that position. The EU is basing its negotiating strategy on that letter." Munchau also rules out EFTA EEA as an interim in tweeting "I hate to break it to my friends in the UK, but: no, you can’t "stay in the EEA" after Brexit" and chimes with Nixon via his blog in stating that transition can only be "a continuation of the status quo minus political representation, for a time-limited period".

Munchau also echoes Nixon in dismissing Remainer's hopes of a Brexit reprieve. The EU is not going to suddenly offer Britain a better deal than Cameron negotiated, especially on Freedom of Movement. The EU is more likely to add conditions to any attempt to revoke Article 50. The status quo ante has gone forever.

All of which adds up as good news for those who support Brexit, especially those who support a looser Canadian/Swiss FTA over a Norwegian/EEA model. The major bone of contention now seems to be over transitional arrangements and how much freedom Britain will have in this period:
  • Will the UK be able to sign new free trade agreements during transition ? If a form of customs union agreement is struck to delay the impact of customs declarations and Rules of Origin (RoO), then it follows Britain cannot implement new FTA's. But there should be no reason to prohibit Britain negotiating new FTAs during this period to come into force once new customs arrangements are ready - which may be before the end of the transition period.
  • Will the UK be able to restrict EU immigration during transition ? This will be a difficult sell for the British government. I expect a compromise where British government will proclaim it is providing time for business to adapt via a "phased implementation" of a new immigration policy, potentially coupled with a clamp-down on benefits claimed by EU migrants.
I did see one cloud on the horizon for Brexit supporters this week, in the form of "relentless remoaner" Nick Clegg. Clegg's comments reported in the Daily Express contain the familiar and tiresome: attacks on the Prime Minister; siding with Brussels complaints over clarity on destination; describing Brexiteers as shooting themselves in the feet.  But there was also evidence of the Remain long-game, i.e. rejoining the EU as an associate member:
 “If parliament were to reject the fudge and confusion of Brexit, it may be possible to hit the pause button. This would allow the space for wise heads to sketch out a new settlement in which the Uk re-enters the EU orbit but in an outer circle.” 
This is why for me, clarity on certain issues is so crucial: transition is time-limited; based on WTO GATT 24.5; with a destination of a looser Canadian/Swiss FTA rather than a Norwegian/EEA model. That is the best and surest way to avoid a Remain campaign for EU associate membership.

Thursday, 3 August 2017

Will we starve after Brexit ?



Among the worst of the Brexit scare stories to have emerged is the prospect that we will be no longer be able to import or export food across the channel. Is this true ? If so, what can be done to mitigate this ?

Once we leave the EU and become a third country, plant and animal exports to the EU will be subject to checks at the border as per other third countries:
Live animals and animal products must be imported via a nominated Border Inspection Post (BIP) where specific veterinary controls are undertaken to prevent transmission of human and animal diseases ( the frequency of physical checks of consignments is governed by Commission Decision 94/360/EC ).
Certain plants and plant products must have a phytosanitary certificate,  guaranteeing they have been  properly inspected; are free from harmful organisms ; and conform with relevant plant health regulations. (governed by Directive 2000/29/EC ).

The requirement for checks on live animal and animal products, particularly meat products, will create serious capacity issues at BIPs and cause long delays - hence the risk to the food supply chain. Since the UK is copying EU law into UK law as part of the Great Repeal Bill, EU imports to the UK will also be subject to third country checks. The flow of trade will be impacted in both directions.

So is there any way to avoid these checks when we leave the EU ? DEFRA's Border Inspection Post Manual provides some answers:
Animal products from EFTA EEA states and Switzerland do not require veterinary checks (page 19). 
An equivalence agreement between EU and Switzerland allows animal products to be traded under the same conditions as for intra-EU trade (page 34)
The EU also has equivalence agreements with Canada, Chile, New Zealand, USA to reduce level of checks and is negotiating equivalence agreements with all major trading partners (page 33)

The EFTA EEA states adopt EU Sanitary & Phyto-Sanitary (SPS) regulations, i.e. animal & plant health regulations, by virtue of regulatory harmonisation mandated by the EEA agreement. Switzerland has largely adapted its SPS regulations to the EU's. Effectively, the EFTA EEA states and Switzerland form part of an extended EU SPS regulatory regime, and have border inspection posts which are part of the external border of the EU (see Swiss Border Veterinary Service web page). 

Other third countries who do not have harmonised SPS regulations in the manner of EFTA EEA or Switzerland, can still have equivalence agreements with the EU - where their regimes are deemed of sufficient standard to warrant lower rates of checks and/or mutual recognition of certificates. Chile has agreements covering both animal products and plant products. 


However, it should be noted that the EU's SPS regulations are highly restrictive and protectionist - effectively you have to conform fully to EU regulations to trade freely. Canada has found that barriers to agricultural trade with the EU still exist, despite having an equivalence agreement built into CETA. The EU's regulatory regime is a major reason (along with the EU's Rules of Origin) why developing economies in Africa and the Commonwealth find it so hard to export agricultural goods profitably to the EU. 

So in the first instance, the UK will probably want to follow something like the Swiss model via an equivalence agreement with the EU (which only requires Qualified Majority Voting approval by EU, not unanimity).  The UK will start from a position of 100% harmonisation and the same inspection regime that is currently recognised within the EU. If regulatory convergence is maintained, there is no good reason to impose border inspections. The UK should ensure an equivalence agreement provides reciprocity - inspections are waived in both directions or not at all.

In the medium to long-term, the UK will face a choice - it can reduce barriers to agricultural trade with the Rest of the World but only at the cost of encountering barriers to agricultural trade with the EU. The UK may well choose to diverge on regulations and pivot to trade beyond the EU (although problems for agricultural business operating across the Irish border should be noted), at which point UK-EU agricultural trade would begin to operate less like the Swiss model and operate more like other third countries. Checks may be introduced for given sectors and the rate of checks may increase depending on the regulatory divergence. 

So regulatory convergence, coupled with an equivalence agreement, is the obvious method to avoid disruption to post-Brexit trade in agriculture. But is the EU obliged to provide an equivalence agreement ? Well, yes actually, by virtue of the WTO SPS agreement. I've provided a screenshot of Article 4 on equivalence below:

Even if the Article 50 talks do not reach an agreement (e.g. if the EU will not compromise over an extortionate exit bill or ECJ jurisdiction), it is a bit of a stretch to imagine that in the event of Article 50 talks failing, the EU could reasonably refuse an equivalence agreement. Otherwise, the EU can make any demands it wants in Article 50 on pain of starting a trade war which will :
- break its WTO SPS treaty commitments
- break its own treaty commitments to removing barriers to international trade
- harm its own agricultural sector (the UK imports 3 times more agricultural products than it exports to the EU).

It is also worth noting that Commission Decision 94/360/EC  provides for "a reduction in the frequency of physical checks of consignments of products imported from third countries should be fixed on the basis of the criteria laid down in Article 8 (3) of Directive 90/675/EEC on experiences in the Member States and the danger to public and animal health in the Community". In other words the UK and EU can decide that each other's products are still safe at the point of Brexit and do not warrant an immediate imposition of a high levels of checks.

Now I don't have a high opinion of the EU. But those who push this food scare story are suggesting the EU really are mad and bad. If so, why would we want to stay in the EU (as Remainers want) or under EU regulatory control in the EEA (as Flexciteers want) ? Beats me.