The UK’s decision to leave the European Union in 2016 has arguably triggered one of the most laborious and frustrating times to be alive in Western European history. It has since hijacked all political debate and media headlines, which in turn have divided an entire nation – including our trusted servants – who’ve admittedly proven to be ill-equipped to negotiate and deliver what the British electorate had voted for. As we are edging closer towards an official exit from the European Union, trade negotiations with nations outside the EU have been the utmost priority among diplomats.
What impact will the UK’s departure from the customs union and single market have on British consumers? Here we will try to analyse such implications in an unbiased fashion by simply diverting our attention away from the incessant Project Fear policy undertaken by most media outlets and economic forecasters
Customs Union and Single Market
It would be fair to suggest that both the Customs Union and the Single Market have been the European Union’s greatest achievements. Thanks to these great innovations, there is now a single market of over 500 million people, far larger than the US, which also includes a free-trade area larger than the NAFTA (North American Free Trade Agreement). While the customs union allows internal free-trade within the EU, it would also be fair to suggest that the EU is rather protectionist towards the rest of the world, especially when we account for food and drink products. To understand how the EU is regarded as being ‘protectionist’, Matt Ridley provides an easy representation of the dissimilarity between free trade and the Customs Union.
He writes: “Free trade says to the poorest: we will enable you to get access to the cheapest and best products and services from wherever in the world they come. We will not, in the economist Joan Robinson’s arresting image, put rocks in our own harbours to obstruct arriving cargo ships just because other people put rocks in theirs. The customs union, however, says: if Italy wants rocks in its harbours to protect its rice growers against Asian competition, then Britain must have them too, even though it grows no rice.’’
These rocks protecting domestic rice growers from foreign producers is literally known as the Common External Tariff (CET). The CET is administered at EU level, meaning all EU members need to abide by the rule – and as a result – EU consumers pay elevated sums for products which should in theory cost very little. The consequence of such a policy is that individual states no longer have any direct control over international trade policy and have no administrative staff to negotiate or regulate trade. We must remind ourselves that the educated brexiteer felt that Britain lacked the power to strike free trade deals with its trading partners outside of Europe. Being in the EU means that Brussels has full control of their trade policy. It is thus logical to understand why many felt that the UK lacked sovereignty and control, and as a result wanted to leave an organisation who arguably seeks to protect the interests of neighbouring countries over their own.
As we can see, the EU imposes high tariffs on commodities which are central to the lives of the average citizen. The prices of food, clothing and textiles imported from third-world countries are bumped up by >6%. And while UK tariff revenue from these items totals about £1bn per year, gains to consumers from the abolition of tariffs on these items could be much larger than that as domestic prices for clothing and textile products generally (not just the imported items) would likely fall. With textile and clothing spending at £82bn per year even a 3% price fall would boost consumer incomes (and potentially spending) by £2.5bn (b4b). According to in Institute for Fiscal Studies (IFS), the abolition of all EU tariffs would cut consumer prices by up to 1.2%. With UK consumer spending at £1.3tn in 2017, this implies gains for consumers of up to £15bn.
Objectively speaking, EU tariffs are not very high; they are, however, often steep on agricultural products. This represents a heavy effective ‘tax’ on UK consumers, especially given the UK’s status as a large net food importer. Subsequently, UK consumers are denied the choice of cheap food from outside the EU and pushed towards consuming expensive products from within it. This cost is high at 0.5-1% of GDP – almost certainly higher than possible rules of origin costs for manufacturers under an FTA.
In view of this, it would make little sense for the UK to remain in what is unquestionably a highly protectionist agricultural system. Moreover, although continued membership of the Customs Union would facilitate cross-border trade administration, it would also involve the UK to accept the EU’s Common External Tariff, hence preventing it from negotiating separate trade agreements with non-EU nations. Cross-border trade is already becoming lightly administered through the Union Customs Code, and most pro-Brexit supporters want the freedom to negotiate new trade agreements, for instance with the USA, India and China.
The reason EU tariffs are so bad for the UK is because it had joined the EEC (European Economic Community) in 1973, when the EEC’s customs Union had already been designed, built and implemented. The tariffs were originally set in order to protect Continental producer interests, notably French farmers, German car makers, and Italian clothing and footwear manufacturers. Those were – and still are – the areas where the EU’s external tariffs are very high.
Alternatives to the Customs Union?
The government’s real intentions had been made clear ever since the infamous ‘Chequers’ proposal was published in mid-2018. It essentially made leaving the EU customs union dependent on the Facilitated Customs Arrangement (FCA), an arrangement which aims to deliver frictionless trade in goods between the UK and the EU after Brexit. Despite its theoretical ingenuity, the FCA is a highly complex and unworkable dual-tariff scheme. As Peter F. Allgeier, the former US Ambassador to the WTO argued, the proposal would prevent the UK regaining an independent trade policy as the proposal “places the UK in a straitjacket that prevents it from pursuing an independent regulatory regime in manufactures and agricultural goods, which will prevent it from securing the major concessions on services and other regulatory barriers it faces in complex trade negotiations with the larger parties”. He goes on to claim that “those who argue that the UK can obtain its pre-EU freedom to conduct an independent trade policy while locking in to the EU’s regulatory rule-book are suffering from, and propagating, a serious delusion.”
Following the failure of Chequers, the government agreed a Withdrawal Agreement (WA) with the EU, preceded by a political declaration which sets out the broad shape of a future UK-EU relationship. The WA and political declaration are so drafted as to make it almost impossible for the UK to avoid ending up in an indefinite customs union with the EU if they come into force:
The WA creates a ‘backstop’ that will kick in if no ‘final deal’ is agreed. This creates a bare bones customs union between the EU and Great Britain, with Northern Ireland effectively staying in the EU customs union and so becoming part of a separate customs (and regulatory) territory to the rest of the UK. There would be no route for the UK to leave this backstop customs union without the EU’s agreement.
As a result, the government proposals were rightfully rejected, and a no-deal has since been the preferred option in Parliament. A no-deal means leaving the EU before having negotiated a Free Trade Agreement, and hence trading under World Trade Organization rules. The no-deal proposal was welcomed by hyperbolic headlines and dubious counter-arguments; for instance, a Sunday Times headline (12.08.18) read “No deal will hike food bills by 12%” after it reported that ‘senior executives from the big four supermarkets’ claimed that a ‘no deal’ Brexit ‘would force up the price of the average weekly food basket by as much as 12%.’ According to such people, leaving the EU under WTO rules will require the UK to take the current tariffs which the EU at present forces us to impose on imports from the rest of the world, and impose them on imports from the EU as well. This, however, is simply not true. In reality, what the UK has been doing is amending its tariff schedules at the WTO; it is doing so by copying the EU’s current schedules, but such schedules do not specify the tariffs which they will have to charge on imports. What they specify is the maximum level of tariffs which they are permitted to charge. The UK will subsequently have the freedom to charge lower levels of tariffs, or zero tariffs.
The Most Favoured Nation (MFN) principle is a rule which the WTO requires. According to the WTO’s official website, the MFN “treats other people equally Under the WTO agreements, countries cannot normally discriminate between their trading partners”. In other words, whatever tariffs the UK decides to set must be charged equally to everyone, apart from countries with which they have customs union or free trade agreements.
Despite what the doomsayers might be saying, there has been substantial progress since a ‘no deal’ was voted in parliament. In Skanker Singham’s well-researched article, he writes that:
“The agreements that we have through the EU (excluding the recently-signed Japan agreement where tariff cuts only commence in January 2020) account for 11% of our total trade. Looking at how much trade is duty free around the world (or duty free under a GSP programme), it would not be surprising if the trade actually affected – in case the agreements are not rolled over – would be approximately half of that. Of these, the Swiss agreement alone – which has been rolled over – is worth 20% of our trade. Other significant agreements here include CETA, covering a further 12% of the trade under these agreements (almost rolled over), and the EU’s agreements with South Korea and Singapore, each covering around 10% of this trade.” https://brexitcentral.com/department-international-trades-no-deal-planning-advanced-doomsayers-believe/
He also adds that “trade is also more than just about trade agreements”. Proof of this is the UK’s ability to strike many mutual recognition agreements (MRAs) that are very important to facilitate trade. “MRAs make it easier for people to trade and easier to prove that their products satisfy the standards and regulatory requirements of the other party. The UK has already signed MRAs with the US, Australia, Israel and New Zealand. There are sectoral agreements on insurance with the US and Switzerland, on wine with Australia, and the US. A range of air services agreements have been signed with the US, Canada, Switzerland, and Israel to name a few. The UK and New Zealand have rolled over the UK-NZ veterinary agreement. A distilled spirits mutual recognition agreement with the US (with whom there is a rapidly growing whisky trade) has been signed and a similar agreement is due to be signed shortly with Mexico.”
Could the UK join Progressive Trans Pacific Partnership (CPTPP) which was signed last week by 11 Pacific Rim countries representing 13.5% of world GDP? If the UK accedes to the CPTPP, it also sees a possibility that the US will one day return to the TPP fold. If the UK, US and new accession countries like Indonesia and South Korea accede to the CPTPP, then it will command 45% of the world’s GDP, and include the fastest growing countries in the world (compared to the EU27’s 20% assuming static performance over time, whereas it is likely that on current trends the EU27 will decline from this 20% figure). https://brexitcentral.com/department-international-trades-no-deal-planning-advanced-doomsayers-believe/
Another possible future free-trade agreement, and perhaps the most attractive one thus far, is the Canada Plus FTA. This involves free trade in goods plus substantial regulatory alignment, but no free movement of persons. There should be no EU objection to a basic CETA-type FTA, but it may be difficult to augment this with extra agreements on financial services.
Theresa May has made it clear enough that she wants the UK to stay in the Customs Union. It has been revealed by Skanker Singham that the EU was prepared to offer an advanced free trade agreement which would work for the complex supply chains in the EU-28, involving zero tariffs and no quantitative restrictions, with regulatory co-operations and measures to facilitate customs and Irish border controls. The deal, however, was rejected because the UK wanted to keep in alignment with the EU by remaining partially tied down with the Customs Union and Single Market. I do not enjoy repeating myself, but one has to wonder why Mrs May and her cabinet has such a deeply entrenched obsession with the Customs Union? Isn’t she simply betraying a nation with her deviation tactics, masked by her poor negotiation skills?
Although the whole Brexit ordeal cannot be summarised in a few pages, we hope that we have offered enough evidence to perhaps challenge some of the views which you so vehemently adhered to. Many have (perhaps understandably) been blinded by the information put forth by the mainstream since it is widely accepted as dogma – that is – it is viewed and interpreted as unequivocally true. It is important to remind yourself that many who wish to remain in the European Union are either (a) seeking to protect their interests, or (b) mere ideologues. That is why it is so hard for certain economic forecasters (or any ‘expert’ in the financial district) to remain impartial when covering Brexit, since on a purely subjective level they fear that their income or general livelihood may take a substantial blow. They are effectively committed to membership of the EU by their careers, and as a result, fail to evaluate Brexit objectively. The ideologues are fairly simpler to evaluate since they are blinded by their own biases, hence consistently incapable of any rational reevaluation in light of any new evidence which may challenge their preconceived beliefs. They are committed to the great European Project spearheaded by Macron and Merkel! This seems to be the future for the European Union.