Tuesday, 24 April 2018

The case for a customs union is falling apart.

The Westminster groupthink has it that a customs union is a magical device that makes all the problems of post Brexit trade disappear. You cannot persuade remainers otherwise since they are drunk on their own superiority, having convinced themselves that all the expert opinion is on their side.

Admittedly this has been exacerbated by the likes of  BrexitCentral and the Tory Brexiters who have yet to put forth a coherent solution, instead claiming that trusted trader schemes, mutual recognition and "technology" solves the problem. Neither are correct.

The Brexiters are wrong primarily because they think a combination of all of the above not only solves the customs union aspect but also that of the single market if we throw in mutual recognition of standards - which is not at all possible. The EU does not use mutual recognition where there are already harmonised rules.

What both fail to recognise is that the core concern for frictionless trade is regulatory harmonisation. That is what eliminates the non-tariff barriers and that is what facilitates low friction borders. The single market.

We are told that there is no cherry picking from the single market but this is not strictly true if you adopt the rules effectively under ECJ supervision as Switzerland has. But that then begs the question as to why Switzerland still has remaining border infrastructure. It is assumed this is because Switzerland is not in the customs union. This is not the case.

The reasons for Switzerland's dysfunction is largely down to its own under-investment in customs systems. If existing legislation was implemented properly then there would be no need for the large scale border post we see pictured above. The customs formalities themselves are all done by the exporter and pre-filed - but the independent local customs authorities have a habit of asking for unnecessary documentation - much of which could be eliminated.

What should be noted is that none of this has anything to do with tariffs, rather it is primarily a VAT border - and a customs union would not make that problem go away. It requires a different kind of agreement - one which the UK will need to hammer out over the course of Brexit.

One might then ask why Switzerland has never made a move to resolve this. It all comes down to politics. Cross border traffic in Switzerland is politically sensitive. There is a strong isolationist caucus in the country which would ban through traffic and severely restrict cross-border movement. The federal government, therefore, finds itself frozen into immobility, with not enough popular support to introduce reforms or even slight changes. It thus has to make do with the mess it has - it is the best it can achieve.

Meanwhile, if we look to the Norway border with Sweden we gain find the problems are largely of Norway's own making and the result of political choices. Origin inspections are not done at the borders nor is tariff collection. This is handled behind the border and with electronic transactions. Again we find the border infrastructure is for VAT and inspections are primarily for contraband - drugs, weapons and alcohol.

This seems to suit both sides of the border. There is only one post for both sides, the customs officers from both countries police both sides of the border, and clear each others consignments. There is no great political pressure to upgrade the system so it is not a high political priority. In theory though, it is possible to have an invisible border. Where spot checks are necessary, these can be roadside checks in the 10km border zone, or checks at the point of origin or destination. It all depends on the degree of harmonisation, the system design and the amount of trust and confidence.

The basic gist is that both Norway and Switzerland could have entirely frictionless borders if they upgraded their systems and there was any particular political will. It seems though that there is not. Were there the same political imperative the UK has in Northern Ireland then the problem would already be solved.  

In the remainer Brexitologist camp, however, the argument is a little more sophisticated than the Westminster groupthink. They would have it that though regulatory harmonisation is needed, a customs union is still a precursor to frictionless borders. One can see why but it actually isn't. 

Assuming we had full regulatory harmonisation, either by way of the Swiss "model" or the EEA, electronic filing and post-delivery auditing would still be sufficient. It's really a question of behind the border customs and excise enforcement to remove the incentive for smuggling.

The main problem here is that is it heavily dependent on systems and IT - which is not insurmountable and the general direction of travel anyway, so that makes it a question of what we do in the meantime. There is no possibility of rolling out a system in time for Brexit day. 

But that is another groupthink in play - the insistence that any solution must be finalised for our day of exit, when in fact longer term interim solutions can be found which again do not require a customs union. It is simply a matter of unilaterally aligning tariffs until the systems are ready. This does not even require the EU to consent to it. 

Critics would say that this involves a good deal more "red tape" than a customs union, which initially is a fair assessment in that we will have to equip and train for this regime. The opportunity therein though is to be an early adopter of UNECE Single Window, leading to greater integration of existing commercial accounting and supply chain software. We would be pioneering the methodologies and the system will eventually find its own natural equilibrium. 

What it does not solve in the long term is the issue of rules of origin, but there is no political obligation that says these must be avoided. The obligation is for an invisible border and nothing more. Rules of Origin is a purely economic consideration.

There we must examine whether the penalties of ROO tariffs are worse than losing our ability to deviate from the EU's common external tariff. Remainers tend toward the pessimistic, assuming that this will trigger the departure of the automotive sector and not leaving the single market. More likely it is the other way around, not least since, if we are creative, there avenues we can take to mitigate the impact. We should also note that the EU is being considerably more generous in ROO thresholds now. 

The basic point, however, is that a customs union does not eliminate third country controls, it does not eliminate the VAT issue and has no discernible bearing on what happens at the borders. What little influence it has will likely be eliminated by the end of the next decade - not least thanks to improvements to global rules.

Ultimately the customs union debate is a major distraction from the more important debate yet to be had about our regulatory relationship - especially when the favoured solution of this government, inspired by the Tory right is simply not going to fly. Eventually that we will have to have this out where the choice will come down to either an ECJ or Efta regime. There are no other avenues short of full disengagement resulting in every kind of border friction going on every frontier.

There is then one final and pretty obvious consideration. Supposing we do elect to become a third country with no intention of retaining the single market, the extent of controls would be such that all those companies nominally let off the hook by a customs union would likely leave our shores anyway making a customs union redundant. If we are going to wreck the economy to such an extent and give ourselves multiple avoidable headaches, what's one more? 

From a personal point of view I object to a customs union in principle simply because the purpose of Brexit is to become a distinct customs union and repatriate decision-making, and like my fellow leavers I think that the economy is secondary to that. Trade is an aspect of foreign policy and we must have all the tools at our command to say that we have an independent foreign policy. that it inconveniences a handful of multinationals is not really top of my list of concerns.

The fact is that British industry, multinationals especially can adapt to being out of the customs union, and contrary to the persistent whinges of risk averse remainers, there are opportunities in doing so. They key battle was always going to be the regulatory relationship and those who keep dragging the debate back to the matter of customs unions are only muddying the waters and regressing the debate. The sooner they get their heads round the fact we are leaving the customs union, the sooner we can resolve that far more urgent question.

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