Tuesday, 27 November 2018

The optimal Brexit

I'm probably preaching to the converted but this is another post about the so-called Norway Option.

To explain the option we have to go right back to basics. Brexit is all about choices. Trade with the EU comes with obligations. The more market freedoms you want, the more obligations there are. Being that the EU accounts for almost half of our trade, any deal is going to come with obligations - some of which we would prefer not to have. That was always going to be the case. To completely remove EU influence would result in substantially less trade with the EU. That is a fact. It is unarguable.

Then when it comes to trade is is also one of the few unarguable truths of economics that you do the most trade with your nearest neighbours. The Gravity Model. Moreover our relations with the EU go far beyond trade in goods. It is a rich market of trade in services and we have multiple tiers of intergovernmental cooperation on anything from fisheries protection to intelligence sharing. A comprehensive relationship was never going to be a simple and easy affair.

Our trade in goods, though, is what pushes us in the direction of the Norway option. Over the last thirty years we have seen an explosion of trade through Dover which is facilitated by low customs friction. Border formalities are kept to a minimum. Mistakenly, politicians believe that the customs formalities are removed by a customs union. This is incorrect. Almost all border inspections are eliminated by a system of rules that make up the single market. The customs union is only a minor component.

The option faces opposition from all sides. Opinion varies among leavers. Some think regulatory harmonisation is not required for frictionless trade and that technology can eliminate most of the customs issues. Whether or not this is feasible in practice is neither here nor there. The EU has said no. Were the UK to diverge from the EU regulatory ecosystem, the EU would be allowing the UK the unilateral right to set the lowest bar of market entry. This would open the EU up to challenges at the WTO.

Then there are those leavers who believe we can trade on WTO terms alone. This is an article of faith. It has no basis in fact. there are no WTO rules which compel the EU to relax its standard third country controls. This would result in losing more than a third of our overall trade with lasting economic repercussions.

Ultra remainers also oppose the EEA Efta option. They see it as inferior to EU membership and will spread a number of lies about the option which further poisons the debate. Anyone giving the option a fair hearing will see that is it an equitable balance of obligations. Ideological opposition tends to ignore the practicalities of modern trade. Unfairly, the option is characterised as Brexit in name only - or worse; that the UK would be a passive recipient of all the rules with no say. The myth that refuses to die.

The debate largely turns on the nuances of the EEA system which is an adaptive framework overseen by the Efta court and the EEA Efta secretariat. There is dialogue at every stage and when laws are adopted members can secure their own opt outs and exemptions. No two members have the same EEA configuration and it represents only a quarter of the EU body of law. Presently the balance of power is in the EU's favour but the UK's membership of Efta would, to a point, rebalance the equation.

For whatever complaints one might have about such an arrangement, the alternative for securing frictionless trade is to adopt EU rules verbatim, as indeed Switzerland does, but with direct ECJ applicability. They do not have the Efta system as a firewall. Putting it bluntly, if you don't like the EEA option, you are entitled not to, but the alternatives are worse.

So what's all this Efta Plus business? This is MP Nick Boles totally misunderstanding how the system works - telling us we need the EEA and a customs union or a "customs arrangement". We have heard a number of MPs and hacks telling us that the EEA Efta solution alone doesn't solve the Northern Ireland border problem. This is a particularly poisonous groupthink grounded in a fundamental ignorance of how the EEA system works.

Firstly joining Efta would rule out a customs union, so Boles and Co believe a confected version of Efta can be bodged. If they understood the system they would see why it isn't necessary. By joining the EEA system we would then look to incorporate a number of added tools and components in much the same way Norway has. The UK would adopt the Union Customs Code.

Here the debate is behind the times with many repeating half understood mantras recycled from the referendum when there have been a number of new developments since. All goods moved within the EU have a customs status of either Union or non-Union goods. Union transit (UT) is a customs procedure used to help the movement of non-Union status goods between two points in the customs territory of the EU. As of last year, Common transit extends UT to include the European Free Trade Association (EFTA) countries of Switzerland (and Liechtenstein), Norway and Iceland.

Between that and a number of political and legal obligations within the EEA agreement to simplify customs formalities, there is enough there to form the basis of a UK customs protocol attached to the EEA. The EEA Agreement embeds tariff-free arrangements, and customs cooperation (and Rules of Origin), while adopting the EU's tariff schedule unilaterally gives us the effect of a common external tariff from which we can diverge where appropriate.

For what it actually solves, a customs union would be absolute overkill and contrary to the aims of Brexit. This is why I am no fan of Nick Boles. His ignorance is regressing the debate while making the option far less attractive to leavers who would otherwise compromise.

Many chime in remarking the Norway still has a border with Sweden but this fails to note that we are not proposing the Norway Model, rather we are using Norway as a baseline template. Our relationship would have to go further but certainly not as far as a customs union. Even now the customs formalities at the Norway border a minimal and of the checks that exist, they pertain mainly to the VAT border - which is nothing at all to do with customs unions. There are peripheral issues that would need to be resolved but there is nothing that necessitates a full blown customs union and certainly not one of the kind that appear in the withdrawal agreement backstop.

In every way the EEA option is more equitable and more in line with what leave voters want when compared with Theresa May's deal. Though it does not deliver on all of what we would wish for but the Brexit as promised by Vote Leave is not deliverable, impractical and when all factors are considered, highly undesirable.

So about the fly in the ointment. Freedom of Movement. There is a pathway to make a suspension of FoM permanent starting with the Article 112 safeguard measures. This has been subject to much debate as to how possible it is. Whatever I say there will always be someone ready and willing to gainsay. I therefore take the line that we must deal with the issues in the order or importance. The Ashcroft polls after the referendum pointed to immigration being the secondary concern. We must therefore concern ourselves primarily with delivering a stable and sustainable exit from the EU.

When that is accomplished we can then examine the options. My own view is that Article 112, though justifiable, would be a last resort and we should seek out a consensus view with Efta states to come up with a system of reforms with the implied threat of the nuclear option. Either way, we should cross that bridge when we come to it. 

The plan put forth by Nick Boles is an irritating distraction dressed up as the EEA Efta option but in truth, it's a mishmash of poorly conceived fudges to problems he doesn't understand and can't be bothered to explore. This is typical Westminster bubble stuff. If there's a wrong end of the stick they will grasp it with both hands.

The EEA option is not, as Boles would have it, a matter of simply shifting from one side of the EEA table to the other. The UK will need negotiated protocols on everything from fishing through to customs cooperation. To do this it will require full cooperation from the EU and it must be done in good faith rather than seeking to hoodwink the EU with loopholes in the system. Boles damages the case by pretending we can fudge it. If we do this then we have to do it as a full and active participant of Efta, fully committed to advancing the interests of Efta.

In respect of that, the merits of moving to an already respected bloc with considerable clout of its own, should not need further argument. It beats Theresa May's vassalage by a country mile. Of all the available options it is the only one we can truly say is in the national interest. Hardliners on both sides of the debate will wail about it, but the one thing in they have in common is the complete absence of a viable counter proposal. That should really speak for itself. 

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