Brexit options & no-deal Free Trade Agreement Blog Featured

It’s time the EU stopped playing hardball and agreed on a basic free trade deal

brexit trade barriers
Written by David Blake

It is high time the EU faced reality and the fact that their own economies will be hit hard by their refusal to negotiate. They need to conclude a short-term bridging agreement to continue tariff-free trade while a long-term Free Trade Agreement can be negotiated.

The UK is leaving the EU on 31 October 2019.  The new Prime Minister, Boris Johnson, has made this perfectly clear.

The EU refuses to reopen Theresa May’s Withdrawal Agreement (WA) and the UK Parliament has rejected it three times.  Her WA is toxic for the UK – as I pointed out in a previous Briefing for Brexit.  It is time to admit that the WA is deceased and cue the dead parrot sketch. And in any case, the WA is what it says – a ‘withdrawal agreement’ – not a deal for a future relationship. The EU insisted the future relationship deal could only be negotiated after we leave the EU.  So there needs to be a new settlement between the UK and EU that both sides can accept.

The short-term costs of not finding a settlement by 31 October are high for all sides.  In February 2019, the German Halle Institute for Economic Research estimated that EU exports to the UK would fall by 25%, as the UK reaches out to new global suppliers. Germany could lose 100,000 jobs, with the greatest effects felt in the car industry. France could lose 50,000 jobs. A total of 422,000 jobs could be lost across the EU27. It estimated that there could be 12,000 job losses in the UK.

In January 2019, the Irish Central Bank predicted a 4% cut in GDP and around 100,000 job losses in the Republic if tariffs such as 69% on fresh boneless beef imports into the UK were imposed. UK exporters to the EU would pay annual tariffs of £5bn, but EU exporters to the UK would pay annual tariffs of £13bn due to the high tariffs on food and cars that UK consumers buy from the EU.

These costs can be avoided.  The long-term solution is a comprehensive free trade agreement (FTA) building on the EU’s deal with Canada. The EU has offered such a Super-Canada deal in March 2018.  But this will take time to negotiate.

What is needed now is a short-term bridging arrangement in the form of a temporary basic FTA, as outlined by Martin Howe QC, Chairman of Lawyers for Britain. This could be implemented through a political agreement, rather than a formal legal agreement.  The FTA would allow the UK and EU to continue trading in goods on current zero-tariff terms under Article XXIV of GATT (General Agreement on Tariffs and Trade) and in services under Article V of GATS (General Agreement on Trade in Services), while the Super-Canada deal is being negotiated.

There also needs to be a new much simpler withdrawal agreement.  There are three key issues. The first is citizens’ rights which both sides could guarantee – but without the special status conditions of May’s WA.  The second is the EU’s financial claims which it decided in an arbitrary and one-sided way.  As Howe points out: ‘the UK could offer to submit them to a binding international arbitration, provided of course that the UK’s counterclaims would also be taken into account — such as claims to a share of EU property and the assets of the European Investment Bank’.

The final issue is the Irish border. Again, as Howe argues: ‘It always was nonsense to discuss customs arrangements on this border in advance of and divorced from the long-term trade relationship between the UK and the EU where such discussions naturally belong’.

The UK offered numerous solutions to avoid a hard border which would protect the integrity of both the UK and EU internal markets without any physical infrastructure on the border or any need for new technology.  These included the Smart Border 2.0 proposal – which was actually commissioned by the EU Parliament from customs expert Lars Karlsson – and the more recent proposals of the Alternative Arrangements Commission.

Andrew Lilico has proposed an innovative solution that uses the external borders of the island of Ireland to avoid a hard North-South border. There would need to be regulatory compliance and rules of origin checks even if a FTA eliminated tariffs. But EU and UK officials could work together both at the Irish Sea border to check products entering Northern Ireland from the UK that were intended to pass on into the EU and at the Celtic Sea border for products entering the Republic from the EU that were intended to pass on into the UK. He points out that ‘Ireland is in a common travel area with the UK and is not in the Schengen area, so there are in principle passport checks between Ireland and the rest of the EU at the Celtic Sea border’.

He also points out that the North-South ‘border (either side of which there are a large number of regulatory, tax and legal differences) is controlled via a combination of administrative cooperation, whistle-blowing, auditing, site raids by customs, tax and regulatory enforcement officials, occasional random spot-checks on roads leading up to and at the border (yes, that happens now), and cameras and other physical infrastructure at the border (yes, that is there already)’. So nothing would really change.

According to Stewart Jackson, only 1.6% of Irish exports and imports cross between the Republic and the North. By contrast, a ‘hard border would threaten 50% of Irish SME exports to the UK (including half the beef products) and 80% of all Irish exports routed to external markets through Great Britain’.

The EU has until now argued that these proposals are unicorns, but recently Annegret Kramp-Karrenbauer, Angela Merkel’s successor as leader of the Christian Democratic Union, has said that a workable solution to the border could be agreed in five days of discussions. On 21 August, Mrs Merkel gave Johnson 30 days until 20 September to propose a suitable alternative to the backstop.

There is another strong incentive to agree a basic FTA as Dr Katy Hayward from Queen’s University Belfast has pointed out in a chapter entitled ‘Could a hard Irish border be avoided under WTO rules?’ in the report What would ‘trading on WTO terms’ mean for the UK?.

All parties – the UK, the Irish Republic and the EU – have agreed to avoid customs checks at the border. The Irish government confirms: ‘We will not accept a hard border on this island and therefore we are not planning for one’. Michel Barnier, the EU’s Chief Brexit Negotiator, has said: ‘We will have to find an operational way of carrying out checks and controls without putting in place a border….My team have worked hard to study how controls can be made paperless or decentralised’. The Sun reveals that ‘No Deal will cause Dublin such chaos that the EU intends to let them waive border checks. So much for the “backstop” being vital to avoid a hard border. In the end they’ll just make checks away from the border, as Eurosceptics said’.  So immediately after Brexit, goods will pass freely across the border in both directions.

This makes it all the more surprising that Donald Tusk, President of the European Council, has once again rejected Boris Johnson’s request to remove the backstop from the withdrawal agreement, implying that the absence of a backstop means the return to a hard border.  Who exactly is going to impose it?

Nevertheless, if there is no deal and trading between the UK and EU reverts to WTO terms, then Dr Hayward points out that, under WTO most-favoured nation rules, both the UK and EU would have to have the same policy for goods entering their territory from all other countries.  This would clearly be unacceptable to the EU and can be avoided very simply using a basic FTA.

The EU should be under no illusion that the UK will leave the EU on 31 October.  It is written in statute – the 2018 Withdrawal Act. So long as the government avoids introducing new primary legislation of any kind before 31 October – which could be amendable by Remainer MPs intent on blocking Brexit, unlike secondary legislation – then the UK will automatically leave on 31 October.

Remain-supporting parliamentarians are refusing to accept this and are looking at new ways of stopping a no-deal Brexit, such as a temporary government led by the Leader of the Opposition, Jeremy Corbyn; a government of national unity, led by Ken Clarke or Harriet Harman; and the introduction of new legislation that orders the PM to request a Brexit delay to avoid no deal.

However, former Supreme Court judge Lord Sumption believes that the PM has the legal power to force through a no-deal Brexit even if he loses a confidence vote in the Commons. Under the Fixed-term Parliament Act, if the PM loses a second confidence vote which must be held within 14 days of losing the first, then the Act requires that a general election is held on a date specified by the Queen as advised by the PM – and that date will be after 31 October. Sumption also thought a legal challenge in the courts would fail: ‘I can’t see how the courts could say the Prime Minister wasn’t entitled to take political considerations into account. It’s an intensely political process. These aren’t questions of law for the courts’.

Further, even if there is no deal, there won’t be any serious delays on the Calais-Dover route, as the redoubtable Jean-Marc Puissesseau, president of Port Boulogne Calais, makes clear: ‘There are certain individuals in the UK who are whipping up this catastrophism for their own reasons. This has provoked a lot of concern but basically “c’est la bullsh**t”. Nothing is going to happen the day after Brexit. Britain will be a third country, that’s all, and there is no reason why this should lead to any problems. If both sides do their homework traffic will be completely fluid. … Roughly 30pc of the lorries from Dover to Calais currently travel empty. They will go straight to the green line and won’t need any clearance. Another 60pc of the rest do not carry material that needs to be checked’.

Theresa May’s Operation Yellowhammer study of the impact of a no-deal Brexit – leaked to the Sunday Times – outlines a ‘worst-case scenario’ where the UK could face months of disruption at its ports. It claims that up to 85% of lorries using the main Channel crossings ‘may not be ready’ for French customs and could face delays of up to two and a half days. Yet Owen Paterson MP tweets that he attended a briefing on the study given by civil servants on privy council terms and asked whether they had discussed these predictions with the port authorities in Calais. They said ‘no’ – they hadn’t been asked to. Yet Lord Kerslake, the former head of the civil service, described the predictions as ‘credible’ – which tells you all you need to know about the establishment’s hysterical ramping up of Project Fear Mark II as it continues to believe that it can block Brexit. We didn’t believe Project Fear Mark I at the time of the Referendum – we are not going to fall for this now. What it will do though is encourage the EU to continue digging in its heels – believing that the UK government will back down.

Far better for the EU to listen to organisations like the German Mittelstand – the small and medium-sized businesses that are the backbone of the German economy – and their concerns that they could be dealt a ‘crippling blow’ from a ‘dangerous’ no deal Brexit, given that the UK is Germany’s fifth biggest export market. It is clear that the EU has a lot to lose – not least its £64bn trade surplus with us.

So it’s time for the EU to stop playing hardball and agree a basic free trade deal to come into effect at midnight on 31 October 2019.

About the author

David Blake

Professor David Blake is at Cass Business School