19 February 2018

May needs an answer to the Irish question – before it scuppers Brexit

By William Davison

A late January speech by Philip Hammond at the World Economic Forum reignited the debate over the possibility of the UK maintaining a customs union with the European Union after leaving. Given the Chancellor’s support in his address for the government’s broad strategy, which includes ending customs union, it is not immediately clear why.

The resulting furore was a product of Brexiteer paranoia about Hammond’s intentions, and confusion about EU trading arrangements, rather than the content of the speech. The confusion is exploited by the “soft Brexit” campaign and efforts to prevent decoupling. Foremost among the justifications for as much continuity as possible is the Irish border situation. And if there is a situation that can be portrayed as essentially the status quo but with less say in the rules for the UK, then there will be an increasingly convincing case for reversing Brexit. Labour’s emerging support for customs union makes this scenario more likely.

This black and white presentation of the options is centre-stage while more pragmatic solutions are shunned. The EU has established Deep and Comprehensive Free Trade Areas (DCFTA) with nations on its periphery that facilitate a high degree of access to its Internal Market. A bespoke UK version would create a very soft form of “hard Brexit” by ensuring significant regulatory alignment. Combined with the implementation of modern customs arrangements, this could keep the Irish border invisible without a new customs union or de facto Single Market membership via the European Economic Area (EEA).

Yet rather than detailing its plans in EU terminology, a dithering government instead lies prone as Brussels’ legal machinery churns out ammunition for its opponents. If this continues, Brexit could be stopped, further poisoning British politics, and reopening the vexatious debate about the UK’s role in an integrationist EU.

The post-Davos kerfuffle was largely due to Hammond’s remark that the UK economy may move only “very modestly” apart from the EU’s. Commentators read this as proposing effectively staying in the Internal Market and Customs Union, which are two key building blocks of European integration.

But what Hammond said was: “We are taking two completely interconnected and aligned economies with high levels of trade between them and, selectively, moving them, hopefully very modestly, apart.” That formulation is within the parameters of government policy, which is to leave the customs union but otherwise maintain the trading status quo as much as possible. Also, Hammond said the UK should not seek membership of the EEA and twice referred to new “customs arrangements”, which are distinct from customs union.

The EU Customs Union was formed in 1968 and is a vital part of the freedom of movement of goods, an aim of European integration since the founding 1957 treaty. In the Customs Union, members collectively set external tariffs on goods imports, which eliminates all internal tariffs. Remaining a member of this Union would mean continuing to apply the EU Common External Tariff, constraining the trade offers the UK could make to other nations. However, there’s a strong campaign for continuity to ensure integrated supply chains are not ruptured.

Separate from the Customs Union are regulatory requirements imposed on imports from outside the EU, such as checks on animal health and drivers’ licences, or inspections to ensure products are labelled correctly. These actions enforce the rules of the Single Market or the EEA. Within the EU, regulatory compliance before goods are moved combines with customs union to create frictionless internal trade. This means that the frequent suggestion that staying in a customs union is a silver bullet for the Irish border problem is a fallacy – there is also a need for regulatory alignment, which is distinct from customs union.

One outlet misleading on the issue is The Guardian. For example, despite evidence to the contrary, a recent Guardian report said customs arrangements for the Irish border require “hitherto unimagined” technology. The issue is often raised simply to muddy the waters. Contributors  to The Guardian and The Observer regularly commit the customs union fallacy  over Ireland, or perform a sleight of hand by conflating the Customs Union and Single Market.

While a DCFTA could resolve the regulatory issues, the conventional alternative to customs union is a customs arrangement which involves the UK participating in EU systems to ensure efficient cooperation. There would be waivers for local trade and electronic clearances and physical checks before or after the border. Integral to such a set-up are bonded warehouses, where goods are held until approved, an expanded trusted traders scheme, and technology such as GPS and cameras to monitor vehicles. The customs expert Lars Karlsson suggested such a package for the Irish border in a report for the EU Parliament. But those recommendations in November did not go far enough to satisfy the commitments agreed the following month by the EU and UK.

Last year, while the UK argued the solution for the Irish border would emerge out of the future partnership, the EU demanded specifics. That resulted in the December text stating that, if other solutions were not found, the UK must stay in “full alignment” with Internal Market and Customs Union rules in relevant areas. While that may prove critical, the fundamental stipulation that there must be the “avoidance of a hard border, including any physical infrastructure or related checks and controls” could be even more so. However, Karlsson, the former Director of Capacity Building at the World Customs Organization, said in an email that it was possible to comply with the stipulation using his technological package, and, tellingly, Ireland’s customs authority seems to agree. That is also the view of David Raynes, the former Assistant Chief Investigation Officer in HM Customs & Excise National Investigation Service. He said in an email that there is also precedent for the intelligence-led cooperation between UK and Irish authorities that is needed to combat fraud.

Nevertheless, if the EU insists the December text must be interpreted to preclude, for example, bonded warehouses anywhere near the border, or cameras on roads leading to the frontier, then a technological solution looks impossible, and a customs union of some sort inevitable. That could, theoretically, either be a model proposed by the UK where it applies the Common External Tariff only to imports destined for the EU, a customs union for some goods only, or Northern Ireland remaining in a customs union with the EU.

With reports that Labour’s leadership is prepared for the UK to stay in customs union, an upcoming parliamentary vote on the issue, and the EU working up the December “full alignment” backstop into legal terms, which will include some form of customs union, the net is closing. Remainers want Parliament to reject the Withdrawal Agreement and the blueprint for the future partnership when they are voted on later this year, which they hope will lead to a second referendum. If the EU plays hardball over the Irish border, the future blueprint could look more like an extension of the strict terms of the proposed transitional period than a mutually beneficial free trade agreement. One Eurosceptic commentator described the possibility as the “British Versailles”‘. Remainers, and possibly most Labour MPs, would then argue that because the Conservatives had bungled the negotiations, the status quo was preferable to remaining economically integrated with the EU, but without voting rights.

This scenario leaves May with stark choices: quit the Article 50 process, reverse course and request to be in the EEA, or elaborate on policy and make a specific DCFTA proposal within an Association Agreement for the entire arrangement, as recommended by the European Parliament. That would include the recently discussed security partnership. Karlsson-style customs arrangements will be needed regardless.

Given the history of harmonisation, a bespoke DCFTA, which is backed by EU experts, could facilitate mutual recognition of standards and authorise British regulators to check compliance with EU regulations. In theory, the templates offered by Ukraine’s deal suggests unhindered access to the Internal Market for the UK’s financial and other services industries, but given the discouraging noises from Brussels, Paris and Berlin, this appears most unlikely. Instead, to maximise preferential treatment for its valuable service exports, and so create a more balanced trading arrangement, the government will need to make a generous immigration offer and contribute to the costs of regulatory systems. Hardliners must accept an indirect role for the ECJ, which would provide interpretations of EU law in the event of disputes coming before an arbitration panel. Should the UK be held to undermine the European social market model, or diverge from regulations, there would be mechanisms for the EU to impose trade restrictions.

As with all options, a DCFTA with streamlined customs arrangements will not satisfy everybody. But it would respect the Referendum, allow for substantial economic continuity, and avoid a hard Irish border. Rather than flirting with high-risk strategies, moderates should support such a proposal – that is, assuming May’s government finally begins to take back control of Brexit by providing one to back.

William Davison is a freelance journalist.