13 February 2020

What does ‘friction’ in trade really mean for the UK?

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It seems like every few weeks, a British minister says in no uncertain terms that there will be friction in the customs and administrative procedures between the UK and EU. Such pronouncements are followed by howls of anguish from the business community, and cries that the death knell of frictionless trade has been sounded. That we continue to have these discussions is somewhat bizarre.

To repeat the obvious, we have known that there would be some friction in the relationship from the moment it was clear that the UK would be leaving the single market and customs union. Indeed, one could argue that this was made clear as long ago as the Lancaster House speech back in January 2017.  The logic of Brexit is that such costs are only acceptable if the UK can improve its economy significantly in other ways – through regulatory reform, and trade agreements with major partners, many of whom are unlikely to reach a deal with the EU because of its agricultural or regulatory baggage.

The confusion of the May years ended in July 2019. From the moment that Boris Johnson – who opposed the Chequers agreement with its New Customs Partnership and high regulatory alignment – became Prime Minister, he was crystal clear that his aim was a comprehensive, advanced Free Trade Agreement. Such an agreement automatically means that there will be customs checks and forms between the UK and EU. Clearly the object of a comprehensive FTA is to minimise those frictions as much as possible, but frictions there will always be outside of the customs union and single market.

The UK government had known that there would need to be upgrading of customs for the last three years, but until Johnson became PM, no serious effort was made to invest in that upgrading, on the basis that it was not worth spending the money if it proved unnecessary.  That position was largely because the UK political class did not really believe we would ever be leaving the customs union and single market.

So perhaps business could be forgiven for not planning properly in that period. But certainly once Johnson took over, there could no longer be doubt that the FTA was the final destination.

It is also not surprising that once the UK left the EU with a deal in January 2020, the Project Yellowhammer planning for no deal would no longer be directly applicable. If the UK had left without a deal, then certainly transitional simplified measures such as those suggested for “no deal” might be needed on a temporary basis because it was reasonably certain the parties would ultimately come together to sort out the divorce bill, citizens rights and the Irish border.

But now that likelihood is diminished, since the divorce deal has been done. Transitional measures as suggested in no deal planning are no longer sustainable for the long term. Business must therefore prepare for the possibility that we cannot control – that the EU’s demands are so unreasonable that there can be no further agreement. This position is certainly to be avoided, and if both parties are willing to be reasonable and commercially rational, a deal should be achievable. But any deal will require customs processes in any event, so business should prepare for them.

So, what do these customs procedures and checks mean?

First of all, we must distinguish between checks and form filling. Documentary checks which will be needed involve electronic submissions, and we pointed out in an earlier paper (Brexit, Movement of Goods and the Supply Chain, February 2017)) that this does not actually represent a huge administrative burden. Take the Tate and Lyle case study (here at pp 26) showing that customs clearance administrative costs worldwide amount to 0.01% to 0.02% of the value of the product.

The cost of customs fees and so forth in the Tate and Lyle case study amounted to 0.055% of the value of the product. I am not suggesting that all companies face these same very low administrative burdens, but it does illustrate that even for a product like cane sugar, imported from all over the world through many different trade programmes, the costs are much lower than the media often suggests.

This quite different from physical checks which can slow down the flow of goods and make the process less than seamless.

While in the Tate and Lyle case study, the company pointed out that in ten years they had never encountered any delays from customs checks, we do need to find ways to minimise the frequency of physical checks. This is done by using customs simplifications such as the Trusted Trader scheme (the UK’s current Authorised Economic Operator programme is badly in need of upgrading), but also by seeking maximal mutual recognition.

For how that might work, look at a deal like the EU-NZ veterinary agreement, in which New Zealand and the EU agreed that for certain meat products, the EU would recognise New Zealand’s underlying product regulation. The effect of this is that for these products, you only need to check 2% of the products as opposed to 100%. If the EU can do this for New Zealand, then surely it can do so for the UK, whose product regulation and testing is identical now, but may diverge in the future.

If such equivalence can be granted, then the parties can agree the circumstances where it would be lost and lead to 100% physical checks on these goods. As we have said, most recently in our work on the Alternative Arrangements Commission, many of these checks can take place in facility, thereby reducing the burden. The key point is that the EU must agree with all of this for it to work.

That point hods for the overall shape of future trade: there will be friction, but the precise amount of that friction will depend on the agreement between the parties, and it need not be as damaging as it is sometimes portrayed. Business should therefor push for the best and prepare for the worst.

Since it is the UK that wants maximal recognition and equivalence, and customs and trade facilitation, then it is to Brussels business must go to lobby.

You would only lobby London if you think that there is some way that the UK can end up in the customs union and single market. And though this belief still stubbornly persists in some quarters, make no mistake – the Government is serious about leaving both.

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Shanker Singham is CEO of Competere and a former trade advisor to the UK Trade Secretary and the US Trade Representative