Our Director of The Legatum Institute Special Trade Commission Shanker Singham and Senior Counsel to the Special Trade Commission, Victoria Hewson write for The Daily Telegraph
about the positive free trade opportunities between Britain and the EU.
The Prime Minister was well aware that repeating “Brexit means Brexit” was not going to suffice for long so when she made her speech outlining the Government’s strategy for Brexit negotiations she was also aware she’d need to outline specific plans with some clarity. The White Paper on the United Kingdom’s exit from and new partnership with the European Union confirms and elaborates on what she said.
On the issue of membership of the single market she could not have been clearer or indeed more emphatic. The UK will not be a member of the single market after Brexit. But there are also questions about the Government’s position on the customs union. Here the answer Theresa May gave, and the position in the White Paper, is a little more ambiguous.
What the Prime Minister essentially said about no longer being bound by the common external tariff and having our own schedules at the WTO means that the UK will no longer be part of the customs union.However, she went on to signal a clear desire to put some form of agreement in place to preserve frictionless trade with EU member states. This is a sensible response to what must be done in the negotiations. Detailed research by the Legatum Institute’s Special Trade Commission sets out how tariff and non-tariff barriers that might apply outside of the customs union can be managed or indeed avoided altogether.
Ideally a comprehensive Free Trade Agreement (FTA) will be agreed and ready to come into force on the day after Brexit, under which the UK and the EU decide not to apply tariffs or quotas to imports from each other.
This isn’t the end of the story. A customs union is an arrangement where two or more countries agree to apply the same tariffs and customs controls on goods coming into their territories. They can then eliminate tariffs and customs controls on goods. FTAs include provisions reducing and eliminating tariffs on goods traded between the parties, but do not control the parties’ trade policies with other countries. So under an FTA goods must still be subject to customs controls for various reasons, including to ensure that only goods that actually originate in one of the countries benefit from preferential tariffs. If one of the parties had lower or no tariffs on a particular product than another, exporters could circumvent one country’s tariffs by shipping their goods through the other. So this is where the rules of origin come in – a mechanism to determine what country an item originates from and in what circumstances it can therefore benefit from the FTA.
The complexity comes where products comprise parts or ingredients from several sources. If tariff-free trade is agreed with the EU all exporters will need time to assess the make-up of their products. This is not the system whilst Britain is a member of the customs union and moving away from that may mean a phased introduction of rules of origin will be necessary. As described in our paper, one way of doing this would be for us to commit to keeping the same tariffs and quotas as the EU as against the rest of the world for a short period of adjustment, say, a year. Both sides could then waive requirements to prove the origin of goods we import from each other during that transition period.
Agreeing a full FTA is a challenging goal in the time allowed by Article 50, but it is possible, and permissible under WTO rules, to agree zero tariffs and quotas between the two sides for a limited period of time, in anticipation of an eventual FTA. Even if the EU will not agree to this, there are ways to mitigate the impact of tariffs. The fall in the poundwill allow many manufacturers to absorb the import duties, and integrated supply chains will be protected by the availability of inward and outward processing reliefs, which mean that duties are not payable on parts that cross borders as part of a supply chain until they are imported as a product for sale on the market.
If the EU imposes tariffs on our imports, Britain would have the right to impose the same tariffs on imports from the EU, but while this could deliver significant revenue for the Treasury it would increase prices, especially food prices, for ordinary consumers. The Government could choose to keep EU imports tariff free – a huge step with repercussions for UK farmers and manufacturers. It would also mean that other countries might have less incentive to reduce their tariffs on imports from the UK, so while consumers would benefit from lower prices and more competition, the longer-term gains from FTAs with established and emerging markets could be threatened.
This may look risky, but our report describes how a balance could be struck by selectively reducing and eliminating tariffs on goods that the UK does not produce or compete with, or where the tariffs are very low. This would shield consumers from price rises, while maintaining our negotiation position with supplier countries. Ultimately, being outside the customs unions will allow the UK to reduce and eliminate tariffs and quotas as part of a global free trade agenda.
The commercial interests on both sides strongly point towards these interim measures being agreed in time for the kind of phased implementation envisaged by Mrs May. To paraphrase Mrs May, it would indeed be an extraordinary act of self-harm for the European Union not to deliver the minimal level of cooperation to realise first the necessary interim measures, and then the final comprehensive FTA. This article originally appeared in The Daily Telegraph.