The government’s Brexit plan is still one big contradiction

The UK wants to remain in the single market for goods, but not for services. It also wants to end the free movement of people. Added to this, it hopes its “facilitated customs arrangement” will prevent the need for border checks.

The first obstacle is whether the European Union will accept cherry-picking, which is contrary to its negotiation guidelines and which it has not allowed so far for any third country.

There is also the question of whether hardline Brexiteers will accept it. Apart from these political obstacles, are the technical proposals realistic?

The UK suggests the following on goods and customs. It would apply the EU’s tariffs and trade policy for goods intended for the European market, but apply its own for goods intended for the domestic market. This is complicated but worth spelling out.

-  where a good reaches the UK border, and the destination can be robustly demonstrated by a trusted trader, it will pay the UK tariff if it is destined for the UK and the EU tariff if it is destined for the EU;

-  where the destination cannot be robustly demonstrated, it will pay the higher of the UK or EU tariff. Where the destination is later identified to be a lower tariff jurisdiction, the trader would be eligible for a repayment from the UK government equal to the difference between the two tariffs.

But there’s a problem. If the UK collects duties on behalf of the EU, it must also accept supervision by EU institutions such as the Commission’s Department for Budget and the European Court of Auditors, and it must accept rulings from the European Court of Justice. In her foreword to the government’s new white paper, Theresa May rejects all of this. Furthermore, trust in the UK applying rigorous controls on goods coming from third countries is not high in EU circles, following a damning report last year by the ECA.

One basic contradiction of the white paper is that the UK wants to leave the EU customs union and fiscal territory, but wants at the same time to avoid border formalities (eg customs declarations) between the UK and the EU. As I have explained in my earlier blog, you can’t have both: either you are in the customs union territory or you are out.

By leaving the customs union, the UK introduces the need for border formalities. It can, of course, try to make them as frictionless as possible, but insofar as this implies the use of IT solutions, more time is needed. Nothing will be ready by Brexit day nor the end of the transition.

What else? The UK wants to conclude a free trade agreement with the EU, and hopes to remain a party to the free trade agreements the EU has with 71 other countries. Such a solution is indeed possible but requires the agreement of the countries concerned. Both the conclusion of an agreement with the EU and with its trading partners will take time, and in the intermediate period benefits will not be available to traders in the UK.

In addition, the UK wants to conclude its own free trade agreements with third countries though, according to the white paper, these will not cover goods but services. Again, this will only be possible if the EU accepts different treatment of goods and services. One example shows how complicated this may become: If an elevator manufacturer exports an elevator, this is trade in goods; if he/she then installs or repairs the elevator, this is trade in services. Where two different sets of rules apply, exports and imports will become more cumbersome.

The envisaged free trade agreements with the EU and other countries will not be in force in March 2019 nor in 2021. This raises the question: what will happen? In principle the normal customs duties will have to be paid and customs formalities undertaken. This result can only be avoided if the UK remains in the EU customs union, at least until the envisaged free trade agreement with the EU has entered into force. The inclusion of the UK in the free trade agreements of the EU, if accepted by the trading partners, will take place further down the line.

As I said in my earlier blog, Brexit is a bad deal for importers and exporters in the UK and, to a lesser extent, the EU.