Another day, another report from the House of Lords EU committee looking at Brexit – this time its impact on trade.
And it doesn’t mince its words, concluding “Brexit will dramatically alter the UK’s trading relationship with its biggest trading partner, the EU”.
And it states that those trade negotiations will be carried out “against an extraordinarily difficult political and institutional backdrop”.
Its advice to the UK government is clear – forget about free trade deals with India and Australia – the priority is nailing down the UK’s relationship with the EU, and sorting out its schedule of tariffs and concessions at the World Trade Organisation (WTO) – something the UK has to do regardless of whatever trade arrangement it negotiates with the EU.
The Committee also has plenty of patrician put-downs of the extreme-end of the Brexiteer spectrum for their lack of knowledge on trade.
For example: “The notion that a country can have complete regulatory sovereignty while engaging in comprehensive free trade with partners is based on a misunderstanding of the nature of free trade”.
It goes on to explain that modern Free Trade Agreements (FTAs) involve extensive regulatory harmonisation in order to eliminate non-tariff barriers, and surveillance and dispute resolution arrangements to monitor and enforce implementation.
In short, “The liberalisation of trade thus requires states to agree to limit the exercise of their sovereignty”.
Last week, the Nevin Economic Research Institute published research on Brexit’s impact on Northern Ireland, and argued that staying in the EU Customs Union was more important to Northern Ireland than staying part of the EU Single Market.
This is because it would reduce the impact of a separate customs regime, particularly for the agri-food sector, and firms from the island of Ireland that transit goods through the UK.
The House of Lords Committee also zeroes in on the Customs Union as a critical – perhaps the critical issue in the EU-UK trade relationship post Brexit.
It urges the UK government to make an early decision on whether or not the UK should seek to remain part of the Customs Union.
The report states: “We are concerned that the Government appears not yet to have given sufficient consideration to the implications of leaving the EU’s customs union.
“While there may be opportunities to use digital technologies to streamline customs procedures, we are troubled that the Government presently has no estimate of the cost to businesses of administrative delays, compliance with customs checks, and the rules of origin if the UK left the customs union, and that it was unable to confirm whether or not such information would be available before triggering Article 50.
“Our concerns are made more acute by the implications of leaving the customs union for the UK’s land border with the Republic of Ireland.”
It also urges the British government to carry out and report a rigorous analysis of the cost to businesses and taxpayers of leaving the Customs Union – before it triggers Article 50.
At the very least it says the UK government should consider remaining part of the Customs Union on an interim basis at least until the terms of the UK’s future trading relationship with the EU have been settled.
And using the understatement characteristic of the House of Lords, it adds “We are also conscious of the practical challenges of introducing full customs controls within two years”.
The heart of this report on trade post-Brexit looks at the four models most often cited as possible arrangements for the UK – joining the European Economic Area (EEA), Staying in the Customs Union, a Free Trade Agreement with the EU, and Trade under WTO rules.
It ranks the options in this order to run from the least disruptive to the most difficult option (WTO rules).
Joining the EEA – with Norway, Iceland and Lichtenstein – would give Britain some but not total access to the Single Market, but would come at the price of having to accept all of the EUs four freedoms, including the free movement of people – as well as paying into the Budget and accepting the jurisdiction of the EU Court of Justice.
The British government has spoken of a “bespoke deal” to suit Britain, rather than take any one of the four models on offer.
But the Lords conclude that a modified version of the so called “Norway model” to suit Britain is “unlikely”.
“Reform of the EEA agreement to limit free movement and include voting rights on EU legislation is improbable. Creating a customs union arrangement with the EU would limit the UK’s ability to have an independent trade policy. Even in areas not covered by the customs union, pressure would be put on the UK to shadow the EU’s trade negotiations.
“While a FTA provides the greatest flexibility in securing a bespoke deal and could potentially be combined with wider UK-EU co-operation after Brexit through an Association Agreement, we see no evidence that trade on terms equivalent to full membership of the Single Market (especially in services) could be achieved.
One particularly difficult piece of information for some Brexiters is the Lords’ views on the importance of dispute resolutions mechanisms in trade agreements, and the fact that all trade liberalisation agreements require states to agree to limit the exercise of their sovereignty.
Although Prime Minster Theresa May has stated the UK does not want to be subject to the jurisdiction of the EU Court of Justice (part of her definition of what Brexit means), the Lords are adamant that any trading relationship requires constraints on sovereignty that usually include ceding dispute resolution on trade matters to an outside body.
Of the trade relationship with the EU in particular, the Lords write: “The level of market access the UK is able to negotiate with the EU would depend in part on the extent to which it was willing to accept and adopt EU law or demonstrate equivalence with EU rules. In the medium to long-term the UK may have to continue to update its domestic law to be consistent with EU law”.
And it goes on to set out the restrictions that will apply to the UK no matter what form of trade agreement it settles on: “As an EU Member State, the UK has full membership of the Single Market, but is subject to decisions of the CJEU in enforcing the rules of the Single Market.
“Joining the EEA as a non-EU member would make the UK subject to the decisions of the EFTA Surveillance Authority and the EFTA Court. Participating in the customs union would require the UK to cede to the EU the right to set tariffs and to determine its trade policy.
“A FTA with the EU would require the UK to agree to trade terms with the EU that would be binding under international law. Finally, agreeing its schedules of concessions at the WTO would require the UK to make legally-binding commitments to all members of the WTO, most notably on its tariffs, which would be enforceable under international law.”
With such complexity at play – and a grave shortage of experienced staff to deal with it – the UK is in a weak position in negotiating its future trading relationships.
No wonder the Committee recommends that the UK aims to negotiate a transitional arrangement to buy time for it to sort out the trade complex beyond the two-year Article 50 process.
It’s urging the UK government to establish, at the outset of negotiations, a clear game plan for a future transitional agreement, with specific proposals as to what form it should take.
This is a practical measure, but it also reveals the depth of the UK’s vulnerability on trade in the forthcoming Brexit negotiation.
Comment via Twitter: @seanwhelanRTE