Why is the EU in no hurry for a trade deal?

The BBC’s Adam Fleming reported today that the EU’s trade commissioner hasn’t yet started preparing for trade negotiations:

Katya Adler said something similar yesterday:

[T]his is another reason for the rather laid-back atmosphere in Brussels Brexit circles right now – EU insiders think much of the detail and substance governing EU-UK future relations will actually be worked out after the UK leaves the bloc in March next year.

Perhaps the clue to this is in the report by Institute for Government last month on the views of the EU 27:

The Single Market matters more than the UK market to EU27 governments and businesses.

[T]he other member states mean it when they say that maintaining the integrity of the EU and its Single Market is their priority.

[T]here are many reasons why the EU27 will want a close future relationship with the UK, and they will all have their own priorities. That does not mean that the consensus that has prevailed so far will crumble. All member states share an interest in a deal that protects the integrity of the Single Market and the stability of the EU.

The integrity of the Single Market is a phrase we hear often from the EU but one to which a lot of our politicians and commentators don’t seem to have paid a lot of attention. There are good reasons for wanting to preserve it though. When it works in sync with the EU’s Customs Union it enables trade to flow freely in a way it does nowhere else in the world.

Outside the EU, trade is a lot more complicated. Many people seem to think that leaving the EU will free us; that there is some state of nature where countries trade freely with each other. The truth is that, in international trade, the state of nature is nasty and brutish. Historically, countries have restricted trade. They have protected their home markets and imposed tariffs, quotas and regulations on others. Over time, through trade agreements and the World Trade Organisation, these barriers have started to come down.

The EU has taken this process further than most. Its Customs Union removes tariffs and its Single Market harmonises regulations on goods and some services. The combination of these two systems removes the need for border controls. Common tariffs are charged and common standards enforced at the EU border so once something is inside the EU, whether as a finished product or a component of another product, it can be moved freely. It is therefore possible to put goods on a truck in Manchester and drive them to Munich, then pick up another load and come back again, without being stopped. One way to think about the EU is as a system of immunity. It provides a space in which the usual constraints of international trade do not apply.

It therefore follows that once a country leaves the EU it loses that immunity. There is much talk of the EU threatening to put up barriers once the UK has left. That is back-to-front thinking. Once the UK leaves the EU, the barriers that exist in the normal course of international trade will reappear. By placing itself outside the system, the UK loses the benefits of that system’s removal of tariffs and regulatory barriers. The EU’s border will move and the restrictions that apply to other countries will then apply to the UK.

But couldn’t we just decide not to check goods that cross our borders with the EU? After all, we have the same regulations as the EU at the moment so what’s going to be different after 29 March? Wouldn’t that solve the problem in Ireland too?

Unfortunately it’s not that simple. WTO rules mean that countries can only offer preferential trading terms as part of a trade deal. As the Institute for Government explained last year:

[T]hough there is scope for flexibility to unilaterally apply a lighter-touch regime, the UK would be unable to liberalise its borders for EU imports completely.

First, under World Trade Organization (WTO) rules, unless the UK is prepared to drop tariffs for all imports, it will have to collect duties on EU imports.

Second, as a member of treaty organisations such as the WTO and as a signatory of the TBT (Technical Barriers to Trade) and SPS (Sanitary and Phytosanitary) agreements, the UK would be bound by the principle of non-discrimination when it comes to applying regulatory checks.

In other words, if you drop tariffs for one country you have to drop them for everyone. The same applies to regulatory checks. If the UK decided not to implement checks on the Irish border it would have to stop checking imports from anywhere or else, sooner or later, someone would bring a legal challenge to the WTO. As the FT’s Alan Beattie pointed out:

If the UK discriminates in this way, it will be vulnerable to widespread litigation in the WTO. This will come at a time when the UK is attempting to regularise its position in the organisation, in which it has hitherto been represented by the EU. The UK is dependent on the goodwill of other WTO members in the tricky question of splitting the EU’s existing commitments on food import quotas. It must also establish its position in the WTO’s government procurement agreement which gives its companies the right to bid for public tenders abroad. Arriving on the scene while creating one of the biggest breaches of WTO law in the organisation’s existence probably isn’t the way to get other countries on side.

The same applies in the opposite direction. The EU would be obliged to treat UK exports the same way as any other and therefore subject to customs and regulatory checks. It is not that the EU would ‘slap’ tariffs and checks on British goods. They would simply appear as a consequence of our withdrawal from the customs union and single market.

There is no free trade deal that can magic these borders away. A zero tariff agreement on its own would not remove the need for border checks. Regulatory and rules of origin checks would still need to be applied. Once the UK leaves the customs union and the single market there will have to be border checks.

Which is why the EU is very reluctant to allow the UK to ‘cherry pick’ which bits of the single market it wants to be in. Once the UK starts doing trade agreements with other countries it will mean that goods that don’t conform to EU standards will be circulating in the UK. That means there is a risk of those goods crossing borders and so there will need to be border checks. A country can’t be half in and half out of the Customs Union and Single Market because that contaminates the system. The whole point is that any goods inside can be moved anywhere and any goods outside are checked as they come in.

This ease of movement has enabled firms to set up EU-wide supply chains. This FT graphic, showing the journey of a fuel injector, is an example of how something manufactured in the UK can end up as part an EU product manufactured elsewhere.

The UK imports to make its exports and exports so that others may make their exports. As Mark Carney pointed out last year, over 30 percent of the total value of UK exports is components for goods that are finished elsewhere in the EU:

The proportion of UK exports that are intermediate components of EU value chains has increased from about 1/5th of exports in 1995 to about 1/3rd in 2014. Increasingly the UK doesn’t so much export to Europe as through Europe; it is a supplier of components to final goods that are exported beyond the continent.

Chart by Bank of England

Once the UK leaves the Single Market and Customs Union this trade will be subject to border checks. This will cost to processes that have been integrated for years, many of which are time sensitive. In some cases, the disruption will be enough to make it worth relocating these supply chains. For the most part, it will be a lot easier for EU firms to do that than for UK ones, simply because they will still have a number of other countries from which to choose while UK firms will have to source components from within the UK.

As the Institute for Fiscal Studies remarked:

[T]he UK is a much less important source of inputs for the EU than vice versa. For example, manufacturing firms in the rest of the EU only obtain 1.5% of their inputs from the UK.

The disruption to supply chains will be a lot less of a problem for EU countries than for the UK.

Chart by Institute for Fiscal Studies

From the perspective of other EU countries most of the problems associated with Brexit come from the UK’s withdrawal from the Customs Union and Single Market. A free trade agreement might mitigate that to an extent but it won’t restore the smooth flow of supply chains. As BMW’s sales and marketing director Ian Robertson said, a FTA isn’t that much better than WTO rules. Once the supply chains are disrupted the damage is done.

The British Ports Association agrees. The impact on ports, it says, would be the same under a FTA as under WTO rules. Its chief executive said:

A potential Brexit free trade deal will be welcomed by many in the sector but this is unlikely to cover border processes. In terms of border operations the impact of leaving the Customs Union and Single Market is now fast becoming a ‘no deal’ scenario for ports. Indeed this means that new border controls on UKEU trade are likely to be unavoidable and that delays at certain ports and important trade gateways are a distinct possibility.

Maybe that is why the EU doesn’t appear to be in any great hurry to talk about trade deals. Its objective is to limit the damage to EU supply chains and re-set the Customs Union and Single Market to operate without the UK. That’s the priority. Set against that, a trade deal is simply a nice-to-have.

 

It reminds me of what happens when you disturb an ants’ nest. The ants rush to seal the breach as quickly as possible. That is what the EU will do when the UK ruptures its carefully designed system. It will re-seal it in a way that does not leave any holes. A two-year transition period, should it be agreed, will give it time to do this. EU firms will be able to relocate their supply chains so that when the final break with the UK comes it will not be as big a deal.

There is a possibility that the EU might agree to the UK staying in the Single Market for goods only and negotiating a new customs union. As Sam Lowe and John Springford argue, this is similar to the arrangement Jersey has now and it would enable the UK to regain control of its immigration policy. The “Jersey Option” would also remove the need for physical checks on goods thereby avoiding the disruption to supply chains and the need for a visible border in Ireland. So far, it is the only proposal I have seen which enables the UK to retain its red lines, honour its commitment on the Irish border and to which the EU might just agree.

Otherwise we may find that come 2021 the EU will happily let us leave without a trade deal. It will have relocated its supply chains, put its port infrastructure in place and secured the UK’s budget contributions until the end of the financial period. With its system of friction-free trade preserved, then the EU might get around to talking about a trade deal with its awkward neighbour.

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25 Responses to Why is the EU in no hurry for a trade deal?

  1. Gary Taylor says:

    “Second, as a member of treaty organisations such as the WTO and as a signatory of the TBT (Technical Barriers to Trade) and SPS (Sanitary and Phytosanitary) agreements, the UK would be bound by the principle of non-discrimination when it comes to applying regulatory checks.”

    Sounds like a big problem. Except…except…don’t we discriminate already today? I mean we don’t treat imports from Munich or Moscow in the same way today. So we discriminate already. So does everyone else inside the EU. But we can’t continue to discriminate? But they can?

    What am I missing?

    • Rick says:

      We can’t discriminate outside some form of trade agreement. because we are in the EU we treat goods from Munich more favourably than goods from Moscow. Once we are out of the EU, unless we have some form of trade agreement, we will have to treat goods from Munich and Moscow in the same way.

    • Jonathon Stoodley says:

      The EU is a regional integration agreement under WTO rules and the EU is a member of the WTO. This provides a specific legal basis for an exception to the principle of non-discrimination.

  2. P Hearn says:

    The more Remain supporters blog on this subject, the clearer it becomes just how much control we’ve given up for the glorious benefits of running an £80,000,000,000 annual trade deficit with the EU.

    The Irish border can and should be used effectively to lever the EU into an FTA. Offer them a deal with unilateral free trade and complete recognition of all their standards for, say, seven to ten years whilst we re-establish our own regulatory agencies. We hope they will reciprocate since that would solve the Irish border problem and promote wealth and free trade within the EU, which is their remit.

    Of course, if they really want to make a point of hurting the UK via a deal that imposes tariffs on our exports, that’s their choice. That will entail a border for traffic from Northern Irelan to the Republic on the EU side, but that’s for them to square away with Dublin (i.e. tell Dublin to lump it).

    The EU is incredibly weak IF the Irish border is used against them. They would face clamours from EU business to accept a zero tariff, full regulatory equivalence FTA and political pressure from Dublin to do the same to eliminate the need for a hard border. Would love to see Barnier tell Sinn Fein that the EU will have to impose a hard border and tariffs, though I expect Barnier’s knee surgeon would be less excited at the prospect of the required patella rebuild.

    After that, the discussions could turn to fishing, though I’m sure the EU won’t expect to cherry pick any fishing quotas or special access to foreign waters.

    • “There is much talk of the EU threatening to put up barriers once the UK has left. That is back-to-front thinking. Once the UK leaves the EU, the barriers that exist in the normal course of international trade will reappear. By placing itself outside the system, the UK loses the benefits of that system’s removal of tariffs and regulatory barriers. The EU’s border will move and the restrictions that apply to other countries will then apply to the UK.”

      • P Hearn says:

        Put more simply:

        UK offers zero tariffs and accepts all EU product standards for seven years.

        All traffic coming into the UK over the Irish border can therefore proceed unhindered.

        The end.

        • Gulliver Foyle says:

          Having zero tariffs on goods does not remove the more disruptive non tariff barriers and if the UK decides it wants to maintain regulatory alignment (and anything else that is required to avoid re-imposition of the barriers every other third country experiences) it might as well remain in the Single Market, it will certainly need to if it wants to access it in the same way it does now, i.e. with no friction.

          • P Hearn says:

            “Having zero tariffs on goods does not remove the more disruptive non tariff barriers…”

            Which is why we should accept their product standards unilaterally to avoid such non-tariff barriers. This is unilateral action – they can hardly refuse to sign such a generous deal if offered.

            They might want to impose all sorts of delays, checks, tariffs and paperwork on goods from the UK into the EU, perhaps strip search the lorry drivers for all we know: we should let them if they’re that stupid and can cope with the PR disaster that will ensue.

            The EU will have to consider how such action will mess up Ireland good and proper. And it will. When a truck can [still] travel from Dublin to Belfast without any checks whatsoever, (as now), but must queue for hours to get back into the Republic at the EU border with lots of accompanying paperwork, questions will be asked. Especially when it’s all imposed on Ireland by the EU.

            We have to produce goods and services (80% of our economy is services, don’t forget) to meet the standards required in China, USA, Japan, Brazil, India etc. It’ll be the same for the EU. Given we already have 100% compliance, it’s not a difficult place to start from.

            We are then free to continue to shadow their regulations or not with our own agencies. Regulatory equivalence is well established as a principle. It will depend what makes most sense for the UK. As the German Finance Minister said on Radio 4 the other morning, if German industry comes to London to refinance their debts and fund investment, there’s nothing the EU can do about it. In that case, UK financial services regulation will be just fine.

            Some goodwill from the EU would be nice, but they’re clearly bitter and twisted over the whole divorce, so best let them get through the stages of grief and eventually they’ll reach acceptance. Then we’ll be able to talk as friends.

          • Gulliver Foyle says:

            @P Hearn: –
            “Which is why we should accept their product standards unilaterally to avoid such non-tariff barriers. This is unilateral action – they can hardly refuse to sign such a generous deal if offered”

            They can and will and a refusal to accept our “generous” offer will be entirely justified on several grounds, not the least of which are, in no particular order: –

            – Unilaterally deciding to accept EU “product standards” does not in any way deal with the way the Single/internal market avoids the need for border inspection of goods etc. It was fairly obvious that the UK was never going to unilaterally ditch wholesale EU regulations and standards because that would have rendered virtually impossible export to EU/SM markets but equally, simply adhering to those standards would not enable the continuation of frictionless trade because the act of leaving the EU/SM places the UK, voluntarily, outside the coordinated regulatory system that enables frictionless trade in the first place

            – WTO MFN conditions, how could the EU legally allow a third country (whether or not the UK 100% accepts to maintain regulatory alignment) to have unfettered access to the EU internal market while at the same time refusing such access to other third countries

            – Assuming the UK manages to negotiate and implement trade deals with, for example, the USA and if, as part of that trade agreement, the USA is able to export products that do not meet EU standards then the EU would be perfectly within their rights to inspect goods coming from the UK to ensure that no US products are trying to enter the EU market via another route

          • P Hearn says:

            “..Unilaterally deciding to accept EU “product standards” does not in any way deal with the way the Single/internal market avoids the need for border inspection of goods etc”

            This is about goods coming INTO to the UK only. We should simply accept anything they deem acceptable by their standards, but NOT require them to do the same in reverse. It’s unilateral. That’s the entire point. Only a fool wouldn’t sign such a deal when they have a massive trade surplus with us to maintain.

            “….how could the EU legally allow a third country (whether or not the UK 100% accepts to maintain regulatory alignment) to have unfettered access to the EU internal market ”

            It actually could but clearly wouldn’t. Precisely why this is about NOT asking for ANY special access to the EU market. Offering the COMPLETE and unfettered access to ours – that’s all we have the power to do. They can erect hard borders for our goods to get into the EU, and Irish hauliers returning to Dublin from Belfast will have to deal with it, as will we at Dover, Folkestone etc.

            “..the USA is able to export products that do not meet EU standards then the EU would be perfectly within their rights to inspect goods coming from the UK…”

            Absolutely! That’s why we should not and would not ask the EU to accept that. Negotiating 101 is not to ask the other side directly for something they cannot possibly give.

          • @ P Hearn

            You’re basically describing Minford’s solution, which is fine so long as you also accept the inevitable damage this will do to indigenous industry, and especially agriculture. By accepting tariff free and inspection free goods from the EU, and by definition goods from everywhere else (WTO – MFN rules again) you’re also going to damage the ability of UK food exports to send goods to the EU/EEA market where, as you correctly understand, the EU will most definitely want to do the border inspections, that’s if they don’t refuse entirely the products given the inherent risk of allowing in-regulated stuff into their market.

            The unilateral route will also lead to cheaper, less regulated products entering the UK market and I’m sure I don’t need to tell you what this will do to the UK producers.

            When Minford and his “Economists for Free Trade” first suggested unilateral free trade he also said that as a result he could not see how UK manufacturing could survive, he was right about that at least.

  3. lbc says:

    “the EU will give us a good deal” was always the british equivalent of “Mexico will pay for the wall”.
    so delusional it belongs in psychiatry textbooks.

  4. Guano says:

    I was at a talk by Stefaan de Rynck, and he made a point that wasn’t picked up in any of the reports of that talk: the UK appears not to like the way that the Single Market operates and to expect a large-scale re-write of the rules of the Single Market, even though the UK took part in the creation of the Single Market and the rules and procedures that under-pin it. Margaret Thatcher was one of the chief architects of the Single Market and the way it operates (with all its rules and regulations) but those who claim to be her successors don’t like it (based on some sceptical remarks made by Thatcher in her last two years in office).

    The EU is probably not in a hurry to try to accommodate one of its members that has fallen out of love with its own creation.

    • P Hearn says:

      Did you ever create something, only to think years later that it could have been better and, given your time again, you might change a few things?

      Unless you work in the public sector, change isn’t news.

      • Coprolite says:

        Your final comment exposes the Mail as the source of your worldview. The public sector has seen nothing but gratuitous change for changes sake for at least 20 years.

        • P Hearn says:

          Insult me all you like if it help you validate your existence.

          The public sector is involved in constant change, but it’s of the pointless type designed to show they’re “doing something” or to prove some politician has made changes so lessons can be learned from some tragedy or other.

          They operate without a price mechanism, with no means for consumers to pay more or less or to vary whatever it is they do in accordance with demand. The whole offer is based on giving Paul something that Peter has paid for to ensure you get Paul’s vote next time round.

          Good luck getting that to work.

      • Guano says:

        If you regret doing something one way and want to do it another way, it is best to admit that you participated in the decision to do it the first way. Brexiteers don’t do that: they claim that the rules and regulations of the Single Market have been imposed on us.

        • P Hearn says:

          It’s a new line of argument to suggest that Bexiteers are denying that the UK played a role in the formation of the so-called single market.

          For another 11 months, we’ll officially continue to have our 1/28th say in the way it develops, though in reality, our views will already count for nought in Brussels.

          Cameron did make a humiliating attempt to suggest some modest reforms, but was swatted like a fly and sent home looking like a complete fool for even having tried.

          The rest you know.

    • Blissex says:

      «the UK appears not to like the way that the Single Market operates and to expect a large-scale re-write of the rules of the Single Market, even though the UK took part in the creation of the Single Market and the rules and procedures that under-pin it. Margaret Thatcher was one of the chief architects»

      Sure, but the plan of the thatcherites was quite specific: Thatcher thought that “liberated” from trade unions and with much cheaper wages thanks to that and her recessions english businesses would wipe out their continental counterparts if barriers to trade were removed, because the continental businesses had higher wages, paid good pensions, obeyed fair rules for treating their workers, had to negotiate with trade unions.

      Then the blairite plan was quite similar: with a large influx of low wage non-unionized immigrants from eastern Europe, while most other countries kept them out, english businesses could outcompete in the single market the continental businesses with higher costs because they could not employ “race to the bottom” eastern european immigrants.

      Neither plan quite worked out as intended, and better managed and organized continental business survived vigorously. Therefore the english elite opinion has soured on the single market, as it is obvious nowadays that it is not a channel for english “race to the bottom” domination of the european economy, and they are rediscovering H MacMillan’s opinion of it:

      https://www.foreignaffairs.com/reviews/review-essay/1999-09-01/importance-being-english-eyeing-sceptered-isles

      «England fought Louis XIV and Napoleon, whose Continental System excluded the British isles from European trade. Young quotes de Gaulle’s memoirs on a meeting with Harold Macmillan: “The Common Market is the Continental System all over again,” the British prime minister told his old friend, the French president. “Britain cannot accept it,” Macmillan told him. “I beg you to give it up.”»

  5. perry525 says:

    I find the emphasis on regulations somewhat surprising. Anyone who exports to any country in the World, has to ensure their product is compatible with the destination countries requirements. At the moment as part of the EU, everything we export to the EU is compatible with the EU requirements. This will not suddenly change when we leave. We are members of the WTO, because of our membership of the EU, we gave up our individual membership as part of joining the EU. When we have left the EU, we may or may not join the WTO, until we do, the WTO rules do not apply.

    • Raybond says:

      Sorry Perry525, but we are members of the WTO in our own right, not as a member of the EU.

      https://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm

    • Richard says:

      No it will not change but we be a Third Country (not a EU member state) and will no longer be part of the eu market surveillance regulation so all shipments can be subject to inspection to ensure they meet the EU’s regulation. This is especially true for agriculture and chemicals. Much has changed in the world since we joined the I suggest you read up on the GATT https://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Trade No serious trading country is not in the WTO!

      • P Hearn says:

        The EU can survey goods going into the EU all they like.

        By definition, that’s not our problem any more than it’s China’s or America’s.

        Our issue is goods coming into the UK. Accepting their standards (by adopting them as the de-facto start point for our own standards agecies) means we needn’t inspect anything from the EU.

        We already have no tariffs, so a deal offering them that is too good for them not to sign. If they don’t want to sign such an easy deal, fine. They can’t say we didn’t offer. If that means borders in Ireland and a return to terrorism (since that’s the implied threat) then so be it.

  6. Pingback: Why is the EU in no hurry for a trade deal? via /r/economy | Chet Wang

  7. Blissex says:

    «Maybe that is why the EU doesn’t appear to be in any great hurry to talk about trade deals.»

    The main reason is that it is illegal under the EU treaties for the EU institutions or any of its members to negotiate a special trade deal with just one member: all negotiations are among all members. If there was a truly compelling reasons to start negotiating now instead of on March 30th 2019 (or January 1st 2022) the EU Council could well make an exception, but there is no compelling reason.

    «Its objective is to limit the damage to EU supply chains and re-set the Customs Union and Single Market to operate without the UK. That’s the priority. Set against that, a trade deal is simply a nice-to-have.»

    M Barnier has repeatedly said that in due course a trade deal with the UK is likely to happen, something Canada-style. As to Jersey-style that seems to me highly unlikely: it would not allow frictionless trade (that would requires joint negotiations of the goods part of trade deals, which is absurd), tariffs on goods are already low, and anyhow the UK main interest is in “passporting” for service exports to the EU, which is something that the EU are never going to let happen, because it is a sovereignty issue.

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