After four years during which Brexit dominated UK news, it still seems to have taken British businesses by surprise. As evidence of the disruption mounts, business groups are calling on the government to ‘do something’ to sort out the mess. According to the Observer, some even think we can re-open negotiations with the EU. The CEO of Marks and Spencer remarked, with typical British understatement:
Tariff-free does not feel like tariff-free when you read the fine print.
All the talk of ‘new’ red tape and regulations betrays a fundamental misunderstanding about what happened on 31 December. These regulations are not new. They are the normal rules of trade. Membership of the EU’s customs union and single market effectively gave us immunity from these rules when we traded within its borders. The reason the EU built a trade wall around its borders is so that trade can move freely within it. Once goods are within the EU, the customs union means that they have already had their tariffs paid and the single market means that they have either been made or imported according to a common set of regulations. Therefore they can be moved around the EU without any further checks.
By triggering Article 50, the UK set itself on a course to rip up that immunity, at which point, the normal rules of trade reappear. Somebody (I think it was Jacob Rees Mogg) said that the vote for Article 50 was a vote for No Deal. In a sense he was right because Article 50 destroyed the legal basis of our trade with the EU and left a blank sheet of paper in its place. We were left with the same trading relationship as Venezuela until something else was negotiated. What we have negotiated is better than No Deal but it is a long way from the ease of trade that we once enjoyed.
We have a Free Trade Agreement (FTA). Like all FTAs, tariff-free trade only applies to goods wholly or mostly made in the countries party to that FTA. Therefore, if your business is bringing in goods from Asia, attaching a design and logo to them, then re-exporting them to the EU, there will now be tariffs on those goods. There is much talk about tariffs being ‘slapped on’ British exports. Again, this is to misunderstand what is happening. Those tariffs are the normal terms of trade. They would apply under any of the FTAs we have agreed. Despite what our prime minister says, we have not negotiated tariff-free trade with the EU or anyone else. You can only have tariff-free trade on everything if you are inside a customs union.
This Rules of Origin question isn’t something that has been dreamt up overnight. Trade experts have been warning about it for years. Sam Lowe wrote about it in March 2018. As he explained, free trade agreements don’t actually mean free trade.
Without an EU-UK customs union British exporters will face a new barrier to trade: rules of origin. No amount of positive thinking and innovative solutions can eliminate this problem.
In October 2019, former Australian trade negotiator Dmitry Grozoubinski produced a handy diagram to explain it.
A trade agreement, even one that eliminates all tariffs, doesn’t mean countries can do away with customs checks on shipments from one another. This is because while they have no tariffs between themselves, they may have vastly different tariffs on other countries.
The diagram below illustrates why this could be a problem. In it, Country B has Free Trade Agreements eliminating all tariffs with countries A and C. Country C wants to sell something to Country A, but doesn’t want to pay the 10% tariff. So it sends the shipment via Country B, avoiding the tariff.
To prevent that, Country A needs to maintain a goods border with Country B, to check that any incoming goods are actually eligible to take advantage of their trade agreement (they really come from Country B).
So even if we have FTAs with other countries, it still doesn’t mean that we can bring in their goods and re-export them to the EU.
This presents the UK with some difficulty because a lot of what this country exports is made from imports. As the Institute for Government (IFG) pointed out in 2017, around a quarter of the value of UK exports was accounted for by foreign components. In those sectors where the UK is more closely integrated into a global value chain, the figure is significantly higher; 44% of the value of UK car exports comes from imported products. It was always likely, then, that some of our exports would attract tariffs under a free trade agreement.
A FTA was only ever going to mitigate the effects of tearing up our EU membership. Leaving the EU’s customs union and single market reintroduces barriers to trade. As the Resolution Foundation remarked, this means that much of the economic damage of Brexit was already baked in.
Of course, big Brexit decisions will also be taken in the coming weeks, with the OBR expecting a no deal Brexit to permanently knock another 1.5 per cent off the size of the UK economy, on top of the 4 per cent that is baked into the forecast assuming a deal is done. This means the economic scarring from the worst-case Brexit outcome would be almost double the long-term cost of the coronavirus crisis.
The trouble is most of those of working age have little experience of life before the EU. We have traded tariff-free for as long as most people can remember and free of any checks at all since the implementation of the single market almost three decades ago. The single market was in place by the time the channel tunnel opened in 1994, so the UK has traded under its terms for as long as there has been a land border with the EU. On 31 December 2020, the trade framework that existed for much of people’s working lives was torn up. It seems that many have not yet grasped what this means.
It is unlikely that any of this will change significantly. Whatever ‘sorting out’ business groups hope the government will do is unlikely to make much difference. The bureaucracy involved in our new trading agreement with the EU is not a bug. It’s a feature. It is meant to be like this. Outside the single market and customs union, things are more difficult than when you are inside them. That’s the whole point.
Lobbying government or MPs won’t do much good as there is not much they can do about it. It’s not like before, when we could complain about EU rules and exert some influence to get them changed. This is now an agreement with an external trading bloc signed by our sovereign government. That, too, was the whole point.
None of this is new and none of it should come as news to businesses. There have been articles, videos, online panel discussions and live events, many of them free, running for the past four years. There really is no excuse for not understanding this stuff if your business is, in any way, dependent on trade with Europe.
We have been told that the UK will prosper outside the EU because it has exceptionally creative and entrepreneurial business leaders. Let’s hope they arrive on the scene soon because, at the moment, a lot of our business leaders still don’t appear to have understood what the hell has just happened.
In mitigation, our government has not served its companies well. Politicians have been constantly reassuring business that everything will be fine. Perhaps a lot of people believed the prime minister when he said we were going to have tariff-free-trade. As the IFG’s Jill Rutter said, there was a lot of political pressure being applied to downplay the likely downsides of Brexit. Even so, basing the fate of your company on the guarantees of a man who said ‘fuck business’ and who was once sacked for lying might not be the soundest of business judgements. Not everyone was so credulous. As Pernille Rudlin, an expert on Euro-Japanese trade noted, Japanese companies in the UK have been preparing for Brexit for years and many moved parts of their operations to the EU in anticipation.
Nevertheless, as that great business guru David Brent would have said, we are where we are. Paul Weller’s words have rarely seemed more fitting:
What you see is what you get
You’ve made your bed, you’d better lie in it
You choose your leaders and place your trust
As their lies wash you down and their promises rust
The public got what the public wanted, or, at least, an interpretation of what it looked like a small majority of those who turned out to vote might have wanted in 2016. That involves increased red-tape, greater difficulty exporting and most likely, a lot of businesses going bust.
There really is no going back from this now. It’s not going to get ’sorted out’. Any easing of restrictions will only be temporary. The deal has been signed. This is Brexit. It is what it is and now we have to live with it.