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.
The first thing is that Brexit is saving hundreds of lives. If we were still in the EU, we would almost certainly be in the EU vaccination programme. We would be sat in our hands waiting for Sanofi to develop a vaccine instead of leading the way with the UK developed one. That’s a real big Brexit win right there. [If you’re going to reply saying that isn’t so, that we could have done what we have done inside the EU, don’t bother. We never did that. Whilst other nations did what they wanted regardless of EU rules, we were always desperate to show what good Europeans we were. That was the problem.]
There were always going to be teething problems. But every problem is an opportunity. Every difficulty importing stuff is an opportunity to make it here. So businesses will adapt. If trade in manufactured goods becomes difficult that will reduce net trade. That will net benefit the country with the trade imbalance. That’s us.
There are logical solutions to a lot of these problems if there is willing on both sides. Processes can be smoothed, pre-checks can be done. But if the EU are still in a punishment mentality, well, given the argument was about sovereignty, that isn’t making me thing we should submit to threats from overseas. Quite the opposite.
Problems fall into two categories; those you can do something about, and those you can’t. Brexit is about accepting problems that you can do something about (trade, migration) in order to avoid problems you can do nothing about (loss of control over those who make your laws, mass immigration you cannot control). If you have no power, arguments about GDP and trade are irrelevant, as without power, you will receive none of the economic benefits.
Nothing you state is true but is instead regurgitating the same falsehoods that have been thoroughly debunked over the last four years. This idea that the UK is somehow a victim is truly delusional.
Always refreshing , usually laced with practical experience
Dipper may not have noticed that the 27 have been able to pursue their own individual strategies to combat Covid-19. The EU’s health and medicines agencies may have been regrettably slow to recognise the danger of the virus, but they do not mandate members.
Frank – there’s a lot in the press about this so I won’t go over it, but there was an agreement to let the Commission organise this, and by procuring its own supply Germany is breaking that agreement. The Astra-zeneca vaccine is still not approved by the European agency, so if we were in the EU then the vaccine we are currently using in bulk would not yet be approved.
So what’s the most pro-EU explanation for how and why the UK has managed to administer more vaccinations than the entire EU?
Actually, the vaccine was developed and deployed while still in the EU…..we did not officially leave fully until the start of this year.
And the wait for a vaccine is likely to be related more to the intensive and expensive lobbying in the EU by the pharmaceutical industry….why sell a vaccine for 2-euro/no-profit, when you can sell one for 30-Euro and a good profit. Plus, of course, they can see what the after effects are as the UK population becomes the global guinea-pig..
John – are you saying that the EU *chose* to go more slowly so that UK would become a guinea pig?
The UK left the EU on 31 Jan 2020 – coincidentally the same day as the confirmation of the UK’s first Covid case. From then on the MHRA was responsible again for novel drug authorisations.
During the transition period there was just an agreemenet on the mutual recognition of marketing authorisations betwee the EU and UK.
The rest of your comments seem equally well informed.
Even if your absurd fantasy of Euro 30 / dose was true, then the entire cost of the UK purchasing 350m doses would amount to about 10 DAYS of this years s extra public spending on Covid. Partnering with drug companies to end the pandamic sooner is FAR more important than fussing over the price/dose or the nationality of the vendors.
Richard North has been talking about this sort of thing for ages….
Reblogged this on Tory Britain!.
So we have partisan actors like C4 telling us that the sky is falling in. We’ve got pictures of Sainsbury’s who are struggling mightily with staff shortages due to covid, and we have sober inside analysis saying that there are no problems at the ports and Brexit is not problem at all, although the shortage of vaccine is a worry.
It’s just so difficult to know who to believe.
Forget to include source:
Much of this is true for Great Britain. However, NI has had a land border with the EU all along. Otherwise I agree with much of this, in particular that this suits a small bunch of people, is bad for an awful lot of people and that many, many businesses should have seen it coming.
Sovereignty is a process not a destination. NI has an Assembly that allows their elected representatives to raise and discuss these issues. Both the GFA and the FTA have mechanisms that allow these issues to be addressed.
We prepared for a no-deal Brexit, so few issues. Anyone expecting anything other than a last-minute fudge shouldn’t operate heavy machinery or a company.
The notion that the EU is the one and only way, and non-believers must be ridiculed and punished, is a tad sinister. It should be quite possible for the EU to integrate [as the Euro currency demands they must] into a vast country, and for us not to. We happily co-exist with the other big boys, the USA, China and India, so why not the United States of Germany?
Judging the alternative to a 50 year project after week one isn’t necessarily that enlightening. Come back in 2030 and blog about it, then again in 2040.
What will be interesting is to see where the EU goes now. With the obstructive UK no longer blocking integration at every turn, will they soar to a prosperous, harmonious future as one unified people, all humming Ode to Joy?
It appears that, since we left the EU, it has not turned into a land of harmony and solidarity:
“German health minister Jens Spahn said earlier this week that his country had signed a memorandum of understanding with BioNTech last September for 30 million additional vaccine doses – a decision which seems to put at risk the principle of solidarity between European countries.”
EU Border Force Frontex announced. https://frontex.europa.eu. Nice uniform.
So are borders good or bad? Which version of the software are we running this week?
and Rick humming Always Look On The Bright Side…….
There is a critical difference between the FTA and EU membership.
A good treaty allows two parties to interact. It provides a means by which they may progress their separate interests to mutual benefit. It provides a mechanism for the assertion of power and to allow the other party to assert theirs. It is like a marriage. Getting married in western societies does not make one dominant over the other. It creates a vehicle for each party to benefit. Getting married doesn’t mean you stop working on your relationship, instead it gives a basis for working to advance the relationship.
The FTA does this. Take fish; Brexiteers are generally disappointed that so little of the quota has reverted to the UK, but the rationale is that our fishermen get access to EU markets. Currently there are stories that due to extensive bureaucracy this access is effectively denied. In that case, the UK can and should push for a greater repatriation of quotas at the next discussion point if not before. Through such discussions do mutual benefits arrive own a proportionate way.
Membership of the EU didn’t allow any such discussion. It required us to accept principles irrespective of whether or not the implementation of these principles brought us benefit. As such it made our politicians unable to promote UK interests.
The Good Friday Agreement is an example of a treaty that allows each part a means of advancing their interests. What it doesn’t do is mandatory either party to do anything in particular. It contains within it one definitive statement, which is that NI is part of the UK (which one would have thought meant being governed by the laws and regulations of the UK, which the FTA clearly contravenes). The EU has, to borrow a phrase, cared most about the clauses of the GFA that aren’t in it. They aren’t happy about being part of treaties that give the counterpart power. They prefer treaties that mean the other party has only obligations that they must fulfil or face punishment. Hence the advancement of the notion that the GFA signs up the UK to a full and open border with RoI. To repeat, the GFA does not do this. Theresa May signed up to this notion, and an agreement was only able to be reached by implementing this. But the GFA still stands, it provides a means for NI to act politically to assert its interests within the context of being one part of the island of Ireland. I will be watching the development of this with interest, as will no doubt all who feel sufficiently interested to get to the end of this comment.
just to pre-empt anyone who starts about fish and NI issues saying ‘no-one voted for this!’. well, I did. I voted for a sovereign government negotiating with and working with our EU neighbours.
See https://www.express.co.uk/news/politics/1383689/brexit-news-boris-johnson-trade-northern-ireland-protocol-article-16-latest-eu. Boris will take these issue up with the EU. He may win, he may lose, he will probably get some kind of fudge, but this is proper politics. Concerns being raised to national governments, who engage in discussions with other powers.
Good article, Rick. It’s a shame many of the commenters didn’t read it. You are correct, all this is a feature not a bug, but it was consistently denied by the Leave campaign and by the government’s of May and Johnson. The current government continues to deny these are the inevitable consequences of the agreement they have signed – but then I suspect most of them probably haven’t read it, let alone understand it.
That’s on (particularly ungracious) reading of the comments.
Another is that most commenters *have* read the piece, and conclude that the relevant margin is not the gross additions to bureaucracy (new online export forms, etc), but the *net* addition i.e. after subtracting the (literally deadly) bureaucracy of European Centre for Disease Prevention and Control, no EU regulation for UK firms not exporting there, no EU procurement documentation, etc.
Feel free to perform your own analysis of the net impact and argue it is negative (which neither you nor Rick have attempted), but it is absolutely on point to the piece to mention specific examples of bureaucracy that we have now escaped and therefore the net impact may *not* be negative.
I did read it. Rick is very readable. always well argued, well researched, and to the point. Not like some other blogs which just read like someone having a breakdown.
One of the features of the Brexit debate is both camps talk past each other. What I try to explain here is what is important to many Brexiteers and what is less important. The things that people like Rick who argued to Remain in the EU think are important, such as details of trade deals, membership of organisations, are less important than other things such as sovereignty and the right to vote who makes our laws. Partly they are only issues because rather than arrive at a mutually benefit arrangement the EU wants to use them as tools to punish the UK, and as I’ve said above does not make me regret any of my recent votes one iota, only confirms they were correct.
i’m loving the arguments why the comparative Covid vaccination rates are nothing to do with us leaving the EU. Very creative. Almost as good as the argument that a 25% increase in population isn’t a lot. Keep them coming.
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This issue rumbles on.
The latest is JD Sports complaining about losing money and business due to Brexit. On closer inspection the issue is that they import lots of shoes from Asia into UK warehouses, and then send them onto Europe. The Brexit paperwork now means they will probably have to set up a warehouse in Europe.
Frankly this is exactly the kind of result I wanted out of Brexit. In all likelihood most of the warehouse employees are from the EU anyway. It makes no sense to move people from Europe to do basic tasks here to send the products back to Europe. For the UK it means more pressure on housing, more pressure on roads. You cannot build a high-value economy by importing lots of people to do minimum-wage tasks. So, good. I hope other employers follow suit.
Dipper, you say: “In all likelihood most of the warehouse employees are from the EU anyway. It makes no sense to move people from Europe to do basic tasks here to send the products back to Europe. For the UK it means more pressure on housing, more pressure on roads. You cannot build a high-value economy by importing lots of people to do minimum-wage tasks.”
You produce no evidence that these warehouse workers are from the EU.
Even if they were, your comments fail to reflect that the UK was part of the EU (for half a century).
So this wasn’t moving people from ‘Europe’ to ‘here’ (that’s if any such movement took place in this case, which you do no know).
‘Europe’ was ‘here’.
It would be people moving for one part of the EU to another to fill job vacancies, as they were perfectly entitled to.
Just like people move from Paisley to Peterborough, or from Lancaster to London.
This might create pressure for more roads and housing (though, concomitantly, less pressure somewhere else, which you fail to mention). But the JD Sports warehouse is in Rochdale, not exactly a boomtown, with unemployment well above the national average, so unlikely.
But if it did, that’s life. People move. Do you want us all to remain in our place of birth for our whole lives? How will you enforce that? How will employers find workers?
And even high-value economies need people to perform lower-paid tasks. In fact, they may need more than low-value economies, because they probably create more jobs overall.
There’s evidence of the extent of Eastern European employment in warehousing if you wish to look and its effect on towns eg https://www.bbc.co.uk/news/election-2017-39973990. These warehouses have done nothing for the locals in the towns in question other than to push up house prices, and dump young men on their streets drinking and socialising because their multiple-occupancy houses have no communal areas.
I get this business about why Paisley or Peterborough but not Poland. The key question is what is the best unit of democratic accountability, and for me in 2016 and now it was the UK not the EU. Notably pro-EU want to define the unit as Europe, not the world; there is still a border, a group who are us and a group who are not us.
How will employers find workers? Well, they won’t. During the negotiations there was a local news investigation into food processing and some manufacturers had invested in machinery. Good. More please.