Brexit Different

Dec 11, 2017

Sunday Business Post, 10 December 2017
The avoidance of a hard border through the overall EU – United Kingdom relationship is one of the most important elements of Friday morning’s communication from the EU Commission (as Brexit negotiators) to the European Council.  But then the communication identifies an enormous problem.  In a sentence immediately afterwards it says “this intention seems hard to reconcile with United Kingdom’s communicated decision to leave the internal market and the Customs Union”.

Usually a Customs Union is regarded in terms of internal flows of commerce between members of the customs union.  There are two main aspects – policing and payment.  Policing involves declarations, customs checks, barriers, borders, queues, delays, and officers with peaked caps and sniffer dogs.  Payment involves paying whatever customs tariffs and value-added taxes are due on the goods being shipped across the border.  Membership of the EU customs union eliminates both policing and payment for most practical purposes on transactions between EU businesses. 

Surveys and research earlier this year showed that Irish businesses feared the bureaucracy and delays associated with crossing between North to South at least as much as the actual customs tariffs involved when trading with UK after it left the EU customs union.  The news that a hard border is to be avoided is unequivocally good news.

External Borders

However a question mark remains over another other key aspect of a customs union.  A customs union works by allowing free trade within its own borders, but the corollary is that the external borders must remain secure.  There can be no importation of cheaper or inferior standard goods without customs tariffs from outside the customs union, because that would prejudice the commercial interests of businesses within it.  The border between all customs union members and so-called “third countries” which are not within the customs union must be secure.  The UK’s “communicated decision to leave the internal market and the customs union“ will make it a third country, and so there must be a border in the future between the UK and any remaining EU member state.  Such a border might not be a “hard border” but it will have to be secure. 

This is not just about playing with words.  Customs and trade agreements do not work when countries have porous borders, and the EU is particularly rigorous when it comes to policing its own member states.  In 2016 the EU antifraud office, OLAF, initiated proceedings to recover almost €2 billion in customs duties from the UK because of shortcomings in declarations of goods being imported from China and then shipped onwards to other EU destinations.  Undervalued Chinese textiles dumped in the EU market could not be allowed to undermine EU producers. 

There is absolutely no reason to believe that the EU’s approach to the UK when it comes to enforcing customs duties will be any less rigorous when the UK ceases to be a member of the customs union.  In fact the importance of safeguarding the internal market is repeated over and over again in this week’s communication.

Safeguarding the Customs Border

As Ireland has a particular responsibility, as a remaining EU member state, to manage whatever form any future border takes with the UK, reinforcement from Brussels will be forthcoming.  Should the need arise, Madrid will undoubtedly receive support if there are issues with the Gibraltar border, and Paris can expect similar solidarity if it has to restructure customs controls at Calais.  For now though the most difficult section of the EU-UK border to negotiate is on this island.  Here, another assurance in the communication that the Ireland/Northern Ireland issues will continue to be a distinct strand of phase II negotiations reflects the scale of the practical customs union enforcement problems.

While the EU’s own Community Customs Code sets out the ground rules for the operation of the Customs Union, the actual details of customs policing is by and large left to individual Revenue Authorities – the Revenue Commissioners and HM Revenue and Customs are the key agents on this island.  The practical terms for future customs payment and policing between the UK and the rest of the EU are likely to be determined outside the political sphere, but must conform to both the political aspirations of the Commission communication and the legalities of the Customs Community Code. 

A Tall Order

While that’s a tall order it is in the UK’s interest as well.  A much vaunted advantage of Brexit is that the UK will in the future be able to negotiate its own trade deals with countries outside of the EU.  No new deals would be forthcoming if the UK cannot show to putative partners that its own trade borders are secure.

Friday’s communication on the status of the article 50 negotiations provides a very welcome political solution, but it requires some serious work to make it a practical commercial reality.  This is not “hard Brexit” nor “soft Brexit” nor “Brexit light”.  It is “Brexit different”.  When the UK finally leaves the customs union, there will be tariffs on UK imports and exports.  The point of charging those tariffs will just not be at a hard border.  Unless the UK remains in the customs union there will still have to be checks on the quantities, valuations and standards of goods being imported and exported.  But those checks will not take place at a hard border. 

This week’s agreements mean that north-south trading post Brexit will be a lot easier than it could have been.  While the challenges are certainly mitigated, businesses which trade with the UK would be prudent to plan for the UK’s departure from the customs union as if nothing, however momentous, had taken place this week.

Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland