Crazy

May 14, 2018

Sunday Business Post, 13 May 2018
I find myself agreeing with Boris Johnson when he described as crazy a plan for future Customs arrangements between the UK and the EU.  He thought it too bureaucratic and that it would make it very difficult to do free trade deals.

The plan, which was apparently seriously considered by Theresa May's government last week, is indeed crazy, but not for Johnson’s reasons.  The so-called “customs partnership” would fall at the first hurdle; it would never be acceptable to the EU.  

Let’s recap exactly what has happened.  The UK has formally invoked a clause in a legally binding international agreement.  The clause, called article 50, means that the UK will leave the European Union with effect from 29 March 2019.  This is at present the only certainty.  

On 30 March 2019, the UK will have neither the privileges nor the obligations of EU membership.  However, because it is accepted by all sides that the UK is not in a position to leave the European Union next March without chaos at its ports and airports, a transition agreement is in the course of negotiation.  

Misnomer

“Transition agreement” is a misnomer, because it is in reality a deferral agreement.  It would defer the British departure date from the EU for a further 19 months until 31 December 2020, by which time it would hopefully have the necessary arrangements in place for managing goods crossing its borders (because the most immediate impact of Brexit is on goods, rather than the movement of people).  But the transition agreement is not agreed, because there is no agreement on either the Border backstop arrangement, or on the international law that could govern it.  As the Taoiseach pointed out in the Dáil this week, no backstop means no transition. 

The customs issue which so irked Mr Johnson relates neither to Article 50, nor to transition. The customs issue concerns how the UK will trade with the EU post transition.  The EU customs union is specifically designed to provide trading advantages to its members.  The EU will not surrender any of those advantages to any country which has ceased to be a member because that would be poor politics and poor treaty negotiation.  There is only hard self-interest. 

It is critical for modern democracies to maintain a divide between the legislative, the executive and the judicial functions.  The Brexit chaos can be viewed as an attempt by the legislators to usurp the executive function mandated by the EU treaties, without agreeing where the judicial function lies.  The Brexit process is hampered by a lack of precedent, but it is also hampered by a lack of acceptance on the part of decision-makers on both sides that they are dealing with the constraints of international treaties, where trade is policed by customs rules. 

As long as this craziness continues, and there is no sign of it abating, there will be neither a transitional agreement, let alone a future customs deal.  So what does this mean for Irish business? 

The Very Worst

It means that we have to prepare for the very worst.  It means that we have to assume that customs barriers will be erected between the EU and the UK, and accordingly between Ireland and the UK, on 29 March 2019.  It means that the 50,000 or so containers of goods which will be in transit between the EU and the UK on the evening of 29 March 2019 will be delayed, perhaps indefinitely.  Overstretched customs officials in under resourced customs yards will not be able to sort out the mess of undeclared goods crossing the new EU/UK borders.  

If you export any goods to the UK which attract high levels of customs duty, you will find it harder to be paid for your exports by UK customers after 29 March 2019.  That's because the customs duties will be so high as to make your products unaffordable, or because the importer will be hit for VAT up front, or because your products will have perished in transit because of the hold-ups.  If you must export to the UK, invoice in euro not sterling, because sterling will be in freefall.  Don't take any orders for delivery after next St Patrick’s weekend because by then panic will be really setting in.  

If your business is counting on UK imports or imports shipped via the UK, source new suppliers and delivery routes now.  In six month’s time it will be too late, as your competitors will also have realised the need to source from elsewhere.  

Don’t forget about people and services delivery.  The controls on the free movement of people will be found at labour exchanges and recruitment agencies, rather than at borders.  If you are a professional person, check that your qualification and competency to provide services will continue to be recognised in the UK, or vice versa. 

Don't plan any travel between Ireland and the UK for the month of April 2019.  You won't be going anywhere fast.  It's because our ports and airports won’t be able to cope.  It might be a good idea not to book any journey which is dependent in any way on the British airline industry.  Along with the single market and the customs union, the Open Skies Treaty will also lapse on 29 March.   

Trade War

Remember only a few short weeks ago the entire world was shocked by President Trump's suggestion that there would be new US tariffs on steel and aluminium, with threats of retaliation and fear of an escalating trade war?  Brexit means new tariffs between Europe and the UK.  The only difference between US tariffs and Brexit tariffs is that the Brexit tariffs will affect supplies of all goods, not just metal.  

Maybe the craziness is necessary.  Maybe it is necessary to have 6 months or so of absolute chaos and mayhem and disruption to ordinary people's lives and businesses, so that the negotiators on all sides realise that Brexit is not turning out to be in anybody's interest.  Does there have to be a crisis on a crazy scale before any progress can be made?  

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