Five Myths of Brexit

Jun 18, 2018

Sunday Business Post, 17 June 2018

The political brinkmanship on Brexit on show in Westminster in the last few days is masking the fact that politicians are making promises outside the legal structures of the EU treaties. 

A UK junior justice minister Philip Lee resigned last Tuesday morning, a casualty of the “will they won't they” approach in the Commons to a vote to decide whether the Commons itself will have a veto on any future exit deals.  In his resignation statement, he commented that the practicalities, logistics and implications of leaving the EU are far more complex than were ever envisaged, and certainly more complex than the people were told in 2016.  He went on to say that the outcome that is emerging will be neither fully to leave the EU, nor fully remain within it. 

That makes little sense as a piece of analysis.  A country is either a member of the European Union, or it is not.  Mind you, the clarity of thought on display on the UK opposition benches isn't much better.  According to its manifesto, the UK Labour Party wants to retain the benefits of the single market and the Customs union.  The only way to do that is to remain in the EU. Theresa May herself observed in Florence last September that post Brexit, life will be different.  There seems to be little acceptance of that fact in the political discourse.  So what realities are being lost in the current political noise?  What myths are being created to suit political agendas?

 

  1. The European Union is out to get the UK

No, it is not.  The EU's number one priority is to hold the remaining 27 member countries together.  That can only happen if it is abundantly clear to all concerned that remaining a member of the EU is better than leaving.  Any country which leaves must end up worse off as an EU trading partner, otherwise the EU project is a waste of time. 

The risk of a number of countries following the UK lead and exiting was more acutely felt immediately after the Brexit vote.  There was clear potential for domestic political forces in France, and to a lesser extent in the Netherlands and Germany, to derail aspirations for EU solidarity.  Election results in those countries meant that the full extent of the risk did not materialise. 

Furthermore, somewhat ironically, the EU project to corral the remaining 27 has an unwitting ally in the shape of Donald Trump. US moves to impose tariffs on goods, notably steel and aluminium, coming in from the EU have if anything galvanised its members to form a more united front.  EU Council President Donald Tusk has namechecked a united approach that will strengthen the Commission in its ongoing negotiations with the US.  Also, the language and tone of the current EU budget negotiations suggests that the absence of the British contribution in the next EU budget period to 2027 is an inconvenience to be worked around, rather than a reason for hostility.

 

  1. The cost of EU membership is too high for the UK

The famous claim that the EU was costing the UK €350 million a week as displayed on the side of the Vote Leave campaign bus seems increasingly off the point. 

The UK had a very good deal on the amount paid into the EU budget, because its contributions were capped relative to the amount the country was receiving from the various EU programmes.  The formula meant that in some years the UK could receive back from Brussels as much as one third of its annual contribution.  This “rebate” or “correction” depending on who you ask was negotiated by Margaret Thatcher back in the day, but relies for its existence on the ongoing goodwill of the other EU member countries.  Only five other EU member countries have had similar deals on their level of EU funding.  Ireland is not among them.

The next Brexit exit bill of some £50 billion amounts to approximately two years’ worth of UK contributions to the EU before the rebate is calculated.  A £50 billion sterling bill is a big chunk of money but must be considered relative to the size of the UK economy - the UK collects over £600 billion in taxes.  In addition, under the transitional arrangement within the UK/EU withdrawal agreement which if agreed would ensure UK de facto membership benefits and obligations to 31 December 2020, the annual contributions will continue beyond the official Brexit date of 29 March 2019. 

A special EU budget rebate is likely to be available for the UK up to 31 December 2020, but the signals are that the UK would have to pay its full contribution under any arrangements to extend rights and obligations past December 2020.  Beyond that, all bets are off.  The signals now are that there would be a 50% increase in the U.K.’s annual contributions to the Brussels budget, if it needed to stay in the EU for whatever reason beyond 2020.  The Brexit settlement amount looks increasingly bad value for the UK.

 

  1. A clever customs arrangement will sort out border issues.

Generally speaking, with the important exception of agricultural products, customs tariffs aren't particularly high.  The purpose of the tariff is twofold – to raise money for the national exchequer while protecting the domestic market for indigenous business. 

Tariffs are relics of a time when products were simple and countries mostly traded in commodities.  They were devised in an era when countries sold each other steel, or meat, or wool across national borders.  Now we sell cars and computers, sandwiches and ready meals, and apparel made using many fabrics.  Tariffs become a greater problem when goods are made with components or ingredients from multiple sources, with those components or ingredients crossing borders more than once before the final manufactured product can be delivered to consumer. 

It is these repeated customs charges as goods cross borders, coupled with delays to inspect their origin and their compliance with international standards that will cost businesses.  As the Confederation of British Industry put it on Wednesday last, elements of the UK car industry face extinction unless the UK remains in the Customs union.  That's not so much because of individual tariffs but because of the disruption to the supply chain involved with customs compliance. 

Even if customs tariffs were set at zero, there would still be checking to be done to insure the goods been shipped originated within the Customs union.  Verification to ensure compliance with single market standards - packaging, hygiene, safety requirements and like - would also be carried out.  All this checking will inevitably lead to delays and costs.

 

  1. It will be possible to create streamlined customs arrangements without hold-ups or costs

Maybe, but certainly not in the short term. 

Jon Thompson is the CEO of HM Revenue and Customs.  In a letter to the House of Commons Treasury select committee at the start of this month, he identified three problems with a putative “highly streamlined customs arrangement”. 

There will be ongoing annual administrative burdens for customs declarations, 145,000 UK businesses will have customs setup costs, and lastly there is a risk of delays at airports where select logical solutions such as electronic tagging of consignments, vehicle registration identification and the like were not implemented. 

Thompson put the bill for a highly streamlined customs arrangement between £17 billion and £20 billion a year for UK businesses.  That's just the estimated charge for UK businesses, and doesn't take account of the additional costs and regulatory burdens for exporters from EU countries sending goods to the UK. 

No matter how frictionless the customs arrangements, they are going to cost significant amounts of money, and therefore can never be truly described as frictionless.

 

  1. When it comes to border issues the Northern Ireland tail is wagging the UK dog

This was the suggestion by the UK Foreign Secretary Boris Johnson in ostensibly off record though widely quoted remarks about the situation pertaining to the Ireland and Northern Ireland border.  There is a clear political, social and economic necessity to keep the Border as it is - invisible. 

Despite Johnson’s suggestion that “there are so few firms that actually use that border regularly” Ireland/Northern Ireland trade flows are not insignificant.  According to the CSO and InterTrade Ireland the total value of the goods traded across the border was about €3bn in 2016, with the value of the flow roughly equal both ways.  The other point that Johnson either missed or chose not to address is that post Brexit, an Ireland/Northern Ireland customs control would not just be about Ireland/Northern Ireland trade.  It would also be about preserving the integrity of the EU's customs union, ensuing that goods originating outside the EU would not get into the EU customs union via a leaky border with the UK.  The same principle applies with the forty or more EU and third country borders in existence, from Norway/Sweden to the north, down to Turkey/Greece to the south.

 

Gaining Traction

These myths seem to be gaining traction in the political discourse, not just in the UK but on this island as well.  They need to be dispelled.

It is admittedly difficult for public servants in the UK to do so; the intervention by HM Revenue and Custom’s Jon Thomson which I mentioned earlier is unusual in that respect.  At present, according to the IDA’s Martin Shanahan, Ireland may be gaining in job terms at least from the Brexit uncertainties.  But this country could still be among the biggest losers from Brexit.  If political decisions around Brexit are made on the basis of these myths, the longer-term prospects don’t look so good.

 

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