By Conor Lambe, Chief Economist at Danske Bank

The month of July was one of the most significant, and turbulent, in the Brexit process so far. Following a Cabinet summit at Chequers, the UK Government published a White Paper containing its proposals for the future relationship between the UK and the EU. There were a number of resignations from the Government, one consequence of which was a new Secretary of State for Exiting the European Union being appointed. We saw a number of extremely close Brexit votes in the House of Commons. And there were two rounds of negotiations between the UK and the EU in Brussels.

So what does the Government’s White Paper actually say?

Regarding the future trading relationship between the UK and the EU, there are three key things to note. The UK wishes to establish a free trade area for goods with a common set of rules applied in an attempt to make it easier for businesses to sell across borders. The Government has also proposed a new approach to customs, known as a Facilitated Customs Arrangement, which would involve UK tariffs being applied to goods destined for the UK and EU tariffs being applied to goods en route to the EU. However, for services, the UK wants to be able to move away from some EU rules, which would mean that the market access currently experienced by service providers could change.

The move towards common rules for goods with the EU is a welcome development. Much of the public debate around future goods trade after Brexit has been focused on tariffs, but regulatory standards are as important, if not more important when it comes to our future relationship with the EU. 48 per cent of the UK’s goods exports in 2017 went to the European Union so it is vital that our future relationship with Europe includes steps to align rules and minimise trade restrictions.

The EU has expressed concern that this proposed alignment of rules will only apply to those standards that are checked at borders and won’t cover, for example, the use of pesticides and food labelling.

Clearly, there are still aspects of future goods trade to be discussed and negotiated, but the White Paper proposals are a step in the right direction.

Regarding the Facilitated Customs Arrangement, things are not quite as positive. The Government has proposed that the mechanism would work as follows.

When a good enters the UK, if its final destination can be reliably shown, then the appropriate UK or EU tariff would be applied. However, businesses would need to seek and be granted ‘trusted trader’ status in order to make the correct payment at this stage in the process.

When the final destination of the good can’t be reliably demonstrated, then the higher of the two tariffs would be applied when the good enters the UK. If it is later proven that a lower tariff should have been levied given where the good ended up, then a repayment can be claimed from the UK Government equal to the difference between the two tariffs. 

The EU has poured cold water on the Facilitated Customs Arrangement. It stated that it will not allow a non-member, which would be outside the EU’s formal governance arrangements, to assume responsibility for applying the EU’s customs rules. It also highlighted the potentially costly and bureaucratic nature of the UK’s customs proposals. The negotiations on this issue could be particularly difficult.

The UK has said it wants to be able to deviate from EU rules on services, but doing so would likely lead to restrictions on the ability of UK-based service providers to access EU markets. Services account for around 80 per cent of the UK’s economic output, meaning these industries are the main driver of the economy. It’s also worth pointing out that, while not as high as for goods, about 40 per cent of the UK’s services exports currently go to the EU.

Moving away from EU rules could provide the UK with flexibility to strike future free trade deals, with a particular emphasis on services, with other countries around the world. But most existing free trade deals focus on goods, with only limited provisions for services. There is no guarantee that the UK will be successful in agreeing the comprehensive trade agreements on services that the Government hopes for, particularly if staying close to EU rules on goods restricts what the UK can offer to other countries as part of a full trade package. The Government’s plan for services is not without risks.

Despite the flaws contained in the White Paper, it is encouraging to see the UK Government publish a relatively detailed set of proposals for the future relationship with the EU. However, in my opinion, the Facilitated Customs Arrangement appears to be a complex and untested system that would present some challenges for businesses and will be difficult to get the EU to agree to.

I suspect that if the UK had presented these proposals alongside a request to form a customs union with the EU, then the paper would have been greeted more positively in Europe. The UK Government are adamant that the UK will not join a customs union with the EU after Brexit, and to do so would now be more difficult given recently Parliamentary votes. But if the UK is serious about advancing most of its proposals, the customs union question may be one worth revisiting.

The above discussion relates to the long-term trading relationship between the UK and the EU. But for now, there remains one key Brexit objective – reaching agreement on the backstop to avoid a hard border in Northern Ireland. The Government continues to talk about a ‘time-limited’ backstop which would apply to the whole of the UK. The EU are very unlikely to accept a time-limited backstop as the whole point of the arrangement is to prevent a hard border in Northern Ireland in both the short and long-term. If it were time-limited, then the backstop would not provide long-term assurances.

In summary, it’s good to see some discussion around how the UK and the EU will interact in the future. But at this stage, the backstop remains the key Brexit issue.

This article was published in The News Letter on 7th August 2018