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How Awful Are The Backstop Trade Proposals?

brexit cost
Written by Harry Western

Suggestions that the ‘backstop’ trade arrangements in the EU withdrawal agreement are somehow advantageous to the UK are wide of the mark. They would create a trading environment worse than a UK exit based on WTO rules.

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In recent weeks, some UK government sources and government-friendly organisations have been trying to argue that the trade arrangements created by the proposed withdrawal agreement (WA) and especially its Northern Ireland ‘backstop’ are not so bad and even advantageous to the UK.

The arguments advanced in favour of this idea are varied, including:

  • The backstop arrangements will allow ‘frictionless’ trade in goods between the UK and EU
  • Under the backstop arrangements, the UK will be freed from a lot of EU regulation
  • The backstop will free the UK from the common agricultural and fisheries policies and end free movement of people between the EU and UK
  • The WA leaves enables a permanent trade arrangement between the UK and EU that allows the UK to have an independent trade policy
  • The backstop in the WA, as a UK-wide arrangement, prevents Northern Ireland (NI) from being partitioned from the rest of the UK (unlike earlier versions of the backstop).
  • The backstop will be very unattractive for the EU who will instead move quickly to a permanent trade arrangement

Unfortunately, none of these arguments stand up to serious scrutiny.

‘Frictionless trade’. The backstop creates a ‘bare bones’ customs union between the EU and UK (with, importantly, NI staying in the EU customs union). This means no tariffs or quotas on trade between the EU and UK. But it most certainly does not create ‘frictionless’ trade as the UK will be subject to a full range of non-tariff barriers (NTBs) to trade, which in many cases would be larger than tariffs.

There are two particular problem areas. The first is that all goods shipped between GB and NI and GB and the EU will need to be accompanied by a paper movement certificate stamped by the customs authority. This archaic, pre-digital system will impose significant costs and delays, being especially onerous for smaller firms dealing in multiple small-sized consignments. Indeed, this system could be costlier that the situation facing firms from outside the EU trading on WTO terms.

The second relates to agricultural trade, where NTBs are potentially very high given the EU’s very restrictive SPS regulation system. Based on the existing WA text, there would need to be extensive border checks on agricultural products moving between GB and NI and GB and the EU because the WA contains no mechanism for minimising these. New Zealand and some other EU trade partners have agreements with the EU to reduce inspection rates to low levels (e.g. 1%) but the UK would not have this under the WA.

In principle, the UK could erect similar NTBs against EU agricultural produce. But this would be self-defeating. Such barriers would drive up UK food prices and hurt UK consumers and because the UK would be locked into a customs union with the EU, there would be no scope for the UK to switch to lower-cost non-EU suppliers. So, the backstop arrangements ‘bake in’ the EU’s huge agricultural trade surplus with the UK and hobble UK farm exporters as well.

And although they would keep tariffs on EU-UK trade at zero, the backstop arrangements threaten to drive tariffs up on a portion of the UK’s trade with the rest of the world. This is because the customs union created under the backstop is an asymmetric one. The UK would drop out of the free trade agreements in force between the EU and non-EU countries like Korea and Mexico so UK exporters would face higher tariffs exporting to these markets, but these countries would retain zero-tariff access to the UK via the UK’s continued customs union with the EU. In principle, the UK could negotiate separate free trade deals with these countries to maintain tariff-free access for UK exporters but these countries would have no incentive to agree such deals.

So, far from delivering ‘frictionless trade’, the backstop trade arrangements only deliver a very modest benefit, saving average tariffs of 2-3% on industrial goods. They would lumber UK firms with a clumsy and costly movement certification system, potentially hit farm exporters very hard, and remove tariff-free access to a host of non-EU countries. And the UK would be obliged to pay £39 billion up front to the EU for this.

Regulation: Far from freeing the UK from EU regulations, the WA, if passed, would mean the UK remained subject to vast swathes of EU regulation – with no say in shaping those regulations. Under the so-called ‘level playing field provisions’, the UK would remain subject to all existing and new EU competition rules, and subject to a host of regulations on taxation, the environment, labour and social standards. This would greatly limit the UK’s ability to enhance its global competitiveness through better regulation.

Moreover, the UK authorities have said that if the UK entered the backstop they would not use the limited regulatory freedom it allows. This is because under the backstop, NI would be subject to essentially all EU single market rules on a dynamic basis – so unless GB also followed these rules, a regulatory border would appear between NI and GB. The NI backstop therefore creates a backdoor to the UK remaining subject to all single market rules, indefinitely.

The WA also creates a dangerous situation in the defence industry, which employs over 100,000 people in the UK. The WA limits the UK’s room to use state support to assist defence industries, while not limiting EU governments in the same way – potentially leaving UK defence industries at a significant competitive disadvantage.

CFP/CAP: Fisheries and aquaculture are excluded from the customs union created by the backstop. However, the EU has made clear that it seeks a deal on fisheries very soon after the WA is agreed and is also clear that such a deal must include arrangement for EU access to UK fishing grounds that are similar to now. It has explicitly linked progress in future trade talks to such an agreement.

On agriculture, the WA again creates an unbalanced position in which UK farm support is limited to  levels that could be those prevailing several years earlier in the EU while no reciprocal limits are placed on the EU. So UK farmers, already hobbled by high NTBs if they wish to export to the EU, would also potentially be faced with competing at home with heavily subsidised products with the UK authorities unable to match such support.

An independent UK trade policy: The UK government claims that the political declaration of the WA explicitly recognises the UK’s goal of having an independent trade policy, that is, freedom for the UK to negotiate its own free trade deals and set its own external tariffs.

Importantly, it should be understood that the WA places no legal obligations on the EU to agree any kind of permanent trade deal with the UK. The EU could instead simply pocket the £39 billion the UK would have to pay the EU under the WA and never agree a trade deal.

But more critically still, the PD also states that any final trade deal that is agreed between the UK and EU should ‘build and improve on the single customs territory provided for in the Withdrawal Agreement which obviates the need for checks on rules of origin’. These two conditions can only be met by the UK and EU remaining in a permanent customs union, thus ruling out the UK having an independent trade policy.

What we see here is the same deliberate ambiguity visible in the Joint Report that laid out the original version of the Northern Ireland backstop. And we can be certain that if the WA were passed, the outcome would be the same too – the EU adopting its own, maximalist, interpretation of the agreement and dropping the elements that are inconvenient. So, the EU would make it clear from the outset that the ‘final’ trade deal would require a customs union. If the UK disagreed, the EU would simply let the backstop kick in – which of course creates a customs union anyway.

Northern Ireland:

NI faces potentially significant economic costs from the backstop because the backstop arrangements places NI in a different customs, VAT and excise territory from the rest of the UK; the ‘backstop’ arrangements are not really a UK-wide system at all. This would create potentially large NTBs to trade between NI and GB, including full third-country customs and regulatory controls.

If we take the UK Treasury’s estimates of the potential costs of such NTBs seriously, we could be looking at a long-term decline in NI GDP of up to 10%. The Treasury claims tariff and non-tariff barriers on UK-EU trade will cut UK GDP by 8% in the long run, with 80% of this effect coming from NTBs. But NI-GB trade is twice as large as UK-EU trade as a share of GDP, so even if the backstop created only half the level of trade barriers between GB and NI that the Treasury claims Brexit will create between the UK and EU, the Treasury methodology would see NI GDP cut by 8%.

This calculation raises a very serious question about how realistic these Treasury estimates are. If they really believe the effects on GDP could be this large, it’s hard to understand how they could ever have agreed the backstop. And indeed, official sources are keen to claim that ‘checks’ on trade flows between NI and GB under the backstop could be kept to a minimum. But if that is so, then the Treasury’s claims about massive GDP losses for the UK outside the single market and customs union look extremely questionable as the same minimising techniques could presumably be used.

The EU will hate the backstop:

this claim is perhaps the most dubious claim of all. The trade arrangements set up by the backstop are hugely advantageous to the EU:

  • The backstop would be preceded by a two-year ‘transition’ in which the UK would be a 100% rule-taker from the EU, allowing the EU to launch a series of regulatory attacks on key UK industries including financial services
  • The backstop arrangements involve the UK agreeing to recognise the EU’s protectionist system of geographical designations (for foodstuffs etc.) which benefit the EU far more than the UK
  • The EU’s massive trade surplus in foodstuffs with the UK will be baked in as the UK will be unable to turn to cheaper third country suppliers and will have its own food exports hindered by high EU NTBs. The same will be true, to a less extreme extent, for the EU’s large trade surplus with the UK in manufactures
  • The ‘level playing field’ clauses in the backstop prevent meaningful deregulation in the UK across most economic sectors and tie the UK into a host of damaging regulations
  • The EU will be able to ‘sell’ access to the UK’s huge $1.8 trillion consumer market in trade negotiations with non-EU countries. The UK will be able to do nothing about this and will not even get any benefit for its exporters from such deals
  • The UK will not be able to act as a serious competitor to the EU in the trade arena, but will be effectively an economic dependency of the EU

The trade arrangements created by the backstop are so one-sided and so damaging to the UK that it is very likely the UK will try to negotiate alternative arrangements rather than enter the backstop. The obvious areas for change would be the archaic system of movement certificates and some kind of deal on SPS regulations to minimise checks on trade in foodstuffs.

But the EU will be ready for this with its own list of further demands. Aside from an insistence that any replacement for the backstop must take the form of a customs union, these demands will include a fisheries deal that preserves the EU’s massively unfair quotas of UK fish, continued financial contributions to the EU budget, the preservation of free movement and probably the UK accepting dynamic alignment with the EU across an even wider range of regulatory areas – even more extreme ‘rule-taker status’. On past form, the UK would be likely to give in to these demands and doubtless business lobbies will quickly begin to agitate for precisely that.

This would leave the UK with a ‘Brexit’ from which all the possible upsides would have been stripped; no regulatory independence, no trade independence, no upside for agriculture or fisheries, no end to freedom of movement, and continued payments to the EU.

Under the WA, which has no exit clause, there would be no way for the UK to avoid this outcome without either abrogating an international treaty or (possibly) allowing the EU to annexe NI. So, the WA inevitably leads to a) backstop trade arrangements that are hugely damaging, arguably worse than WTO rules and which partition the UK or b) an alternative set of trade arrangements that are essentially EU membership with no say.

Rather than accept the choice of these unfavourable outcomes, the UK authorities would do far better by embracing an exit based on WTO rules-based trading with the EU. While this would have some short-term costs, these would be broadly similar to the likely costs of the backstop trade arrangements – and the UK authorities would save £39 billion and would have enormous scope to offset short-term costs with intelligent use of trade, regulatory and tax policies.

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About the author

Harry Western