EU Referendum: no default option

30/06/2015

We thus recall CBI President Mike Rake asserting in May that: "No-one has yet set out a credible alternative future to EU membership. The current alternatives are not realistic options … ", whence Lea elected to address his claim by way of an "open letter" (extract illustrated above). Unwisely, she declared that, if the UK left the EU, "the UK-EU default relationship would be under the WTO rules, by which many countries, including China, very successfully conduct much of their trade".

Despite the obvious fatuity of this message, and the attempts at rebuttal, we still see repeats on Twitter, in Eurofacts, in the Better off Out magazine and in multiple other outlets. This blog, it seems, is the only site attempting to bring sense to the debate and, against the constant repetitions of Lea's myth, we are struggling to make ourselves heard.

But what is perhaps more disturbing is that lack of debate – from both sides of the divide - over what is quite plainly a suicide option that would bring trade with the EU screeching to a halt. In fact, right across the board, one sees an almost complete lack of appreciation of the adverse effects of the "WTO option".

Even the prestigious Bertelsmann Stifung, which reported on the implications of this option back in April of this year, came up with an incredibly anodyne analysis of what it called the "deep cut" scenario, where the "United Kingdom exits the EU and there is no trade agreement between the EU and UK".

This, said Bertelsmann, means that "non-tariff barriers to trade would be introduced/ increased by dismantling exemptions from existing trade agreements and tariffs would potentially be introduced between the EU and UK". However, it then goes on to say:

While prevailing WTO law requires a country to levy MFN tariffs against its trade partners if they do not have a free trade agreement, there really is no reason why – if a Brexit does happen – the United Kingdom would have to return to the non-tariff barriers from before it joined the EU. After all, the acquis communautaire has been implemented into UK law. But uncoupling from the EU's regulatory coordination and harmonization process – a key demand of the UKIP and other Euro critics – would gradually lead to a build-up of new non-tariff barriers to trade.

This apparently plausible argument, however, is seriously flawed, so much so that it tends to demonstrate that German think-tanks are no more knowledgeable than their UK equivalents, and just as prone to error.

In this case, what we are seeing is the same error as exhibited elsewhere - the failure to understand that entry for third country goods to the EU's Single Market requires surmounting two basic hurdles. The hurdles would have to be surmounted by importers of UK goods, once the UK had left the EU.

On the one hand, there is the requirement for regulatory conformity (achieved either by harmonisation or mutual recognition of standards). On the other, there is the separate requirement for products to undergo conformity assessment and for there to be a formal means of providing evidence of conformity. And it is this latter requirement which is being neglected.

The point here is that all the UK assessment systems and bodies, which are currently recognised under EU law by virtue of our EU membership, ceased to be recognised. The documentation and certification that they produce will not be valid, and will not be accepted by the authorities in EU (or EEA) Member States.

Furthermore, in law, the UK on leaving the EU without concluding a trade agreement will formally assume the status of a third country. An indication of what is required when there are formal agreements in place comes from the US. What our list will look like, when there no agreements in place, is very difficult to say, but it is self-evidently the case that our exporters are not geared up to producing the level of paperwork required.

However, if you want a quick guide to the requirements for demonstrating conformity assessment, it is here, which deals with the general principles and concepts behind the EU's "New Approach" laws and directives – essential reading for any putative third country (i.e., British) exporter - and the importers of British goods.

There is, in this, an interesting twist to the procedures related to the "New Approach", in that many of the goods can be released by Customs, for circulation in the internal market, on the basis of self-certification. But, if there are no Mutual Recognition Agreements (MRAs) in place, self-certification is not recognised. The responsibility falls on the importer, which must have a representative resident in the EU. This would add costs and delays to imports from the UK, making them less attractive than goods sourced from within the EEA, or from countries which have trade agreements with the EU.

Even when British goods were able to gain access to the Single Market, therefore, they would most often carry a cost penalty that would make them less competitive than other products.

Now, in what is a complex field, nothing of this has to be taken on trust. The EU is nothing if not generous with its information, setting out copious details on the Europa website. What most readers will particularly enjoy are the eponymous SAD guidelines, which spawn thousands of additional pages of guidance. And, as this guideline indicates, without mutual recognition, any exporter is going to have a hard time getting products into the Single Market.

The "bible" however, goes by the name of the Blue Guide. It sets out the broad requirements, making reference to the need for conformity assessment, and outlining how the status of different countries affects their ability to export. Then, the whole system is given legal "teeth" by Council Regulation (EEC) No 2913/92 of 12 October 1992, as amended, otherwise known as the Community Customs Code.

Of this 88-page document, Article 79 in particular applies, setting out the terms for "release for free circulation" of goods from third countries - the technical term for customs clearance. This, the Article tells us, "shall entail application of commercial policy measures, completion of the other formalities laid down in respect of the importation of goods and the charging of any duties legally due".

The important thing to understand from this is that it is a negative procedure. Customs officials may not admit goods unless they conform with the requirements. With intra-community trading, there is a presumption of conformity. With third country goods, valid documentary evidence of conformity must be provided. If it is not furnished, the goods cannot be admitted. It is as simple as that.

From there, it gets doubly interesting. You might have thought that the procedures for dealing with goods, in the event of the documentation proving inadequate, might be well-established. But that is not the case. The procedure I sketched out in my earlier blogpost is based on my personal experience as a port health inspector, and my work as a one-time consultant, when I was involved on behalf of clients on legal issues relating to rejected imports.

However, as this press release makes clear, after all these years of a Customs Union, there is no standard procedure applying throughout the EU. Remarkably, each of the 28 countries have their own way of doing things. To resolve this, the Commission has proposed a new directive which, as it stands currently, is still going through the legislative procedure.

Make no mistake, though, if the UK drops out of the Single Market and the attendant treaty system, and does not replace it with a new and comprehensive agreement, trade with Member States will be severely disrupted. Then, given how fragile the physical system is, it would take very little to bring the whole structure crashing down.

Therefore, people who are currently promoting the "WTO option", by whatever name it is called, must be brought to recognise that there is no "default option". We can either negotiate a settlement under Article 50 or trade goes down the pan. Helpfully, on page 6 of this document, the Commission sets out the criteria it expects to be fulfilled, before there can be a trade agreement which gives near neighbours access to the Single Market.