Brexit: a serious lack of urgency

12/09/2017

As we slide closer to the abyss called Brexit, we face a crisis of unknown proportions, the cost of which could be measured in hundreds of billions of pounds over the next decade or so, depending on how badly the process is handled.

At the epicentre of the crisis is our relationship with the EU, where the ability to continue trading will be determined to a very great extent by the border controls in place once Brexit takes effect. Onerous and inflexible controls have the potential over the short-term so seriously to disrupt trade that we could see a period where there is scarcely any movement of goods to and from the continent via the main Channel ports, with serious long-term damage to trading levels.

Where we are also seeing a lack of engagement by government and a sense of drift, with no signs of leadership from the May administration, the main impetus for change and direction must come from outside government. In such occasions, it is not unusual for think tanks to take a lead.

Away from the sterility of the Westminster debate on the Withdrawal Bill, therefore, the publication yesterday by the Institute for Government (IfG) of a report, entitled: "Implementing Brexit: Customs" was potentially of some importance.

A well-focused and properly framed report from such a prestigious institution could have revitalised this flagging but nonetheless important corner of the debate and provoked the Government into taking urgent action. Alas, though, whatever expectations there might have been, they have not been realised.

The report's problems are in part illustrated by its title which, to say the least, is unfortunate. Focused on "customs", it fails to convey adequately (or at all) that the problems we are confronting are not confined to customs per se, but to the wider issue of border controls as they affect the trade in goods, post Brexit.

The EU system of border controls does include customs but - not properly appreciated by many – it also encompasses separate and distinct "official controls" dealing with live animals, foods, plants and related goods, including timber products. These are the so-called sanitary and phytosanitary controls.

These goods that come under this category comprise a significant part of EU-UK trade. The border controls applied to them, separately from customs, will have a significant impact on the UK and its EU trading partners in the aftermath of Brexit.

Yet, running throughout the IfG report is a fundamental failure to understand the impact of these separate controls. In my view, this failure, together with other important omissions which I will discuss, seriously diminishes the impact of the report. That is a pity as the IfG is one of the better think-tanks and is one that is attempting to explain Brexit issues in a dispassionate manner.

Without nit-picking on the detail, we can see the problems with the report emerging early on, with the summary telling us that:

…responsibility for different elements of the customs process sits right across the public sector. From HM Revenue and Customs (HMRC) to the Horticultural Marketing Inspectorate, from Border Force to over 100 port health authorities across the country, day-one delivery depends on a very large, disparate group all working closely and effectively.

This, as readers of this blog will know, is plainly wrong. The port health system in this country – run by local authorities – works to the EU's "official control" regime and is entirely independent of the customs system. The same goes for the systems in the other 27 EU Member States.

This error is repeated in the body of the report, where the Institute (page 8) tells us that: "What we call customs goes beyond simply the collection of tariffs on goods as they are traded. It involves enforcement of a wider set of rules and regulations that determines what can be traded and how it is treated by authorities". Then, set out in a table (Table 1) is a list of Customs controls which wrongly includes: "Environment and health: Phytosanitary, veterinary and hygiene controls".

The report goes on to say that with falling tariffs and higher volumes of trade, focus has shifted from revenue generation and towards security, regulations and standards.

Governments, we are told, are focused on the careful management of what is going in and out of their country – preventing smuggling, making sure that animals aren't carrying diseases, checking that food is safe to eat, ensuring that chemicals are properly handled and car parts aren't faulty and, crucially, making sure that their domestic traders aren't being unfairly undercut.

These rules and regulations, it rightly says, are just as important as duties and taxes being collected (if not more so).

We then begin to get a sense of how intrusive have become the "rules on agri-food" as currently applied in the UK. Between 20 and 50 percent of shipments of beef and lamb imported from outside the EU, we are told, must be checked by a food safety agency at the border.

We are also told that "the UK is party to agreements such as the one between the EU and New Zealand, which exempts most checks". The EU–NZ deal only requires two percent of lamb shipments to be sampled at random. "Which shipments are randomly sampled", the report claims, "is determined by HMRC and relayed to freight services agencies at ports and airports via CHIEF (the computerised customs declaration service).

Tellingly, there is no source attributed to this claim. But then it is hard to see how one could be a valid reference. The claim is fiction. According to EU guidelines, prior notification of the physical arrival of the products on the EU territory must be provided to the border inspection post where the goods will arrive, using the Common Veterinary Entry Document (CVED). This is sent directly to the "competent authority" at the point of entry. HMRC is not involved in this process.

Once we leave the EU, we have to deal with the problem that the UK will become a "third country". And, as specified by Regulation (EC) No 882/2004, no third country can export food of animal origin to the EU unless it is on the list of approved countries.

Under normal circumstances, only a third country can apply to be on the list of approved third countries, which puts the UK in an interesting Catch 22 situation. In order to export to the EU after Brexit, it must be on the approved list. But it can't apply to be on the list until it has left the EU. And, given that approval is not automatic, there could be a time lapse of weeks or – more likely – several months - when exports mat not be possible.

As for the reverse flow, the Institute tells us that, currently, 70 percent of the UK's food imports by value come from the EU. At the moment, these are not subject to checks. Following Brexit, the UK could unilaterally continue allowing EU goods to enter the UK without regulatory checks, on the basis of trust. To do so would be within the UK's gift as an independent nation.

However, without a trade deal in place, there is an argument – which the Institute does quite neatly rehearse – that it must dismantle the checks on all other food imports or fall foul of WTO anti-discrimination rules.

On the other hand, if we have to inspect all EU food imports, says the IfG, this "will place substantial new burdens on the UK's border operations". In particular, we are told, shipments of agri-food which require a Border Inspection Post (BIP) for checks and – unlike most other goods – cannot generally be cleared inland due to the risks of spreading pests and diseases while in transit.

What I find lacking here, though, is the flat, neutral tone of the discussion. There is no possible way that the UK system could handle the increased inspection burden. There simply isn't the capacity, either in terms of the facilities or the trained staff. It takes three years to train a qualified food inspector, and probably longer to build the extra BIPs.

If we decided – which the IfG says is a possibility – to forego the checks, and face down any WTO complaints from our other trading partners, then there other issues, to which the Institute does not refer. To what extent, one needs to ask, can the UK rely on the good faith of EU Member States to ensure that food exports to the UK will be maintained to the requisite standards? How will we be able to tell if some traders start using us to offload the rubbish that they could not sell on their own domestic markets?

Now we come to an area not directly related to the food issues, amounting to one of those important omission that I referred to earlier, which fatally weakens the report. This comes in page 20 (and subsequently), where we are told that our ports could "grind to a halt".

I actually take no great issue with the thrust of the section, in terms of the predicted outcomes. We see rehearsed the familiar litany, whereby the total number of customs declarations will undergo a five-fold increase and there will be an increase in customs checks. Movements will rapidly grind to a halt as vehicles back up waiting to be processed by customs authorities.

Where I take exception to the narrative is the assertion that the adverse outcomes are all predicated on a "no deal" scenario. What the IfG fails to do is come to terms with the fact that so many of the effects it reports will occur whether there is a deal or not. As with so many others, the Institute simply don't seem to be able to come to grips with our coming status as a "third country".

There's the rub. On Brexit day and thereafter, the UK has moved outside the EU's external border. Irrespective of whether we have a free trade agreement with the EU, all exports to the Union will have to be declared and routine checks will be made at the point of entry.

As we are intending to be outside the Single Market, there will also be other complications which will affect the movement of a wide range of products. Medicines which have been manufactured in the UK under market authorisations held by UK companies, will no longer be permitted entry. The same applies to chemicals, to aviation components, to some types of machinery, to vehicles, and many other products.

Unless businesses have been given plenty of information and advance warning, it is almost inevitable that there will be problems and misunderstandings at the new border, with the potential for endless delays. Yet nothing of this is conveyed by the Institute report.

But the failure doesn't stop there. In a major breakdown of understanding, as we get into recommendation territory, the Institute optimistically asserts that that there is "one alternative to border checkpoints".

We could, it says, "carry out investigations and compliance audits at the source of production rather than at the border". For instance, conducting onsite veterinary controls of cattle and sheep going for slaughter could allow them to be pre-cleared electronically, avoiding the need for testing and checks at the border. This is not true.

To compound its mistake, the Institute calls in aid the Union Customs Code which permits pre-clearance for imports. But, the Customs Code does not apply to sanitary checks. And under the official controls regime which actually does apply (see Article 23), pre-export checks do not remove the need for import controls. They simply reduce the frequency of those controls – as in the case of New Zealand lamb.