ExplodingthemythsofleavingtheCustomsUnion

AjointpublicationfromtheEuropeanResearchGroupandGlobalBritain

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Fact – NOT Friction ExplodingthemythsofleavingtheCustomsUnion

AjointpublicationfromtheEuropeanResearchGroupandGlobalBritain

CONTENTSForeword 3ExecutiveSummary 4Introduction 6MythssurroundingaUK-EUfreetradedeal 9Mythssurrounding‘NoDeal’–ortradingonWTOterms 20Aboutthepublishers 23

20thNovember2018

Coverpicture:ThePortofSouthampton,DiegoTorres

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FOREWORDBySimonBoydFinstD,ManagingDirectorofReidSteelItisoftensaidthatwhentheUKleavestheEUSingleMarketanditsCustomsUnionthatitwillbefarhardertotradewhetherit'simportorexport–thatfrictionlesstradewillbecomedifficultwithdelays,obstaclesandcosts.FrommyownexperienceIcansaythereverseistrue.InmyexperiencetradingwithourEuropeanfriendsisinfinitelymoredifficultthanitistotradewithothercountriesoutsidetheEU.Ithas,forinstance,beeneasierforustoexporttoMongoliathantoFrance,despitethefactwewerefoundedtherein1919.Thereasonsforthisareobvious,theEUisbureaucraticbyitsverynatureanditsCustomsUnionisafortressdesignedtoprotectproducersinsideitratherthanencourageopenfreetradewhereeveryonecanbenefit.Butwearenotandneverhavebeenprotectedbythisprotectionistregime.InsteadwehaveseenthesteadyebbofmanufacturingmovetootherareasoftheEU–andeventoareasbeyond–asaresultofourmembership.Addtothebureaucracyandprotectionism;theunevenplayingfield,demiseofourworldrenownBritishStandards(seenbymanyasthefinestintheworld)andtheconstantanti-competitivedietofbadEURegulationandDirectiveswhichourcivilservantsgoldplate,itisnowonderthatourproductivityandabilitytogrowhasbeenheldback.TheEUsystemsuitsonlythemultinationalswhohavethemeanstolobbyandunfairlyprofitattheexpenseofthevastmajorityofUKbusinesses.Thispaperisarevelationbecauseitexposesthetruththatwehavebeenonthereceivingendofacarefullyorchestratedblizzardoffalsefactsandpredictionsthatarenotbornoutbytheevidence.Indeedtheseventeenmythsthataretakendownherearetestimonytotheprevalenceoffear-mongeringthroughouttheBrexitdebatetomakeitappear"catastrophic"toliveandtradeoutsidetheEU.YetifweonlyaskourselveshowperfectlynormalandsuccessfulcountriessuchasChinaandAustraliaontheothersideoftheworld–andtheUSAontheothersideoftheAtlantic–havebeenabletotradesuccessfullywiththeEUandtheUKfromoutsideitscustomsUnionwehavetoadmitlifeandtradeinsuchacircumstanceisnotcatastrophicatall.IndeedlivingunderWTOrulesissuccessful,profitableandlife-enhancingfortheirsocieties.Tobefreetotradewiththegrowingworldwillreaphugerewardsforourcountryandourtradingpartners.Wewillthenseethereversalofthehugetradingdeficitofcirca£100BillionperyearingoodsourEUmembershiphasdelivered.Iaskmyfellowbusinesscolleaguestoreadthispamphletandtakeitslessonsonboard–wecanalladjusttotradingunderWTOrulesandworkingtowardsatradedealthatreducesanyfrictiontonearzero–butitshallnotbecatastrophic,itshouldnotevenbeuncomfortable,itshouldjustbeanotherbusinesschallengethatwillbeworthit.Wewillsucceedthroughourcountrytakingbackcontrolofourlaws,ourmoneyandourborders.

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EXECUTIVESUMMARYTheprovisioninthePM’sdraftWithdrawalAgreementthatcouldkeeptheUKindefinitelyintheEUcustomsunionisdrivennotjustbyconcernthatcustomsproceduresneededoutsideacustomsunionwouldrequireahardborderinIrelandbutbyfearsthattheywillimposecosts,causedelays,disruptsupplychainsandundermineeconomicgrowth.However,manyoftheproblemsascribedtoleavingtheEU’scustomsunionareimaginaryandmostoftherestareexaggerated.§ Referencesto“customspaperwork”havingtobe“checkedattheborder”afterBrexitconjure

upvisionsoflorrydriversfillinginformswhicharethenlaboriouslycheckedagainsttheirloads,causingdelaysandqueues.Infact,virtuallyallcustomsdeclarationsaremadeelectronicallyaheadofarrivalataport;mostconsignmentsareclearedwithinsecondsofarrival;atinypercentagearephysicallycheckedasaresultofriskassessmentbyHMRCcomputersorintelligenceinformation;andsuchchecksmaybecarriedoutawayfromtheborderatimporter’spremisesorwarehouses.

§ Mostchecksrelatetodutiablegoods,drugsorillegalimmigrantsandaremadeonthebasisofriskorintelligenceinformation.HMRCdonotexpectanyoftheseriskstoincreaseornewriskstoemergeasaresultofBrexitsotheywillnotrequiremorechecksthanatpresent.Thesameistrueforchecksoffood,plantsandanimals.Inanycasetheywill‘prioritiseflowovercompliance’topreventcongestion.

§ ItisoftenassumedthattherearenoborderproceduresorchecksontradewiththeEUatpresent.Yet,infact,companieshavetoreporttheirtransactionswithEUcountriesseparatelyintheirVATreturns;paydutyontobaccoandalcohol(whichyieldfarmorerevenuethantariffswouldintheeventof‘nodeal’);theymaybesearchedforillegaldrugsorimmigrants;driversmustshowtheirpassports;andcompaniesofanysizemustsubmitdetailsoftheirintra-EUtradetoIntrastat.Allbutthelatter(whichwillbereplacedbycustomsdeclarations)willcontinuepostBrexitandconstitutethemajorelementofbordercompliance.

§ TheclaimthatWTOrulesrequirecheckstobemadeattheborderisincorrect.Checksofcustomsdeclarationsarecarriedoutelectronicallyandphysicalchecksoftenmadeatimporter’sorexporter’spremises.EventheUnionCustomscode,whichrequiresagri-foodchecksatborderinspectionposts‘inthevicinityoftheborder’allowsthemtobeasfaras40kmsinland.ThisisparticularlyimportantforavoidinginfrastructureandchecksattheIrishborder.

§ Just-in-TimesupplychainsdonotoperateexclusivelywithintheEU.Indeed,afifthofcomponentsimportedbyUKmotormanufacturerscomefromoutsidetheEU,andtheirtimelyarrivalisjustasessentialtothereliableoperationofassemblylines.TheyaresubjecttocustomsproceduresthatdonotcausetheproblemssupposedtobelikelywhenappliedtofutureimportsfromtheEU.

§ Theassumptionthatfreetradeagreementsimposefarmoreburdensontradethandocustomsunionsisnotbornoutbyeconomicstudiesorintherealworld.Surveysoftheliteratureshowthatfreetradeareas–e.g.NAFTA-aremore‘tradecreating’thantheEUcustomsunion.BusinessesinSwitzerland,NorwayandotherEEAcountriesarenotcomplainingaboutcompletingcustomsdeclarationsletalonecallingtoconverttheirfreetradearrangementsintoacustomsunion.Thismaybebecausetheywelcomethefreetradeagreementstheircountrieshavebeenabletonegotiatewhichwouldnotbepossiblewithinacustomsunion.TheSwiss

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haveFTAswithcountrieswhosecombinedGDPisthreetimesthatoftheFTAsnegotiatedbytheEU.

§ AlthoughSwitzerlandandNorwayhavefewerchecksonproductcompliancebecausetheycomplywithEUsinglemarketrulesthecustomsdeclarationsrequiredattheirborderswiththeEUaresimilartothosethatwillberequiredattheUKborderandtheytoohavetocomplywithrulesoforigin.

§ Ofcourse,weshouldendeavourtominimisethecostofcompliancewithcustomsprocedures.ButastheChairoftheEuropeanlogisticsandcustomsassociationhassaid:“AlltheingredientstoensureasmoothexitprocessoftheUKfromtheEUandwhichallowalmostfrictionlesstradeaftertheexit,arealreadyavailable[intheUnionCustomsCode].”Sowedonotneedtonegotiatesimplifiedcustomsprocedures.

§ TheHMRCestimateofthecostofcompletingcustomsdeclarationsisanorderofmagnitudelargerthanactualcostsincurredbycompaniesandreportedbytheSwissauthorities.TheHMRCfigureisbasedonthechargesbycustomsagentsforlargeconsignmentsofcomplexproducts.ItignoresthefactthatovertwothirdsofbusinessescompletetheirowndeclarationsbecauseitischeaperandthatforthesmallrepeatconsignmentsthatcharacteriseUK/EUtradethecostofreplicatingdeclarationsisnegligiblecomparedwiththecostoftheinitialdeclaration.

§ Officialestimatesofthecostofcomplyingwithrulesoforiginareevenlessdefensible.TheyarebasedonoutdatedandirrelevantstudiesoftradebetweenunderdevelopedcountriesandtheUSAortheEU.AmorerecentauthoritativestudybytheWTOshowsthat,exceptforinfrequentconsignments,thecostsofcomplyingwithrulesoforiginare‘negligible’–theydonotevenwipeouta1%tariffpreference.Moreover,thenewREXsystem–whichtheEUhasagreedtoextendtotheUKpostBrexit–furthersimplifiestheprocedurefordeclaringorigin.

§ AparticularconcernhasbeenfearthatlengthydelaysatportsandconsequentcongestiononmotorwayswilldisruptplantsdependentonJust-in-Timesupplychains(JIT).Asexplained,HMRCdonotexpectmorechecksonimportsfromtheEUpost-Brexitandwillprioritiseflowovercompliance.Thefearis,however,thatdelays–eitherdeliberateorthroughlackofpreparation–onvehiclesarrivingatCalaisfromtheUKwillcauseaback-upofvehiclesextendingbackoverthechannelanduptheUKmotorwaysystem,interferingevenwithsuppliescomingintheoppositedirection.Deliberatedelayswouldbeabreachofthreetreatycommitments(theoriginalWTOtreaty,theTradeFacilitationAgreement(FCA)andtheLisbonTreatyrequiringtheEUtobehaveinaneighbourlyfashiontowardsadjacentstates).Ofcourse,legalredresswouldtaketimebutportsinBelgiumandHollandareeagertotaketradeawayfromCalais.

§ Moreover,queuesresultingfromproblemsatCalaisarenotunknown.OperationStackhashadtooperateon211dayssince1998anddidsofor23almostcontinuousdaysin2015withdelaysof35hours.YetJITplantsappeartohavemanagedsincenonewerereportedhaltingproduction.

§ ItisnaturalthatbusinessescontemplatetheworstpossibleconsequencesintheeventoftheUKleavingwithoutanagreement–duetolackofpreparationcombinedwithhostilenon-cooperationbytheEU.Sadlysomecommentatorspresentthesescenariosasiftheyrepresentwhatwouldbeapermanentsituationpost-Brexit.Butmostsuchproblemsarenotmerelyunlikelybut,iftheyhappenatall,essentiallytemporary.

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INTRODUCTIONOneofthemostcontentiousprovisionsofthePrimeMinister’sdraftWithdrawalAgreementisthecommitmenttokeeptheUnitedKingdominacustomsunionwiththeEUwhichwewillnotbeabletoleavewithoutEUapproval.ThatissupposedlynecessarytoavoidahardborderbetweenNorthernIrelandandtheIrishRepublic1andacustomsborderbetweenNorthernIrelandandGreatBritain.ButitalsoreflectsstrongpressurefromtheTreasuryandDepartmentforBusiness,EnergyandindustrialStrategy(BEIS)toavoidthecustomsprocedureswhichwillapplytoallourtradewiththeEUifweleavethecustomsunion–evenifwehaveaCanadastylefreetradeagreementoriftheUKleavestheEUonWTOterms.Theyclaimthatthesecustomsprocedureswillcauseunacceptable“friction”whichwillimposehugecosts,causedamagingdelays,disruptjust-in-timesupplychains,undermineeconomicgrowthandprovokemilitantresentmentontheIrishBorder.ThesefearsaredrivenbyaseriesofmythsabouthowtheythinkCustomsprocedureswork.Unfortunately,fewingovernmentorthemediaarefamiliarwiththem.Thispaperattemptstodispelthesemyths.Ofcourse,leavingthecustomsunionandreplacingitwithafreetradeagreementwiththeEUand/orothercountrieshasbothcostsandbenefits.Inafreetradearea,unlikeinacustomsunion,businesseshavetomakecustomsdeclarationsandcomplywithrulesoforiginwhentradingwithothermemberstates.Ontheotherhand,inafreetradeareastatesarefreetosettheirownexternaltariffsorabolishanyofthemeitherunilaterallyorinnegotiatingadditionalfreetradeagreementswithothercountries.Thispaperdemonstrateshowthepossiblecosts,delaysandcongestionofcustomsproceduresifwetradedwiththeEUonthebasisofafreetradeagreementoronWorldTradeOrganisationterms,havebeenexaggerated.Likewise,thebenefitsofwiderfreetradeagreementshavebeenunderstated.OnthebasisoftheirinevitablytheoreticalestimatesthegovernmentarguesthatthecostofleavingthecustomsunionwouldexceedthebenefitsoffreetradeagreementswiththeEUand/ortherestoftherestoftheworld.Yetcountriesthathavepracticalexperienceofbothcostsandbenefitsoffreetradeagreementshavereachedtheoppositeconclusion.MembersofEFTA,theEEA,NAFTAandtheAsianfreetradeareasarenotlobbyingtoconverttheirfreetradeagreementsintocustomsunions.Theirbusinessesdonotseemtofindcompletingcustomsdeclarationsandcomplyingwithrulesoforiginasignificantproblem.Andmemberstateshaveprofitedfromtheopportunitytonegotiateadditionalfreetraderelationshipswithaswatheofothernations.Inthelightofthis,itisstrangehowmuchnegotiatingandlobbyingefforthasbeenexpendedonkeepingtheUKwithinacustomsunioninwhichtheUKhashistoricallybeentheloser.WhentheUKjoinedtheCommonMarketin1973itwasoneofthefastestgrowingmarketsintheworld.Wehopedthatgettingwithinitsthenhighexternaltariffwouldenableustosharethatgrowth.YetonlyfouryearslaterBritainwasbustandhadtobebailedoutinthebiggesteverIMFrescue.Themain

1SeeTheBorderbetweenNorthernIrelandandtheRepublicofIrelandpost-BrexitEuropeanResearchGroup12thSeptember2018whichshowsthattheEUcouldavoidinfrastructureorchecksattheborderwhilecomplyingwithitsownrules.HMRChassaidthattheUK“doesnotrequireanyinfrastructureattheborderbetweenNorthernIrelandandIrelandunderanycircumstances”

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causesweredomesticbuttheywereaggravatedbythehugetradedeficitopeningupasimportsfromthecontinentfaroutstrippedBritishexportstothecontinent.FortyyearslaterthatdeficitintradewiththeEUisapproaching£100billion.Ontheotherhandourtradewiththerestoftheworldisgrowingmorerapidlywithagrowingsurplus.Meanwhile,theEUisnowtheslowestgrowingcontinentaleconomyapartfromAntarctica.TheEUitselfexpects90%offuturetradegrowthtobeoutsideEurope.AndtheEUexternaltariffnowaveragesonly4%makingitmuchlessimportanttobeinsideit.ThedecisiontoleavetheEUisapoliticalone,notaneconomicone.Itwasaboutrestoringnationalself-governmentsothatwecouldholdthepeoplewhomakeourlawsdemocraticallyaccountable.Notthatprosperityanddemocracyarealternatives.Inthelongruntheygohandinhand,becauseifademocraticgovernmentfailstodeliverprosperitytheelectoratecanthrowitout.Furthermore,anationalgovernmentcantailorlawstothenation’sneedsratherthanhavingtoacceptone-size-fits-allrulesacrossacontinent.Itisdomesticpolicythatoverwhelminglydetermineswhetheranationiscompetitiveornot.SotakingbacknationalcontroloverourdomesticlawandeconomicpolicywillstrengthentheUK’sflexibility,agilityandfreedomtocompete.MembershipofthecustomsunioninpracticeentailsremainingsubjecttothebulkofEUsinglemarketlawincludingallfuturelaws–withnosayoverthem.Theparadoxofthedebateaboutremaininginthecustomsunionisthatthosewhoareentirelyhappytoforegotherighttolightentheburdenofover10,000EUlawsandregulations2somehowbaulkattherequirementtocompleteacustomsformanddeclarationoforigin.IsitreallycrediblethatcustomsproceduresalonearemoredamagingthanalltheREACH,MiFiDandcountlessotherdirectivesandregulations,imposedonindustryovertheyears?Furthermore,newindustrieslikeBioTech,FinTech,AI,GMandGeneEditinginwhichtheUKisstrong,facetheriskofbeingregulatedbyotherEUcountrieswhichhavenointerestintheirprosperity.ApologistsforEUlegislationarerighttosaythatregulationisanecessaryevilinacomplexmoderneconomy.Therewillbelittlescopeforabonfireofregulations.Buttherewillbeconsiderablescope,andcumulativelyenormousbenefit,frombeingabletostreamlinetherulesweinheritfromtheEU,tominimisecompliancecostsandabovealltoreducethebarrierstoentry.Weshouldofcourseseektodothesamethingforcustomsprocedures.Indeed,oneofthemythsthatwedebunkisthatthereisnoscopeforsimplificationwithinthecurrentEUcustomscode.ThereisanditshouldbeaprioritytoencourageandfacilitateBritishbusinessestotakeadvantageofthesesimplificationswhentradingwiththeEU.So,itmakesnosensetotrytopreservethetradestatusquowiththeEU.ThereisfarmoreopportunityfortheUKbygainingfreedomtosimplifyregulatorystandardsongoods,tosetourowntariffsandquotasandtradepolicy,andtousetheseleverstoachievebettertradingrelationshipswiththerestoftheworld,whichisgrowingsomuchfasterthantheEU.ThisiswhyitissooddthattheUKgovernmentshouldhavebecomesopreoccupiedwithdefendingadeficittradingrelationshipwiththeEUattheexpenseofthegrowingsurpluswegeneratefromtradewiththerestoftheworld.

2“Attheendof2008,therulesoftheTreatyweresupplementedbysome8,200regulationsandjustunder1,900directivesinforcethroughoutthe27MemberStates”EuropeanCommission’s26thAnnualReportonMonitoringtheApplicationofCommunityLaw(2008)

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Onlyafterweleave,andretakecontrolofourowntradepolicy,willwehaveregainedtheflexibilitytoadaptourselvestoachangingworld,andbuildastrongfoundationforourfutureprosperity.So,theUKshouldwelcometheprospectofaCanada+++tradedealwiththeEU,aswasofferedbyPresidentTuskbackinMarch2018.CombinedwiththeERGproposalsforcustomsfrontierswithoutnewinfrastructure,whichremovestheneedfortheso-called“back-stop”ora“hardborder”betweenNorthernIrelandandtheRepublic,aCanada+++advancedFreeTradeAgreementoffersthebestandonlydeliverableFutureEconomicPartnershipwiththeEU.

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MYTHSSURROUNDINGAUK-EUFREETRADEDEAL(butmayalsounderliediscussionsof‘nodeal’)

MYTH1

• Customsdeclarationsarepiecesofpaperthatareexaminedandcomparedwithloadsattheborder.

“trucksfromnon-EUcountries…havetoparkandfillinaformatthefreightclearanceoffice.AcomputerisedsystemknownastheCustomsHandlingofImportandExportFreight(CHIEF)logsdetailsautomatically,indicatingwhatthegoodsareandwhattheimportdutymightbe,butithastobechecked.”TheEconomist6April2017

Thereality:

• Virtually100%ofcustomsdeclarationsforgoodsarrivingintheUKaremadeelectronicallyaheadofarrivalattheport.Theyaresentto,andcheckedelectronicallyby,theCustomsHandlingofImportandExportFreightcomputersystem(CHIEF)3.

• CHIEFcarriesoutcomputerisedriskassessmentprocessestoidentifyconsignments,orgoodswithinaconsignment,thatneedtobephysicallyexaminedortheirdocumentationexamined.Checksarenormallycarriedoutonlyifariskofnon-complianceisidentified.

• Fewerthan1%ofimportsarephysicallycheckedasaresultofCHIEF.• Around94%ofimportsareclearedin5secondsand96%oftheremaining6%arecleared

within2hours4.• Fewerthan3%ofnon-EUimportsaresubjecttodocumentchecksand96%ofthoseare

clearedwithin2-3hours.• Most“border”processes–likecustomsdeclarations–arenotcarriedoutattheborderbut

electronicallyorattheexporter’sorimporter’spremises,inlandwarehousesetc.• PostBrexit,inthevastmajorityofcases,theonlynewcustomscheckneededunderafree

tradeagreementwouldbeconfirmationofthecustomsdeclarationsimilartothecheckonthedrivers’passports(whichalreadytakeplace)wherethereareborderpostsasatDover,oratthedestinationpremises.

MYTH2

• CustomsdeclarationsatChannelportswillrequirechecksanddelaysattheborder.Thereality:

• ThereneedbenomorechecksongoodsenteringtheUKthanatpresentasaresultofBrexit.JonThompson,CEOofCustomsandRevenue,inevidencetotheSelectCommitteeexplainedthatthereneedbenoextraCustomschecksbecausechecksarerelatedtorisk(mostofwhichrelatetogoodsliabletoexcisedutiesandillegaldrugs)andimportsfromtheEUwillbenoriskierpostBrexitthanbefore.5

3CHIEFwillsoonbeupgradedtothenewCustomsDeclarationService(CDS)furtherfacilitatingtrade.4HMRCbriefingtoMPsOctober2018.5EvidencetoDEXEUSelectCommittee29thJan2017.Q220MrRees-Mogg:IfIhaveunderstoodyourevidencecorrectlytoday,customsandexcisecan…minimiseanydelaysatthebordertoensuretheyarenoworsethantheycurrentlyareonourside?…JonThompson:Inrelationtoimports,yes.

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MYTH3

• TherewillneedtobefarmorechecksonfoodandanimalimportsenteringtheUK.“Oursystemforimportingandexportingfoodimplodesalmostinstantly…Wedon'thaveenoughinspectionposts,wedon'thavethestafftomanthem,wedon'thavethemeanstodivertproducttothemandwedon'thavethecoldstoragecapacitytohandleproductgoinginandout.Manyportsdon'thavespacetoinstallmorefacilities.”IanDunt,Editor,Politics.co.ukJuly2018Thereality:

• ThereneedbenoextraSanitaryandPhyto-SanitarychecksonfoodandanimalsenteringtheUKpostBrexit–unlessinfutureEUgoodsrepresentagreaterhealthriskthannow,whichseemsunlikely.JohnBourne,PolicydirectorofAnimalandPlantHealthforDEFRA,confirmedthat,becausephysicalinspections(likecustomschecks)areriskrelatedtheyseenoreasontoincreasetheirfrequency6.

• FreshfruitetcisflowninfromIsraelandothernon-EUcountrieswithnegligibledelaysatUKairportCustoms/SPScontrols.AslongasfreshfoodclearancepointsaregeareduptooperateatDoverinthesamewayasatfreightairports,thereneedbenodelays.

• Indeed,EUrulesrequiringarbitraryhighpercentagechecksonimportsregardlessofriskneednolongerapplyintheUK.

• TheEUmayimposeadditionalchecksonfood,plantsandanimalsenteringtheEUfromtheUK.TheUK’sSPSmeasureswill,however,initiallybenotjustequivalent,butidentical,totheEU’s.TheWTOSPSagreementappearstodisallowadditionalEUchecksinsuchcircumstancessinceitrequiresthat:“MembersshallacceptthesanitaryorphytosanitarymeasuresofotherMembersasequivalent,evenifthesemeasuresdifferfromtheirownorfromthoseusedbyotherMemberstradinginthesameproduct,iftheexportingMemberobjectivelydemonstratestotheimportingMemberthatitsmeasuresachievetheimportingMember’sappropriatelevelofsanitaryorphytosanitaryprotection.”However,theEUmayimposecheckstoensurethatequivalentrulesinnon-membercountriesincludingtheUKarebeingadheredto.

MYTH4

• WTOrulesrequirememberstatestooperatebordercontrols“thelegalrequirementwewillhave…tooperatetheWTO-compliantborder,whichdoesrequirechecksattheborder.That’swhattheWTOrulesrequire.”PhilipHammond7Thereality:

Q237JonThompson:Thefundamentalquestionhereiswhetherwhatiscurrentlyintra-EUtrafficwillbeanymoreriskypostleavingtheEuropeanUnionthanitisnow?Whatweinterveneonnowisriskandintelligence-based.Thatisasystemwewillcontinuetoapplyinthefuture.Wemaynotinterveneanymorethanwedonow,6IbidQ237JohnBourne:Fromourpointofview,weabsolutelyagreewithyou:wedonotthinktherearesignificantreasonstoalterourriskassessmentsondayone.Wehavebeendoingthisforalongtimeandnothinghasreallychanged;hopefully,wehavegotrelativelyappropriateriskmanagementprocessesinplacenow.7https://www.politico.eu/article/philip-hammond-brexit-ireland-uk-will-enforce-hard-border-in-ireland-if-there-is-no-brexit-deal/

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• Despiterepeatedrequests,thegovernmenthasbeenunabletoprovideuswiththetextoftheWTOrulesthatallegedlyrequirechecksattheborder.

• WTOrulesaredesignedtofacilitatetrade–nottohinderit.Theyprohibitdiscriminationbetweengoodsonthebasisoftheircountryoforigin.

• Mostdeclarationsaremadeelectronically,notattheborder;checkscanbe,andoftenare,madeawayfromtheborderatcompanypremises,warehousesetc.

• EvenBorderInspectionPoststhattheUnionCustomsCode(whichinanycasetheUKwillbeabletoamend)requirestobe‘inthevicinityoftheborder’andareoftensited20kmsormoreaway.

• WTO/GATTrulesrequiregoodstobetreatedinsimilarwaysregardlessoforiginanddestination.8However,itisnormalforprocedurestodifferbetweenports(forexample,notallwillhavefull-timecustomsposts)andbetweenlandandseaborders.So,aslongastheUKdoesnotdiscriminatebetweengoodsataparticularlocationonthebasisoforiginordestinationitisnotobligedtoperformitschecksattheborder.

• TheWTOalsoallowswaivers–albeittemporarybutrenewable–evenfromnon-discriminationrulesontheverysecuritygroundsthatunderlietheconcernabouttheproceduresapplyingtotradeacrosstheUK/Irishborder.

MYTH5

• TherearecurrentlynochecksorproceduresrequiredforimportingintotheUKfromtheEU

“Currently,goodsmovingbetweentheEUandUKdon’tneedtobecheckedatborders”JonStone,Independent,23July2018Thereality:

• TherearecurrentlyseveralborderprocessesandchecksontradecrossingtheUK/EUborderwhichwillremaintheprincipalprocedureswhenitbecomesacustomsborder.Currentchecksinvolve:

o CompanieshavetoreporttheirtransactionswithEUcountriesintheirVATreturnsbecauseexportstotheEUarezeroratedwhereastransactionswithintheUKincur20%VAT.(Thiswillcontinueandrequiresmuchoftheinformationthatwillbenecessaryforcustomsdeclarations.)

o Excisetaxesonimportsoftobacco,alcoholetcareseveraltimesthevalueofimporttariffs9.(ThatwillremainthecasepostBrexitwhetherwetradewiththeEUonFTA,WTOorFCAterms.)

o IllegalDrugs–involveasignificantproportionofchecks(whichwillnotchangepostBrexit).

8“withrespecttoallrulesandformalitiesinconnectionwithimportationandexportation,andwithrespecttoallmattersreferredtoinparagraphs2and4ofArticleIII,anyadvantage,favour,privilegeorimmunitygrantedbyanycontractingpartytoanyproductoriginatinginordestinedforanyothercountryshallbeaccordedimmediatelyandunconditionallytothelikeproductoriginatinginordestinedfortheterritoriesofallothercontractingparties.”GATTArticle19IbidQ217…JohnThompson:themajorriskfromanHMRCperspectiveisactuallyexcise.PerhapsIcangiveyouanillustration.Apacketof20cigarettes,whichretailsinthiscountryfor,say,£9,youcanbuyinEasternEuropefor£1.IfyouarepreparedtotrytoimportitfromsomewhereintheMiddleEastacrossaneasternEuropeanboundary,youcanalmostcertainlygetitfor10p.Now,giventhat£7billionofexciserevenueisraisedattheborder,thereisasignificantchallengeinrelationtotobaccoandalcoholattheborder.Thatisthemajorriskhere,notreallythe£3billionofcustoms.Attheminute,wepass80%ofthatontotheEuropeanUnion.ThatistheareawhereHMRCisparticularlyexercisedaboutriskovertime.

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o Illegalmigrants–are,likewise,acauseofchecksatpresent(whichwillnotchange).o Statisticalreturns.Allbutsmallercompanieshavetosubmitdetailsoftheirintra-EU

tradecomprisingmuchoftheinformationwhichwillberequiredbycustomsdeclarations,thoughonamonthlybasisratherthanwitheachconsignment.Nextplcsaytheyexpectlittleextraworkasaresult10.(Customsdeclarationswillreplacethis,notbeadditional.)

o Drivers(andpassengers)mustshowtheirpassportssincetheUKisoutsideSchengen.(Thiswillnotchange.)

• Intheeventofanoutbreakofdisease,epidemiologicalcontrolsmaybeintroducedattheborder.

MYTH6

• Just-in-Timesupplychainscannotoperateacrosscustomsfrontiers

“Idon’tthinkit’sfeasibleforthecarmakerstocarryonrunningtheJITsupplychainsif…UKleavestheEUcustomsunion.”TimLawrence,PAConsultingFinancialTimesJune2018Thereality:

• Just-in-TimeandJust-in-SequencesupplychainscananddooperateacrosscustomsfrontiersintheUKandworldwide.

• 21%ofautomanufacturers’bought-insupplychaincomesfromoutsidetheEUagainst36%fromtheEUand43%fromwithintheUK11.Thereliableoperationofproductionlinesisasdependentonthesenon-EUimportedJIT/JISsupplychainsasthosefromtheEU.CustomsproceduresatUKportshaveneverbeencitedasaproblemforthesesupplychains.

• FordandGeneralMotorsdependonsupplychainsthatoperateacrosstheCanadian/US/Mexicoborderswhere,becauseNAFTAisafreetradeareanotacustomsunion,thereisacustomsborder.12

• Freshcutflowers(whichareverytimesensitive)traveldailyfromtheNetherlandsacrossthecustomsbordertoSwitzerland.(BecausesinglemarketrulesapplybothsidesoftheSwissborder,flowersdonotfaceSPScheckstherebuttheexampleillustratesthatordinarycustomsdeclarations,whichapplytoflowersastoallgoods,donotresultindelays.)

• Althoughdelaysindeliveriesareundesirable,UKmotormanufacturersalreadyhavetocopewiththesometimesprolongeddelaysatChannelports(resultinginOperationStack–seeMyth13),delaysonmotorwayssuchastheM25andacrossEuropebetweenEUsuppliersandUKplants,causedbybadweatherandotherincidents.

10BrexitPreparationandImpactAnalysis,NextCEO’sReportforHalfYearendedJuly2018.“AlthoughthereisnocustomsborderbetweentheEUandUK,anycompanyimportingmorethan£1.5morexportingmorethan£250kpaisrequiredtosubmitIntrastatdeclarationsforallgoodsflowingintotheUKfromtheEUandviceversa.Intrastatdeclarationscontainalmostentirelythesamedatathatisrequiredtomakeacustomsdeclaration.Therefore,wedonotanticipateanyadditionaldatawillbeneededinordertoimportgoodsfromtheEUpost-Brexitandsothereislittleadditionalworkinrespectofdatacollection.”11TradePostBrexitBostonConsultingGroup,HerbertSmithFreehillsandGlobalCounsel12ThiswashighlightedbytherecentagreementonrevisionstotheNorthAmericanFreeTradeAgreement.https://www.cnbc.com/2018/10/01/ford-general-motors-rally.html

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MYTH7

• CustomsUnionsarefarmorebeneficialthanFreeTradeAgreements.“[ACanada-styleFreeTradeAgreement]wouldbeabadBrexitoutcomefortheUK…acustomsunionshouldserveasapractical,real-worldanswer”CarolynFairbairn,DirectorGeneraloftheCBI13Thereality:

• NorwayandSwitzerlandarenotcallingforcreationofacustomsunionwiththeEU.NorisCanadacallingtoconvertNAFTAintoacustomsunion.Theydonotfindthesecustomsprocedurescauseonerous‘friction’.

• ComprehensivereviewsofstudiesoftheimpactoftradeagreementsprovidenoevidencethatacustomsunionwouldbemorebeneficialforUK-EUtradethanastandardfreetradeagreement(FTA).OnefoundnoevidencethatcustomsunionsoutperformFTAsintradecreation14.ThemorerecentstudyfoundmembershipoftheEUcustomsunionhadmodesttrade-boostingimpacts(15-20%)butthatthesewereonalltheirmeasuressmallerthanthetrade-creatingeffectsofFTAssuchasNAFTA15.

• TurkeyhasacustomsunionwiththeEUbutdelaysattheEU/Turkishborderarelegendarynotleastbecauseofchecksforillegalimmigrants(whichareandwouldremainafeatureofUK/EUtradesinceweareoutsideSchengen).WhentheEUdoestradedealswiththirdparties,thesethirdcountriesgaintariff-freeaccesstoTurkishmarketsbutTurkishexportersdonotgainautomaticreciprocalaccesstothesethirdcountriesandTurkeyhastotrytonegotiateparallelarrangements(notalwayssuccessfully).Notably,TurkeycameclosetocancellingitscustomsunionwiththeEUwhentheEUwasnegotiatingtheTTIPtradedealwiththeUS.BritaininacustomsunionwouldbeinthesamepositionasTurkey.16

• AcustomsunionwouldruleoutUKnegotiatingourowntradedeals.• Switzerlandhasnegotiatedtradedeals(someinconjunctionwithEFTA)withcountries

whoseGDP(excludingtheEU)is3times17thatofthecountrieswithwhichtheEUhastradedeals.However,Swisstradedealscanbeone-sidedbecauseadherencetosinglemarketrulesmeanstheycanoffernoregulatoryflexibilityintheirtradenegotiations.

• Nonetheless,athirdofSwissFTAshaveasignificantservicescomponentwhereas90%ofEUFTAshavealmostnoservicecomponent18.YetoverhalfoftheUK’sexportsbyvalueaddedisinservices,givingusadifferentinterestfromtherestoftheEU.

13(http://www.cbi.org.uk/insight-and-analysis/a-business-plan-for-a-good-brexit/)14“Lookingatthemostwidelystudiedagreements–EU,EFTAandNAFTA–,thelargestimpactisforNAFTA(131%),whiletheEuropeanagreementsregistermuchlower,butpossiblymorerealisticvalues:27%inthecaseofEFTA,41%fortheEU.Itisalsoworthnotingthatcustomunions–EU,CARICOM,MERCOSUR,CACM,CISCU–donotseemtoconsistentlyoutperformthefreetradeareasintermsoftradeimpact.Indeed,inthemeta-analysisregressionthecoefficientoftheCUvariablewasneversignificant.”Reciprocaltradeagreementsingravitymodels:ameta-analysisMariaCipollinaandLucaSalvatici(UniversityofMolise)15Table6GravityEquations:Workhorse,Toolkit,andCookbookHeadandMayer(2013)1614ReasonsWhyaUK-EUCustomsUnionRemainsaTerribleIdea.ByGudginandWeston,BriefingsforBrexit17MythandParadoxoftheSingleMarket:HowthetradebenefitsofEUmembershiphavebeenmis-soldMichaelBurrageCivitasJan2016.SwitzerlandhastradedealswithcountieswhosecollectiveGDPis$39.8trillionofwhich$16.7trillioniswiththeEUwhichhasFTAswithcountrieswhosetotalGDPisonly$7.7trillion.18Ibid

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MYTH8

• CustomscompliancebetweentheEUandEEAcountriesorSwitzerlandisverylightonlybecausetheyhavetocomplywithEUrules.

Switzerland,Norway,IcelandandLiechtensteinarenotpartofaCustomsUnionwiththeEU.Sotheyhavenegotiatedtheirownfreetradeagreementswiththerestoftheworldandlevytariffsonimportsfromnon-EUcountriesatratesthatdifferfromtheEUexternaltariffs.Thereality:

• ThesamecustomsproceduresapplytotradeacrossthebordersbetweentheEUandSwitzerlandandNorwayaswilloperateatUK/EUborderspostBrexitundera‘CanadastyleFTA’.However,theiralignmentwithSingleMarketrulesreducestheextentofnon-customschecksbelowthosetheUKwouldfaceinaCanadastyleFTA.

• AllgoodscrossingthebordersbetweenEUandEFTAcountrieshavetocompletecustomsdeclarations,declaretheiroriginandeitherdeclaretheirconformitywithEUrulesoforiginorpayfullEUdutyonimportswheretheEEAcountryhasapreferentiallowtariff.

• TherequirementforthesecustomsandorigindeclarationsisnotremovedorreducedbecauseEEAcountriesadopt(orinSwitzerland’scase,closelyalignwith)Singlemarketrules.(AdherencetoSingleMarketrulesdoesremovetheneedforcertificationofcompliancewiththoserules)

• AgriculturalproductsandanimalsfaceadditionalchecksatEUborderswithNorwayandSwitzerland.

• UKmembershipoftheEEAwouldnotremovetheneedforcustomsdeclarationsforgoodscrossingtheIrishbordernoraddresstheEUdemandforabackstopincorporatingNIortheUKinacustomsunion.

• Despitethesupposedlydamaging‘friction’causedbycustomsborders,Switzerland,Norway,LiechtensteinandIcelandhavehigherGDPpercapitathananycountrywithintheEUcustomsunion.

MYTH9

• CustomsprocedurescannotbesimplifiedwithoutEUagreement.ItiswidelyassumedthattheUKwouldhavetonegotiatewiththeEUtosimplifyprocedurestominimisefrictionforourexportersandimporterspostBrexit.Thereality:

• “AlltheingredientstoensureasmoothexitprocessoftheUKfromtheEUandwhichallowalmostfrictionlesstradeaftertheexit,arealreadyavailable.”Paper19byCLECATrepresenting19,000EUcustomsagentshandling80%ofEUclearances.

19PositionPaper:ThefutureeconomicpartnershipbetweentheEUandUKCLECAT–EuropeanAssociationforForwarding,Transport,LogisticsandCustomsServices–October2018

15

• ThereisarangeofsimplificationsalreadyavailableintheUnionCustomsCodethatcanbeimplementedbyWTOmemberstatesimmediately.

• CLECATlists60simplificationsalreadyavailableintheUnionCustomsCodethatcanbeusedbyUKcustoms,Britishimportersandexportersandcustomsagents.

MYTH10

• CustomsandRulesofOrigindeclarationscouldcost£17-20billion.“Takentogether,[RulesofOriginandCustomsDeclarations]indicateaburdenonUK-EUtradeingoodsofaround£17-20bnayear.”–LetterfromJonThompson,CEOofHMRCtotheTreasurySelectCommitteeTheseHMRCestimatesincludethecostsofdeclarationsbothintheUKandtheEUonbothexportsandimports(£6.5billionfordeclarationsineachdirectionplus£3-5billionforRulesofOrigin–seeMyth13).SohalfwouldbebornebyEUbusinessesandconsumers.Thereality:

• Measuresofactualbordercoststurnouttobeafractionofthesetheoreticalestimates.• Switzerlandcalculatedthecostofbordercomplianceatlessthan0.1%ofthevalueoftrade.

BecauseSwitzerlandadoptsEUsinglemarketrulesitstotalbordercompliancecostswouldbeexpectedtobelowerthanthosetheUKwouldexperienceinCanada-styleFTA.ButthatdoesnotexplainwhyHMRC’sestimatejustofthecostofmakingcustomsdeclarationsandcomplyingwithrulesoforiginisover50timeshigherthantotalSwisscosts!

Regulatorycosts/millionCHF

Dutiestoact Imports Exports TotalPresentationandregistration 230 105.9 335.9Controlsandinspection 2.9 0.4 3.3Paymentofimportduties 19.6 0 19.6Archivingandbacking-upofdata 12.9 7.5 20.4Foreigntradestatistics 39.4 16.1 55.5Proofoforigin 16.7 27.4 44.1Total 321.5 157.3 478.8

Valueoftrade 277,000 293,000 570,000Percentagecostofcustoms 0.116 0.054 0.084 Thepapernotes:“Theestimatedcustomsclearancecostsinthisstudyarelessthan0.1%ofthevalueofimportedandexportedgoods.Thecostspercasearehigherforimportsthanexports.”20

• AstudyfortheDutchgovernmentbyKPMG,21whichwentintomuchmoredetailthantheHMRC,putthecostofcustomsdeclarations(excludingcompliancewithRulesofOrigin)if

20BerichtüberdieRegulierungskosten:SchätzungderKostenvonRegulierungensowieIdentifizierungvonPotenzialenfürdieVereinfachungundKostenreduktion.Dec201321Impactofnon-tariffbarriersasaresultofBrexitKPMGforMinistryofEconomicAffairsandClimatePolicyandMinistryofAgriculture,NatureandFoodQualityJanuary2018

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theUKtradesonWTOtermsat1%ofUK/Netherlandstrade–onequarteroftheHMRCfigure(andKPMG,likeHMRC,didnotallowforthemuchreducedcostofreplicatingmultiplesimilardeclarations).

• NEXTplc,whichhaspublishedadetailedimpactassessmentof‘NoDeal’22,estimatestheadditionalcostsofcustomscomplianceonthe£170mstocktheyimportfromtheEU/Turkeywillbe£100k–i.e.lessthan0.1%.

• Tate&Lylereportsthatforallitsimportsviaitsownterminalitemploysjusttwopeople(whoalsoundertakeothertasks)tohandletheircustomsdeclarationsatacostoflessthan0.02%ofthevalueofimports.EvenforconsignmentsofspecialistcanearrivingatotherportsforwhichTate&Lyleemployscustomsagents,thecostofcustomsproceduresaddslessthan0.06%tothecostoftheconsignment.23

• TheHMRCestimateassumesthattheverylargenumberofsmallconsignmentswhichcompriseUK/EUtrade,manyofthemregularrepeatdeliveriesforindustrieslikethecarindustry,willhavecostssimilartotheone-offcostsofagentshandlingthefarlarger,lessregular,consignmentswhichcomprisetradefromoutsidetheEU.

• Makingthefirstofmanydeclarationscanbetimeconsumingandcostly–itinvolvesassemblingdataaboutname,numberandlocationofexporter,transporter,importeretc.andthecommoditycodeandvalueoftheconsignmentandinsertingitinthedatafieldsoftheCHIEFform.Butrepeatingtheprocessforsubsequentconsignmentscanbedigitalisedifonlyafewelementschange,reducingthemarginalcostofmakingsubsequentdeclarationstonegligibleamounts.

• TheHMRCestimatewasbasedonthreestudies–o astudy(Grainger)24involvingjust3importersofchilledandfrozenmeatand2

freightforwarders(agents)specialisinginthemeattrade–ahighlycomplexanduntypicaltrade.Thestudyquotedagent’scostsofhandlingcustomsdeclarationsof£20to£40.

o astudy(Ipsos-MORI)25coveringcompliancecostsofalltaxes.Theaveragecostofacustomsdeclarationhandledbyagentswas£41but68%ofcompaniesdothisthemselves,presumablybecauseitismuchcheaper.

o thestudy(KPMG)referredtoabovefortheDutchgovernmentestimatingthecostofcustomsdeclarationsintheeventofnodeal,whichcameupwithacostfordeclarationsof1%ofthevalueoftrade.

• ThereasontheHMRCestimateissooutoflinewithcompanies’experienceappearstobe:o Theybasetheirestimateonthechargesofcustomsagents

§ Theseoftencoverotherservicesincludingcalculatingdutyduewhichwouldbeirrelevantinafreetradearrangement.

§ Customsagentsareoftenusedformorecomplexconsignmentslikefrozenmeat,whichinvolvemorethancompletingthedeclaration,orforirregularconsignmentsthatdonotbenefitfromrepetition.

§ 68%offirms26completetheirowndeclarationspresumablybecauseitismuchcheaper.Ofthosewhousedagentsmostdidsoforcalculatingdutypayableorforgoodsrequiringinspections.

22CEOReport:BrexitPreparationandImpactAnalysis,NextplcResultsforHalfYearendingJuly201823Brexit,MovementofGoodsandtheSupplyChainbyShankerA.SinghamandVictoriaHewson,LegatumInstituteFeb201724TradeandCustomsProcedures:TheComplianceCostsofMeatImportsDrAndrewGraingerNottinghamUniversityBusinessSchool3rdSeptember201325UnderstandingtaxadministrationforbusinessesIpsosMORIHMRevenueandCustomsResearchReport375July201526UnderstandingtaxadministrationforbusinessesIpsosMORIHMRevenueandCustomsResearchReport375July2015p33

17

o HMRCalsobaseditsestimatesoncostsincurredonimportsfromoutsidetheEUwhereastradewiththeEUtypicallyinvolvesconsignmentsthatarefarsmallerandmorefrequent.Thecostofreplicatingmultiple,similarrepeatdeclarationswilltendtofalltonearzerooncedigitalised.27

MYTH11

• Motormanufacturerswillfacehighcostsofcompletingcustomsdeclarations.“Hondaexpectsitwouldneedtohandle60,000additionalcustomsdeclarations,requiringanewITsystemandadditionalstaff.HMRevenue&CustomssaysthiswouldcostHonda£2.1mayearinform-fillingalone.”FinancialTimesJune2018Thereality:

• Honda’sestimate(whichassumestheHMRCestimatedcostof£35perconsignmenteventhoughanITsystemwouldreducetheunitcosttoafractionofthisfigure)nonethelessimpliesthecostofdeclarationswouldaddjust0.2%tothecostofcomponentsandlessthan0.1%tothecostoftheaveragecar.

• Moreover,itimpliestheywillemploysome50to60stafffull-timeoncompletingcustomsdeclarationsmeaningeachcompletesonly4or5perday.Thisisasurprisinglylowthroughput.

MYTH12

• CompliancewithRulesofOriginissocomplicatedthatitwilloutweighthebenefitsoffreetradeagreements.

“costly‘rulesoforigin’thatcouldrenderatariff-freedealmeaninglessformanycompaniesinthesesectors.”CustomisingBrexit,InstituteofDirectors2018ACanada-stylefreetradeagreementwiththeEU(unlikeaCustomsUnion)wouldallowtheUKtoenterintofreetradeagreementswiththirdcountriesaswell.However,wheresuchFTAsreduceUKtariffsbelowthosechargedbytheEU,theEUwouldwanttostopgoodsavoidingtheirexternaltariffbyenteringtheUKonaloworzerotariffthenbeingre-exportedtotheEU(eitherunchangedorascomponentsoffinishedgoods).Consequently,allgoodsmovingfromtheUKtotheEUwillhavetodeclaretheirorigin;andthosedeemedundertheEU’sRulesofOrigintocomefromoutsidetheUK/EUfreetradeareawillhavetopaytheEU’sexternaltariffonexporttotheEU.Thereality;

• RulesofOriginapplytoexportsfromSwitzerlandandNorwaytotheEU.ItisscarcelyanissueformostoftheirtradersthoughSwitzerland’sstrongengineeringand

27HMRCestimatefromVATreturnsthat217,000firmswillmakeanextra205millioncustomsdeclarationspostBrexit.Thatmeansonaverageeachfirmwillmakenearly1,000shipmentspaaveragingjust£2,000each.Bycontrast,the150,000UKfirmstradingwiththirdcountriesmake55milliondeclarations–onaverageroughly370paperfirm,nearly£7,000pershipment.Itisprobablethattheunitcostofmultiple/repeatdeclarationsontradewiththeEUwillbefarlowerthanonhighvalue,lessfrequentshipments.

18

pharmaceuticalsindustries,inparticular,involvesupplychainswithboththeEUandtherestoftheworld.

• ThenewRegisteredExportersystem(REX)intheUnionCustomsCodeallowsself-reportingoftheoriginofgoodsexportedtotheEU28.Itisnolongernecessarytohavethiscertifiedbythenationalauthorities.

• TheEUhasagreedthatREXwillbeapplicabletoUKfirmsunderapostBrexitFTA,asitisforothercountriestradingwiththeEUonpreferentialterms.

• Thiswillsignificantlysimplifytheprocessofcomplyingwithrulesoforigin:o REXonlyrequiresfirmstoregisterwiththeirhomecountryauthority.o Firmsthensimplyself-declaretheoriginwhenmakingacustomsdeclaration.o Theymustalsokeeprecordsoftheoriginofrawmaterialsandtracebacktheorigin

ofcomponentssothattheycanprove,ifrequired,thatthedeclaredoriginoftheirexportscomplieswithEURulesofOrigin.

• Companiesproducinggoodsusingnon-UK/EUcomponentsandmaterialswillstillneedtoshow,ifrequired,acalculationthatestablisheswhetherthelocalvalueaddedmeetstheRulesofOrigin.Thisisusuallyaone-offcalculationforeachmodelofcar/derivative.Thecalculationdoesnotneedtoberepeatedforeachunit,sothecostperunitisusuallytrivial,beingspreadoverallthefirm’sexportstotheEU(thoughforfoodproducts,forexample,wheneversourcingofrawmaterialschanges,thenthecalculationmayneedtoberepeated).

• MostUKexportswillqualifyasofUKorigin29–acrosstheNI/Irishborderitisvirtually100%.• Theadministrativecostofdemonstratingcompliancetorulesoforiginisexaggerated,the

substanceofthoseruleswillbeveryimportantforindustrieslikemotormanufacturing.Inparticular,thelevelof‘localcontent’willbeimportantaswilltheabilitytoincludeas‘local’componentsfromcountriesthatalsohavemutualfreetradeagreements.

MYTH13

• ThecostofcompliancewithRulesofOriginexceedstariffpreferencesthatwillbenegotiatedinUKfreetradedealswiththirdcountries.

HMRChasputthecostofcompliancewithrulesoforiginat£3-5bn.ABISReviewofCompetencesquotedcostsnegatingtariffpreferencesashighas15%ofthevalueoftrade.TheCBIquotescostsupto8%oftrade.Thereality:

• Theseestimatesarenotcredible.o AmorerecentWTOstudy30concludedthatthecostofcomplyingwithrulesof

originis‘negligible’–insufficienteventocancelouta1%tariffpreference31.o TheyignorethesimplificationintroducedbyREX.o TheyignoretheactualcostsincurredcomplyingwithRulesofOriginbetweenEEA

countriesandtheEUthataretoolowtocauseanyconcern.28https://ec.europa.eu/taxation_customs/sites/taxation/files/rex_registered-exporter-system_en.pdf29AssumingtheEUappliesthePan-EuroMedsystem,whichitnowappliestoallotherregionalpreferentialagreements.30NewevidenceonpreferenceutilizationAlexanderKeckandAndreasLendleWorldTradeOrganizationEconomicResearchandStatisticsDivision31“Byvalue,atleast80%ofpreference-eligibleimportsinboththeEUandUSwithmarginsoflessthan1%enterunderpreferentialregimes.IntheUS,manylow-valueimportswithlowmarginsstillenterunderapreference,evenwhensaveddutiesarelessthanUSD10.Thisstronglysuggeststhatutilizationcostsareoftennegligible.”NewevidenceonpreferenceutilizationAlexanderKeckandAndreasLendleWorldTradeOrganizationEconomicResearchandStatisticsDivision

19

o Theyarebasedondiscredited32,outdatedandirrelevantstudiesoftradebetweendevelopingcountriesandtheEUorUSAthatignorethevolumeoftrade.

• TheWTOstudysuggeststheonlysignificantcostistheone-offcostofassemblingtheinformationtodemonstratecompliancewithrulesoforigin.Theycalculatethisrangesbetween$15and$1,500butspreadoverallofafirm’sconsignmentsthisisusuallynegligible.

• Ifthecostofcomplianceexceedsthetariffpreference,acompanycansimplypaythetariffinstead.Thatisonlylikelytobethecaseifthetariffisextremelylowandthegoodsareexportedinverysmallquantities.GiventhattheaverageEUexternaltariffonindustrialgoodsisabout2.5%theaveragecostofcompliancecouldnotexceedthatamount–waybelowfiguresquotedbytheCBI.

32TheBISReviewofCompetencesclaimedthatstudiesshowedthecostofcomplyingwithRoOswasbetween4%and15%ofthevalueofimports.Nearlyallthestudiesanalysedrelatedtotradewithdevelopingcountries,whichmayfinditdifficulttoprovecompliancewithRoOs.Incalculatingthelikelyrangeofcostsitexcludedwithoutexplanationthemostrelevantstudy–ofRoOsbetweenEEAandEU–whichshowedcompliancecostsbelowthelowerendofthequotedrange.Theupperendoftherangecamefromdoublecountingelementsofastudythatactuallyshowedmaximumcostsofhalfthatlevel.

20

MYTHSSURROUNDING‘NODEAL’–ORTRADINGONWTOTERMS(butmayalsounderliecriticismsofaUK/EUfreetradedeal)MYTH14

• TherewillbelengthydelaysonclearingimportsenteringthroughDoverifweleavewithoutadeal(orevenwithaconventionalfreetradedeal).

“TherisksofaNoDealBrexit–delaystolorriesatDover”HilaryBennMPThereality:

• HMRChassaiditwill“prioritiseflowovercompliance”.33So,evenifinitiallysomehauliershavenotcorrectlymadetheircustomsdeclarations,theywillbewavedthroughtopreventdelays,andfolloweduplater.

• TheideathattheUKwillitselfholdupflowsofgoodsenteringtheEUpostBrexit(whetherornotthereisaDeal)wouldbeabsurdandisnotthegovernment’spolicygiventheircommitmenttoprioritiseflowandavoidnewchecks.

• ItisequallyinconceivablethattheFrenchorotherEUauthoritieswilldeliberatelypreventordelaytheirexportsthroughCalaistotheUKasthelocalFrenchauthoritieshavemadeclear.34(SeeMyth15belowforUKexportsthroughCalais).

MYTH15

• DelaysinclearingUKexportsthroughCalaisarelikelytocauseabacklogoflorriesontheM20ifweleavewithoutadeal(orevenwithaconventionalfreetradedeal).

“Wealsoneedtopreparefortheworst-casescenariowheretheauthoritiesatCalaisaredeliberatelydirectingago-slowapproach”.DominicRaab,October2018Thereality:

• Adeliberatego-slowatCalaiswouldbeabreachofthreetreatyobligationso TheoriginalWTOTreatyforbidsdiscriminationagainstgoodsfromanycountryso

proceduresatCalaiswouldhavetoapplytoIrishgoodsthathavecrossedtheUKaswellasBritishgoods.

o TheTradeFacilitationAgreement,whichcameintoforceinFebruary2017,requiressignatories(includingallEUmemberstates)tofacilitate–nothinder–trade.

o TheEU’sownConstitution(Article8)35requiresthemtoco-operatewithneighbouringcountriestoestablishanareaofgoodneighbourliness.

• Otherchannelports–especiallyZeebruggeandRotterdam–areeagertowintradeawayfromCalais.Itisestimatedthatotherroll-off-roll-onportscouldhandle40%ofDover/Calaistrade.

33HMGBorderDeliveryGrouppresentationtoACITAconference18thOct201834https://www.bbc.com/news/uk-politics-4599024335Article8.1.TheUnionshalldevelopaspecialrelationshipwithneighbouringcountries,aimingtoestablishanareaofprosperityandgoodneighbourliness,foundedonthevaluesoftheUnionandcharacterisedbycloseandpeacefulrelationsbasedoncooperation.

21

• AthirdoflorriesgoingfromDover/FolkestonetoCalaisarereturningempty36(reflectingthehugeEUsurplusontradewithus)soCalaisauthoritieswillhaveathirdfewerdeclarationstoclear.

• ThenewheadoftheFrenchequivalentoftheUKBorderDeliveryGroupistalkingabouta“risk-basedapproach”tochecks37.

• TheHautesdeFranceauthoritieshavemadeclearthatfarfromhinderingtrade–anideatheydescribeas“economicsuicide”38–theyaremakingpreparationstoensuresmoothflowpostBrexit.

MYTH16

• JITsupplychainswillbeinterruptedbyunprecedentedlorryqueuesbackinguptheM20–forwhichweareunprepared.

“JustminordelaysattheChannelTunnelandDoverwouldforcehundredsofitstruckstowaitfortheequivalentof90hoursaday…itisverydifficulttoseehowcross-borderJustInTimesystemscansurviveintheircurrentform.”UKinaChangingEuropeApril2018Thereality:

• TherehavebeenfrequentandprolongeddelayscausingblockageoftheM20yetwithnoreportsofproductionbeinginterruptedatmotormanufacturersorotherJITplants.

• OperationStack39hasbeenactivatedon211daysbetween1998and2015asaresultof:o BlockadesofCalaisbyfishingboatso Industrialdisputesonferrieso Immigrantsbesiegingsecurityfenceso FiresandbreakdownsintheChannelTunnelo SevereweatherintheEnglishChannelo SnowblockingroadsexitingCalais

• Insummer2015OperationStackwasinforcealmostcontinuouslyformorethanthreeweeksbetween23Juneand1August2015.

• Atthepeak,7,000HeavyGoodsVehicles(HGVs)werequeuedontheM20,taking36hourstoworktheirwaythrough.

• ThereisnorecordofanyJITmanufacturingplantshavingtohaltproductionintheUKasaresultofthesedelays.

• OperationBrock,withenhancedcapacityandimprovedtrafficrouting,willreplaceOperationStackaheadofBrexitthoughpermanentlorryparksmayalsobeneededinfuture,regardlessofBrexit,tocopewitharecurrenceofpastproblems.

36RichardEveritt,ChairmanDoverPort:“Iwouldliketothinktheycouldgothroughrelativelyeasily...Onethirdoflorriesareemptygoingback.”DEXEUSelectCommittee29/11/1737UKBorderDeliveryGrouppresentationtoCLECATconference18thOctober201838BBC:“FrenchofficialsdismissUKfearsofCalais'go-slow'”https://www.bbc.com/news/uk-politics-4599024339OperationStackHouseofCommonsTransportCommittee23rdMay2016

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MYTH17

• Shorttermproblemsfollowing‘nodeal’willbepermanentProjectFearMark2postulatesshorttermdisruptionintheeventofnodeal–eitherasaresultofdeliberatenon-cooperationorlackofpreparationbygovernmentsandbusinesses–andthenportrayswhatisintrinsicallytemporaryasifitwillbethepermanentstate.Thereality:

• ConceivablysomefirmswillinitiallybeunfamiliarwithcustomsprocedureswhichmightcauseorexcusedelaysinCalais(thoughnotinDoverwhereflowwillbeprioritisedovercompliance),butbusinesseswillsoonlearntheproceduresashavefirmstradingwithnon-EUcountries.

• Itistheoreticallypossible,thoughextremelyunlikely,thattheFrenchorEUauthoritieswilldeliberatelyprovokeaperiodofdisruption‘pourdécouragerlesautres’,butinconceivablethatitwillbepermanent–bothbecauseitwouldbeabreachoftreaties(seeMyth15)andbecauseitwouldinflictgreatharmonFrenchandEuropeanbusinesses.Legalremedies(possiblytakenbydisadvantagedEUbusinessesortheirgovernments)taketimebutwouldensurethattreatybreacheswouldnotbepermanent.

• ItisimportantthatCustomsandallgovernmentagenciesprepareforexitingtheEUwithnotradedeal.Thatmeansnotonlyensuringthatstaffaretrained,equippedandinformedoftheneedtogiveprioritytoflow,butalsoensuringbusinesseswhichtradesolelywithintheEUaremadefamiliarinadvancewithordinarycustomsprocedures.

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Aboutthepublishers…EuropeanResearchGroupTheEuropeanResearchGroup(ERG)isaresearchsupportgroupfortheUK’sConservativePartyMembersofParliamentwhochoosetosubscribe.ThisdocumentisnotendorsedbyanyERGmemberwhoissubjecttoGovernmentcollectiveresponsibility.GlobalBritainGlobalBritainwasfoundedovertwentyyearsagotoprovidethepositivebusinesscasefortheUKtoleavetheEuropeanUnionandpublishedawealthofresearchbriefsandpaperstothatend.Nowthattheargumentforanoutward-facing,sovereign,democraticUKhasbeenwonGlobalBritainiscommittedtoensuringthatourpoliticiansdonotbetraythe17.4millionBritonsthatvotedforchange,throughthepublicationofpapersthatshowhowBrexitcanbedelivered.

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Fact – NOT Friction ExplodingthemythsofleavingtheCustomsUnion

AjointpublicationfromtheEuropeanResearchGroupandGlobalBritain

20November2018