After the Customs Union

In an event chaired by the APMG vice-chair and former shadow BIS minister Baroness Lorely Burt , the All Party Parliamentary Group for Manufacturing which Made in the Midlands and Made in Yorkshire are members brought together two prominent experts on manufacturing, export and international trade to discuss the future of the UK manufacturing sector after we leave the European Customs Union. Many manufacturers consider the loss of barrier-free European trade and regulatory compliance to be a price far higher than the imposition of tariffs, and as Theresa May has now indicated firmly the UK is to leave the Customs Union with the intention of negotiating a bespoke deal it is imperative that the manufacturing sector begins to plan for the future. Of course, one possibility that was also discussed by our panellists was ‘no deal’ with the EU upon our departure, which Baroness Burt described as “the worst of all worlds”.

In her opening remarks Namali Mackay, EU trade specialist at the EEF and former Australian trade negotiator, highlighted the importance of manufacturing to the UK economy as “the 8th largest manufacturer in the world by output, employing 2.6 million people and contributing 10% of UK output.” Namali also described that for a majority of EEF members the UK-EU trade relationship is the only environment in which they had ever traded – and over 70% of EEF members want to remain in both the single market and the customs union.

Prof L. Alan Winters, director of the University of Sussex’s UK Trade Policy Observatory (founded just 3 days after the Brexit referendum), spoke eloquently from his experience of analysing the initial EU single market of the benefits to the UK and European companies in establishing highly integrated value chains. Describing the EU single market and customs union as “an unprecedented organisation for frictionless trade”, Prof Winters outlined how a huge degree of coordination, leaps in communication technology and common legal enforcement system have created an environment in which international value chains have spread across Europe. Prof Winters defined this as a ‘value added’ process in which UK manufacturers are tailored to their potential to add value to other products, but that the majority of these value-adding steps involve internationally imported components or commodities – likely from our largest trading partner the EU.

180,000 companies export to only the EU

Our panellists described the current state of play in the manufacturing sector where the UK has over 180,000 companies who export directly to the EU and only to the EU – companies who have never known any other trade regime and who are largely unprepared for the consequences of leaving the customs union and single market. This issue is compounded by tier 2 suppliers to these manufacturers who do not class themselves as exporters but who don’t realise that their products are exported indirectly. This was also raised by an audience member from the Federation of Small Businesses.

Prof Winters particularly criticised the focus on dividing exports from the UK into goods and services, as many organisations do both and have a significant stake in both markets working effectively and smoothly. Many manufacturers now sell services too, and the value chain of products is built on both physical and non-physical components.

To allow these manufacturers a sufficient amount of time to adapt to the new regulatory framework of trading outside the convenient confines of the customs union, the EEF and other trade bodies are demanding a transitionary period. In the mind of the EEF this transition period must include full and unchanged access to the customs union and single market to avoid companies having to “adapt twice” to new rules. Our panellists and audience were in agreement that manufacturers should only have to adjust once to new legislation, at the point of Brexit.

Finally, the physical and logistical challenges of leaving the Customs Union were discussed, whilst a more comprehensive discussion of this can no doubt be found elsewhere, our panel raised significant concerns around the ability of British ports, particularly Dover, to cope with the new burden of customs checks.

‘For many companies, Brexit starts 1st Jan 2018’

Namali Mackay made it clear in her opening remarks that due to the budgetary planning and investment cycle, for many companies the date of Brexit is 1st January 2018. Given the continued “sparse” information from the government on the future trading relationship, this is highly destabilising. Significant components of the UK-EU future trading relationship remain unclear in the view of both our panellists, and areas such as rules of origin, authorised economic status, inward processing relief, and developing a simplified customs approval system all remain outstanding topics of negotiation. These must be clarified as soon as possible for manufacturers. This again highlighted the urgent need for an extended transition period, not to subvert Brexit, but to allow exporters to adapt to the new proposals in a “reasonable” time.

Many manufacturers in the audience raised the prospect of regulatory divergence once the UK leaves the customs union – both unintentionally as both entities develop new standards, but also intends to erect a trade barrier between the UK and EU in certain sectors. Our panellists agreed that this was a valid and significant concern, however, due to the vast amount of legislation in place both organisations represented on the panel are currently researching this issue. An audience member also highlighted a new grouping of trade associations called EURIS which is currently working with several thousand UK manufacturers on this issue.

The Customs Union, not A Customs Union

With the Prime Minister’s commitment to leaving the EU customs union, but an intention to negotiate a bespoke arrangement a discussion was had between our panellists and audience on whether we wish to be members of the customs union (meaning the current EU-wide customs union) or a customs union (a hypothetical arrangement negotiated separately with the EU, potentially mirroring many aspects but presumably not including ECJ jurisdiction). In the words of Namali Mackay “What [the EEF] are lobbying for is membership of the customs union, avoiding a negotiation and separate agreement”, however Prof Winters responded that “the option of staying in the customs union doesn’t exist with Brexit because the customs union refers explicitly to membership of the EU”!

Prof Winters and Namali Mackay both agreed, however, that the demands of the UK manufacturing sector to remain part of the EU customs union was undoubtedly at odds with the governments stated the aim of negotiating separate free trade agreements with other international countries and groupings. In the words of Namali Mackay “we would have to ask the EU for an exemption to negotiate separate free trade agreements with other countries which is very unlikely”. This seems to be in line with the views of manufacturers more widely: “65% of EEF members would rather stay in the customs union and have the EU negotiate on our behalf.”

Given the ambition of the government to quickly negotiate new free-trade agreements with other non-EU countries, the panellists briefly discussed the US-Australia trade deal which is often held up as an example as it was completed in 18 months. Our panellists said “it was not a brilliant agreement – it was shallow and Australia had to compromise in many areas. Australia does not hold that up as its best FTA”, also adding “And there had been years of Australia-US trade conversation beforehand”. The government must bear in mind the amount of time taken to negotiate new trade-deals from scratch and be realistic about the prospects of these being completed quickly to benefit manufacturers who may lose ours from the loss of EU membership.

No deal – “worst of all worlds”

One point upon which our panel and audience were in agreement was of the possibility of no deal with EU upon Brexit – the so-called “cliff-edge” scenario. In the words of Baroness Burt, this is “the worst of all worlds”. Prof Alan Winters outlined the many ways in which leaving both the single market and customs union without a trade agreement would damage UK manufacturers and providers of services, from the perspective of access to products in the value chain and in human resource available within Europe. Namali Mackay also described how not only was this highly dangerous from the perspective of manufacturers but wasn’t a particularly good negotiating position either. In the case of two countries negotiating to harmonise their standards and reach a trade agreement, a no deal is the default and returning to that situation would be a return to the status quo. However in the case of the UK and EU, both bodies are already negotiating from a position of being at the pinnacle of mutually beneficial harmonisation – a reversion to having no deal from this situation would be damaging to all parties.

Fundamentally, a no deal situation would also have very harmful implications on the Northern Irish economy – primarily because of the undoubtedly imposition of a hard border between the Republic of Ireland and Northern Ireland. For decades, the EU has focussed on agriculture, and Northern Ireland is disproportionately economically dependent on agriculture and food & drink manufacture compared to the rest of the UK – for this reason alone the effect on Northern Ireland could be very damaging.

To conclude, let us quote the words of Prof Winters in his opening remarks: “For sure manufacturing is important, but manufacturing is not an island. While each of us has our own corner to fight, the whole point about value chains is that we are very closely interlinked. So in some sense, it shouldn’t be “I need a special deal for my sector” because your sector is going to have links out to all sorts of other sectors. In other words, we do need something which is very comprehensive.”