Big manufacturing businesses have good reasons to stay in the EU. They get high levels of protection against international competition, they dominate the EU regulative process through their lobbying (so keeping their rivals at bay) and they have access to an unlimited supply of subsidised cheap labour from the EU.
However, they can hardly plead these as reasons for the UK to stay in the EU, as they are all against the national interest, besides having been voted against in the Brexit Referendum. So, cleverly, they have come up with another argument that is terrorising ministers, and especially our Prime Minister. This argument is called ‘Border Friction‘- the dire consequences if we do not have a ‘deep and close relationship with the EU’, which is code for staying in the Single Market and the Customs Union.
This Border Friction consists of two parts:
The Civil Service, ever anti-Brexit, has taken up the charge and input these two ‘frictions’ into their new modelling approach to Brexit (the Cross-Whitehall Report, leaked to Buzzfeed and then made available in outline to the rest of us via some two dozen PowerPoint slides for the Brexit Committee) and come up with costs ranging from 1.8% to 6.8% of GDP, depending on how ‘close’ or ‘distant’ we manage to get our EU relationship. These costs are rather extraordinary when one considers that the entirety of our trade to the EU represents only 12% of our GDP.
The only problem with this new business ploy is that it is entirely and demonstrably false – yet another effort at a Project Fear. Thus the CBI, Airbus et al are either ignorant or deceitful; you can take your pick.
I have explained why these estimates are so absurd (see here). As usual, Big Business is enthusiastically backed by the Financial Times’ Martin Wolf whom we have shown to be equally misguided (see our response to his comments on 29th June here).
WHY BIG BUSINESS IS SO WRONG
The starting point is international law, which is deeply respected both by the UK and the EU. That law in the trade field is represented by the World Trade Organisation (WTO), which already regulates the some sixty per cent of our trade today that is with non-EU countries. Once we leave the EU, we then become an independent third-country member of the WTO, like Canada, or Australia, taking up our (founding) seat instead of having the EU be our representative.
What does WTO law say about Border Friction? Quite a lot.
On the first issue of standards there are three directives, all of which outlaw ‘discrimination’ with regard to scientifically-based, technical and service standards. ‘Discrimination’ means treating foreign products differently from domestic products: all foreign products, from any country source, must be treated the same as any home product.
Consider then our UK exports to the EU. On a Monday (pre-Brexit) they satisfy EU standards. Can the same products on Friday (post-Brexit) be deemed not to satisfy them? Certainly not. Any attempt to do so would wind up in the WTO courts rapidly and would be thrown out as illegal. An EU that prides itself on abiding by international laws that uphold its very own Treaties would not risk any such court case.
Indeed, the EU has scrupulously obeyed high-profile and high-value WTO court rulings on both GM organisms and on Airbus/Boeing. If you doubt my word on this, please consult that of a leading academic lawyer specialising in WTO law: David Collins, Professor of International Economic Law, City, University of London who lays this on the line and covered the issue in detail on BrexitCentral yesterday.
There is more. Firms that export to the EU are perfectly free to continue to meet EU standards on their EU exports as long as they wish, even if the UK decides to ‘diverge’ and change its standards for the economy as a whole. Of course, from their own commercial interests these businesses will do exactly this.
What sane firm does not obey export standards of the country to which it exports? For example, JLR’s auto exports to the US differ markedly to those to the EU with regard to emission standards; in fact, their exports to California must meet emission standards that are different to other US states. Similarly EU firms exporting to the UK will obey UK standards on its exports if we do diverge as above.
On the second issue of Border Procedure Costs, again the matter is clear-cut. It is illegal under WTO rules to have any but seamless, state-of-the-art, computerised procedures at the border if you are a rich developed country – this is governed by the WTO Trade Facilitation Agreement. The reason for this Agreement is that much of modern trade consists of supply chains that are dependent on rapid, just-in-time transportation. Developed countries anxious to have a good reputation in this area have cooperated vigorously in implementing the Agreement.
In 2016, the World Bank Logistics Report recorded that the median developed country border post processed 98% of its trade without any border checks at all, while processing the remaining 2% within a day.
As far back as 2012, the Swiss estimated their total EU-Swiss border costs being only 0.1% of trade value (even after including such items as ‘waiting time’ in queues). These costs are essentially trivial.
Thus, the points made above about standards and border costs totally blow away the case that Big Business is making about Border Friction.
So what are the main implications of the above?
It is this: a plain vanilla trade agreement with the EU, as with any third party country such as Canada, that avoids putting on any UK-EU tariffs would keep border costs essentially at zero, just as they are now. There is no need for that ‘deep and close relationship’ (i.e. stay in the EU in all but name).
Furthermore, the City will continue to do well either with existing mutual recognition or without any deal at all. See our written evidence submitted to the International Trade Committee.
One can go further. Many countries around the world have expanded their trade with the EU faster than countries inside the EU, even though they faced tariffs. Tariffs in fact are a small factor in most of today’s world trade: for example EU tariffs on manufactures have a weighted average of around 3%. Border frictions for these countries are non-existent because their exports meet EU standards and the customs posts must be seamless.
It follows that if there were no deal our trade with the EU would still continue pretty much uninterrupted. The tariffs would have to be paid; as it happens this would be a burden for the EU and not for the UK. In addition, with no deal, the EU would find itself without the promised UK financial contribution (see here).
Therefore, it makes sense for the EU to join a straightforward trade deal with us. Indeed, it seems that M. Barnier has said from day one that the EU would do so – ie, Canada+. What he has balked at is all the ‘cunning plans’ from Olly Robbins’ fertile mind that involve half-in, half-out status. The EU has, fairly logically, said ‘we would like you fully in’ (of course they would) but you cannot be ‘half-in’.
It has only been the threats from Big Business of Border Friction, backed up by the fallacious calculations of the Cross-Whitehall Report, that have stopped Mrs May and her fractious Cabinet from going for the straightforward EU trade agreement already on offer.
It is time for Big Business and the Civil Service to end their self-serving propaganda and stop terrorising the Cabinet. Let Mrs May and her Cabinet do the sensible thing and offer to join a Canada-type trade agreement.
If the EU reneges on that undertaking, she should not be fearful in embarking on a World Trade Deal that will be economically attractive as it terminates the promised £39 billion dowry to the EU and accelerates the benefits of a Clean Brexit.
To read Patrick Minford’s piece for BrexitCentral in full, click here.