The White Paper’s Answer to the ‘Brexit Trilemma’ (Part I)
Chloé Papazian (European University Institute/ Dublin City University)
On 12 July 2018, the UK Government issued its long-awaited White Paper setting out its proposals for the future relationship between the United Kingdom and the European Union. The Government dedicates a large portion of the document to its future economic partnership with the EU, as well as to its prospective trade policy with third countries which the country expects to conduct independently from the EU.
Intended to finally bring long-sought clarity, the White Paper paradoxically brings once more to the surface a fundamental trilemma that the UK faces with respect to its future relationship with the EU and its trade policy. Indeed, Brexit confronts the UK with a trilemma similar to the Mundell-Fleming ‘impossible trinity’ or ‘unholy trinity’ of monetary policy. This concept of international economics developed by Mundell and Fleming postulates that no more than two of the three following objectives can be contemporaneously achieved: (i) the free flow of capital (or the absence of capital controls); (ii) a fixed foreign exchange rate and (iii) a sovereign monetary policy.
Brexit confronts the UK trade policy with a similar conundrum. The ‘Brexit trilemma’ (see also Dani Rodrik) seems to suggest that it is manifestly impossible for the UK to achieve more than two of the three following ends:
- Internal and external sovereignty in terms of clawing back control on internal regulation and developing an independent, more advantageous trade policy;
- The prevention of a hard border between Ireland and Northern Ireland;
- The Preservation of the level of pre-Brexit market access to the EU Single Market and the continuity of existing EU-UK value chains.
The White Paper aims at reconciling these three seemingly irreconcilable goals. How does it fulfil the task? Can it seriously accommodate the three objectives without sacrificing one?
Upon its withdrawal from the EU, the UK will leave both the Single Market and the Customs Union. The UK Government proposes, however, in its White Paper to create a new form of customs and free trade agreement with the EU named the ‘Facilitated Customs Arrangement’ (FCA). According to the White Paper, the trade relationships between the EU and the UK will be governed by a entirely novel framework which locates itself halfway between a Customs Union with the EU (such as the Customs Union between the EU and Turkey) and a Free Trade Agreement (FTA) without a Customs Union (such as the European Economic Area (EEA) between the EU, Norway, Iceland and Liechtenstein).
The UK proposes a free trade agreement between the UK and the EU which would ensure the free circulation of goods and remove customs duties between the two territories. The UK’s proposal however goes beyond a simple FTA, as it also foresees that the UK will abide by a common rulebook with the EU for manufactured goods, as well as for agricultural, food and fisheries products. This would ensure complete regulatory equivalence between EU and UK rules on industrial goods as well as agricultural, food and fisheries products even after Brexit.
In addition to customs duties, the common rule book would thus remove potential obstacles to trade in goods arising from divergent internal regulations and eschew the need for burdensome border controls, in terms of phytosanitary controls, customs declarations, routine requirements for rules of origin, and entry and exit summary declarations. The rationale behind this approach is twofold: it will preserve complex integrated supply chains existing within the two territories, which might corrode in case of divergent regulatory eco-systems and customs controls at the border; and it will avoid a hard border with the Irish republic.
The goal to pursue an independent, sovereign trade policy while avoiding a hard border on the island of Ireland pushes the UK government to yet another capriole. The Chequers agreement indeed provides for a new and unprecedented form of customs arrangement. At its border, the UK will apply, depending on the incoming good, either the EU’s Common External Tariff and trade policy, or its own tariff and trade policy. In other words, for third-country goods intended for the EU, the UK will levy the applicable EU tariff. For third-country goods intended for the UK, the country will collect the UK tariff. The UK customs authorities will apply the higher of either (the UK or EU) tariff and where appropriate reimburse the importer for the difference between the two tariffs if the good’s final destination is later identified to be the lower tariff jurisdiction This difficulty may most likely arise for ‘intermediate goods’ as the final destination of ‘finished goods’ can be more easily identified. The White Paper stresses that repayment should possibly occur at the earliest in the supply chain in order to avoid any significant disruption of trade between the two territories.
Hence, the White Paper strives for a reconciliation of the three incompatible objectives of the ‘Brexit trilemma’. By complying with a common rulebook with the EU and by waiving customs duties and processes between the two territories, the UK preserves an open border with Ireland, as well as unrestricted market access for goods between the UK and EU post-Brexit. More generally, this would facilitate a frictionless trade in goods and ensure the continuity of existing value chains between with the EU and UK firms. Furthermore, by opting for a bifurcated customs regime where the UK customs authorities would collect both EU and UK tariffs at its border, the UK would respect its commitment to an open border with Ireland, while preserving policy space for an independent trade policy with third countries. Nonetheless, each of the public stakeholders concerned and involved in the Brexit process (eg the EU 27 Member States, the UK Parliament and pro-Leave Tories, the WTO and WTO Members, and the FTA partners) are likely to oppose the new framework put forward by the UK Government. In addition, several elements under the UK proposal remain weak and uncertain. While this present blog post focuses on the possible reactions and oppositions of the different public stakeholders to the White Paper, the next blog post will deal with three more technical points likely to undermine the objectives of the White Paper. In general, the two blogs pinpoint the difficulties for the UK to solve this ‘Brexit trilemma’ on trade.
- The EU 27 Member States
It is unlikely that the EU will embrace the proposal of the White Paper. First, the proposal of a FTA combined with a common rule book only for goods stands in blatant contradiction with one of the key EU redlines: namely, the ‘inseparability of the fundamental freedoms’. Even in the unlikely event that the EU accepts the UK ‘cherry picking’, the EU bloc will likely disagree with the possibility that the UK, as a non-Member of the EU Customs Union, continues to apply the EU tariffs and trade policy at its own borders. Importantly, the UK will have to collect not only the EU tariffs, but also to apply the EU antidumping duties, countervailing duties and safeguards. On behalf of the EU, the UK customs authorities will need to apply the rules of origin of the EU, and by the same token determine whether an imported product intended for the EU must receive most-favoured-nation treatment or preferential treatment. Moreover, should the UK concede lower tariffs before the WTO, the EU may fear abuses on the part of UK importers. In that respect, the EU will need to agree with the UK on clear definitions of both ‘finished’ and ‘intermediate’ goods, as well as on common rules of origin.
Reacting to the UK Government White Paper, the Brexit Steering Group of the European Parliament emphasised that within the framework governing the future EU-UK relationship, there will be “no space for outsourcing EU’s customs competences.” Following the White Paper, Conservative members of the pro-Leave European Research Group proposed an amendment to the UK Customs Bill ensuring that the UK customs authorities could not collect duties or VAT on goods on behalf of the EU unless there was a reciprocal arrangement. The endorsement of this amendment by the UK Government and UK Parliament on Monday 16 July 2018 would undoubtedly make it less likely that the EU bloc will accept the White Paper proposals.
- The UK Parliament
A more immediate challenge for the White Paper arises from the domestic opposition of both sides to the government proposals. Over the last few days, Eurosceptics and Remainers alike have pointed out that the proposal that the UK Government abiding by a common rule book on goods means quite the opposite of ‘taking back control’ and strengthening UK democracy. On the contrary, the UK would remain subject to a myriad of regulations decided in Brussels, yet without having any say over them or a vote in the EU institutions and agencies. Whereas a significant portion of the Remainers appear to be in favour of the UK remaining part of the Customs Union, the Eurosceptics in the Tory party simply wish to torpedo the Chequers agreement. On Tuesday evening (July 17), a number of pro-Remain Tory rebels pushed an amendment that would have required the UK to join a Customs Union with the EU in the absence of a deal on frictionless trade, but this was narrowly defeated in the House of Commons.
The Brexiteers have taken particular aim at the lack of reciprocity included in paragraph 17(a) of the White Paper. It provides that while the UK would levy both EU and UK duties at its border, the UK would not expect the EU to reciprocally collect both the UK and EU duties at its border. Only the EU tariff would apply. As a result, a number of hard Brexiteers successfully tabled a number of amendments to the UK Customs Bill which warrant the reciprocal collection of duties (Amendment 36) and legally enshrines the absence of a custom border between Northern Ireland and the rest of the UK after Brexit (Amendment 37). Despite initial reticence, Theresa May eventually endorsed the amendments which were approved by voted by the House of Commons on Monday night. It is however rather unlikely that the EU will accept the reciprocity amendment in its current form. The internal opposition to the Chequers agreement within May’s own party left the government in turmoil and casts serious doubts about the survival of the White Paper. The extent of the concessions made by Theresa May reflects the difficulty for the UK Government to fully achieve the three objectives at the same time.
- The WTO and WTO Members
Leaving the EU Customs Union, the UK will be a WTO Member on its own. Because the UK emphasises throughout the White Paper its strong intention to establish and conduct an independent trade policy with the rest of the world, the UK is unlikely to merely reproduce the EU Schedules of Concessions and Commitments. In that regard, the country will need to re-negotiate its tariff rates in accordance with Article XXVIII GATT 1994 and propose a UK-only goods schedule of concessions and commitments. Negotiating new tariff lines is, however, a lengthy, at times cumbersome process involving an important number of WTO Members. Undoubtedly, modification of the UK Schedule will provoke important disruptions to trade not only between the UK and the EU, but also between the UK and its import/export partner countries.
Furthermore, the UK and the EU would need to notify the WTO Committee on Regional Trade Agreements of their intention to create the new Facilitated Customs Arrangement (FCA). Having the status of an FTA, the new form of partnership between the UK and the EU should pass muster with Article XXIV:8(b) and XXIV:5(b) of the GATT 1994. Once again, the part of the arrangement most likely to cause problems with the WTO is the idea that the UK Government would apply both EU and UK tariffs and trade policies at its own borders.
- Other FTA partners
As soon as the UK exits the EU and leaves the Customs Union, the country will no more be part of the numerous FTAs the EU has concluded with other partner countries around the world. The UK Government, nevertheless, intends to establish entirely new trade relationships with partners worldwide. As stated by Theresa May, “the UK [would] step out into the world; driving forward an independent trade policy by striking trade deals with new friends and old allies.” (Foreword by the Prime Minister to the White Paper).
With respect to goods at least, the UK Government may, however, benefit from a particularly limited room of manoeuvre. By abiding to a common rulebook with the EU for manufactured goods, agricultural, food and fisheries products, the UK Government considerably reduces its regulatory space. On the one hand, a common rulebook would preserve complex integrated supply chains and frictionless trade between the UK and the EU. On the other hand, when negotiating new FTAs, the UK Government may not be able to offer a competitive regulatory framework on goods without the final approval by the EU. Such lack of regulatory autonomy may truncate the independence of the UK’s external trade policy. Mirroring this argument, the US President Donald Trump reacted to the UK White Paper by observing that the UK Government’s approach jeopardises a future preferential trading relationship between the UK and the US. The UK proposals would keep the UK, according to the US President, chained up to the EU on matters of trade; the US would likely have to continue dealing with EU regulations when exporting to the UK after Brexit.
In conclusion, the potential reactions of the different public stakeholders may enfeeble the proposals advanced by the UK Government in this White Paper with respect to goods. Clearly, it appears that the three objectives are not easily reconcilable. Would the UK be able to ‘step out into the world’ and strike new trade deals, independently from the EU, while abiding to a common rulebook with the EU? Would the UK Government prevent a hard border with Ireland while exiting the EU Customs Union? Would the UK ensure frictionless trade with the UK, while applying on its behalf the EU tariffs and trade policy?
It remains doubtful that the UK Government would be able to achieve these ends without sacrificing at least one of the objectives of the ‘Brexit trilemma’. At the same time, the Eurosceptic critics of the White Paper have also failed to explain how they strike the balance between these three irreconcilable goals. The next blog post on this issue will delve into three more technical points that further illustrate the ‘impossible trinity’ of Brexit.