Trade and Customs Policy

Lord Kerr of Kinlochard Excerpts

Tuesday 5th December 2017 Lords Chamber

[Lord Kerr of Kinlochard (CB)]

As the legendary and topical Irishman said when asked for directions to Dublin, “If I wanted to get to Dublin, I wouldn’t be starting from here”. It seems to me that it might have been a good idea before the October Conservative Party conference speech to stop and consider the possible effects on the Good Friday agreement, and perhaps to consult our co-signatories to the 1998 agreement—the Irish Government—and the devolved Administrations before concluding that Brexit meant leaving the customs union and the single market. However, we are where we are. The easiest way to solve the present problem would of course be to reinterpret what Brexit means and to consider, as the costs of leaving become clearer, whether it might not be better to avoid the damage to our trade that will be done by leaving the customs union and the single market.

It was a pleasure to hear the Minister introduce this debate in such an elegant way. It is less of a pleasure to follow the noble Lord, Lord Whitty, because he made most of the points I wanted to make—and rather better than I would have.

The two White Papers we are debating today are rather contrasting. I do not mean to be rude to the Minister, but the Chancellor’s is a sort of technical explanation of a Bill, and I find it extremely useful. On reading Dr Fox’s, I was reminded of Dr Pangloss: there is a lot of aspiration and assertion, but not a lot of facts. So I thought I would suggest eight facts to keep in mind. It would have been 10, but the noble Lord, Lord Whitty, pinched a couple of them on the way.

Fact one is that it is worse than the noble Lord, Lord Whitty, said. It is not just a matter of time. Legally, one cannot negotiate a trade agreement under Article 50. It is not possible. Article 50 is about divorce, settling the debts and setting the dates. That is all. Yes, one is enjoined by the treaty to agree a framework for the future relationship, guidelines and ground rules. I have been arguing for over a year that we would do very well to submit our own draft framework. I do not understand why we insist that it is for the other side to put forward all the papers. We would have done ourselves some good if we had submitted a draft long ago. But the draft cannot amount to a free-trade agreement or an association agreement because they come under the different rules of Articles 216 and 218.

The Secretary Of State for Exiting the European Union was quoted in the FT yesterday as saying that if we leave the EU before we have a trade deal,

“trying to finalise an FTA under those circumstances would be very disadvantageous from a negotiating leverage point of view”.

That is if we have left before we do it. But that is what will happen. He is quite right. It is very disadvantageous from a negotiating point of view, but the inconvenient fact is that we cannot do trade under Article 54 or until we have left. That is a fact.

The second fact is that a free-trade agreement, as the noble Lord, Lord Whitty, said, will take several years —perhaps five—to negotiate and ratify. I imagine that it will be a mixed agreement, as he said, so ratification will add another couple of years. The Canadian deal took seven and it is still not in force. A deeper agreement than the Canadian one, extending to services, might take longer to negotiate and will certainly face greater ratification problems. It certainly cannot be done by 2021—the end of this standstill period—so another hiatus will be coming up. That is a fact.

The third fact is that the standstill agreement that is being talked about is one that the EU has been offering since April. It is in its April guidelines. It is in the Florence speech so it seems that the Prime Minister is now ready to accept it. It would only be a standstill. It comes in after we have left, so we would no longer have a vote in Council, judge or Commissioner and we would no longer have Members of the European Parliament, but we would agree to respect, in the Prime Minister’s words, all the rules and regulations of the EU during that period. We would be enjoying, if that is the word, a sort of colonial status. It might be politically a little ignominious but economically very convenient, except that it would lapse after two years and the second hiatus would then come in. The standstill agreement does not avoid the cliff edge; it merely postpones it. It gives businesses more time to do the packing as they prepare to leave, but it does not avoid the cliff edge. It would be wrong to call it a transition or an implementation period because, by the time it ends in 2021, we would have nothing agreed to transition to and nothing to implement. It cannot therefore provide the certainty that employers and investors now seek. That is a fact.

I will add another equally inconvenient fact. Many I meet in the business community say, “Ah well, the can will be kicked down the road. The usual solution to the problem is that you say now that it will take two years, but it will stretch for longer than that”. Under the treaty, it cannot do so. The Commission and Council lawyers looking at the divorce treaty already have grave difficulties in accepting that it can cover the colonial period when you have left but are still respecting the rules of the club. There is no colonial article in the treaty or any provision for this state. Moreover, it is odd to have a relationship with a third country that is not covered by any of the articles of the treaty; it will be a first. The European Parliament lawyers say that it is completely impossible, while the Commission and Council lawyers seem to have compromised on two years as a maximum that cannot be stretched. I am afraid it will probably remain the view that you cannot do as the French say and make the temporary the provisional and then the permanent. Legally, that will not happen, so the cliff edge will still beckon.

Dr Fox’s White Paper states that during the standstill period we will be able to negotiate new trade deals with third countries. That is right because the standstill period will begin only after we have left. In practice, our first concern will probably be to try to salvage a share of the third country access that we currently enjoy under agreements negotiated by the EU. The Minister referred to that in her introductory speech and she made it sound rather simple, as does page 28 of the White Paper. However, it would not be simple at all because it is not a matter of arithmetic, of dividing it up. Trade diplomacy is a form of mercantilist arm-wrestling. We have seen that already in the reactions of Australia and New Zealand to the division of quotas agreed between us and our European Union friends. They were instantly rejected by the Australians and the New Zealanders. It is not simply a question of dividing our share from their share; the third country will want to grow the cake.

Nor will it be easy to replace in these third countries the market share that we will be losing in the European Union. The reason for our large export trade with the European Union is principally because it is quite close. The member states are our neighbours. There is a pretty much infallible rule when talking about trade in goods that the trade halves as the distance doubles. It is really hard to see how we can replace in distant parts what we will be giving up close to home. That is not in Dr Fox’s White Paper but it is a fact.

How good a deal with the EU will we get eventually? To coin a phrase, the key is in regulatory alignment. Tariffs are not the problem these days when we talk about trading goods. The greatest obstacle is not tariffs but differential standards. In services, of course, the greatest obstacle is regulatory misalignment. It is not just in Ireland that the issue of regulatory alignment is important; it is the key to the whole negotiation. A month ago in London, the American Secretary of Commerce, Mr Ross, told the CBI and others that if we hope for greater access to the US market, we must break with EU regulations and standards and adopt American ones. Three weeks ago in Brussels Mr Barnier asked in public whether the UK’s aim was to limit or to maximise divergence from the EU regulatory model we have been working to build for 44 years. Nobody in Brussels knows the answer. I do not think anybody in London or the Cabinet knows the answer, because the issue has been ducked up to now. To hold the coalition that is the Cabinet together, it has been important not to ask the question but to pretend instead that one can have the cake and eat it. However, the crunch point is coming quite soon. The moment we start talking about trade, the EU will need and want to know where we are going. If the Cabinet decides that we will go with Dr Fox, insisting on adopting American standards or setting our own autonomous national standards and regulatory systems, I do not see how we can get anything better than the Canadian deal, which is very light on services and would therefore be very bad for us.

I have only two more facts to go. Fact seven is that the EU’s existing free trade agreements include most favoured nation clauses. That means that if a third country, as we would be, gets a better deal for any particular category of goods or services than the South Koreans, Singaporeans or Canadians got—or than the Japanese will get—the EU is obliged to upgrade the deal for the third country in question and is not entitled to claim any compensation in better terms for its exports to that third country. That could be a disincentive for the EU to offer us a much better deal than Canada. You will not find that in Dr Fox’s White Paper, but it is a fact. The most favoured nation clause, which we were extremely keen on while a member of the club—because we were trying to liberalise the EU’s external trade—will now be a weapon against us. We will find it very disadvantageous.

Fact eight is simply to cheer noble Lords up. We do not have to go there. A notification under Article 50 is not an irrevocable act. As more inconvenient facts emerge, and as the costs of leaving the EU become clearer, it is important that people understand that the people of this country have the right to say that we should take back the Prime Minister’s March letter. We are still free to choose not to move to colonial status in 2019, nor to stormier waters in 2021. We have not crossed the Rubicon. It is still up to us.