Trade Bill

Baroness Kramer Excerpts

2nd reading (Hansard): House of Lords
Tuesday 11th September 2018 Lords Chamber

[Baroness Kramer (LD)]

My Lords, let me from these Benches join in the welcome extended to the noble Baroness, Lady Meyer. Sometimes in this House we have a Member who gets to their feet and speaks deeply from the heart; she did that today, and I hope that she will continue that passion into her future speeches.

I have the great advantage of speaking in the middle of the batting order, so I can now select just a few topics on which to focus. I think that it will not surprise the Minister that I want to talk about rules of origin. She said that that she would address that issue in her summation. Unfortunately, it will be difficult to challenge her at that point in the discussion, so I hope that she will be comprehensive.

In the continuity FTAs that are to novate—as the noble Lord, Lord Lilley, phrased it—the 40 to 43 existing deals that the EU has with 70 countries, rules of origin become critical. As this House will know, the right to reduce a tariff to zero is in many cases dependent on the content of the good being exported. Local content has to reach a pre-agreed threshold. In the example often used, of the sale of automobiles to South Korea, the required local content threshold under the EU agreement with South Korea is 55%.

The UK is a major exporter of cars to South Korea. It has no difficulty using that definition of EU content in reaching the 55% threshold. However, the UK alone has content that is far lower. From reading speeches of Mike Hawes of the SMMT, which is basically the automobile trade association group, I understand that the core UK content is on average about 20%. Through various other mechanisms, that number can for some vehicles be raised to about 40%. To get to 55% or 60% is generally acknowledged to be impossible. The rationale for that is simple: it is economies of scale. Major manufacturers are not going to want to have multiple ball-bearing parts in every country from which they export; they are not going to want to replicate the construction of tyre wheels, or whatever else. It is the supply chain, collectively, that delivers that final product to the UK for onward export to Korea.

My understanding is that it would be very difficult to get a variance from that 55% to 60%, for the simplest of reasons: the benchmark is used in trade deal after trade deal across the globe, and many of those trade deals include a clause that says that if more favourable terms are offered to another country, then automatically that more favourable benchmark is included for each country that is engaged. You know that if the UK were able to get a benchmark reduced to 20%, for example, the EU would enjoy that, as would many other countries that have free trade deals with South Korea, so we create a problem. The answer that the Minister often gives is that we will have a triangulation system that allows the UK to treat EU content for these purposes as if it were UK content and vice versa. However, my understanding is that that would last only to the end of the transition period even under the Chequers agreement, and if there is no deal then there is no possibility that that arrangement will even be in place late on 29 March next year. Perhaps the Minister will take us through those various issues.

I took a look at a very handy chart derived from world import-export tables—these are 2016 numbers—produced by a company called Absolute Strategy Research. That 55% to 60% benchmark is quite common for a wide variety of goods: we are not talking just about automobiles. It may be lower for some: there is an agreement in aerospace, for example, that there will be no benchmark. I looked at this and at UK content of its exports. In electrical equipment we just about get to 20%, in food products we are below 10%, in rubber and plastic products we are at just about 20% again, and in chemicals at just over 20%, so there is a very wide range of our exports in which we could not meet the local content benchmark in these free trade deals that we intend to novate. We could if we included other EU products, but that requires agreement with the EU and requires the EU to renegotiate every one of its existing free trade deals, because of course it has to make that adjustment as well.

I would really like some realistic comment from the Government, because I have a sense from my discussions that they think it will be an absolute no-brainer to get an agreement to bring the thresholds down to something like 20% or 30%, because Britain is Britain—that seems to be the logic, as far as I can see. For the reasons I have described, including the impact on trade deals all over the globe, I cannot see that that is likely. I certainly cannot see that it would ever happen without reciprocal giveaways. I shall give this House the example of Korea. The South Koreans basically said that if they were to change the threshold and allow EU content to be considered as local UK content, they would wish to do the same for Chinese products. As I understand it, the automotive industry in the UK has now said that if that door were opened, essentially it is the end of automobile production in the UK, because it would allow such a flow of cheap Chinese automobiles into the UK and it would be so damaging to our manufacturing that every investor would have to fundamentally reconsider. Spread this across industry sector after industry sector and we deserve a better answer.

I want to pick up one other issue around rules of origin. It is a point that I made in debate on the customs Bill, but that was such a truncated debate that it would be wrong not to make the point in this context as well. The noble Lord, Lord Lilley, said that tariffs are not really such a problem—they have been coming down all over the world, so it really does not matter if we do not have a zero-tariff regime: our competitors might have it but we can still do fine. But rules of origin have a huge non-tariff cost. The estimate given by the Government—perhaps the Minister will confirm it—is that a single certificate for rules of origin will cost £30 to produce. I have previously used the example of a small stationery supplier in Northern Ireland, who imports his goods from the Republic of Ireland—he has no choice; there is a wholesaler only in southern Ireland—and the shipment comes every week. The cost to him for that shipment would be £30 for the pencils, £30 for the white paper, £30 for the blue paper, £30 for the filing cabinet, £30 for the pens, and so on. The slightest difference creates the requirement for a new certificate of origin.

[Lord Lilley]

The Swiss have to fill in rules of origin on their trade with Europe, which constitutes 80% of their exports. They say that the overall cost of dealing with borders is about 0.1% of the value of trade. How does the noble Baroness make that tie in with the scare story she is currently retelling?

[Baroness Kramer]

This is not a scare story. I think the Government will be able to confirm the description that I have just given. I will make one, more general comment but I do not want to go on because of time. Different countries have different patterns of production and trade. Over the past 40 years the UK has integrated into a supply chain, just as the Northern Ireland economy has integrated across those borders. I cannot speak about the Swiss because I do not know that economy in detail. It requires detailed knowledge of the specific economies. We are part of a crochet, deeply embedded into it, just as many of the supply-chain countries are, with constant trading across borders within the EU.

Even under the Chequers proposal, rules of origin certificates are required on every good. I have talked before about the small company that sells party supplies across Europe. It would be £30 every time they sent out a shipment of cups, £30 for the plates, £30 for the paper napkins, £30 for the tablecloths—you can go on with those kinds of numbers and you quickly realise why for many companies this is a totally destructive additional cost, which changes the game completely. I ask the Minister: can we please have some comprehensive answers? Can we have the impact assessment of what this will do to our businesses as they are today—not the fictitious new businesses that may develop in the next 20 years which will abandon the kind of trade that I have described and specialise in something different, perhaps more along a Swiss pattern, but the real businesses that exist today, in which people have invested and by which people are employed?

[Lord Purvis of Tweed (LD)]

My noble friend may be interested to learn, on the Swiss example, that the regulations associated with all agricultural, tradeable and industrial goods are fully aligned with the European Union, and Switzerland is part of the Schengen agreement, so for the movement of people and those agricultural and trade goods there are no necessary checks.

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[Lord Hamilton of Epsom]

I would point out to the noble Lord that you could make exactly the same point about the verdict of a general election. You could say that the people who won the election did not give the right information, ignored many vital issues and produced inaccuracies in their election addresses. Do you, on that basis, reverse the general election? If you do, you will find that people will be given no option but to take to the streets.

Actually I am rather heartened by the people contributing to this debate. Many of my noble friends who have arraigned us with their views do not seem to be speaking here today. Perhaps they have been somewhat discouraged by the lack of enthusiasm for the rebels in my party in the other place, who failed to uphold any of the amendments to what was then the European Union (Withdrawal) Bill—perhaps the stuffing has been knocked out of them.

This seems to be a very sensible Bill because it paves the way for transferring many of our trading arrangements. As my noble friend Lord Lilley pointed out, this is not a very complicated exercise because, of the countries that have free trade agreements with the EU, only about four, accounting for 80% of our exports, really matter in terms of the negotiations.

The point was made by the Opposition Front Bench that some of these countries might want to alter the agreements. I have to say that I sincerely hope they do—but that does not mean that we do not transfer the agreements as they stand today on a cut-and-paste basis and then go back at a later date and negotiate a more wholehearted deal that will incorporate a lot more trade.

[Baroness Kramer]

I have a question for the noble Lord, which I hope might help. How does he propose we cut and paste rules of origin and local content? I find it a really interesting concept that we could do that.

[Lord Hamilton of Epsom]

The noble Baroness mentioned the question of origin, and I thought my noble friend Lord Lilley dealt with that. I do not think it is quite the problem that the noble Baroness seems to make it out to be. I do not see that there is going to be any great problem in transferring over the existing agreements. Indeed, there is tremendous good will from the countries involved that want to do this.

[Baroness Kramer]

My Lords—

[Lord Hamilton of Epsom]

I am not going to give way again. The noble Baroness cannot go on getting up; I have only a limited amount of time. It must be right that we sign up to the government procurement agreements as well, because they involve a lot more countries. This will make it easier for us to leave the EU without an agreement and resort to the WTO.

It is interesting that, during the progress of these negotiations, the whole idea of going to the WTO and having no deal on trade has been taken off the table. Let us face it: the Government had a very weak hand, and no deal was the only ace in that hand. It almost defies credibility that, at one point during the negotiations, it was taken off the table. Now there is a lot of preparation being done for no deal and for the WTO. This Bill will form part of the preparation.

The whole attitude of the EU has completely changed. There are a large number of manufacturers in the EU saying, “What does the WTO mean for us?”. What it means for German car manufacturers is a 10% tariff on all assembled cars they send to this country. Everybody says, “Oh, it’s a much smaller amount of trade for the EU than it is for us”—as the noble Lord, Lord Butler, did a moment ago. The eurozone sells us one and a half times as much as we sell to it, and the Germans sell twice as much in manufactured goods to us as we do to them. So it does impact on them. There was a moment when we were told that we were being the laggards of Europe and that our growth rates were falling. I agree that you cannot believe quarterly figures, but now our growth rates are up by a margin over those of the EU. So the EU is not in such a strong economic position that it can say, “For political reasons, to punish the British, we are going to have a really hard deal which means that we sell less to them than they do to us”.

Let us look at what has actually happened. It was not that long ago—before the election, I must admit—that the Prime Minister said that no deal was better than a bad deal. That was in the days when Nick Timothy was her special adviser. As a result of the general election, he has gone. Now we have Olly Robbins instead, and we seem to be in the position where any deal is better than no deal. The result has been the Chequers agreement. In my opinion, this is a complete dog’s breakfast that could have been dreamed up only by a civil servant. Why have we moved away from the simplicity of a Canada free trade deal with serious additions? I do not understand why that was ever taken off the table and why we are in the nonsensical position that we are today. If this country is going to have a future, we want a clearly understood deal, based on Canada. That will get us out of the EU and trading as the Canadians intend to do in the future.

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[Baroness Fairhead]

I am just coming to the noble Lord’s question. The noble Lord asked some very specific questions and I will write to him and take up his kind offer.

[Baroness Kramer]

My Lords, I have just looked up the WTO rules and I believe that the Minister will find that she unintentionally misspoke. May we talk afterwards, or could she write to me with the accurate information?

[Baroness Fairhead]

I am happy to follow that up with the noble Baroness. If I misspoke, I apologise, but I will happily meet with her and follow up afterwards.

I have tried my best in going over 20 minutes to address as many points as I can. I appreciate that there are a number of questions that I have not been able to cover and I undertake to write to noble Lords in detail ahead of Committee.