Brexit: Options for Trade (EUC Report)

Baroness Verma Excerpts

Thursday 2nd March 2017 Lords Chamber

[Baroness Verma (Con)]

My Lords, I am extremely grateful for the opportunity to debate the report of the External Affairs and Internal Market Sub-Committees of the EU Select Committee. It is a great pleasure to follow the speech of the noble Lord, Lord Whitty. We have worked very closely with him and his sub-committee on this joint inquiry. He has laid out with great eloquence a number of key areas that have been provided by witnesses in evidence to the committee and the range of questions that the committee has put to the Government.

I will not repeat many of the areas the noble Lord has alluded to but, as the chairman of the External Affairs Sub-Committee, I start by extending my thanks to its members for their important and considered contributions to this report. I am pleased that many of them are here supporting the debate and contributing to it. I also put on record our thanks and appreciation to the secretariat, to Eva George and the policy analyst, Julia Ewert, for their assistance and diligence throughout the inquiry and in the preparation of the report. It has not been easy. It has been a difficult one to bring together. They have done a sterling job with the clerk and members of the Internal Market Sub-Committee. I also put on record my appreciation and thanks to our specialist adviser, Holger Hestermeyer, for his expertise. It made a valuable contribution to our work, the report and our wider understanding of some of the minute details of the work the Government have to undertake.

As the noble Lord, Lord Whitty, said, future trade with the EU after Brexit is a hugely important issue. The EU is the destination for 44% of our exports and the source of 53% of all our imports. The terms of this relationship will be fundamentally changed by our exit from the EU. We are entering uncharted territories, so in this environment the role of Parliament in investigating the implications of Brexit and in scrutinising the Government is critical. The committees have sought to provide a balanced and thorough overview of the issues that are likely to arise from the four main options for trade. As the noble Lord, Lord Whitty, said, the EU committees will further be publishing detailed reports on trade in goods and trade in services next month. In this debate, I will focus on two options not covered in detail by the noble Lord, Lord Whitty, in his opening remarks, although he did mention them: the implications of leaving the customs union and trade under World Trade Organization rules.

I turn first to the customs union. As we set out in the report, the customs union prohibits customs duties and non-tariff barriers on imports and exports between member states. It forms the single market in goods and has significantly benefited cross-channel trade and facilitated the development of integrated EU supply chains in many industries, for example in, first, the chemical industry and, secondly, the automotive industry.

We have heard that great attention has been given to the Government’s stated intention to negotiate their own trade agreements after Brexit, and since we published our report, as the noble Lord, Lord Whitty, said, the Government have confirmed their intention to leave the common external tariff and forge new agreements with third countries. In our report, we concluded that addressing tariff barriers within an FTA could be relatively straightforward, notwithstanding the short timescale to negotiate an agreement. But replicating the prohibition of non-tariff barriers to trade while outside the customs union will be more of a challenge. This includes compliance with rules of origin, regulations and standards. A second issue in leaving the customs union will be costs and delays resulting from customs procedures and any added administrative burdens.

Since we published our report, the Government have, as has been alluded to, ruled out membership of the customs union following the model of Turkey—a non-EU country. They have also stated their intention to achieve “frictionless” trade with the EU. Currently, it is unclear how this can be achieved outside a customs union, but our forthcoming report on trade in goods will consider and probe these matters in greater detail. It will be interesting to understand much more clearly what frictionless trade means.

My second point is about the World Trade Organization option. Establishing the UK’s independent schedules at the WTO is a matter of first-order concern. The UK’s WTO schedules will be the baseline for the rest of our trade, with the EU and with other trading partners. I am pleased that the Government have confirmed that work is under way to begin this process, and that they will seek to replicate the EU’s existing schedules. The Government told us that this process should be a largely technical “rectification” process, and so relatively straightforward. Although I hope that this is the case, as we noted in the report, politics and events can sometimes intrude into such negotiations. Although establishing UK schedules swiftly may be the UK’s priority, other members of the WTO may seek to use this process to seek further concessions and clarifications from the UK. Notably, negotiations on tariff rate quotas for agricultural products often prove protracted and complex to resolve.

The Government have said that they recognise the need to increase human resources within government and, as the noble Lord, Lord Whitty, said, we are pleased that the headcount is going up. I am assured that the Government are working to increase not only staff numbers but capacity at the Department for International Trade. However, we concluded in the report that its current staff headcount is relatively modest compared to the ambitions of the Government to begin preliminary discussions on FTAs with a range of third countries. It is crucial that in that light, and looking at what other current partners already have, we see the capacity and resource issues addressed urgently.

I reiterate the view of the committee that establishing the UK’s schedules at the WTO, alongside the negotiations with the EU, should be the Government’s priority. The UK’s WTO schedules will be the foundation of its independent trade policy. Future FTAs with countries such as the US cannot be concluded until the UK has left the EU, and so work by the Department for International Trade should be sequenced accordingly.

If, as we concluded in the report, the UK is unable to agree an FTA with the EU within the two-year Article 50 process, as raised by the noble Lord, Lord Whitty, we will trade on WTO terms. The Government have said that, in their view, no deal is better than a bad deal—but when the Government describe the no-deal scenario, trade under WTO terms is the reality. I will elaborate a little further. Trading with the EU on the basis of WTO schedules would involve a considerable change to the UK’s current conditions for trade: tariffs would be imposed, non-tariff barriers would no longer be prohibited, and there would be no provisions for many important services traded by the UK. This could be extremely damaging. The Government have been clear that this is not the outcome that they seek but, while we must aim for the best possible outcome from the negotiations, rigorous planning is needed to understand the impact of no deal—that is, of trading with the EU on WTO terms—to help businesses prepare for this as a possibility.

This also highlights how important it will be to secure a transitional arrangement, as the noble Lord, Lord Whitty, has said. The Government’s position—as stated by the Prime Minister on 17 January at Lancaster House, and in their response to our report—has been somewhat unclear. They have ruled out what they term an “unlimited transitional status” and instead proposed a “phased process of implementation”. This may be a case of semantics—at least, I hope it is—but UK businesses need a bridging agreement that begins immediately after our current terms expire. I urge the Government to seriously consider negotiating a transitional arrangement as they begin these vital negotiations with the EU.

I recognise that there is a lot of work being undertaken by the Government, but the Prime Minister has excluded membership of the single market and the EU’s customs union, and there remains considerable uncertainty. Can my noble friend the Minister tell the House how they will assist business in managing the transition to a new trading framework, and provide more detail on the content and feasibility of the Prime Minister’s approach to the customs arrangement? I look forward to hearing from my noble friend.