Brexit: Trade in Goods (EUC Report)

Lord Stirrup Excerpts

Tuesday 18th July 2017 Lords Chamber

[Lord Stirrup (CB)]

My Lords, as a member of the committee which conducted this inquiry, I, too, congratulate the noble Baroness, Lady Verma, on chairing it so ably and introducing the report so persuasively. I also add my thanks to the team that supported us so well.

During our evidence sessions I was struck, although not surprised, that the overwhelming majority of those who gave evidence wished for no change to the current trading arrangements. Almost without exception, they saw Brexit as making their life much more difficult. I start with this point not to bemoan the result of last year’s referendum and the triggering of Article 50 but to stress the challenge that the Government face if they are not only to get, as they desire, the best possible trade deal from the EU but to ensure that the best possible deal is in fact one that allows British businesses to operate in a way that minimises the inevitable disruption and additional costs.

All too often, the Government have given us reassuring words about the nature of the post-Brexit environment. Whether one believes them or not, this report clearly demonstrates that a satisfactory arrangement will only be made possible, if at all, by a great deal of careful planning, hard work and skilful negotiation. Rumours about the current political climate do not fill me with confidence in this regard.

The report points out that, although the UK economy is dominated by the services sector, goods continue to represent the largest share of our trade, amounting to some 56% of the total in 2015, with nearly half of our exports going to EU countries. Furthermore, goods and services are frequently bundled, and, as the noble Lord, Lord Howell of Guildford, so eloquently explained, it is often difficult to separate the two in trading terms. But far from diminishing the importance of goods, this overlap with services increases it. Rolls-Royce makes much of its profit from servicing, not making, jet engines, but it would not service them if it did not make them. So this issue is crucial to our future prosperity and we need to treat it as such; we cannot afford to approach it with insouciant overconfidence.

The report looks in some detail at the question of tariffs. It is clear that changes in this area would have an uneven impact, depending on the particular sector that one is considering. Increased tariffs would, though, have a serious and very significant effect on, inter alia, the UK automotive industry and the food and beverages sector. All this suggests that substituting World Trade Organization terms for the current arrangements would severely damage our economy, at least in the short term. Even more problematic, though, is the question of non-tariff barriers. As other noble Lords have noted, businesses operate with highly integrated cross-border supply chains. By and large, few producers warehouse items these days. Deliveries are made direct to production lines—just in time supply, as it is known. Any interruption to this process would drive up costs significantly and lower competitiveness, particularly for small and medium-sized enterprises. This means that delays at international borders for duty payment, checks on compliance with rules of origin and so on would have a severe impact on the UK economy. Establishing arrangements that ease or eliminate the necessity for such delays will be complex but crucial.

Even if such negotiations are successfully concluded, there will inevitably be an increase in the degree of cross-border and customs administration required. This will mean more resources and improved processes. The Government are introducing the new customs declaration services IT system, which should help in that regard—but it comes with a couple of important caveats. The first, which has also been noted by the National Audit Office, is that government has an inglorious history when it comes to the handling and introduction of large IT projects. One has to wonder whether—and, if so, why—the customs declaration system will be any different in this regard. The second is that customs procedures exist on both sides of a border. As a retired Belgian civil servant wrote to me, “Our system may indeed turn out to be wonderful, but in all too many instances the ones on the other side are not”. This is an area that requires a great deal of further thought.

It is of course true that highly integrated supply chains work in both directions, and that cross-border disruptions would affect businesses across the EU, not just here in the UK. This should create a powerful incentive for us and our European partners to work together to solve the problems. The trouble is that such a rational approach relies on good will, even tempers, common sense and a lack of overriding domestic political priorities on both sides—a tall order, I would suggest. It is also true that businesses rely upon some international supply chains which lie outside the EU and that we have systems and processes to deal with these. But Brexit will dramatically increase the volume of such transactions; the status quo will simply not be able to cope.

All told, then, the questions around non-tariff barriers are very difficult. How do we handle rules of origin? What is the best approach to regulatory standards and their oversight? How do we maintain the integrity of pan-EU supply chains? What additional resources will be required? What recruiting and training of extra staff will be necessary?

Considering all this alongside the challenge of tariff barriers and throwing in the matters of cross-border availability of skills and third-party trade agreements, neither of which I have touched on today but both of which are of great importance, I draw two broad conclusions. The first is that the chances of everything being concluded before the expiry of the two-year Article 50 notice period are as close to zero as makes no difference. Yet businesses are making investment decisions regarding that period now. It is therefore crucial that we have certainty about what happens after the two years are up, and that we have it very soon.

The need for a transitional arrangement, perhaps a temporary continuation of the status quo ante, seems to me so self-evident that I cannot understand why the Government have resisted it for so long. During an evidence session for this report, a government witness practically tied himself in knots trying to avoid using the words “transitional arrangements” while grudgingly acknowledging that something of that sort may be required—something that might be called “phased implementation”, which is apparently completely different from “transitional arrangements”.

Even if the Government were to judge that there is at least some chance of reaching a final trade agreement within the two-year limit, no sensible business is going to bet its future on such an unlikely outcome. Unless the question of the arrangements under which we will trade at the start of year three is settled unequivocally and quickly, businesses will have to assume that we will be left with World Trade Organization rules at best and plan accordingly. This is therefore a pressing matter, requiring “action this day”.

My second conclusion is that the breadth and complexity of the issues involved, the challenging nature of the negotiating environment and the urgency of the situation demand a serious, skilful, committed, well-resourced and highly professional approach at all levels, from top to bottom. Maybe we have that, but the evidence suggests not. Indeed, the fact that the Government either could not or would not respond to this report indicates otherwise—as does the resignation of the Minister’s predecessor.

I say this more in sorrow than in anger. I am not one of those who believe that the Government’s life should be “made hell” over the EU repeal bill and the subsequent legislation, as some have threatened with relish. Whatever my personal views about Brexit, it is in nobody’s interests for the process to founder, and I should like to be supportive of the Government in this extremely difficult endeavour. But if I am to be so, I must be persuaded that our efforts are serious, coherent and cohesive. So to the Minister I say, with all respect, that it is time for the Government to demonstrate to the nation that Brexit is being conducted not just with vision but with grip, attention to detail and political and technical skill. She will perhaps tell me that this is happening; I would reply that neither I nor, I suspect, the nation is convinced. It is past time that we were.