Trade and Customs Policy

Lord Whitty Excerpts

Tuesday 5th December 2017 Lords Chamber

[Lord Whitty (Lab)]

My Lords, I thank the Minister for that explanation of the Government’s position, which was rather clearer than what leaps out from the White Papers and the explanations of the Bills.

I thought my prominent position in the batting order today was in compensation for me being almost last in the debate on the Budget last night. However, more logically, it probably relates to the fact that almost exactly a year ago the noble Baroness, Lady Verma, and I co-chaired committees that produced the document on options for trade. At that time we already asserted that trade negotiations would inevitably take some considerable time longer than two years. We also said that whatever change was needed, we would need a transition arrangement. We also said that the least disruptive change for Britain would be to stay within the single market in the EEA. Shortly after that, of course, the Government ruled out in the Lancaster House speech the EEA option and the customs union option. Instead of referring to a transition period, they have continued—like the Minister today—to refer to it as an implementation period. The Government continue, even now, to refuse to accept that they need longer to negotiate a full, bespoke free trade agreement, which is now the preferred option, and that they can still do that in time for March 2019.

More recently, there has been slightly more realistic talk from the Government. David Davis spoke to the Select Committee about a bare-bones agreement by that time, and in different contexts they have referred to an in principle or heads of agreement by March 2019. I welcome this increased realism. However, even that is a tough call, and it means ratification by the European Parliament, which would have to start in October 2018. In addition, of course the free trade agreement itself, which would not come into play until after we had left the EU, would probably be a mixed agreement and therefore require ratification by the parliaments of the 27 member states—no doubt the noble Lord, Lord Kerr, will correct me in a moment. Therefore speed is not exactly on the table in concluding this agreement, even if we have the substance right.

I welcome what the Minister says about the measures being taken to regulate the position under the WTO and to establish our own means of deciding our own tariffs. I welcome also the measures on government procurement and state aid, and on the issue of the trade remedies body. Indeed, my committee is looking at state aid and competition issues post Brexit, which will be helpful. However, on the bigger issues, the Government need to stop prevaricating and explain to the nation where we are. A transition period needs to be a transition period; it is not simply an implementation period, because we will not have agreed what exactly we are going to implement. It needs to be, in effect, a standstill period, during which we can negotiate the full details of a free trade agreement—assuming that we have a bare-bones agreement to start with. It will also probably be used to negotiate a full-scale security agreement. In addition, in the context of this debate, we will need that time to develop and test new customs procedures and the systems they involve on this and the other side of the Channel, and to familiarise business with them, staff them up and make sure that they operate properly.

During the transition period, it seems almost a no-brainer that, while we will have left the European Union, we should stay within the single market and the customs union. That is the standstill option. It will have to last for at least two years and, if necessary, for longer because we do not want two switchovers for British business and trade patterns.

Indeed, we may, as some witnesses to the committee have recently said, need both a standstill period and an implementation period. However, if the Government or the EU maintain their position that 19 March will be the leaving point, we will need a period of stability when we may well be outside the EU politically and constitutionally but we will still be subject to its rules. I recognise that that is a difficult political sell for some within the Conservative Party; nevertheless, it is the rationale and the logic of the position.

However, we must now look beyond that transition period. We need to look at what kind of free trade agreement we want, how it will operate and how it will impact on the subject matter of this debate. In any trade deal, negotiated tariffs should be lower than they otherwise would have been—therefore, in this context, lower than the current common external tariff between ourselves and the EU. Not all of them will be at zero but, even if they are, or if most of them are, that will not fully achieve the alleged objective of the Government to achieve frictionless trade. The reality is that outside of a single market and a customs union, there is really no such thing as entirely frictionless trade. Therefore, a zero tariff across the board does not mean “frictionless”.

At lunchtime I, along with a number of other noble Lords, attended a seminar of customs experts. The message that came across was somewhat complicated and, in some ways, depressing. For businesses—had they been present, as some were—and particularly for small businesses and those with complex multinational supply chains, this is all a headache; indeed, it is a severe migraine. There will almost certainly be additional administration and significant costs. There may be serious delays and businesses may eventually be faced with a deterrence to trade. A lot of those companies are not aware of the complexities, because for 40 years they have not had to operate with them.

Many small companies export only to the European Union and to nowhere else, and they will be faced with much more complex transport, customs and taxation procedures than they have been used to. They will also have to face the rules-of-origin requirements. The EU will need to treat the UK the same as it does other most-favoured nations under some of the other trade agreements that it has around the world. Of course, trading into the EU also requires regulatory equivalence for goods, agricultural products and the whole range of services, which are unaffected by tariffs but will be affected if they need differential regulatory provisions. Regulatory equivalence relates to standards and a regulatory regime, but it also relates to the specific sectoral regulatory requirements. As people keep emphasising, we start from the great advantage that we are currently equivalent and indeed pretty much identical in relation to many regulations, but, as part of a free trade agreement, we will have to agree with the EU a procedure for dealing with proposals on either side of the new relationship for divergent regulations, and we will also have to agree a very clear resolution procedure between the two sides.

At this point, we need from the Government the rapid development of new customs systems and protocols. They will need to be, as far as possible, digitally based but they will be subject to checking and inspection, and borders, ports and airports will mean that the system may not be entirely invisible, as some are hoping for. They will also have to cover differential VAT and excise duty reconciliations, as well as straightforward customs provisions. Therefore, we also need a two-year period in order to develop these systems. Current improvements in the HMRC system have not yet been tested and will need to be scaled up substantially. I understand, as of lunchtime, that the EU improved system will not come into full force until 2025. Therefore, we will need some fairly hefty work on both sides of the channel to ensure smooth, let alone frictionless, trade.

This is a nightmare for a lot of small businesses, and they need taking through it very carefully. Last week, the noble Baroness, Lady Verma, and I met a trade association that explained its anxieties. It represents small, sophisticated electronics companies that have specialist markets in the EU, multi-sourced components and multinational supply chains. One company produces ventilation equipment in Britain and exports it to the EU, but 30% to 40% of its components are made in the EU. It asks questions such as: is there a minimum level of EU content in order for tariffs not to be charged, or for administrative costs to be avoided? What if the components are not of EU origin—as some still are—but are partially EU and partially third country? Is there a minimum level at which that has to be declared? How will origin composition need to be recorded and reported, and with what level of evidence? Will that company suffer duties—if duties there are—on the total value? What records will it need to keep? What checks will it face? Will that mean delays at Dover, Calais or Boulogne for exports or component imports? The company is worried about such things, and about continuing acceptability of the product standards to which it has hitherto worked; hence, it is also worried about continued regulatory equivalence. It and hundreds and hundreds of other exporting companies require clarity, they require it soon, and they need the Government to start that mentoring process now and take them through it.

I hesitate to say something about the Irish border—so I will not. I will leave that for another occasion.

The Minister touched on the situation of the Crown dependencies, because we do have other borders with the EU. I would like her to explain the position on Gibraltar. What about small British territories in the Caribbean whose markets and supplies are with French and Dutch territories in the Caribbean? How will the customs arrangements work in those very small, very independent—and in most cases, recently devastated—Caribbean communities, which are part of the Government’s responsibility and are covered by this provision? I ask that question from left field, but if the Minister could reply to it now or in writing, I would be very grateful.

I will spare the Minister my current views on the Irish situation.