Future Free Trade Agreements

Marcus Fysh Excerpts

Thursday 21st February 2019 Commons Chamber

[Barry Gardiner]

It is always the way with the Secretary of State: when he sees that a valid point has been made and that he is vulnerable to it, he tries to go on the attack. It does not work. It is a pathetic response when he knows and should, with some humility, accept that the proper impact assessments were never made.

[Mr Marcus Fysh (Yeovil) (Con)]

Is the hon. Gentleman aware that there is some concern among Japanese car manufacturers about whether the US will end up imposing tariffs on EU products and that that might make exports from the EU to the US very uncompetitive? Is that not potentially a much better reason why, in this case, sad though it is of course, they are consolidating low-volume production models back to Japan?

[Barry Gardiner]

The hon. Gentleman makes a fair point, and I will address it because he has done so in an open spirit. It could well be the case that the risk of America doing as he has suggested could have had that impact. I think he will concede that it is more likely to have been the case in the high-value sectors of our automotive industry, such as Jaguar Land Rover, where we export prestige vehicles to the United States, than in the bulk sector—the Nissans, Hondas and Toyotas that form the bulk of our domestic production and of our exports to Europe. He is partially right. It could well have affected their decision making, but it is more likely to have been at the high end of the market than the low.

--- Later in debate ---

[Mr Marcus Fysh (Yeovil) (Con)]

Future trade deals must be part of a coherent trade strategy, and it is imperative that, as part of that strategy, we rapidly set out what our tariff schedules will be in all eventualities, and our attitude to tariff-rate quotas. Many people in business throughout the land are looking for that guidance. It is a key part of their preparations as we leave the EU, and I think we owe it to them to make clear what the position will be, particularly as the lead times to import are quite long in the case of some products. If products will have to go into catalogues in the future, businesses really need to know what their margins will be, and it seems unfair that they have not, as yet, been given that guidance.

Today’s debate is a classic that has been heard in this place for the last 150 to 200 years: the age-old debate about protectionism versus free trade. It is an argument that has proved to have the potential to split parties, communities and families right down the middle. I think that, in the modern era, it would be wise to try to go about these matters in as well-informed a way as possible, because we owe it to the people on whose behalf we are making our decisions to understand fully what we are talking about.

People in the trade world talk about offensive and defensive interests in negotiations, but, in many circumstances, the attempt to reach mutual agreement means that it is not really a zero-sum game. Approaching negotiations with the right partners and in the right way can bypass such oppositional characterisations of trade and of our own interests. That is not to say that we should not be mindful of the impacts that different trade arrangements might have on our people—our businesses and our farmers, for instance. I am keen to champion the maximum supply of information and the maximum involvement of communities in the preparation of trade strategies and trade policies along the way.

[Emma Little Pengelly (Belfast South) (DUP)]

Several Members have expressed concerns about the NHS today. We have probably all been contacted by constituents about the need to protect it, which is close to the hearts of many people throughout the United Kingdom. Does the hon. Gentleman agree that it is important not only to protect it and issue strong statements to that effect, but to provide transparency so that people are clear that what is agreed, what is to be negotiated and the negotiating mandate do not include things that are precious to them and that they do not want to be compromised?

[Mr Fysh]

The hon. Lady makes a good point. The earlier the involvement in these conversations, the more confident communities can be about a mandate that the Government can take to a negotiation, and the process of ratifying whatever comes back from the negotiation can then take place in a timely manner, which I think is essential. I shall talk about the NHS in a bit more detail later, but I see no reason why there should be those fears about it. Indeed, I can see reasons for it to benefit, and for its users to benefit, as a result of deals with, for example, the United States that might allow earlier and cheaper access to drugs than is possible now.

This debate is, of course, about future free trade agreements, but those agreements, and the trade strategy, are inevitably coloured by consideration of what our potential relationship with the EU might be, and what obligations we might enter into in order to acquire it. I now want to say a little about the impact of the restrictive nature of the proposed withdrawal agreement, including some of the prejudices to our future trade policy and strategy that it sets up.

The withdrawal agreement commits us to paying a lot of money without real limits, and with oversight by the European Court of Justice of the exact obligations that will be required. It allows the possibility of an extension by up to two years of the transition period that is being contemplated. We do not know at this point what sort of competition or anti-competition legislation the EU might produce in the next four years, but it might affect our economy, and might have an impact on what we could or could not do with future trade partners, either during that time or afterwards. The agreement gives the joint committee very wide powers of interpretation of what it says, and, in fact, powers to change what it says, as if it had the effect of law and Acts of Parliament. That means that the position in another two to four years’ time is very uncertain.

It should be noted that the agreement proposes the acknowledgement and implementation of the current EU system of geographical indications. I am not necessarily opposed to their being implemented in the same way in the future, but that really should be a matter for the future trade negotiation, which we have been told all along cannot take place during the article 50 negotiation period.

What is slightly more worrying for us in this discussion of future trade policy is that the agreement strengthens the current requirement for “sincere co-operation” within the common commercial policy to which we are subject as members of the EU, which effectively means that we are obliged not to undermine the EU’s interests in any international forums. I do not think we should be in the business of trying to undermine its interests, but that requirement may well restrict what we can discuss with future free trade partners during the transition period. That, I think, adds to the uncertainty that already exists about the transition period, and about what has or has not been agreed by the EU and the UK. Whether and how the EU’s existing free trade agreements with the rest of the world will apply to the UK during the transition period remains opaque, as does the extent to which the UK is able to sign free trade agreements during the transition period in the context of that sincere co-operation.

Within the backstop provision for after the transition period should nothing be agreed, there is a hard veto for the EU on any superseding agreements. Article 20 of the protocol is very clear that there needs to be a joint decision by the EU and the UK for future alternative arrangements to succeed the backstop. So whatever the best endeavours clause does or does not do, that is still a hard veto that needs to be dealt with.

The reality of the operation of the backstop as written for the UK is very dramatic from the point of view of trade and competitiveness. For example, the EU will be able to increase state aid during the period after 2019, but the UK must maintain it at current levels. If that happened for four years, it could really undermine the competitiveness of some of our domestic producers, which is exactly what we have said we need to think hard about in future trade agreements. Because of how the annexes operate, state aid provisions would effectively be applicable to our defence manufacturing industry for the first time in a way that they are not in the EU. That would enable the European Commission to take cases in our courts against defence manufacturers and/or the Government in instances that were considered to be state aid to the defence manufacturing industry.

Those are the sorts of hostages to fortune that are lurking in the backstop, and that is one reason why I am against it. We need to be very mindful of that sort of leverage over our future arrangements with the EU, whether on the status of Northern Ireland within our constitution, if our fishing is open to European actors, the status of Gibraltar, or our defence capability and sovereign ability. Those are all potential hostages to fortune in the current backstop arrangement, which is a big part of the reason why I am opposed to the current proposal and want those backstop arrangements to be replaced now, or at least to have full legally binding guarantees that they will be replaced over time.

As the backstop is currently written, it envisages a customs union. There has been much talk about whether that means frictionless trade.

[Angus Brendan MacNeil]

I am grateful to the hon. Gentleman, who serves with me on the International Trade Committee, for giving way. He has clearly laid out his opposition to the backstop for various reasons, and I respect what he has said on that, but where does he go then: to no deal or to the revocation of article 50?

[Mr Fysh]

I do not think it is as clearcut as that. In the Malthouse compromise, which some might have read about, there is a proposal to replace the backstop with a permanent arrangement that is effectively a zero-tariff environment for the time being with a trade facilitation agreement, which allows very efficient trade to take place across the border. It would not be a unilateral exit from the backstop, and there would not be a time limit on it; I understand communities in Ireland wanting some certainty about that. I actually think it is a much better idea to replace the backstop within the withdrawal agreement if we want to pass the agreement now, and if that does not happen we should keep offering to do exactly that. I will come on shortly to some of the back-up plans should that not be acceptable either.

The customs union arrangement within the backstop would oblige us to continue to adopt the common external tariff and would potentially oblige us to have the common commercial policy. There is a great deal of uncertainty about the physical operations at our borders. What the annexes of the withdrawal agreement backstop say is required, in black and white, is that every transaction between Great Britain and Northern Ireland and vice versa, and between Great Britain and the EU across the channel, would require an a.uk physical, stamped certificate, effectively showing where the duty has been paid in the customs territory it is coming from. That is a massive administrative burden. Based on the HMRC numbers of transactions with the EU, the number the CHIEF—customs handling of import and export freight—computer has to handle will be going up from 55 million currently to 255 million in the future. That means there will be an extra 200 million of these things every year; that is over half a million physical certificates a day that HMRC officers will somehow have to process. That is wholly unrealistic, and when one talks to the Government in detail about it, or to the EU, they admit this is totally unworkable and will not be introduced. How then can they say they cannot introduce alternative arrangements now that would have another two years to be implemented on the ground?

In addition to those physical stamped certificates there would have to be export declarations into the export control system, which would enable the logging of whether a tariff needed to be collected or indeed whether rectification was needed in the inward processing relief systems. So the idea that this is a frictionless system is wrong, and it needs to be replaced. It is unworkable; it is full of friction and it also prevents an independent trade policy for the time that it persists.

If we were to continue to offer the Malthouse proposals even if we could not get a withdrawal agreement done, we would continue to offer a stopgap measure of a zero-tariff, simple free trade agreement, or an agreement between the UK and the EU to prefer each other’s trade for a period of time, which could be notified to the World Trade Organisation under article XXIV of GATT—the general agreement on tariffs and trade. That is a very simple thing to propose, in a sense: because it would be a goods-only agreement, it would not need ratification by all 27 member states, and it could be agreed and implemented very rapidly.

If the EU did not want to do that either, although that would be best because it would be absurd for us to be charging tariffs on each other, we would need to look at other things we might do. We heard discussion earlier of some elements of the unilateral free trade policy that we would potentially need to put in place to prevent price rises for different goods. That does not mean we would have to unilaterally reduce our applied tariffs for every product; we can make that choice product by product.

We have already heard on the grapevine that we are not planning to zero-tariff agricultural goods in our future tariff policy. That makes sense in many ways, because we need to take a nuanced approach. We need to look, product by product, at where domestic producers need some sort of tariff or programme so that they are not exposed to world prices immediately.

We also need to consider an interesting strategy that would encourage other countries to enter into free trade agreements with us. It would propose that we would take a unilateral free trade approach for a period but that we would reintroduce tariffs going up towards the bound tariff level—the common external tariff level—after, say, two or three years. That would encourage the countries that want the continuation of free trade to enter into free trade agreements with us to achieve it.

In the meantime—coming back to agricultural products and taking beef as an example—while we might have a tariff, we would still have a tariff rate quota that allowed some nations zero-rated access to the UK market up to a certain quota. We could open those quotas that would have been for the EU to the rest of the world. The EU would then have a choice. It could enter into a free trade agreement with us and have a quota or it could see the markets that it currently has in the UK being opened to the rest of the world. I personally think that it will want to have a free trade agreement, at least on a temporary basis.

[Angus Brendan MacNeil]

I am trying to follow what the hon. Gentleman is saying as closely as I can. He talks about working on a tariff-by-tariff basis and making judgments or decisions depending on domestic demand or production, but this would open us up to a retaliatory or mirror action from the European Union. For example, if there were no citrus fruits such as oranges here and we decided to get rid of tariffs on oranges, impacting the Spanish and Portuguese orange producers, they could ask themselves what tariffs had existed only to protect the United Kingdom as part of the EU pot. They could then pluck out those tariffs, and we would find ourselves in an even more disadvantageous trade situation.

[Mr Fysh]

I thank the Chairman of our Committee for his intervention. I absolutely agree that it makes the most sense to have a free trade agreement. That is the simplest thing, and it would eliminate the absurdity of even having to discuss these matters. So it would be my first proposal, my second proposal and my third proposal to have just that kind of FTA. This is really the fall-back to the fall-back to the fall-back position—

[Angus Brendan MacNeil]

The backstop?

[Mr Fysh]

The backstop to the backstop to the backstop, exactly. I really do not think that we should get into that position. Looking at the sensible contingency planning that the EU is doing in lots of other areas, I see no reason why it should not continue to be sensible and reasonable, just as we are, and I believe that we will get there.

I want to come back to the trade facilitation issues, because they are really important to the consideration of what trade costs and therefore to the potential value of future free-trade agreements as well as the value the EU’s current agreement. I would like to congratulate HMRC on its work to make trade efficient in the event of no deal at the end of March. Indeed, that work will also be applicable in the future if we are outside a customs union and the single market. These will all be very useful things.

The transitional simplified procedure that has been opened up to operators is really good news, but I think the Government should take it further straight away by making it available to intermediaries such as the logistics service providers that control a large amount of our trade. That would make the most sense, because it would enable them to be authorised consignees so that they could close out the transit documents that will be an essential part of future trade.

The Government should also look at a more comprehensive scope of waivers for transit guarantees, because the financial liability, especially of operators, cannot close out those guarantees. That will be essential to keeping our trade flowing. They should also look at underwriting some elements of the liability to duty in the EU, so that our export side can operate efficiently.

These things come down to the impact assessments that we have seen. When I have spoken to logistics service providers, customs brokers and others, it is obvious that these documents—the transit documents, the export declaration on this side and the import declaration on the other side—will need doing. It is more than we have to do now, so people need to get ready. I say to business: get ready. Businesses being able to do these things, and ensuring that their logistics service providers are able to do them, will be essential to enabling their trade to flow efficiently.

These measures cost about £50, not hundreds and hundreds of pounds. The value of the goods on a truck crossing the channel can be £10,000 if it is carrying bread or bread products and up to £300,000 for beef or beef products, so £50 is just a tiny fraction of that. We are talking about, at most, 0.5% of the value. According to the Government’s impact assessment, the cost of customs administration in the event of no deal would be 5% to 6% of the value, which is wrong by an order of magnitude. We must not underestimate the value of our future trade agreements based on a misapprehension of the real costs of trade.

Similarly, as the Opposition spokesman said, we should not get the gravity relationship wrong. In the UK, the factor of linkage between trade and distance is only about 0.23%. When we back that number out of the Treasury’s forecasts before the referendum, we get the figure of 0.9%. The figure of 0.9% is the intra-continental EU gravity factor, and it is my contention that the wrong one has been used in our models. That undercooks the benefit to us from free trade around the rest of the world and really overcooks the value of the EU’s trade. I am not saying that we do not want the EU’s trade—we absolutely do—but we want to trade with Europe and with the rest of the world. The referendum result was about us wanting both.

The Government really need to pull their socks up over what they have been saying about UK businesses’ access to Europe. The Secretary of State for Environment, Food and Rural Affairs has again said that there is a big risk of our agricultural products not being allowed into the EU, but that is simply not right. The EU has stated it will put contingency arrangements in place, that we will be listed on the right lists and that we will not be shut out in that way. It is simply wrong to say that we will. I personally think that it does our farmers a disservice to frighten them unnecessarily in that regard.

Similarly, the Under-Secretary of State for Business, Energy and Industrial Strategy, my hon. Friend the Member for Watford (Richard Harrington), who is also in charge of no-deal planning at the Department, said on “The Week in Westminster” on Saturday morning that UK car manufacturers could not be sure whether they could sell their products into Europe because of the regulations. That statement is in grave danger of misleading the British public and the auto industry, and it could be devastating to the confidence of smaller players in the automotive market that may not be aware of what the rules are or what the EU’s position really is.

The reality is that the EU Council and Commission decided on 8 January that UK vehicle certificates can be registered in the EU. There is no reason for UK car manufacturers to fear that their parts or their cars cannot be sold to Europe. That is simply not the case. The Government need to look at themselves in the mirror and stop scaremongering, which is not in the national interest.

Quickly, because I know that everyone wants to get to speak, although it seems that I am the only one left on the Government Benches—

[Mr Deputy Speaker (Sir Lindsay Hoyle)]

Order. That does not mean to say that the hon. Gentleman has to take up all the time and stop others getting in. Come on, Marcus Fysh.

[Mr Fysh]

Thank you, Mr Deputy Speaker.

[Mr Richard Bacon (South Norfolk) (Con)]

I want to point out that my hon. Friend is not the only one left on the Government Benches, although I really came to listen—

[Mr Bacon]

I really came to listen to my hon. Friend, because it is such a privilege to listen to a genuine expert on this subject. He has forgotten more about it than most people know. I am just wondering how he accounts for the fact that we have had palpably inaccurate statements from Ministers. Is it possibly because our esteemed Under-Secretary of State for International Trade, my hon. Friend the Member for Beverley and Holderness (Graham Stuart), was not involved in making those statements?

[Mr Fysh]

I thank my hon. Friend for his intervention. I am quite sure that the Minister present was not involved in the decision making around such Government mistakes. He is an eminently sensible fellow whom I know well. He used to be my Whip, and I would trust him explicitly. I cast no aspersions on the current occupant of the Government Front Bench.

The Government’s sabotage of the people’s desire for an independent trade policy has to stop. Having an independent trade policy is a mainstream Conservative manifesto promise and desire. People want to take advantage of the new opportunities for free trade agreements around the world. They do not think that there will be a gap in or loss of EU trade, just as long as we execute on the things we need to execute, and the measures that HMRC could implement right now would go a long way to ensuring that that is not the case.

We also need to deal with the fallacy that the UK is somehow a small player that will get completely taken to the cleaners in any negotiation. The reality is that many players around the world are excited about the return of the UK to the global trading environment and are keen to do business with us. They see some of our leading markets, such as pharmaceuticals or financial services, as regulatory environments in which it makes sense for them to do more business, and we can help to develop the rules-based trading system around the world in a way that helps them, too.

That is particularly true in the US context, and our service businesses have a lot to gain from potential deals with places such as the US and Japan, where being part of the EU has really restricted our ability to do the sorts of deals that would advantage those service industries because, by and large, the European industry is not services based. For example, America has a $700 billion market in insurance in which our insurers, which are only currently selling about £2 billion into the US, could raise their market share. By comparison, sales of insurance into the EU are about £1.5 billion, so the US represents a much bigger market opportunity than the EU—even under single market strictures.

By way of conclusion, because I want to allow other people to get a look in—[Hon. Members: “Hear, hear!”] I appreciate the House’s time. It is nice to have a bit of time for once on a Thursday to speak in detail about something about which I know, rather than be limited to four or five minutes, which is more often the case in the big debates.

The Department for International Trade has some brilliant civil servants and officials who have been doing incredible work. Even though it is a small market, the roll-over of the Chilean free trade agreement is a benchmark, because the officials have provided for diagonal accumulation between the UK and the EU and Chile. That really should be a benchmark for how we treat our future trade arrangements, which will be the successor arrangements to those that we currently have with the EU. I want to see International Trade Department officials more involved in the thinking about what we are doing with the EU, because that would be of great benefit to the Government and the country.

In conclusion, we need to trust in business and in the ability of businesses to adapt, to innovate and to lift their eyes beyond the current horizons. We need to trade with both the EU and the rest of the world. We need to say no to protectionism, because free trade has driven global growth around the world over the past 150 years, and it is misguided to think that there are not tremendous consumer advantages as a result. We need to be there for our farmers. We need to make the most of the derogations from normal restrictions on subsidy for items such as marketing to ensure that our farmers and producers can get the best prices around the world for their high-quality produce. We must not hang them out to dry. We also need to focus on the tremendous opportunity that leaving the EU gives us to make our way in the world in a different way. We can be best of friends with the EU and best of friends with the rest of the world.

[Several hon. Members rose—]