Trade and Customs Policy

Viscount Waverley Excerpts

Tuesday 5th December 2017 Lords Chamber

[Viscount Waverley (CB)]

My Lords, parallel preparations in advance of final Brexit implementation are essential, even though the end product is yet to be determined. As a reluctant but optimistic Brexiteer, I have no difficulty with a paper entitled Preparing for our Future UK Trade Policy. The principle of free trade and the goal of enabling continuity, boosting global trade relationships, supporting developing countries in reducing poverty, and a rules-based framework for trade remedies and trade disputes are objectives that allow the UK to hold its head high.

I have spoken on multiple occasions over the months on such matters and will not repeat what is already on public record. The covering note on the cross-border trade Bill, however, presents a Rubik’s cube of complex legal and technical issues within equally complex political constraints. It is that lack of clarity around political constraints that makes the technical analysis a testing exercise, such that businesses have no alternative but to prepare for the contingency scenario of no agreed customs arrangement.

It is hoped that this month will shed light on the probable Brexit end game. While a hard Brexit is still on the cards, given the continuing uncertainty, renewed focus on delivering the ideal scenario of frictionless trade, with an interim implementation period, would appear more sensible. Brexiteers should understand, and accept, that frictionless trade will be perceived by some as though we are still in—but surely this is a small price to pay to ensure overall readiness. I have also come to accept, albeit reluctantly, that addressing detail through secondary legislation is acceptable in the circumstances.

In essence, this is about an orderly withdrawal of the UK from the EU. Questions arise, however. Excise and VAT regimes must function effectively on exit day, so what is the Treasury’s preferred option? Is it a continued waiver from entry and exit summary declarations? Is it to remain a member of the Common Transit Convention, so that goods will not need to complete import and export declarations at each new border crossing? Is it to seek mutual recognition of authorised economic operators and press for bilateral implementation of a technology-based solution for roll-on roll-off ports? Will the Government be supporting the adoption of these simplified procedures, including presentation waivers, the use of the CTC and self-assessment? Or would the Treasury prefer an option of a virtual border, where the UK, in partnership with the EU, operates a regime for imports that will remain in the EU market even if they are part of a supply chain in the UK first?

Leaving the EU without a negotiated agreement will necessitate other EU countries having infrastructure in place for the two-way process of importing and exporting to work effectively. Is there any evidence that such preparations are under way? To achieve frictionless trade, the Government must ensure that all departments and related agencies operating at the frontier are joined up. The main cross-channel port countries of Belgium, France and the Netherlands will need to alter their systems to accommodate UK imports and exports. Beyond budgetary issues, this will require co-operation and direction from the Commission. Preventing disruption will require both sides to be prepared for changes.

I spent a large part of yesterday evening scouring public-source EU documents. It is a given that, as of the withdrawal date, the United Kingdom will no longer be part of the customs and VAT territory of the Union. However, in one of those documents, in the subsection, “Modes of Transport”, in each of the sections pertaining to “Maritime”, “Air”, “Road and Rail”, “Postal Shipments” and “E-commerce”, the following words appear:

“These changes will be implemented when all the … IT systems will be available”.


Would the Minister care to comment on this prospect? What is being anticipated, by whom, and at what cost over what period? From what I understand from the excellent briefing this morning, the EU is not expected to have its systems ready until 2025—a point made by the noble Lord, Lord Whitty. So even if we were to enjoy a transition period of two years, it would take us to March 2021. What is the process that would be enacted during the period 2021 to 2025?

We are at a critical juncture in the Brexit journey today. The Irish frontier complexities loom over the negotiations. The question of no divergence on regulatory alignment remains the bogey. I have not been to the large logistics centre on the Chinese side of the Kazakh frontier, but it might be that relevant lessons could be learned given the long-haul shipments that eventually reach Europe.

I have previously raised the possibilities and benefits of an integrated digital economy platform in relation to cross-border challenges. Given that 60% of global B2B trade currently runs through the systems of the leading 12 technology companies, signing up 150 of their leading customers would be sufficient to ensure that the digital economic platform captures around 60% of global trade by 2030. I understand that the Global Coalition for Efficient Logistics—GCEL—stands ready to demonstrate the potential of its digital technology in respect of trade between Northern Ireland and the Republic, in order to enable trade to take place between the two in a manner satisfactory to all parties and without the need for a physical border. I am aware that principals will be in the UK Friday and Saturday, and I have little doubt that a meeting of interest to the Minister and her department could be arranged.

Very briefly, and as a concluding thought, I will flag the concerns of SMEs, many of which have never prepared documents for a customs exit or entry clearance—again, a point made by the noble Lord, Lord Whitty. It stands to reason that a lack of experience, staff and resources for dealing with significant changes, procedures and paperwork will become a challenge. Would the Minister consider placing this issue in her in-tray for consideration? What possible training exercise might be readily entered into?

The greater the divergence between EU and UK regulations and product standards, the more customs capacity the UK will need to develop. The Minister should recognise constraints at the physical border and consider moving checks inland. The UK currently has access to more than 20 EU systems used to track the movement of goods and vehicles. Although an FTA could grant the UK permission to continue to use at least some of these, no deal could require the UK to build and integrate new systems from scratch.

Finally, I have two quick observations. I listened very carefully to the noble Lords, Lord Whitty and Lord Kerr, as I have done to all noble Lords. Two thoughts emerged. Will the Government draw up a comprehensive list of FAQs—frequently asked questions —to address the issues as we move along this journey? That would be very helpful for all our good friends around the country to understand where and what the game is, what they must do, how they should do it, and so on.

Secondly, the noble Lord, Lord Kerr, referred to his Article 50. As no one can judge the political future environment, there may well be a need to consult the people. In anticipation of this, could we jettison the term “second referendum” and instead vote on the “final outcome”—a point raised at a joint meeting that the noble Lord and I attended?

Many other challenges remain. However, I will leave it there for the moment.

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, as the first of the winding-up speakers, I want to say that I have sat through many debates in this House, including in the position of Minister, and I do not think I have ever heard a debate that was more informed, contained more expert knowledge, raised more challenges and took a more intelligent approach to a crucial issue. It has been a privilege to sit through today’s debate.

I say that in welcoming the Minister, the noble Baroness, Lady Fairhead, to her place. However, I have a concern: the noble Baroness, Lady Henig, just used the word “platitudes”. Unfortunately, when Brexit is raised in any kind of discussion or debate in this House, the Minister commonly replies with platitudes and fairly simplistic answers, similar to those in some of the papers before us. That is no longer acceptable, if I may say so. We are now in the late stages of phase 1 of Brexit negotiations. I believe that there will be opportunities to exit from Brexit, but I set that aside. We are at a point where platitudes will no longer serve and where not only this House, but the British public more generally—a number of people talked about the importance of transparency—need a detailed response that addresses the many, seemingly almost intractable, sets of issues.

Following the referendum, when the current Government came into place, there was an almost euphoric sense that Brexit would be simple and cost-free—that there was an upside and virtually no downside. It was in that spirit that many commitments were made that pushed us into a corner where we have a Government who say, “We are going to leave the single market and the customs union”. A year ago, when I held discussions with Government Ministers, it was impossible to get any of the facts without being told that we were simply hearing from whinging people. The situation is very different today; I give the Government credit for it. I do not know how much Theresa May’s views have changed, but I am certain that David Davis’s views have changed. Now, there is a recognition of the extraordinary complexity, challenges and dangers involved, and that the process will be one not of new opportunity—at least not for many years—but of damage limitation. That means that the Government are in a position where they can open their mind and rethink the decisions that are essentially taking us out of the customs union.

A number of people talked about the importance of frictionless trade, but in a meeting—I think the noble Viscount, Lord Waverley, the noble Lord, Lord Whitty, and I were at the same meeting—it was absolutely evident that the only way to have frictionless trade is to have an identical process to the one we have today, with no change whatever. That is the precondition for frictionless trade. The noble Lord, Lord Cope, used the phrase “as frictionless as possible”, but that is as long as a piece of string. Once we move out of the customs union, we move into a regime in which divergence constantly increases: we go from the moment of least friction to moments of increasing friction. Around friction, there are costs, which will be borne by our businesses and, ultimately, the residents of this island. The Government have to face up to—and ought to be coming to us with—a realistic and detailed assessment of those costs, the burdens that will be placed on businesses and the consequences for the ordinary people of this country.

As we all know, we are part of an integrated supply network across Europe, where physical goods move unimpeded across our border—often more than once a day, particularly for larger companies. That is the whole just-in-time concept, about which we had very little discussion but which is critical to the economics and efficiency of virtually every one of our major industries. It underpins lower-cost production and makes the UK a place where it is viable to build a business.

I was a Transport Minister, so perhaps I know the automotive industry best. From talking to companies in the sector, I know that 350 trucks move through Dover every day. That is an extraordinary amount of product. The Minister will know that Dover alone sees 10,000 trucks a day move through, roll-on and roll-off. I do not know whether noble Lords have seen it; I have. I have been down there and looked at the traffic movements in Dover. It is like watching a ballet: a constant, unbroken stream of trucks rolls on to and off ferries. There are no checks whatsoever at Dover because the friction that they would introduce to the system would destroy just-in-time and the businesses that it underpins. As somebody said today at the meeting that I and other noble Lords were at, there is absolutely no slack in the system for just-in-time—there cannot be any delay. For people who do not understand how just-in-time works, I have talked to some of the automotive industries: product leaves the European factory at 8 am, to be in the UK production line at 11 am. It is that tight; the consequences of any disruption are extraordinary, but absolutely no one has produced a viable scheme that does not disrupt those timings.

I turn to tariffs. I recognise that there are those among the Brexiteers who are happy to go to WTO rules. I am glad we heard the noble Lord, Lord Price, say that doing so made no sense—particularly instead of a zero-tariff regime—and would have utterly shattering consequences for our domestic industry. In fact, I find the whole suggestion that we can go to WTO rules completely irresponsible.

Many people have said that tariffs do not matter and that it is the non-tariff barriers that are crucial, but there are some industries for which tariffs absolutely matter. Again, I speak as a former Transport Minister. The 10% tariff that would be applied to our automotive sector under WTO rules would frankly destroy most of the automotive industry in this country. I do not think that is an exaggeration. I suggest that anyone who questions that talks with the industry directly. Tariffs of 35% for the dairy industry would clearly be devastating. There are not many ways to overcome that because any attempt to subsidise gets us in trouble with state aid rules.

We will have really serious problems if tariffs become part of that picture, but of course the issue is non-tariff barriers. We did not have much of a discussion about rules of origin, which are a very large component of the non-tariff barrier problem. It is a complete nightmare. Talking a little off piste at the meeting we were at today with one of the food producers, who works for a major company, he tried to explain to me that to complete rules of origin he has to account for every drop of milk in making his food product if he goes through a customs barrier. That milk could come from three or four different places, but every single drop has to be tracked. It is the same for the sugar, the flour and every other component that goes into those foodstuffs. The challenge, burden and administrative demands that that leads to are huge: export declarations, licences and other kinds of supporting evidence. They are myriad and a nightmare. We have talked in the past about the importance of cutting red tape in this country. Frankly, I cannot think of a way that we can introduce more red tape through a single measure than by leaving the customs union.

Of course, it becomes worse if we divert from any EU rules. This is the whole issue of regulatory alignment. Again, a very good example was given at the meeting today. What do you do if the EU is completely resistant to the idea of GM food? I understand why, but we are quite likely to make trade agreements with countries that would permit GM to come into the country. If any GM maize is fed to a chicken, that chicken cannot be sold to the EU. How do you track the detail, demands and complexity of this? It is astonishing.

The Government have said that there will be an electronic solution. What solution? Everyone I have talked to says that none of the existing systems can possibly cope with anything of this kind. The noble Viscount, Lord Waverley, mentioned that digital clearances at the EU are not targeted for completion until 2025. We also heard from customs experts that HMRC’s new computer system, which is meant to be up and running by 2019, is not scalable to the level required for this system. It simply is not. I tend to trust people who tell us that we have problems with our IT systems because they have been right virtually every time in my lifetime.

On the authorised economic operator system and trusted trader, I say to the noble Lord, Lord Leigh, that there is a reason why only 600 UK companies—I thought it was only 500—have signed up to it. It is extraordinarily complex and delivers very little. It is nowhere near any kind of answer to providing smooth electronic systems at any kind of reasonable cost. Around this House so many people have talked about SMEs’ problems. If they cannot be included in these systems they will be at a permanent disadvantage in trying to compete to be part of supply chains and in trying to grow. Surely they are the backbone of our economy. Anybody who thinks that small businesses can easily adapt to new digital opportunities should be involved in some of the debates and discussions we have had on digital quarterly tax reporting. The Government keep carving more and more people out of that regime because it is so impossible, burdensome, costly and time-consuming to make those kinds of adaptations.

I will talk just for a moment about free trade agreements with countries other than those in the EU. The noble Lord, Lord Price, implied that we can do a kind of transfer over of the 58 agreements the EU has negotiated with other countries that we separate from if we leave the EU. My conversations suggest to me that the Government have finally accepted that there cannot be a rollover: these agreements die and there has to be a new agreement put in place. Surprisingly, the various players on the other side of this picture are turning out to be much more difficult. Everyone assumed that they would simply sign on the bottom line, and they are not doing so. Again, a number of noble Lords referred to trying to split access quotas between the remaining 27 and the UK, but that is a minor problem. We are hearing that a number of the countries see this as a great opportunity to get much better terms than they had before. They intend to use a unique opportunity, not to walk away from it.

To go back to rules of origin, one of the shockers for me in this was to understand the way rules of origin interact with free trade agreements. I admit that until a few weeks ago I was not aware of how this worked. I take the automotive sector again as a typical example. Under free trade agreements around the world, the zero tariff is available only to a country that is exporting an automotive product that has 60% local country content. The highest UK content for any car we export is 43%. That is unusual; the average is 10%. The industry says that it is pretty much impossible to increase the number of suppliers in the UK to push up that number. They have been trying to do it for years.

Economies of scale matter. For example, if you are going to produce ball bearings for your cars, you will do it in one place for the whole of Europe. You cannot afford to put up a separate supplier for a product of that kind in the UK. I do not know how many other products this applies to. I gather it is a really serious issue in the food processing industry. We need to understand how all that works. Here is another issue raised in the meeting today. Perhaps the food product a producer is selling meets rules of origin content, but say it is a flour-based product, we have a bad harvest and at the last minute he needs to switch his source of supply. He might then fall foul of rules of origin content and suddenly face a tariff. All these questions have to be answered so that businesses can plan and deal with them.

I lived for nearly 20 years in the United States. Whenever I hear people talk about creating free trade deals with the United States, I really do begin to laugh. The issue primarily in dealing with the United States is that the trade barriers are at state level. They are never engaged in the free trade discussions that the United States enjoins with any other country. That is one of the reasons why it is considered one of the most protectionist countries in the world. We have had plenty of evidence that from the United States’ perspective an agreement would essentially put America first and means the adoption of American rules. The notion that it will be a rollover strikes me as extraordinary.

[Viscount Waverley]

I apologise for breaking in. Will the noble Baroness agree with the governor of Virginia, who was recently in London, who, when asked, said it would take a minimum of two years to negotiate a free trade agreement with the United States?

[Baroness Kramer]

If we can negotiate a free trade agreement in two years with United States it would be a miracle. Trade negotiations are complicated—there is so much at stake. Everybody in this Chamber knows that. I wish we could simply acknowledge it and start to factor it into the thinking and planning we are dealing with. The noble Lord, Lord Kerr, essentially said that it will take some five to seven years to negotiate a trade agreement with the EU, where we start from a position of no divergence. We have to become realistic. That is one of the things I ask of the Minister. She must know that most of what goes down in print frankly does not have any tang of realism to it. It is so much about wishful thinking.

I shall make some remarks on transition and then I will sit down. I have talked to a number of companies which believe that transition will be a genuine standstill arrangement, because that is the only outcome they can contemplate. I know of no company which thinks that transition will be the beginning of change; they believe that it buys two years of peace in which they can think about what to do, understand what the end game is and work out how they will then respond to it. But that is not what I am hearing from government. Transition is a very different period in which change is ongoing. I suspect that companies will not be in any position to deal with it.

I want also to pick up an issue raised by the noble Lord, Lord Kerr: is there any way to negotiate a standstill arrangement once one leaves the EU, or is the only way to get a genuine standstill the two-year extension of Article 50? The noble Lord is shaking his head. At least, that helps with this situation. Trying to work out transition will be extraordinarily complex. I hope that we will hear from the Minister something that takes us much further along the path of understanding how the Government intend to deal with this situation and a genuine assessment of the consequences.