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In an attempt to move Brexit talks along, the UK government has released a series of position papers outlining its stance on issues crucial to negotiations.
The papers range in topic (and depth) and have so far received a mixed response from policy makers and business leaders alike. For the UK investment market, one of the most important papers is likely to be the government’s plans for a new customs union with the EU; this will directly affect how Britain trades with the single market.
The paper, titled ‘Future customs arrangements’, sets out the UK’s intentions to remain within the current customs union for up to three years after leaving the EU in March 2019 as part of a “temporary customs union”. Brexit Secretary David Davis suggested that this would ensure businesses “only have to adjust once” as part of the UK’s exit from the EU, while one Whitehall official told the Financial Times, the operating environment “should look and feel the same for business”. The government has stressed that discussions with stakeholders will continue over the summer, alongside the publication of a Customs White Paper, which will then be followed by a Customs Bill in the autumn.
Thereafter, the government has proposed two different potential options to implement after the end of any transition period. The first, labelled a “partnership arrangement”, would see the UK mirror the EU’s current import requirements, avoiding the need to change from the status quo. This system would ensure that the free flow of goods continues between the UK and EU markets, while non-EU goods would be checked upon arrival at the UK border. This ‘keep calm and carry on’ proposal would wreak the least havoc with the current economic status quo and, in theory, create a smooth transition out of the EU.
The other option outlined proposes a “highly streamlined arrangement”. It would require goods entering from the EU to be checked upon arrival, and vice versa. The government has stressed that their intention behind such a system would be to create an “even more efficient” arrangement than the existing setup for non-EU products; it would utilise new technology to help minimise the need for manual checks and reduce the disruption to the economy.
Although all this change marks unchartered waters for the EU and UK, commentators are comparing any future EU-UK customs arrangement as likely mirroring that of Turkey’s current trade relationship with the EU. As it stands, Istanbul has the ability to strike a free-trade agreement with any country it pleases, while enjoying a customs union on areas such as manufacturing. Despite this, complaints of complex paperwork and queues to enter the EU with goods are often reported by Turkish businesses given the customs union does not cover key components of the economy such as agriculture or services. This is not ideal for a country like Turkey given it is the fifth largest provider of imports to the EU.
What’s the reaction among business and politicians?
The reaction from stakeholders across the business and political community was mixed following the government’s announcement on a future customs union.
Financial Times labelled the government’s plan as offering “some relief”, yet criticised the plans for dealing with the here and now but failing to provide any sort of constructive plan for what will happen after the end of a transition period: “Beyond the transition period, however, the government’s plans start to leave the realm of the practical and enter the world where cakes are simultaneously owned and eaten.”
CBI Deputy Director General Josh Hardie welcomed the position paper, saying it was a positive sign that the government was proposing a time-limited customs system that is as “barrier-free as possible”. TheCityUK, the main lobbying group representing the financial sector in the UK, echoed this statement while calling for “urgent” talks on a broader arrangement to include services.
“In Europe the response was simple; the European Commission made clear it had no intention of discussing any of the proposed customs options until ‘sufficient progress’ has been made on the issues at hand right now”
Meanwhile, prominent Remainer Anna Soubry said ministers were “moving in the right direction” although “no new agreement with the EU can fully replace the benefits of a customs union membership”. Labour’s Keir Starmer, Shadow Brexit Secretary, also said the proposals were “incoherent and inadequate” and were designed to gloss over the “deep and continuing divisions within the cabinet”. In Europe the response was simple; the European Commission made clear it had no intention of discussing any of the proposed customs options until “sufficient progress” has been made on the issues at hand right now, namely citizen rights, Ireland and the size of the divorce bill. Guy Verhofstadt, the EU Parliament’s chief Brexit negotiator, was even more cutting, describing the UK’s position as “fantasy.”
What does this mean for investors?
This latest position paper does give investors some insight into how the UK could trade with Europe following its exit from the EU. However, the more significant takeaway is that the cabinet now appears more committed than ever to prioritise putting a transitional arrangement in place after we leave the EU in March 2019.
This paper comes after a series of announcements in recent weeks from prominent members within Theresa May’s government, showing a commitment to avoiding any sort of “cliff edge” exit. Philip Hammond and Liam Fox’s joint statement last week in The Telegraph showed an element of unity among Remainers and Leavers on the issue of a transition, while Amber Rudd’s major announcement on immigration proposed a phased approach to transforming the UK’s immigration system. This latest position paper on the future customs union is now further indication that a transitional deal now really does look like priority number one for the government.
In the short term, this is beneficial for investors, who can plan accordingly around any existing ties they have with Europe while potentially having an additional three years to enact any contingency plans for current or future assets.
However, as expected, there is always a caveat with the debate around Brexit. On this issue, it’s the simple matter that Brussels is yet to actually offer up a transitional deal.
In reaction to the paper, Hillary Benn, chairman of the Commons’ Brexit Select Committee was keen to emphasise this broader point, stressing that “we have no idea whether the EU will agree to the government’s proposals and if they are rejected, then what?”. Bronwen Maddox, director of the Institute for Government, wrote this week in the FT that “ministers should not presume that, because it [a transitional deal] is so obviously needed, the EU will agree – without a price.”
This will be an important point to remember and something that investors will need to keep a close eye on as negotiations get underway again later this month. All the rhetoric from the government may make it sound like a transition deal is now the obvious course of path, however, when reading further, it’s clear that things aren’t so simple.