The Brexit debate on trade is fixated on the tariffs that could hobble UK trade with Europe once we leave the EU. But indirect barriers, ranging from customs paperwork to regulatory compliance, would probably do just as much damage.
The OECD estimates that customs compliance, administrative procedures and delays can increase cross-border transaction costs by an estimated 2-24% of the value of traded goods.
Here are five aspects of trade too easily overlooked by Brexiteers who see only benefits from abandoning the single market and the customs union.
1. Rules of origin require exporters to certify the domestic content of goods. The economics literature puts the cost of complying with such rules at 4-15% of the value of trade. Rules of origin don’t apply within the customs union, but would befall British exporters outside it, even if we struck a free trade agreement with the EU. In most FTAs, a minimum proportion of a product’s value must originate domestically to qualify for preferential treatment. Printing companies would rejoice. Goods imported into the EU would require a form with “more than 50 boxes requesting information” and 78 pages of guidance, according to the Treasury.
2. Time-consuming customs checks would wreak havoc with cross-border supply chains. The car industry, for example, sources more than 60% of its supplies from abroad. Depending on the manufacturer, between 20-50% is imported from the EU. Any delayed shipments disrupt the just-in-time assembly processes that automotive firms have perfected. The prospective damage to profits comes, of course, on top of the tariffs that auto makers risk having to pay to sell into the EU. No wonder that Nissan has sought reassurances from Theresa May before it decides whether to invest more money in its Sunderland factory.
3. Within the single market standards are harmonised or prescribed by myriad EU directives. Products that meet these standards receive the “CE” marking of conformity and can be sold in the EU market. If the UK leaves the customs union, there will need to be a new agreement on standards as well as instruments in place to test UK compliance. Given the volume of two-way trade, UK business might wish to retain EU standards as a matter of convenience and find some way to influence the “CE” criteria. But would advocates of a hard Brexit swallow such a surrender of sovereignty?
4. A clutch of studies presented to Theresa May’s Brexit cabinet committee have warned of clogged ports if customs checks were carried out on lorries. Ports would require extra infrastructure and parking space. That would be a problem for Dover because it is hemmed in by cliffs.
5. A hard Brexit would have implications for the Irish border, across which goods and services flow freely thanks to the EU’s customs union. The UK is Ireland’s biggest trading partner (21% of Northern Irish exports go to Ireland). In addition, the Common Travel Area (CTA) has facilitated the free movement of people across the border since 1923. If the UK left the customs union and did not close the Irish border, customs checks could be required at the CTA border to prevent Britain becoming a back door into the single market. This could exact an economic toll on Ireland because it could hinder Ireland’s trade with the rest of the bloc.
UK Chancellor of the Exchequer Philip Hammond, who is battling pro-Brexit Cabinet colleagues to stay in the customs union, has asked the Treasury to examine whether technology could smooth post-Brexit border checks. But industry groups are right to fear that quitting the customs union would put a rather big spanner in the works of UK-EU trade.
This piece was corrected shortly after publication. An earlier version had stated that the Common Travel Area facilitates the free flow of goods and services across the Irish border.