13 December 2018

The Political Declaration: out of the frying pan and into the fire?

Is the UK looking to escape from the customs union backstop, only to land in a customs union future relationship?

It is right that the Withdrawal Agreement should be the focus of attention at this time – it is, after-all, a legally-binding international treaty. But with all the focus on how to make the backstop escapable, it is also worth considering where Theresa May would envisage the UK escaping to.

In terms of trade, the Political Declaration on the future relationship aspires to an “ambitious customs arrangements that… build and improve on the single customs territory provided for the in the Withdrawal Agreement which obviates the need for checks on rules of origin.”

There are only three arrangements which could conceivably obviate the need for checks on rules of origin. As explained below, since two of these can only be considered theoretical, customs union membership should be recognised as the only arrangement that the political declaration can lead us into. In other words, are we escaping the UK-wide customs union backstop, only to land ourselves in a customs union future relationship?

Comprehensive diagonal cumulation

Diagonal cumulation is an arrangement used in international trade, which allows products from party X to be considered to contribute to any originating content requirements that party Y might have in its trade agreement with party Z. The first way that the EU and UK could theoretically avoid checks on rules of origin, would be for them both agree to diagonal cumulation with all of the EU’s current trading partners. If any one of these partners were to disagree, however, checks would need to be instated.

Such is the mercantilist attitude of most countries to imports, that most would not see it as being in their interest to grant diagonal cumulation to the UK and EU, since they would be passing up a chance to weaken the other’s market to export into theirs. This option must therefore be ruled out as impossible for political reasons.

Facilitated Customs Arrangement

Theresa May’s Facilitated Customs Arrangement proposal, as laid out in her White Paper, offers a complex and unclear mechanism by which rules of origin checks could be avoided without sharing the same tariff rates. This option should only be considered theoretical, for at least three reasons. First, because allowing the UK to diverge on tariffs, but to not require RoO checks, would allow the UK to become a backdoor to the EU. Second, because having to trace the destinations of goods (to end up either in UK or EU market) would burden customs processes at the EU’s own external borders. Third - and most importantly - because the EU have repeatedly rejected the idea, on the grounds that it “cannot and will not” allow non-members to oversee their customs.

Customs union membership

The third way that the EU and UK could avoid checks on rules of origin is by way of membership of a customs union. This involves adopting a common external tariff and does avoid checks on rules of origin.

With the first and second being only theoretically possible, we must conclude that the Political Declaration, if kept to, could only lead the UK toward customs union membership. Is the UK looking to escape from the customs union backstop, only to land in a customs union future relationship?