Post-Brexit Trade Rules as Murky as Ever for U.K.

By Stephen Fidler Features Dow Jones Newswires

The British government published proposals this week about how the U.K. might go about developing what it called "the freest and most frictionless trade possible in goods" with the European Union after Brexit.

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But they leave British exporters confused as ever about the future of trade across the English Channel, and importers with hints of heavy red tape to come.

There was one piece of clarity: the U.K. would seek to associate itself temporarily with the EU's customs union after Brexit. That implies that for some years the U.K. will be willing, if the EU agrees, to apply the bloc's common external tariff to non-EU goods and zero tariffs on EU goods.

The big benefit for Britain would be to avoid EU tariffs on goods and rules of origin -- which requires exporters to establish and certify where components in their exports come from.

Apart from that, the future is as cloudy as ever. The paper didn't purport to represent the U.K.'s negotiating position and in some cases just floated some untested ideas to achieve a desired future trade relationship that hasn't yet been defined.

It focused on customs, which relates to trade in goods and therefore had nothing to say about the significant trade in services. And it didn't address the issue that is potentially an even bigger future source of border friction than customs: the U.K.'s withdrawal from the single market, the bloc's zone of common regulation.

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Michel Barnier, the EU's chief Brexit negotiator, has already acknowledged that the customs union is no panacea. "I have heard some people in the U.K. argue that one can leave the single market and build a customs union to achieve 'frictionless trade' -- that is not possible."

Sticking with the customs union would constrain the U.K. from implementing other trade agreements, though the British hope not its ability to negotiate and even sign them.

There are other drawbacks, as demonstrated by Turkey, which has a long-standing customs union agreement with the EU.

Turkey must open its market to countries with which the EU agrees to trade deals but it doesn't get automatic freer trade access to those countries. The customs union mainly covers industrial goods -- so it doesn't include agricultural products or services. And there is no transport agreement with the EU, limiting the freedom of Turkish trucks to travel on EU roads.

These create frequent lengthy hold ups that the U.K would want to avoid, so any temporary U.K.-EU customs union aimed at preventing border checks would also have to include agriculture and cover transport.

The U.K. proposals portray two future technical arrangements that assume Britain will in the longer term be outside the umbrella of the customs union and single market.

The first would be to use technology and other arrangements, such as joining an established transit convention with the EU, to smooth border procedures. The paper concedes "there will remain an increase in administration compared to being inside the customs union."

The second is an unprecedented "customs partnership" with the EU, which it calls "innovative and untested." In it, the U.K. would mirror EU tariffs for goods ultimately destined for the EU that would be tracked technologically as they moved through the U.K.

Henry Newman, director of the Open Europe think tank, argues this is a non-starter. It would be difficult to negotiate with the EU, legally questionable and provide a big administrative burden for businesses and government. It would be politically challenging not least because the U.K. would have to send customs duties it collected to the EU.

There are further clues about government thinking in another paper the U.K. released this week on Ireland. There it suggested that a way to avoid border checks on whether agricultural products complied with EU health standards would be through "regulatory equivalence." That would involve each side recognizing the other's regulation as achieving the same high standards, with flexibility in how the regulation is achieved. Whether the EU would accept that remains to be seen.

There are other sources of trade friction and bureaucracy for exporters and importers as yet little debated. Allie Renison, head of Europe and trade policy at the Institute of Directors business lobby group, says one will arise from the administration of value-added tax at the border.

In what they discuss and what they don't, the British documents this week begin to suggest how complicated for government and for business it will be to extract the U.K. from the EU. It also demonstrates why the extra negotiating time granted by a transition agreement -- that will likely have to cover much more than the temporary prolongation of the customs union -- will be necessary to avoid trade disruption in March 2019 when the U.K. leaves the EU.

--Laurence Norman contributed to this article.

Write to Stephen Fidler at stephen.fidler@wsj.com

(END) Dow Jones Newswires

August 17, 2017 17:05 ET (21:05 GMT)