Barney Hawkins explains the customs union, single market, WTO, Irish Backstop and other key things you need to know about the current Brexit impasse.
Hello, my name’s Barney Hawkins, Investment Director at True Potential.
So, the Brexit saga continues. March 29th the appointed day for the UK to leave the European Union came and went and it looks like the second deadline of April 12th is also going to pass without event. How this constitutional chaos will eventually pan out and with what casualties remains anyone’s guess. But amidst all the headlines and media sound bites it can be easy to lose sight of exactly what is at the heart of all this manoeuvring and speculation.
So, if you’re still not sure of the difference between the customs union and the single market, what Theresa May’s deal actually encompasses or what trading under WTO rules would involve if we “crash out” without a deal, what follows is a simple refresher course.
It’s not exhaustive and doesn’t go into great detail. Time, not to mention life, is too short.
Okay, so let’s start with the Customs Union.
The Customs Union is the arrangement under which countries within the EU agree not to impose tariffs on goods coming from other countries within the EU. All countries in the Union agree to impose the same tariffs on goods and services coming from countries outside the Union. And countries are forbidden from striking their own deals with countries outside the Union. So the Customs Union governs the terms under which all EU countries trade with each other and with other non members like the United States.
This is different from the Single Market. The Single Market allows the unimpeded movement of goods, services, money and people from country to country within the European Union. It also applies many common rules and standards. A UK company can sell as easily to a customer in Barcelona as it can to a customer based in Birmingham. Any money it makes in Spain can be brought back to the UK and if it wants to set up an operation on the continent or send people out there, it is free to do so. And, of course, the reverse applies, European companies are free to trade with UK customers and set up operations in this country.
So why leave this cosy arrangement?
Well, arguably, it’s just a bit too cosy. International trade is a competitive business. If you’re not moving forward you’re falling behind and many of those who voted to leave the EU argue it would be better to strike our own deals with the global superpowers of the United States and China, both of which are growing much faster than Europe, than remain part of a comfortable arrangement within the EU where growth is much weaker and the long term outlook less promising.
So what is Theresa May’s deal that politicians can’t agree on? What is the Irish backstop? And if our politicians can’t agree on anything or if Europe gets completely fed up with us what does “crashing out” without a deal on WTO terms involve?
Under the terms of the Withdrawal Agreement and the accompanying Political Declaration that essentially comprise Theresa May’s deal there would be a transition period until the end of 2020 at the end of which the UK would:
- Leave the customs union and be able to strike free trade arguments with whichever countries it chose to.
- We would no longer be part of the single market but we’d continue to trade closely with Europe. The exact terms of that trade are still to be hammered out.
- We would no longer be subject to the terms of the European Court of Justice and we’d be free to set our own laws without them being subject to the rulings of the ECJ.
- A divorce settlement, thought to be around £39 billion, would be paid over a number of years and that would include our final year’s contribution (expected to be around £11bn).
So, all well and good. We would leave the customs union and be able to strike our own trade deals. No longer part of the single market we would regain control of our borders and be able to limit immigration.
The tricky bit is that Northern Ireland, as part of the UK, would be out of Europe while the Republic of Ireland would continue to be part of Europe. At the moment there is no hard border between the two countries, both of which are part of the EU. However, post Brexit Ireland would continue to be part of Europe while Northern Ireland would be outside the EU.
In order to ensure there would be no hard border between the Republic, (within Europe), and Northern Ireland, (outside Europe), the Withdrawal Agreement contains a provision that in the event of no long term trade deal being agreed by the end of 2020 that avoids a hard border between Northern Ireland and the Republic of Ireland then a “Single Customs Territory” (a customs union) would come into force. Northern Ireland would then be in a deeper customs union with the EU than the rest of the UK and it would be more closely aligned with the rules and regulations of the EU than the rest of the UK.
This is the Irish Backstop. And the UK would not be able to leave independently but only with the approval of the EU. If there was no agreement by the end of 2020 we would in effect remain within the EU but without a voice until such time as the EU gave us permission to leave.
So that’s what all the wrangling is about. This what many of the objectors to Theresa May’s deal find unacceptable and this remains the principal sticking point.
If we can’t reach an agreement or if the EU finally run out of patience and refuse to grant us a further extension to Article 50 we risk “crashing out” without a deal. What does this mean in practical terms?
Well, the UK, along with most trading nations is part of the World Trade Organisation, the WTO, and it has a set of rules governing the trade between nations who do not have separate free trade deals set up between them.
Under WTO rules you are free to set your own tariffs but you have to offer the same terms to all trading partners. At the moment cars from, say China or the US entering the EU have a WTO tariff of 10% applied to them. Some dairy goods have a 35% tariff.
Under WTO rules the UK would be free to set its own tariffs as long as it applied them to all countries equally and without favour.
At the moment 80% of our trade is tariff free. Under proposals set out by the government this figure would rise to 87% after Brexit.
The UK already trades with a number of countries under WTO rules, the US, China and Australia-any country that we don’t have a free trade agreement with, so falling back onto WTO terms wouldn’t be the end of the world.
However, it would be disruptive in the short term and everyone agrees that leaving with a deal would be better.
It’s just setting the terms of the deal that they can’t agree on.
As to what will finally be agreed and by when – who knows?
What we do know is that business will adapt. It is used to changing conditions, meeting challenges and making decisions. Business will make the most of what Brexit has to offer and will inevitably emerge stronger as a result of the challenges it has faced.
What we as investors have to do is keep focussed on the long term and not be afraid to take advantage of the opportunities the current uncertainty has thrown up.
I hope this has helped and thanks for watching.
Your capital is at risk. Investments can fluctuate in value and you may not get back the amount you invest. Past performance is not a guide to future performance. Tax rules can change at any time.