The Brexit Column: Proposal before divorce? | KPMG | UK

The Brexit Column: Proposal before divorce?

The Brexit Column: Proposal before divorce?

Creating a transitionary customs union might help both sides achieve their goals, says Mark Essex.

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Director, Public Policy

KPMG in the UK

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Almost a year after the vote to leave, UK negotiator David Davis took the first steps toward a possible deal as talks began in Brussels: he agreed to the EU’s insistence that the divorce be concluded before discussion of a new trade deal. This probably reflects the new reality after the election. If there is no parliamentary majority for ‘no deal’, then time is on the EU’s side and it is in Britain’s interests to start talking about a new deal as quickly as possible, not a summer of arguments about process.

So, in order to get the discussion moving, Britain is making what it describes a “generous offer” on the rights of EU citizens in the UK. There comes a point in any negotiation when the positions are mutually understood and someone has to make the first move. In an effort to find a zone of potential agreement, Britain has moved first.

Business will welcome this. Of course, nothing is agreed until everything is agreed, but painting a picture of what might be acceptable to the UK government does provide some clarity for those trying to plan their workforce. 

But I wonder if we can’t apply the same approach to other aspects of the deal.  Setting out positive, win-win proposals improves the UK’s standing with fellow EU leaders, businesses and citizens. It also helps the UK’s reputation with the world beyond Europe – no bad thing if we are seeking to increase trade beyond our immediate orbit. 

What might such a proposal contain? Let’s pick up on one issue which has attracted focus this week: the Customs Union. While a future trade arrangement is not one of the three topics to be agreed in the first phase of negotiations, it may have direct consequences for both the issues the land border with Ireland and the divorce bill. This means it is worth talking about now.

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Chancellor Philip Hammond, ended the hopes of some business leaders on Sunday when he said the UK would be leaving the Customs Union. Free trade advocates were delighted, hoping Britain can forge new deals with new markets where the planet’s other 7 billion people, not in the EU, live. The downside is the damage that could be done in the short term to trade with a bloc that still accounts for 44% of trade flows.

In his Mansion House speech, the Chancellor also set out the need for transitional arrangements.  Here’s my suggestion for how we can comply with the need to leave the EU Customs Union while maintaining as near frictionless trade as possible with the EU.  

First, the UK would propose joining a newly created temporary customs union, for say three years. In this time, the UK would continue to apply the EU external tariff to imports from elsewhere. That should reassure Europe that companies were not using the UK as a backdoor into Europe, undermining its producers. That arrangement would mean goods could continue to cross borders without inspection. Of course, during this transition the UK would continue to make a contribution to the EU budget – removing the worry among both net contributors and beneficiaries that the UK’s departure will create a £10.8 billion black hole in the EU’s budget.

Meantime, as we are outside the EU Customs Union, Britain would have the latitude to prepare itself for life after transition by negotiating and signing (in ink, not pencil) trade deals with other nations. Of course, such deals would not allow the UK to reduce tariffs while it remained a member of the temporary customs union. However, the chances are (given the time trade deals often take to agree) that the UK would not have lost much time anyway. Such a solution provides the UK and the EU time to negotiate their new FTA and also the terms of the deals with third countries.

Is three years too ambitious? We know that it took seven years to agree the CETA deal between the EU and Canada, but the value of trade is higher, i.e. more is at stake, and we start from a more harmonised position.  

Such a deal also removes practical issues: the Commission and businesses on both sides of the Channel have time to prepare for life after transition in which Rules of Origin checks will be needed. That gives three years to upgrade systems, process, train staff and ensure businesses are certified as authorised economic operators (AEOs) in order that EU trade is as frictionless as possible.

Would such a deal be acceptable to the EU Commission? Difficult to predict, but I can’t see a downside in the UK trying to demonstrate how serious it is about finding a positive way forward. 

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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK. You can register for the email subscription list of this column and expert views from our Brexit leaders.

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