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The insanity on the Brexit front has become so pronounced that I’ve been finding it hard to keep up. But a story in today’s Financial Times, plus some other sightings du jour, give a window into how the Brexit boosters have not even begun to deal with practicalities.
For instance, one example of how keen the Brexiteers are to claim they have the upper hand is a new study by Civitas that claims that if the EU and the UK were to fail to reach a post-Brexit pact, the cost to the EU would be greater, at £12.9 billion a year goods sold the UK than £5.2 billion in tariff costs on UK exports to the EU.
First, this analysis assumes a default to WTO rules. As we’ve written, based on warning by the Director-General of the WTO pre-Brexit that have been reaffirmed, there is no “WTO default”. A new deal with the WTO has to be negotiated, and those take years. Even if the WTO were to waive the principle that it cannot begin negotiations with the UK until it has left the EU (and this is a matter of treaty, and the Europeans are very procedural about these matters, so making optimistic assumptions is not wise), experts have said that for the UK to conclude a deal with the WTO in as little as 5 years would be unprecedentedly fast, and the WTO is not going to prioritize the UK over other countries that also have negotiations in process.
So basically, Civitas has made clear it has no idea what it is talking about, which makes it hard to take the rest of its work seriously.
Second, the UK has a massive trade deficit with the EU. So the tariffs on the EU side would be larger ex any unusual offsets due to differences in the mix of good. So?
Third, the UK economy will be roughly one-fifth the size of the EU economy post Brexit. Thus tariffs on the UK of 2X the EU level translate into a load in economic terms for the UK that will be 2.5 times greater than what the EU will bear.
Fourth, EU leaders from the outset have made clear that they understand that they will face economic costs in the event of a Brexit. That has not deterred them from taking a hard stance for political reasons, since they clearly regard preserving the rest of the EU as paramount, and that means cutting the UK no slack. Yet remarkably, the folks at Civitas act as if the EU doesn’t understand the tradeoffs, when it is the Brexit camp that is in its own echo chamber.
On to the bigger story, which is the impending Brexit IT train wreck.
As the preceding discussion shows, if UK loses access to the single market, that means tariffs. And for US readers, the UK is now on this path with its plan for a “hard Brexit”. Theresa May and her Brexit boosters have committed themselves to restricting immigration. The EU has insisted from Merkel on down, from the very day the referendum results were in that if the UK wanted to continue to have access to the single market, it had to accept the “four freedoms,” which includes movement of EU nationals in and out of the UK and vice versa.
What has escaped the notice of many observers is that “tariffs” for manufactured goods means that the charges are levied based on the country of origin of the constituent parts. This means a very elaborate customs declaration and tariff computation for goods of real complexity. And yes, there are customs inspections too (I assume on a sampling basis; readers can clue me in).
The amount of extra hassle constitutes a non-tariff trade barrier in and of itself. And that over time will encourage manufacturers to simplify their supply chains. Auto-makers, for instance, will find it less attractive to send parts into the UK for further assembly to be re-exported to Europe; they’ll presumably over time restructure production so as to have manufacture for the rump EU market in the EU, and have parts made in the UK mainly to be included in any final assembly there.
While that is bad enough, a looming problem is far worse. All this border documentation is managed by computer systems. The UK’s present system for handling non-EU-related trade is almost 25 years old and was set for replacement. The new system, called CDS for Customs Declaration System, to be ready by 2018 and to have the capacity to handle 100 million transactions,. At double the current level of 50 million, that would have seemed to be ample headroom.
Reading between the lines of the Financial Time story, there seems to be some doubt as to whether the original spec could have been pulled off in time. But now with Brexit, the project suddenly has a major spec change: it has to handle 350 million transactions.
And what the story does not mention, but seems likely to be the case, is that there are tons of other spec changes that have yet to be identified and documented related to EU and UK tariffs on specific goods. And if the system tracks things like port of embarkation and disembarkation, more data fields need to be added for all the EU ports and air cargo locations. And of course, the Euro currency data field needs to go in too.
In addition, since the negotiations will be in progress, the levels, and potentially even some of the categories are likely to be in flux. Given that olives are a very important export good for the EU, how will olives be treated versus olive oil versus products made from olives, like olive paste? Will green olives be treated differently than ripe ones? How all this sorts out affects the coding.
Recall that Lambert broke the story of the Obamacare exchange systems disaster by noticing that spec changes were being made six months prior to launch (the reality turned out to be even worse, changes were being made weeks before the start date). He recognized how disastrous that was for a systems rollout. And these were modifications to what was presumably an otherwise largely settled development plan. If my surmise about how many things will be up for grabs in a Brexit negotiation (start with will they try to negotiate a WTO and an EU deal in parallel, since there’s no assurance the UK will get timely approval from either set of counterparties), it’s hard to see how any meaningful coding on the EU system can get rolling.
As Richard Smith said by phone, “Even if the UK government had a full team of top-drawer developers, crackerjack managers, a completed project specification, and enough budget, this wold be daunting to complete by 2018. And the reason most big IT projects founder or fail utterly is that the project parameters almost never stay static. They wind up changing as the developers turn over rocks and the client has a further think about what it needs.”
Needless to say, UK industrialists are fretting. From the Financial Times:
Industry is seriously alarmed by the administrative test of applying customs checks and separate tariffs to EU trade. Noting the danger of “major disruption at the border”, the paper to the joint committee argued it was “difficult to see” how CDS or Chief would cope by 2019 with “any substantial changes to what we do now”.
Desmond Hiscock, director-general of the UK Association for International Trade, said there was growing frustration among his members over the uncertainties and risks. “The existing system will be not be able to cope and there is not much confidence that the untested and still incomplete replacement, CDS, will fare much better.”…
Listing a range of additional administrative requirements, uncertainty over duties, databases, security checks, listings and rules of origin procedures, Mr Hiscock said his members had “a very real fear HM Revenue & Customs have neither the infrastructure nor the trained personnel to cope”.
And there do not appear to be good kludges. From the same article:
The most effective workarounds would require EU countries to establish a separate, streamlined customs system for UK trade. But most EU countries will be loath to invest in a huge overhaul of systems; EU officials expect Britain to be treated like any other non-EU country outside the customs union.
The only sort of good news is that because a replacement trade deal is very unlikely to be concluded two years after the UK pulls the Article 50 lever, the developers will have more time. But that really isn’t a solution, since much of the coding will depend on having final specifications, and a good deal will be in play as talks are underway.
The level of downright fantasy and rank incompetence in the Brexit camp is breathtaking to behold. And it’s not helpful to those who have more nuanced criticisms of globalization and want more targeted remedies to blunt its detrimental effects on jobs.