England, home of many important Industrial Revolution innovations, appears to have suffered a form of generalized cognitive decline as a result of its embrace of neoliberalism and the financial services industry. More and more people in positions of power seem to be adopting the behavior we first called out with Obama, of seeming to believe that every problem could be solved with better PR. That is now starting to look like a widespread behavior of the elites in late-stage neolibearlism. People in the financial services industry too often believe that if they can make something work on a spreadsheet, it actually works in real life. The problem is that making spreadsheets sing actually is a very successful approach as far as the financiers are concerned, since that helps them sell deals and investments, while the hapless chump buyers find out that later that they’ve been sold the informational equivalent of adulterated goods.
One of the examples of the refusal to engage with messy real world issues is the la-la land thinking that is almost pervasive when it comes to dealing with border and customs issues post Brexit. More and more Conservatives are starting to recognize that more needs to be done than they can possibly complete by March 2019, hence more and more willingness to contemplate a “transition” or other forms of a softer Brexit. But even these ideas are typically wooly-headed, not worked out in adequate detail, and often would be as undoable as a Brexit (for instance, the fans of a Switzerland-type solution, when Switzerland has negotiated roughly 120 bi-lateral deals, something that would be at least as time-consuming as hammering out a Brexit and a new trade deal with the EU).
The fact that the Irish border question is one of the three first issues to be resolved in the Brexit talks, and no one has a clue how to do that, has put a bit more light on the question of managing borders generally. Consider this high-level discussion from one of the LSE’s blogs (hat tip micael):
…all businesses trading across any customs border will have to find the resource to meet the very significant administrative burden of making electronic declarations for all goods imported and exported. This will have a chilling effect on growth of north/south trade, regardless of whether tariffs are imposed or not. Documentary evidence of proof of origin is another potential new and costly burden. Even if special measures are introduced which help reduce customs burdens at the time and place of import it is highly likely that additional record keeping would be needed to support the maintenance of extended auditable business records….
As we have explained elsewhere, customs administration is difficult – especially in the absence of adequate preparation, capacity for data exchange (ref: the current problems in the development of the customs declaration system due to replace CHIEF), and the paucity of highly experienced customs officers. We have also shown that, while the US-Canada border experience does demonstrate increased efficiency in processing customs clearance through the use of technology, it also shows that successful cross-border trade thrives on regulatory harmonisation and the movement of people to accompany the movement of goods – two points that the UK government seems determined to block post-Brexit.
Let us look in more detail as to what happens if the UK continues down its track of insisting, bugger all, that it won’t harmonize standards with the EU. Reader vlade provided this comment on a post last October, contemplating both scenarios, the “what if you aren’t synched up” versus what you needed to do to achieve that:
I will still claim that tariffs are the easy bit. The hard bit (and your customs IT system needs to deal with that, and a lot of complexity comes from that) is the NTBs. I keep saying Mutual Recognition Agreements (MRA) over and over – but it really is important, and even a number of Brexiters (the ones not blinded by power, history, or whatever) even reconigsed it and were saying as easly as Feb this year WTO is not an option (even assuming can opener – i.e. full and proper WTO membership on day one).
The country of origin rules are massively complex, and what Yves describe (tarrifs based on that) is one potential. What happens is that the tarifs are based on the “last substantial value add”. So if you import chinese stuff, and just package it and sell to EU, the tariffs will be the same as if it come straight from China.
On the other hand, if you incorporate a part into a whole that is substantially more valuable (and how do you decided that is part of the fun) than the other parts, the tariffs are now based on the country where that last ad-valorem happened.
There are other rules, but I’m not going to turn this into a specialist post (especially since I haven’t read the WTO rules in full yet) – but you get the idea.
Now though, it get even more complicated. On the top of being able to determine whether or not a tariffs applies, any goods imported must meet the standards of the importing country. And EU has lots of them (even if it DOES NOT have a standard for how curved bananas shoud be, as the british press told us).
This can be fundamentally met only in two ways. Either via MRA (where you recongise each others standards setting bodies, standards, rules and regulations etc.. Remember – this is not just a snapshot in time, but also takes into account that the bodies/standards etc. evolve with time, so extra layer of complexity there).
Or, that you take a sample from each shippment, and test it. Of course, the owner of the samples (importer) pays the cost of the testing, and it also pays the cost of storing the freight while it’s being tested. So it costs the importer time and money.
TBH, I can’t see how could you possibly trade something complex like cars or plane parts (where safety is involved) w/o an MRA.
And your customs IT system has to support all of that!
Oh, but you say “well, let’s set tariffs to zero for everything!”. Well, that may sort out your customs IT problems – around the tariffs. Unless you want to throw out of the window all YOUR standards, that means you still need to establish the compliance. And I can assure you that if you do throw out all your standards, getting an MRA with somoene else is going to be a nightmare.
So your exporters rather get going on implementing the MRA-less trading processes right now, and hope to get there in time. A friend of mine runs a small caliber ammo manufacturer (very highly policed stuff), and based on what I heard, I doubt he would be able to get their processes and systems in place in two years, and that’s knowing what needs to be done and how.
The LSE article similarly underscores the downside if the UK refuses to comply with EU standards, focusing on an issue important to Ireland, that of cross-border agricultural trade:
Similarly misleading is the claim that the ‘UK can use the WTO Agreement on Sanitary and Phyto-sanitary measures (SPS Agreement) to put pressure on the EU to agree suitable mutual recognition provisions on the date of Brexit’ (p.14) – even going so far as to suggest that it can take legal action to ensure it can continue to export to member-states.
But if the UK were to do a deal with another third country that would allow the free import of agricultural produce (that yummy prospect of chlorinated chicken), the EU has an absolute right to impose barriers to agricultural goods from the UK in order to effectively maintain food safety standards. Any legal case from the UK against this would not get beyond the initial phone call to the lawyers.
For the Special Trade Commission to get this so wrong either implies wilful ignorance (or misrepresentation) of the laws and norms of EU membership and international trade, or else complete indulgence in delusional old-school British nationalism.
And separate from the issue of “harmonize or not,” consider the problem of the pallets, from andy b at Medium via our Richard Smith:
In less than 2 years the UK will be leaving the EU becoming a third country. I am looking in this blog at wooden packing requirements as a third country exporting to the EU. These standards include wooden packing cases and in particular wooden pallets which everyone uses. This is entirely separate from what is in or on that packaging.
The EU requires all imports that have wooden packaging from third countries to conform to ISPM 15 standard http://www.ispm15.com as set out in http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX%3A32004L0102
Currently as the UK is trading within the single market shippers do not have to conform to this standard. If you export to the single market you can use less strict standards as set out by HMRC https://www.gov.uk/wood-packaging-import-export , in reality it means in practice you can use any old pallet that is laying about as there is no control point that checks this requirement.
At 2300 (the UK being an hour behind) on the 29th March 2019 we will have to conform to ISPM15. At that point there will be a control point at the border doing these checks that we are meeting that requirement. A certain amount of trailers will be stopped and checked that the packaging is conforming to the standard. This will cause delays as every wooden pallet will have to be checked for the required marking. In practice this would mean being very careful of how the vehicles are loaded. With a curtain sided vehicle with all the pallet markings on the outside then easier, with a solid sided vehicle everything will be offloaded and checked.
Typically all Customs world wide work via risk profiling. If the ones they do check are fine then they will stick to minimum checks, if (and as I expect) the ones they stop particularly groupage trailers do not conform they will have to check more and more.
This is difficult enough but even then I am assuming there will be a deal on trade and mutual recognition agreements that the notifiable institution (in the UK it is the Forestry Commission) that oversee standards will be recognised by the EU. This isn’t looking currently likely in the event of a hard Brexit, At a stroke we would find that they would not recognise the markings on the wooden packing and would either mean it cannot cross the border or requires fumigation.
And on top of that, we flagged, nearly a full year ago, that a major customs system upgrade was due to conclude a mere two months before the Brexit date of March 2019. As any IT professional will tell you, large IT projects have a high failure rate, meaning they don’t get completed at all. “Success” in large IT project merely means running not too horrifically behind schedule and over budget.
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)….
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 other words, there is a ton of very nitty gritty work that needs to be done to have any form of Brexit not be a train wreck. Not only is that not being done, no one in the Government seems to think that anything remotely like that level of specificity needs to happen. So regardless of the timetable, unless the officialdom gets some sense knocked into it, the UK is going to have a very bad time.