Brexit, customs unions and borders

There have been some suggestions in Ireland, since June 23, to the effect that Ireland and the UK ought to be allowed to cut a special deal avoiding the need for customs borders within Ireland. In many cases these interventions seem to be ignorant of the basics of trade policy, and so a brief post on the distinction between free trade areas and customs unions might be useful at this point.

There are lots of explainers out there on the distinction: here, here, and here, beginning at p. 111 for example. Briefly, the main distinction between an FTA and a customs union is that in the latter, member states agree to a common external tariff, enforced along their common border with the rest of the world. Why would they do this, rather than retain the freedom to set their own tariffs vis-à-vis other countries? Because without a common external tariff, internal border controls will be necessary to avoid what is known as trade deflection.

Imagine that the UK and EU form a free trade area, but that the UK sets a 20% tariff on Japanese cars, while the EU sets a 10% tariff. Without border controls between the UK and EU, everyone would import Japanese cars into the UK via the EU — which would undermine the UK’s trade policy. Similarly, imagine that the UK does a trade deal with the US, and agrees to admit American beef duty free, while the EU retains a 15% tariff. Again, absent border controls between the UK and EU, everyone would import US beef into the EU via the UK, thus undermining EU trade policy.

So long as the UK and EU set different tariffs, therefore, there have to be border controls between them to ensure that Japanese cars and US beef are not being freely traded between them, alongside the UK and EU products that are entitled to be freely traded. And it is precisely because such border controls are costly that the EEC decided, all the way back in the 1950s, that it would set up a customs union rather than a mere free trade area.* The EU’s common external tariff is not a source of barriers: its whole point is to do away with barriers. That is why the provisions in the treaties regarding the customs union appear under the general heading “FREE MOVEMENT OF GOODS”. And so the fact that both Northern Ireland and the Republic were in the same customs union from 1973 onwards, and in the same Single Market from 1993 onwards, has been a great thing for Ireland.

As long as Ireland remains a member of the EU, it remains a part of its customs union. There is zero ambiguity on this point: the treaties state that

The Union shall comprise a customs union which shall cover all trade in goods and which shall involve the prohibition between Member States of customs duties on imports and exports and of all charges having equivalent effect, and the adoption of a common customs tariff in their relations with third countries.

No wiggle room here, as there is for example in some of the provisions regarding monetary union, and for good reason: the customs union has been the uncontested heart of the European project since the 1950s. As long as the North is outside the EU and its customs union, and the Republic is inside, there will have to be border controls between North and South to rule out trade diversion.

We all hope that these will be as unobtrusive as possible: if you like, that they will not be “hard”. IT can surely help. But customs controls of some sort there will have to be. As Eurointelligence says,

this is not an issue of political negotiation, but technical necessity. It is possible to soften the hardness of border by erecting customs posts for trucks alongside the motorway, before and after the border, and allow passenger cars free cross the border. But since the EU applies tariffs and taxes to goods entering the customs union, those goods have to be monitored at some point during the transit. You can think of the softest conceivable border as the one between Switzerland and Germany. Switzerland is in Schengen, but not in the customs union. Passenger cars pass relatively quickly, while there are sometime long lines of lorries on the motorway before the border. Call it what you will. But there will have to be customs controls post-Brexit.

Even if it were mysteriously possible for Ireland not to enforce the common external tariff and remain inside the EU, which it quite obviously isn’t: if we magically got the right to not check goods coming across the Border, what would be the result? Since Ireland would be de facto outside the customs union, all trade between Ireland and the EU26 would necessarily be subject to costly border and customs formalities, so as to rule out trade deflection. The basis for our prosperity, costless access to the Single Market, would be destroyed.

The return of the Border, however soft, is appalling. I understand that people wish that the British had not placed us in this position, but they have (the British, mark you, not the EU). And closing our eyes, sticking our fingers in our ears, and hoping that a fairy godmother will magic our problems away will not help.

It is logically coherent, if lunatic, to argue that Ireland should quit the EU and join the UK customs union (leaving the EU would on its own obviously not suffice to avoid a North-South border: our exit from the EU would have to be of the red, white, and blue variety). It is logically coherent to argue that Northern Ireland should remain within it, and I wish it would. That seems like something worth arguing for. But it is logically incoherent to argue that if we remain in the EU and its customs union, and the North leaves both, there can be some special deal that will avoid the need for a customs frontier on the island.

Those who want Ireland to leave the EU know that they are in a small minority, and many will not come out and argue for their position particularly strongly, for fear of being laughed out of court. The evidence that our prosperity is based on EU membership is overwhelming. But expect them, in the months and years ahead, to claim that the return of a customs frontier somehow shows that “the EU” has let Ireland down. The Brexit campaign shows that such dishonesty can pay: which is why it is so important that everyone understand that if the North leaves the EU and its customs union, and we remain inside it, there is nothing that the EU or anyone else can do to prevent the return of such a frontier.

  • There are other benefits to having a customs union: for example, the EU 27 is a far more formidable negotiator than the UK, allowing the EU to strike more favourable trade deals with third parties.

The UK House of Lords on Brexit and Ireland

This very welcome report by the UK House of Lords is available here, and it is good to see an official British document recognising that “Ireland now faces challenges that are not of its own making” — we might perhaps put things less politely on this side of the Irish Sea. Well done to all concerned.

I do have a couple of nitpicks.

  1. Beware of Britons suggesting bilateral negotiations. The report suggests that the UK and Ireland should negotiate bilaterally on UK-Irish issues. The problem is that UK strategy more generally appears to have been to try to open up divisions between member states by starting bilateral conversations with individual countries. The EU 27 have been very consistent in emphasising that we will be negotiating as a bloc, which is the only sensible way to proceed. In my view Ireland shouldn’t facilitate this long-standing British aim: not only do we share a common interest in getting the best possible deal for the EU27, and in preserving the cohesion of the EU; but as part of the EU 27, we will be in a stronger negotiating position vis à vis the UK than if we were to negotiate on our own. Ireland is already one of Michel Barnier’s top negotiating priorities, suggesting that our diplomats are succeeding in getting our message across to the rest of the EU. They should keep up the good work.
  2. Besides: how could Ireland and the UK agree on arrangements concerning the Border before we know what the eventual nature of the UK’s relationship with the EU will be?
  3. I am genuinely baffled by the following recommendation in the report:

    In the event that the UK leaves the customs union, a customs and trade arrangement between the two countries, subject to the agreement of the EU institutions and Member States.

    What does this mean? Ireland can’t be part of a customs union with both the EU and the UK, unless the UK chooses to stay in the EU customs union.  A bilateral trade deal between Ireland and the UK, not involving the rest of the EU, is impossible, both legally and as a practical matter, and it’s very important that everyone in Ireland understand this. If what is meant is that Northern Ireland should remain within the EU customs union (and, preferably, the Single Market also), then that is another matter — this would require customs controls between the two islands, but that would be far preferable from our point of view than customs controls along the Border. But I am not sure that that is what is meant, and so some clarification on this would be helpful.

But well done to the House of Lords for raising these issues, and for appearing to take them seriously, which is more than can be said for the vast majority of the British political establishment.

Independent Ireland in Comparative Perspective

I gave the economics lecture at the recent national conference at NUIG commemorating the centenary of the Easter Rising. I had three main messages. First, the economic history of post-independence Ireland was not particularly unusual. Very often, things that were happening in Ireland were happening elsewhere as well. Second, for a long time we were hampered by an excessive dependence on a poorly performing UK economy. And third, EC membership in 1973, and the Single Market programme of the late 1980s and early 1990s, were absolutely crucial for us. Irish independence and EU membership have complemented each other, rather than being in conflict: each was required to give full effect to the other. Irish independence would not have worked as well for us as it did without the EU; and the EU would not have worked as well for us as it did without political independence.

There is a podcast available here. Since only audio is available, here is a link to my slides. I’m working on a paper version of the talk and will post a link to this as soon as possible.

What should Ireland be looking for?

It was very disturbing to read the following last week:

Agriculture Minister Michael Creed said Ireland will consider a special free trade zone with the UK if Brexit results in a complex UK split from the EU and the Single Market.

It would be legally and technically impossible for one bit of a customs union and Single Market to have such an arrangement with a third party. To achieve such an objective would require our leaving the EU.

And so I was pleased to read this morning that what the Government is actually going to look for is some sort of special status for the North so as to maintain free trade within the island no matter what the British decide. Presumably this would mean the North remaining within the EU’s customs union and/or Single Market, otherwise it won’t work. (Remember: if Britain leaves the EU’s Single Market and customs union without an interim free trade deal with the EU in place, WTO rules require tariffs on trade between Britain and the EU. This can’t be avoided. And that means tariffs on trade between the Republic and Britain. That can’t be avoided either.) I don’t know if such a thing is legally possible under EU law — though as I mentioned earlier the Kingdom of Denmark might offer a possible model — but it does seem like an option worth exploring.

Beware of weasel words however. Jeffrey Donaldson is quoted as saying that

“What we’re really looking for is a special deal for the island of Ireland which enables free movement of goods and people on the island, and preserves the institutions we’ve created under the various agreements,” Mr Donaldson said. “The people we’ll need to convince are the EU.”

Yes, keeping the North inside the EU Single Market or customs union would indeed require this being possible under EU legislation, and it would require both good will and a fair amount of technical work to make it work, if it is even a runner in the first place. (How on earth would agriculture be dealt with, for example?) But the real problem is likely to come from the UK. Mrs May’s speech over the weekend seemed to rule out a special status for Northern Ireland — I thought she was pretty explicit about this. And how would the DUP feel about the logical corollary of such a scheme, namely customs frontiers (and in all likelihood tariffs) between the island of Ireland and Britain?§ The people that we will need to convince, above all, are in London and Belfast. And let’s start by trying to convince them to remain in the customs union, at least as an interim measure, until a free trade deal can be sorted out.

(And let’s not forget: it’s London that is responsible for this mess in the first place. Why on earth did Donaldson’s party support them?)

§ Yes, a border with the Republic promises to be extremely costly for them, but I presume they also export a fair amount to Britain. One way or another, it looks as though they are in big trouble if London decides to leave the Single Market and customs union.

The EU and the border

Our text for today is Graham Gudgeon’s piece in the Irish Times, which makes a number of questionable claims.

First, he argues that

An accurate version of Ireland’s economic history is important. This is because, contrary to what we are continually told, EU membership does not seem to have had a noticeably beneficial impact on Ireland’s economic growth, even if this seemed to be the case during the great construction boom occasioned by overly low interest rates inside the euro zone.

I don’t think any economic historian or economist believes that the EU has not been massively good for Ireland’s economic growth: just compare our experiences pre- and post-1973.

Maddison’s numbers show per capita growth of 3% p.a. 1950-73, and 4.1% p.a. 1973-2008. 4.3% p.a. 1973-2000, in case you want to strip out the Celtic Bubble years and the first year of the crash. That’s before we even get into the important issue of what was happening to the number of capitas. GDP grew by 3.2% p.a. 1950-73, and by 5.1% p.a. 1973-2000. 5.0% 1973-2008. And there is an even more important point to be made. The period from 1950-73 saw extremely rapid growth throughout Western Europe: our growth rates then were disappointing in that context. Growth slowed everywhere after 1973: our growth rates since then have been very strong in that context.

Our whole development strategy has been to serve as an export platform for multinationals selling into the EU market. You might think that we should be diversifying, and I might agree, but everyone accepts that the strategy has worked, massively, to date.

From the text, it seems that Gudgin may be confusing EU and Eurozone membership. I’m one of those who thinks that the Euro has been a damaging failure, but let’s not confuse the EU, and the Single Market’s four freedoms that have worked so well for us, with a flawed monetary union.

Gudgeon then goes on to say that

Ireland should ally with Germany and the Netherlands in arguing for continued free trade between the UK and the EU. This will greatly ease any pressures for Border controls in Ireland.

In fact, as Ben Kelly has usefully reminded us, unless the British decide to stay in the EU customs union either permanently or as an interim measure (or, most implausibly, succeed in negotiating a free trade agreement with the EU within two years of Article 50 being triggered) there will have to be tariffs between Ireland and the UK. There will be no choice in the matter: for the EU not to impose tariffs on UK exports would leave it in breach of its WTO obligations. And unless the UK has zero tariffs on everything from everyone, WTO rules would similarly oblige it to impose tariffs on EU exports.

Unfortunately for us, it seems likely that the British are intent on leaving the customs union, as Robert Peston points out here. There is therefore a fairly strong possibility that we will see tariff barriers between the Republic and Northern Ireland in the not too distant future (unless the North can get a special dispensation to stay in the customs union, and the tariffs are imposed across the Irish Sea instead).

There are those who would like to see Ireland leave the EU. Expect them to argue in the years ahead that any border controls between the Republic and the North are arising because of “pressure” from the Continent. Expect them to further argue that this shows that our true friends are in London rather than the European mainland. On the contrary: any border controls that arise will be as a result of British decisions, and British decisions alone. And to date there is no indication whatsoever that those decisions are taking any heed of Irish interests.