Adam Johnson, director of logistics specialists Tudor International Freight discusses why pharma manufacturers might lose out if the UK leaves the customs union.
Customs Union
The backstop
Whether the UK should retain its EU customs union membership in the long-term is now the central issue stymying progress towards the country avoiding the default outcome of a calamitous no-deal Brexit.
Extended customs union membership, as expressed through the device of the so-called Irish backstop, is a prominent feature of the draft withdrawal agreement prime minister Theresa May finalised with the EU Commission in November.
The backstop would guarantee a continued invisible border in Ireland, assisting cross-frontier trade and the peace process, plus avoiding smuggling, through Northern Ireland continuing to implement the same customs regime as the republic.
This mechanism would kick-in if the EU and UK had not agreed a free trade deal which made it unnecessary by the end of the envisaged transition period following our departure, currently set for December 2020. Crucially, once in force, the backstop could only be abolished through the consent of both the UK and EU.
However, opposition to the mechanism possibly applying for many years, mainly from Conservative and Democratic Unionist Party MPs, largely explains why the withdrawal agreement was rejected in the Commons during January by a record 230 votes.
The prime minister, as I write in late February, is therefore seeking to negotiate a legally-binding time limit or unilateral right for the UK to exit the backstop with the EU, to placate these critics.
This is despite the EU having said repeatedly that negotiations on the withdrawal agreement will not be re-opened and acceding to May’s requests would mean the device no longer being a backstop.
Moreover, insistence on a permanent customs union with the EU is a key element among Labour’s conditions for supporting any amended version of the withdrawal agreement.
The main objection opponents cite to a potentially durable backstop is customs union membership precludes the UK from implementing its own free trade deals with countries outside the EU. Many Brexit supporters, including numerous MPs, see this opportunity to run an independent trade policy as an important benefit to leaving the bloc.
Weaknesses
However, there are numerous reasons for doubting whether this notional advantage will live up to the claims made for it and believing Labour’s position is preferable for UK businesses, including pharma manufacturing companies.
For one thing, free trade agreements with other countries typically take years to negotiate and ratify – the EU’s with Canada, which came into provisional effect during 2017, for example, took seven. In contrast, the damage to our prosperity incurred through leaving the customs union of the EU, by far our largest trading partner, accounting for nearly 50% of our exports, would begin instantly.
This truth that trade negotiations between nations are usually a lengthy business was underlined in mid-February. Then, it was revealed the government had secured post-Brexit agreements with only seven of the 69 outside countries with which we currently trade under preferential arrangements applying through our EU membership.
The seven nations, which include the Faroe Islands (population roughly that of Torquay) but not relevant giants like Japan or South Korea, account for just £16bn of the nearly £117bn of British trade with the 69 states. This, of course, is despite strenuous efforts by the Department for International Trade to secure rather greater success during the last three years.
On top of this, the government’s own analysis has estimated that even a post-Brexit UK concluding independent free trade deals with the US, China, India, Australia, the gulf and the ASEAN bloc – a highly optimistic assumption – would add merely 0.3 to 0.6% to our national wealth. This would therefore only partly offset the economic damage caused by leaving the EU, which official estimates say will remove between 1.4 and 8.1% from our GDP growth per head, over a 15-year period, depending on what form Brexit takes.
Other weaknesses in the anti-customs union case include that few people still alive have experience of negotiating UK free trade agreements, as this has been done on our behalf by the EU since the early 1970s. Other countries will also be acutely aware that we need these deals quickly, which will hardly improve our chances of securing favourable terms from them.
It should also be stressed that, contrary to the impression given by some politicians, membership of the EU or its customs union does not restrict states from trading profitably with outside countries. Germany’s trade flows with China surpassed its business with fellow EU heavyweight France for the first time earlier this decade, for example.
This difference of parliamentary opinion is a major reason why, with fewer than 40 days until our official withdrawal date on 29 March, pharma manufacturing businesses, which need certainty and time to plan, still have neither.
Indeed, ships are already at sea carrying goods, including very possibly pharma items, from the UK to countries such as Australia, Japan, New Zealand and South Korea, which will not arrive until after 29 March. Nobody currently knows whether tariffs or which regulations will apply to those items or even if they can be landed at all.
Possible outcomes
All alternative forms of Brexit to withdrawal agreement ratification, including the UK re-joining the European Economic Area, remain possible, along with the country even retaining its EU membership, perhaps after a new referendum.
What we do know is our membership of the customs union has helped hugely to create the current highly efficient arrangements for UK pharma manufacturers. When we at Tudor import goods from the EU on their behalf, for example, the only documentation we need is a copy of the packing list or commercial invoice and the travel document.
This is a waybill for air freight, a bill of lading for sea consignments and a CMR note – the abbreviation being derived from its French full name – for road haulage. No customs clearance processes or duties apply, and no VAT is payable before goods can be moved from receiving ports or airports.
Whether this almost ideal system or something like it will apply after Brexit, however, remains anyone’s guess.