2-9-18 5:44 AM EST | Email Article
By Stephen Fidler 

The leading voice of British business argued this week for staying in a customs union with the European Union, saying it was "part of the answer to the tough questions facing the government" over trade.

As the Confederation of British Industry was setting out its case, the government made clear it has other ideas. Britain, it said, wouldn't be a part of any customs union after the post-Brexit transition period it hopes to secure ends in about three years.

As a result, for the first time in decades, the 180,000 British companies that export to the EU will face bureaucracy at the border. Even if Britain cuts a trade agreement with the EU after Brexit that keeps goods tariffs at zero, administrative costs for exporters to the EU will soar.

Goods coming into the EU's customs union are subject to a common set of tariffs, and once inside they trade tariff-free. One consequence of leaving the union is that British exporters to the EU will then have comply with so-called rules of origin by testifying that their products contain enough British content to qualify for zero tariffs.

Dealing with rules of origin -- and red tape that accompanies them -- will be just one of a host of new formalities exporters will face at the border. One 2013 report for the British government estimated that the costs of complying and administering rules of origin alone would range from between 4% and 15% of the cost of goods exported.

Though other estimates suggest this is an exaggeration, there is no way around a fundamental fact: "The only way you solve rules of origin is being in a customs union," says Joe Owen of the Institute for Government, a London think tank.

Once Britain leaves the union, some of its companies may stop exporting altogether. In some industries -- such as chemicals -- firms may decide to just pay a tariff rather than face the rules-of-origin rigmarole. For others, like some in the car industry, the consequences may be more complicated.

Most free-trade accords specify local-content requirements to benefit from tariff-free trade -- usually around 55% to 60%. British car makers buy some 44% of their parts from U.K. suppliers, but the actual British content of those parts is closer to 20% to 25%.

Getting an EU trade agreement that works for some in the British car industry therefore will have to also count EU-sourced content toward U.K. content to meet the usual threshold.

That may not be too problematic, says Michael Gasiorek of the U.K. Trade Policy Observatory at the University of Sussex.

But he says rules of origin pose special challenges for non-EU manufacturers with British plants -- including the three Japanese-owned car makers that met Thursday with Prime Minister Theresa May and Chancellor of the Exchequer Philip Hammond. Their plants in the U.K. use parts from Japan and could fall foul of local-content rules. That would mean tariffs on their exports to the EU even if there is a U.K.-EU free-trade deal.

The government insists it must shake off the shackles of the customs union because it constrains British trade policy. In particular, it prevents the U.K. from signing comprehensive trade deals with the rest of the world.

Yet more evidence emerged this week that the benefits of non-EU trade deals won't make up for weakened access to the EU market.

A study from the U.K. Trade Policy Observatory says preferential trade deals with the entire world apart from the EU -- an unlikely prospect -- would benefit U.K. manufacturing exports by about 7% and output by roughly 2%. But leaving the EU without a preferential trade deal would knock manufacturing exports by 20% and output by 5.5%.

With no trade deals, the British car industry takes a battering, shrinking by a tenth, the study shows. Motor-vehicle output would drop by 10.4% and exports by 17%, while output of vehicle parts would fall 14.2% and exports 19.6%. This would have knock-on effects on a host of industries that feed the sector.

The study shows that leaving the customs union isn't the only thing that will create friction and hamper trade at the border. The government has also pledged to exit from the EU's single market or zone of common regulation, generating a host of other EU border formalities.

Leaving the customs union will hit exporters more or less equally, Mr. Owen says, while the impact of departing the single market will differ among sectors. Among the most affected will be heavily regulated products like pharmaceuticals and chemicals.

In a September speech in Florence, Mrs. May suggested that for some industry sectors the U.K. would be willing to accept EU rules and regulations to ease access to the EU market.

The EU might rule that out as unacceptable cherry picking. But even if it agrees to an accord along these lines, this week's British announcement signals that trade-restricting border formalities between the U.K. and the EU -- once considered a relict of the past -- are also the shape of the future.

Write to Stephen Fidler at stephen.fidler@wsj.com


(END) Dow Jones Newswires

February 09, 2018 05:44 ET (10:44 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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