Brexit and customs from a HK perspective
17 December 2018
We've kept quiet about Brexit on Webb-site Reports since the people of the UK voted on 23-Jun-2016 to leave the European Union. Although your editor still has a British passport, he has no vote on Brexit or anything else in the UK, having lost his voting rights many years ago. That is entirely fair, because he is domiciled in HK and not subject to UK taxation.
However, we're breaking that silence to point out a few realities which are blindingly obvious to anyone who thinks about the customs status of the Hong Kong SAR and the rest of China. Sitting in HK, it has always been clear that there must be a hard border (or in politically-correct terms, "boundary") with the rest of China so long as HK is a separate customs territory from the rest of China (and incidentally, HK is a free port under Basic Law Article 114). The separate customs territory (and its recognition by other countries) has no impact on the sovereignty of China over HK whatsoever. Similarly, there is no reason in principle why Northern Ireland (NI) cannot remain in a customs union with the EU, with a customs boundary with the rest of the UK (Great Britain, GB) at seaports and airports, whilst remaining a sovereign part of the UK.
Theresa May, who voted to remain in the EU, took over as Prime Minister on 13-Jul-2016 with a circular definition that "Brexit means Brexit" and proceeded to define it in terms that Brexit actually means trying to have your cake and eat it, with 2 conflicting objectives:
- leaving the EU and its customs union, and thereby being able to negotiate free-trade (or at least, freer-trade) agreements (FTAs) with non-EU countries that are home to 93% of the world's population, as well as an FTA with the EU;
- keeping an open border with the EU, namely the land border between NI and the Republic of Ireland (RoI), without any customs boundary between NI and GB (down the Irish Sea)
These 2 objectives are mutually exclusive, because the EU has a strong customs boundary around it, with tariffs, quotas and standards on all sorts of imports to the EU, and that wall would be breached if goods could flow freely from post-Brexit UK to the EU, whether the product is originally produced in the UK or outside it. That concern also applies in the opposite direction if the UK sets tariffs which are higher than the EU's and then sees goods flowing without checks from RoI to NI. So in a no-deal Brexit, the EU and RoI would have no choice but to impose customs checks on the RoI border.
However long Mrs May seeks "discussions and clarifications" with the EU, she will never be able to deliver both of these objectives. Post-Brexit, the UK (or at least, GB) has to either stay in a customs union with the EU, or have a hard border between the EU customs union and the UK/GB's new customs regime. With a hard border, the UK would then be free to negotiate FTAs with other countries. To most people's understanding, the Brexit referendum did not include an indefinite customs union, with no freedom to negotiate FTAs. Even the 2017 Conservative mainfesto stated that the UK "will no longer be a member of the single market or customs union" and:
"We believe the UK must seize the unique opportunities it has to forge a new set of trade and investment relationships around the world, building a global, outwardlooking Britain."
Some politicians claim that there is a frictionless way to reconcile the 2 objectives, that would somehow allow goods to be closely monitored to ensure that they don't cross an invisible border into the RoI/EU without tariffs, quotas and compliance rules being enforced, but nobody has shown how this could be reliable. Even the European Research Group led by Jacob Rees-Mogg has conceded that a "necessary measure" for an invisible border would be a "Free Trade Agreement with 100% tariff-free access" - and that's not possible if the UK is free to negotiate deals with other countries while the EU charges tariffs on imports from those countries.
If it were not for her own arrogance in seeking a fresh electoral mandate in 2017, Mrs May could have taken a more robust approach with NI, choosing objective 1 over objective 2, but the election result was a hung parliament in which her government depends on the voting support of the 10 MPs of the NI Democratic Unionist Party (DUP), which opposes a customs boundary between NI and GB as well as opposing a hard land border with the RoI.
That is why Mrs May and the EU leaders have been kicking the can down the economic road. With the DUP watching over her, instead of spending the last 2 years preparing for border checks and negotiating FTAs with other countries (possibly including the EU), and having those agreements ready to activate on 29-Mar-2019, she has carried on with futile negotiations to try to keep the RoI border open but at the same time leave the customs union. That has weakened her hand, because without new FTAs ready to launch, there is nothing to offset the immediate economic downside of a no-deal Brexit. That weakened position now threatens to push the UK into the indefinite customs union, which as a remainer, was perhaps her strategy all along.
The outcome of negotiations with the EU (agreements here, subject to ratification) is a proposed transition period that lasts until 31-Dec-2020 with a possible extension (if a UK-EU Joint Committee agrees) to the end of 2021 or 2022. During transition, nothing changes on trade, and at the end of it there will still be no way to reconcile the 2 objectives, resulting in the automatic "backstop" which amounts to a customs union but with continued EU controls on the standards-compliance of goods entering NI, which will necessitate checks on imports across the Irish Sea from GB, at seaports and airports - in other words, an Irish Sea boundary that the DUP opposes. The UK would be bound by an international treaty not to charge lower tariffs than the EU charges, with no unilateral exit route from the backstop unless it breaches the treaty.
In short, the interests of the 1.9m NI population (2.9% of the UK) are being allowed to drive Mrs May's definition of "Brexit". It is a core "Principle of Consent" in the 1998 Belfast Agreement that there should be no change in the sovereign status of NI without the consent of a majority of its people. The majority of the NI vote, by 56% to 44%, was to remain in the EU. While the question of customs unions and border-checks falls short of a decision on sovereignty, the majority-remain vote in NI does suggest that the customs boundary should be drawn down the Irish Sea, leaving NI in the EU customs union.
The preference of the NI people seems clear, but if there is to be another referendum, then in our view the most sensible one, without having a do-over of the entire UK vote, would be a referendum only in NI on that issue - whether, post-Brexit, NI should stay in a customs union with RoI and the EU, with a customs boundary between NI and GB; or stay in a customs union with GB, with a hard border between NI and RoI. Either way, this would resolve the customs question and allow a full Brexit for GB. That vote could be held early in the transition period - it doesn't need to happen before 29-Mar-2019. This assumes, of course, that if the referendum chooses an Irish Sea customs boundary, then the EU would trust the UK to operate the EU customs regime at NI seaports and airports, perhaps with random inspections to ensure compliance.
HK people, used to dealing on free-trade terms with the rest of the world while dealing via a customs boundary with the rest of China, would have no problem understanding that. Incidentally, that's a reason why all the Newspeak about the Greater Bay Area (formerly, "Greater Pearl River Delta") is limited by the reality that HK, Macau and the rest of the GBA are in 3 separate customs and immigration territories, until such time as China decides to unify them into what we call the "Greater Bay SAR", in which case they will still need a boundary with the rest of China.
© Webb-site.com, 2018
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