Membership of the EU Customs Union and the (largely contrived) Irish border issue are once more on the front pages. After success in the Lords, Remainers smell blood and are slavering at the prospect of defeating the Government in forthcoming Commons votes. Given this growing threat, Mrs May and Ollie Robbins appear to be backsliding and looking for a faux Customs Union so that Brexit, rather than meaning Brexit, will be Brexit in name only - the worst possible outcome.
The Prime Minister is unable (or unwilling) to face down the EU on the (largely contrived) Irish border issue. Her and DExEU's only strategy is to continually appease, concede, beg and bribe the EU to bend to the UK's will. It will not work but they can't or won't grasp this. Their inability to devise or consider innovative workable policies is perhaps further evidence of a lack of commitment to the Brexit cause.
My original Import Excess Tax (IET) article was published in BrexitCentral on 10.02.18 (http://brexitcentral.com/simple-tax-tweak-strengthen-negotiating-hand/) and attracted "lots of positive reaction" – not surprising as no other policy so far ticks all these boxes:
• Respects both UK and EU red lines,
• Retains the benefits of a UK-EU free trade agreement in all but name yet
• enables UK to leave the EU, Customs Union and ECJ completely and
• regain control of our borders.
The Government will have some explaining to do if it adopts a policy that doesn't tick all these boxes and this is the simplest, cleanest and most practicable Brexit solution for the UK and EU. For the UK, it will obviate the need to greatly expand the customs infrastructure and bureaucracy associated with application of tariffs and duties. This is particularly important for goods from the EU that have a short transit from point of origin to UK ports that leaves little time for customs pre-clearance, unlike for sea-borne imports from, say, China.
IET is simple in principle and operation. It is a system for collecting duties by indirect means (as a tax), using the VAT form familiar to all businesses engaged in import and export. The principle could also be extended to similar agreements with third party states.
To date nobody has identified a fatal (or serious) flaw in IET apart from vague doubts about WTO compliance and other issues which I deal with in this updated version. If it sounds too good to be true, please read on and identify any serious flaws if you can.
A Strong Hand for a New Deal
So far, the UK Government has played a very strong hand poorly. It has shown neither competence nor confidence at the table. When your opponents are praising your negotiating skills it's a sure sign that you are the "mark". This simple model for post-Brexit UK-EU trade will reinforce Mrs May's position, enabling her to take the initiative in forthcoming talks. This card should not be kept up her sleeve but confidently laid face up on the table in full view of the EU dealer.
Import Excess Tax
The UK Government should unilaterally offer free-trade terms without any tariffs or duty on imports from the EU, in the expectation that the EU will reciprocate by offering the same terms and without demanding £ Billions for "access". If it does not, the UK should not retaliate in kind but implement a new "Import Excess Tax" (IET) if the EU imposes WTO tariffs and duty on UK exports to the EU.
IET will be payable only by the small minority of UK businesses whose imports from the EU exceed their exports to the EU. It will have the effect of imposing across the board reciprocal duties on imports from the EU without the associated complexity and bureaucracy of the many different tariffs and rates of duty that could be imposed on EU goods under WTO Rules.
The rate of IET could be set by the UK Government to levy a sum equal to the aggregate total of duties imposed by the EU on UK goods. Revenue thus raised can be used to reimburse UK exporters for duties paid on their goods in the EU.
How It Works
The standard VAT Return Form currently records the value of exports (box 8) and imports (box 9) to and from the EU. From 29.03.2019 the post-Brexit form should have new boxes 10, 11 and 12. These new boxes need only be completed by businesses that either sell to (export) or purchase from (import) EU states.
In the example (See form shown at top), the value of the firm's exports (box 8) is exceeded by the value of its imports (box 9) by £20,000 (box 10) for the period concerned.
The IET model can be a game-changer as it will enable UK to leave the EU, Customs Union and ECJ completely whilst regaining control of our borders and retaining the benefits of a free trade agreement in all but name, yet be acceptable to the EU and provide our negotiators with powerful leverage during forthcoming talks.
Options for UK
According to ONS figures (https://visual.ons.gov.uk/uk-trade-partners/), the UK had an £82 billion trade deficit with the EU in 2016. To illustrate IET in principle, the assumed mean rate of duty payable in both UK and EU according to WTO Rules is 5%.
See second table illustrated at top: Duty at notional 5%.
The UK Government could set the IET rates according to these options:
• Option Zero: 0% if the EU does not impose tariffs and duty on UK exports, or insists upon Customs Union membership, or ECJ jurisdiction, or free movement, all of which are unlikely - making this option unrealistic.
• Option 1 (the Carrot) - a low rate of IET to recover only the duty paid on UK exports to the EU (e.g. £11.8 billion), which would be reimbursed to the UK exporters to maintain their competitiveness. This would appeal to EU importers of UK goods and EU exporters as it represents approximately a 25% reduction of tariffs and duty on exports from the EU to the UK. It could be the start of a bilateral process of tariffs elimination. It will also minimise any inflationary impact of tariffs in the UK.
• Option 2 (the Stick) - a high rate equivalent to the notional value of duties payable on imports from the EU according to WTO tariffs (e.g. £15.9 billion) to reimburse UK exporters and generate additional revenue estimated here at £4.1 billion.
WTO Compliance and "Most Favoured Nation"
Upon termination of a trade agreement, the parties are permitted to deviate from WTO Rules during an adjustment period that is not defined but could be 5-10 years. A new bilateral UK-EU agreement based on IET would neither affect third party states nor invite their serious objection.
The IET policy grants tariff free access to the UK market, so the EU is unlikely to baulk at an agreement, particularly under Option 1 ("Carrot"). IET does not discriminate against any type of EU goods or trade or give any competitive advantage to UK exporters. Nor does it constitute preferential treatment or subsidy, if the UK is not charging duty on EU goods.
Should the EU fail to take advantage of the generous "Carrot" option and continue to be an intransigent negotiating partner and reject a bilateral deal based on IET, then WTO Rules and Option 2 ("Stick") will apply by default (benefitting the UK Treasury by £4.1 billion.) However, so will the "Most Favoured Nation" (MFN) rule.
IET is a domestic tax applicable only to UK importers, regardless of the type of trade or industry or product. It cannot be described as protectionist or directly discriminatory against imports from the EU or any third countries.
IET is only payable by UK companies whose EU imports exceed their exports to the EU. Though it may be argued that this discriminates indirectly against EU goods, objection on these grounds is unlikely to gain traction, provided IET revenue does not exceed the revenue that would be raised if the UK imposed WTO tariffs on EU imports.
Effects on Third Country Trade
The WTO MFN rule requires that, in the absence of a bilateral IET deal with the EU, the UK must offer the same IET terms to other states that trade with UK on WTO terms. And why not? It might facilitate the fast-tracking of new trade deals.
In any scenario where the UK is outside the customs union but has an EU free trade deal, the EU will be concerned about tariff-free third country goods being imported into the UK then exported on to the EU thus by-passing the EU's tariff wall. Mitigation of this problem would require unacceptably stringent, onerous and costly control of rules of origin with enhanced Certificate of Origin procedures and other measures.
Under the IET model, UK membership of the EU Customs Union will be unnecessary and cease to be a contentious issue. The UK will be free to conclude trade agreements with other states and the EU will be able to maintain its tariff wall, since all goods from the UK, regardless of origin, will be subject to WTO tariffs.
Much has been made of the need for UK-EU regulatory compliance. The fact is, any business that wishes to export must ensure its goods comply with the relevant laws and regulations of its customer's country, whether that country is in the EU or elsewhere. At present, UK-EU regulations are harmonised. However, there will certainly be some divergence after Brexit. This will simply mean that both UK and EU exporters will need to adapt their products to comply as applicable regulations in customer markets change. This is happening all the time the world over, although there is gradual convergence and harmonisation of international regulations and standards.
The Irish Border
The Irish border "problem" is a mischievous and shameful EU contrivance. After Brexit, without the UK's budget contribution, Ireland, previously a significant beneficiary of EU funds, will become a significant contributor. We can only speculate as to what incentives were offered to Mr Varadkar's government to foment trouble, invoking the inferred threat to the Good Friday Agreement peace in Northern Ireland that may result from the establishment of a hard border, despite the fact that both HMRC and its Irish counterpart have publicly informed their respective governments that neither could envisage the need for a hard border.
Possible post-Brexit regulatory divergence is often cited as justification of the need for a "hard" Irish border. I heard a Financial Times hack (I make no apologies for the term) explain on Radio4 that the Irish Government will need a "hard" border to ensure that goods from the North comply with EU regulations, if the UK signs a free trade agreement with the USA and if the UK agrees to permit imports of the (notorious) chlorine-washed chickens, to prevent such imports if an Irish company knowingly imports chickens that would be illegal to sell or serve in Ireland. This is nonsense. In the event of such an unlikely succession of occurrences it would be a matter for Irish Trading Standards authorities and not Customs. The same principle applies to manufactured goods. Cargo inspections that are deemed necessary can be made at consignees' premises where any duty payable can be assessed from invoice values.
Even during the "Troubles", when the border was heavily policed and patrolled, smuggling was rife. "Slab" Murphy and his ilk plied their nefarious trade virtually unhindered for years. Low level smuggling, mainly by private individuals and small traders, will be as impossible to prevent post-Brexit as it was then and is now.
Under the IET model, the Irish and all other EU Governments will have to collect tariffs on UK exports arriving by sea from mainland UK and by land from Northern Ireland. How EU states do this is for them to decide, but one way to achieve a near frictionless process would be to assess tariffs and duty payable in the importers' accounts departments and not at the border, by using an EU VAT form with similar modifications to the UK IET form shown in Table 1 above. This would also simplify the transit through UK ports of Irish trade to and from the EU.
Other IET Policy Benefits
• In addition to its simplicity, ease of calculation and collection, this simple model for UK-EU trade post-Brexit will provide the UK Government with a mechanism for policy flexibility.
• IET will require minimal expansion of HMRC systems and resources to administer.
• The additional bureaucracy for importers is minimal which should assuage importers' concerns about the impact on their revenues. Implementing IET is almost certainly preferable to administering WTO tariffs and paying duty.
• The tax will encourage import substitution as firms seek UK suppliers, or increase their exports to the EU to minimise their IET liability. (Some IET payers may seek to reduce their liability by buying and exporting third party goods or importing via a third party with a surplus of exports to the EU. Such avoidance must be pre-empted in legislation.)
• As the UK's trade deficit with the EU is approximately £82 Billion, IET could also provide the Treasury with additional revenue as well as assisting UK exporters to remain competitive despite duty paid by EU customers on their goods.
• The 25% reduced tariff offered under Option 1 ("Carrot", value ca. £4.1 billion p.a.) could be offered in lieu of the £40 Billion "Danegeld" divorce settlement.
• Under the IET model, UK membership of the EU Customs Union will be unnecessary and cease to be a contentious issue. The UK will be free to conclude trade agreements with third party states.
• Under the IET model, the UK would not impose tariffs on imports from the EU. Therefore, we would be able to import (if necessary via EU intermediaries) tariff free goods from third-nations that have FTAs with the EU.
• Annual UK vehicle imports from the EU are worth about £40 billion. The UK concessionaires of Mercedes, BMW, VW etc. would be the main payers of Import Excess Tax as their businesses are virtually 100% import without exports to offset their IET liability. This would severely reduce their price competitiveness in one of their most important export markets.
The most obvious way to redress that would be to source more components from UK or, more effectively, establish vehicle assembly and manufacturing plants in the UK and then export most of the vehicles produced.
What's not to like?