Government Avoids Customs Defeat But No Deal Inches Closer - An Edelman Analysis

GOVERNMENT AVOIDS CUSTOMS DEFEAT BUT NO DEAL INCHES CLOSER 17th July 2018

Pawel Swidlicki Senior Account Manager

KEY TAKEAWAYS The Government narrowly survived a series of votes on the Customs Bill last night, winning two of them by a margin of only three votes. This was after the Government had backed down and accepted four amendments to the bill tabled by the pro-Brexit European Research Group. These were intended to harden the UK’s negotiating position and drag it back more towards the vision of Brexit Mrs May outlined in her Lancaster House speech.

While the Prime Minister insisted the amendments were "consistent” with the Government’s recently tabled white paper, this analysis is not shared by many MPs or commentators on either side of the debate.

It would seem two of the four cut across key provisions of the white paper, while another limits its scope for manoeuvre as regards the Irish border backstop, without which there can be no withdrawal agreement and no transition period. The cumulative effect of the amendments and of the politics around them is to increase the likelihood of a no deal outcome.

What amendments did the Government accept?

The two most contentious amendments which only just passed concerned 1) ensuring that the UK definitively leaves the EU’s VAT regime and 2) that it will not in future collect tariffs on behalf of the EU unless the EU also reciprocates. Both concern highly technical issues but it is important not to get lost in the detail and keep in mind the bigger picture.

17 July 2018

Calum O’Byrne Mulligan Senior Account Executive

The VAT amendment is significant because, outside of the EU VAT regime, goods must be charged import VAT before they can be released into free circulation. It is hard to see how this process can take place without the need for new border infrastructure of the sort the Government has said it is committed to avoiding on the Irish border.

The amendment on reciprocation, while sounding innocuous enough, undermines a key tenet of the Government’s bespoke proposal for a Facilitated Customs Arrangement. That arrangement would allow the UK to retain the benefits of the EU customs union (e.g. obviating the need to comply with burdensome rules of origin requirements) while also being able to strike its own FTAs. It is unlikely that the EU would have even agreed to the FCA in its current form anyway, but the reciprocal element – essentially expecting the EU to collect customs duties on behalf of the UK on its own territory – ensures it will almost certainly be dead on arrival.

The third amendment sets out in primary legislation that there cannot be a customs border down the Irish Sea, i.e. between Northern Ireland and the rest of the UK. Although this is long-standing Government policy, and indeed also of the opposition, putting it into law reduces the Government’s scope for manoeuvre to accept the EU’s proposal for the Irish border backstop, which would see Northern Ireland essentially remaining in the EU’s customs union and large parts of the single market.

Reminder: the backstop is designed to ensure that whatever happens, the free-flowing status quo on the border will be maintained, and without some form of

Edelman | Southside | 105 Victoria Street | SW1E 6QT London | www.edelman.co.uk | 020 3047 2177 | @edelmanUK

mechanism acceptable to both sides there can be no withdrawal agreement and no transition period. If the backstop is not to be specific to Northern Ireland it will have to apply to the whole UK, but that would entail staying in a customs union and large parts of the single market which in turn would be derided by Brexiteers as a ‘Brexit in name only’. The Chequers summit and resulting white paper therefore emerged as May’s attempt to cut this Gordian Knot.

The final amendment, the least contentious of all, states that any new UK-EU customs union would have to be legislated for via separate primary legislation and not via a statutory instrument. This means that rather than doing this via secondary legislation using a provision contained in the Customs Bill – which the ERG have little option but to vote for as it is also a crucial no deal measure – any new UK-EU customs union will have to be passed by primary legislation, a move which would require Labour support to pass.

May signals that when push comes to shove, she is unwilling to take on the ERG Aside from the substantive effects of the four amendments discussed above, it is also important to consider the politics. Barely five days after publishing the white paper amid fighting talk of facing down the Brexiteers and forcing through a pragmatic Brexit, the Government has backed away from confrontation.

While it be argued that technically, the amendments are compatible with the white paper, they are designed to reverse the Government’s direction of travel and encourage it to adopt a tougher stance in the negotiations. In short, it looks like the Government is losing its nerve and signalling to the Brexiteers that it does not want a confrontation which in turn is only going to embolden them to push back further and in other areas.

This follows widespread discontent in the party grassroots over the white paper with Gavin Barwell, the PM's chief of staff, reportedly getting "hammered" during a conference call with area party officials. This appears to be corroborated by recent polls which have shown Labour creeping ahead, amid the Tories losing support to UKIP which many had believed and hoped to have been killed off by the referendum.

The absurdity of the situation was demonstrated by Guto Bebb resigning as Defence Minister to vote against the Government in favour of a position which had been Government policy as recently as lunchtime yesterday.

Bebb is the tenth MP to resign from a frontbench or party position over Brexit since Chequers but he is the first to do so in order to support rather than oppose it.

defeat it had four Labour Brexiteers not voted in favour.

Interestingly the rebel count did not include several Tory MPs who have previously spoken in favour of a softer Brexit such as Justine Greening. She has also come out in favour of a second referendum to resolve the parliamentary impasse.

Likewise, given the scale of discontent in Tory ranks, May could eventually require the votes of moderate Labour MPs to pass her final Brexit deal. From their perspective, it will be harder to justify such a vote and risk the threat of deselection and open revolt among their local members, for the word of a PM who they see as liable to caving to the Brexiters at the first hurdle. Equally, from the EU’s perspective, it makes it harder to justify giving May any significant concessions if they do not think she will be able to sell the full package back home.

ANALYSIS: WHAT NEXT? It is important to remember that the white paper relates to the future relationship between the UK and EU and not the process of withdrawal. As mentioned earlier, the crucial issue to be settled in this context is the Irish border backstop. However, accepting a whole UK mechanism in order to avoid differential treatment for Northern Ireland in turn risks pre-determining that future relationship if it provides a means for the whole of the UK to essentially stay with the EU’s customs regime and regulatory ambit.

In this context, Labour are backing an amendment to the Trade Bill tabled by the Tory rebels Nicky Morgan and Stephen Hammond which will be debated and voted on tonight. The amendment backs the “frictionless free trade area for goods” as set out in the white paper, and also mandates the Government to negotiate a customs union with the EU if no exit deal has been agreed with the EU by 21st January 2019.

As Labour’s Stephen Kinnock said, last night was “the final nail in the Chequers proposal”. Today’s Trade Bill and the events of the summer recess will show if Remainers are able to pry out any of those nails or if the Brexiters will place a rose down on the coffin lid. Jeremy Corbyn will be hoping it is a red Labour rose, as whoever wins out in the end in the Tory psychodrama on Brexit, the real winner here may be Corbyn; a divided government only really benefits the opposition.

The risk for May is that in placating the Brexiteers, she has undermined the trust of those Tories who backed Remain and now want a much closer relationship with the EU. Fourteen of them including Bebb voted against the Government last night which would have been enough to 17 July 2018

Edelman | Southside | 105 Victoria Street | SW1E 6QT London | www.edelman.co.uk | 020 3047 2177 | @edelmanUK