Media  Global Economy  2019.02.21

Leaving the EU and imposing border controls is the only way out - Understanding why the UK Parliament opposes May's EU deal points to the solution

The article was originally posted on Webronza on February 4, 2019
Japanese media reporting on Brexit lacks the understanding of the underlying problem

At the end of last year, I began to write about Brexit for WEBRONZA. The reason was that I was discontent with the reporting on this issue by NHK (Japan Broadcasting Corporation) and major national newspapers in Japan, which were just repeating what was reported in the UK. They did not seem to understand the underlying problem: why British Prime Minister Theresa May and the EU had no choice but to agree on what had been agreed or why the British Parliament showed strong opposition to May's deal with the EU.

It is important to analyze this underlying problem to report on Brexit accurately and appropriately. This requires a good understanding of at least three issues: (1) the historical relationship between the UK and the EU; (2) differences between a customs union and a free trade agreement--a basic question concerning trade; and (3) customs union and single market, which constitute the foundations of the EU (see "For those who want to understand Brexit"). These issues are the ABC's of the Brexit question.

Conversely, a full and accurate understanding of these issues allows the media to explain why Brexit is causing such controversy or antagonism and accurately analyze any new development.

This is contingent, however, on another condition: a basic and comprehensive understanding of everything from the UK's Euroscepticism and trade issues for the country to the institutional characteristics of the EU. Specialized knowledge in a specific sector alone is insufficient for taking the right approach to understanding Brexit.

It is not that only the Japanese media is to blame in this respect. A case in point is a Japanese professor's commentary on Brexit I read recently. This commentary apparently fails to touch on the crux of the matter or get to the bottom of it. Material on Brexit issued by a Japanese government agency focuses only on the background and the content of the agreements as well as facts and figures. It completely fails to clarify what is at issue or stake and why.

A deal that puts no border controls first and renounces a complete exit

On January 29, the British Parliament called for renegotiations about the backstop provision in the withdrawal agreement that Mrs. May had agreed with the EU. (The backstop is a safety net to be applied if the UK and the EU fail to negotiate arrangements after the transition period, which ends at the end of 2020.) The idea of renegotiations was immediately rejected by May's negotiating partners--European Commission President Jean-Claude Juncker and other EU leaders.

I wonder whether the Japanese media can accurately analyze why this is so for the Japanese audience.

Of course, the Japanese media can convey the widely reported but superficial reason: it is impossible to overturn the deal that was clinched after lengthy negotiations between London and Brussels--an agreement that was already approved by the other 27 EU member states.

Yet the EU refused to renegotiate, saying that there are no alternative backstop arrangements that will solve the underlying problem.

The underlying problem is a trade-off between two objectives for the UK: (1) avoidance of border controls (a hard border) between Ireland and the UK's Northern Ireland, which might reignite the Northern Ireland conflict; and (2) Brexit, which aims to secede from the EU's customs union and single market.

As I wrote in my previous article titled "What is the only solution to the Brexit problem?" the UK will need to implement strict border controls (as Japan does in relation to other countries) if it wants a complete withdrawal, which means that the UK will become a discrete economic zone. The UK will need to remain in the EU's customs union and single market if it wants to maintain an open border with Ireland as it is, which necessitates continuing to be part of the same economic zone. In that case, the UK has no choice but to give up on the idea of a complete exit.

Simply put, the choice is one or the other.

May's EU deal gave priority to avoiding border controls and all but gave up on the idea of seceding from the EU's customs union and single market--the original aim of Brexit. It is not surprising that Brexiteers (people in favor of the UK leaving the EU) in the British Parliament oppose May's deal.

Brexiteers value the recovery of tariff autonomy

Forgive me for belaboring the obvious, but let me illustrate this point further.

A complete exit that Brexiteers call for--the original purpose of Brexit--for Brits can be hypothetically likened to Kyushu and Ehime Prefecture seceding from "the rest of Japan" to form a Kyushu-Ehime federation for the Japanese.

An independent state, the Kyushu-Ehime federation would be free to adopt trade and commerce policies of its own. Independently from "the rest of Japan," the federation would be able to implement standards on food and autos as well as regulations and measures concerning labor and the environment. More specifically, the federation could impose its own tariffs on imports from other countries. (For example, it would be able to impose a tariff of 50 percent on beef imports while "the rest of Japan" adopts a tariff of 38.5 percent.) It could also conclude a free trade agreement (FTA) with countries with which "the rest of Japan" does not have an FTA (e.g., China). In relation to the countries with which "the rest of Japan" does have an FTA, the federation could strike an FTA that is different in content from such an FTA. (For example, while "the rest of Japan" may agree with Australia to lower its beef tariff to nine percent, the Kyushu-Ehime federation could refuse to reduce the tariff below 20 percent.)

Such autonomy could not be enjoyed, however, if the Kyushu-Ehime federation remained within the customs framework of Japan. Likewise, if the UK remains in the EU's customs union, it will not be able to set its own tariffs since the customs union imposes common and uniform tariffs on imports from non-EU countries. Accordingly, the UK will not have the freedom to strike an FTA with such countries independently from the EU that will allow it to reduce or abolish tariffs (just as a Kyushu-Ehime federation that remains within the customs framework of Japan could not defy "the rest of Japan" and strike an FTA to reduce tariffs of its own accord.) If the UK secedes from the EU's customs union, however, it could adopt an independent UK trade policy. In a sense, this will amount to the recovery of tariff autonomy.

This is exactly what Brexiteers valued.

If any independent state (or customs territory) trades with other countries (including the EU), it needs to conduct customs inspections, a kind of border control. This is just like Japan conducts customs inspections when it trades with other countries. This arrangement, however, contradicts calls for avoiding border controls between Ireland and Northern Ireland.

No tariffs between the UK and the EU alone do not allow for no border controls

Then, if the UK and the EU sign an FTA and abolish all tariffs, will there be no need for a hard border for customs inspection? A hard border will be still necessary.

If the UK withdraws from the customs union, it will be free to apply tariffs lower than those of the EU to the rest of the world. It will also be free to strike an FTA with another country (e.g., the US) to reduce its tariffs below the levels that the EU apply to that country.

Suppose that the unit wheat price is three dollars in the US, eight dollars in the UK, and seven dollars in the EU. If the EU and the UK impose a tariff of 200 percent on American wheat, its unit after-tariff price of the product will be nine dollars (of which six dollars is the tariff portion) in these markets, which will virtually drive out American wheat from the EU and the UK market. If the UK applies a tariff of 100 percent, however, the unit after-tariff price of American wheat will be six dollars in the UK market. In that case, American wheat will be exported to the EU duty-free via the UK. EU farmers will not be protected by tariffs.

Blocking the inflow of American wheat to the EU will require confirming that wheat imports originate from the UK. The idea of such proof of origin is that wheat exported to the EU under a UK-EU FTA must be limited to British wheat. To provide such proof of origin, custom inspection, a type of border control, will be necessary.

In short, negating the need for border controls will require not only abolishing tariffs between the UK and the EU; the UK will also need to impose the same tariffs as those of the EU on imports from other countries.

This cannot possibly be achieved unless the UK remains in the EU's customs union. This is why May's deal with the EU states that the UK will remain in the EU's customs union during and after the transition period that ends in 2020.

The irons of the single market and the ire of Brexiteers

Furthermore, the EU takes the position that remaining in the customs union alone will not negate the need for border controls.

Even after the establishment of the customs union in 1968 (and since UK joined it in 1973), border controls remained in place within the EU. Checkpoints did exist between France and Germany.

Border controls were finally abolished when a single market was formed in 1992 where the movement of people, goods, services, and capital was liberalized. This was because differences in regulations and standards for goods meant that imported goods needed to be judged at checkpoints whether they met such requirements of the importing country. Standards, regulations, and protection and other policies that differed from country to country were coordinated under the EU framework to achieve a single market. In this way, goods produced or distributed in any country within the EU were put on a level playing field. This was how checkpoints between member countries were removed.

If the UK wants to do without border controls in order to avoid the recurrence of the Northern Ireland conflict, it cannot get out of the EU's customs union or single market. There is no other option for the UK. This is the steadfast position of Mr. Juncker and other EU leaders. The EU is thus taking a firm stance that any revision to the deal is unacceptable.

This is something Brexiteers cannot swallow. Shunning border controls on one hand and forming an independent market or customs territory on the other are incompatible with each other. These two avenues will never intersect like two parallel lines.

During the transition period, EU standards and regulations will apply to the entire UK since the country will remain in the single market. After this period, they will continue to apply to Northern Ireland under the backstop arrangement, while Great Britain will effectively remain bound by them because its own standards and regulations must be harmonized with them.

To make matters worse, the UK government will have no say about EU standards or regulations because the UK will have legally withdrawn from the EU by March 2019. In short, the UK's attempt to recover its sovereign rights by leaving the EU is bound to paradoxically limit or derogate such rights further. In this light, remaining in the EU seems to be the better choice.

A hard Brexit, which entails a hard border, is the only way out

Isn't there any solution left to Mrs. May? The logical answer may be "yes, there is."

Is it really necessary to agree on the backstop now? Should arrangements after the transition period be just left to future negotiations? Won't any renegotiation end up with settling on the original backstop proposal as long as the UK, which detests strict border controls, fails to come up with an alternative to checkpoints? Didn't the EU demand too much? If the EU agrees to shelve the backstop provision, the deadlock will end at once. This seems to me the only way out.

This may be a belated solution, however. The UK should have proposed it early in the negotiation process. It may be politically difficult for the EU to change course as it has already obtained approval from the 27 states. If that is the case, rearrangement by way of postponing the withdrawal date (renegotiations or another national referendum) or a hard Brexit is the only option left.

Even so, neither the UK nor the EU has addressed the more fundamental problem.

The above discussion is about trade in goods. Border controls have another important role: inspecting immigrants to regulate the movement of people. The problem is not limited to the prospect that people who are now EU citizens in Ireland and other countries will enter the UK without going through border controls.

It is worth remembering here that concerns over immigrants were a major driver of Brexit.

Brexiteers argue that the UK should take a more stringent immigration policy than the one the EU is taking. They are effectively demanding that the UK, including Northern Ireland, take a different immigration policy than that of the EU, including Ireland. With no border controls in place, however, immigrants will be free to enter Northern Ireland via Ireland, a member state of the EU, which takes a lenient immigration policy. Immigrants who have illegally entered Ireland may flow into Northern Ireland. Immigrants in Ireland may obtain EU citizenship legally and enter Northern Ireland. How would the UK respond to these situations?

If the UK condoned these situations, the UK's "stringent" immigration policy would be undermined.

As long as the UK adopts a different immigration policy than that of the EU, it may need border controls at checkpoints, if not a wall as US President Donald Trump calls for along the US-Mexican border.

If that is the case, a hard Brexit, which entails a hard border, may be the only logical solution.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on February 4, 2019.)