Wednesday, 5 April 2017

Leaving the Customs Union (part 2) - Tariffs & Origin


It is perhaps surprising that so much attention has been given to the Single Market, yet so little attention has been paid to the EU Customs Union. Particularly as leaving the EU Customs Union has potentially greater impacts on UK trade than leaving the Single Market :
  • A repatriated trade policy will need new WTO Schedules and new 3rd country trade agreements.
  • Trade with the EU will face imposition of tariffs or Rules of Origin processing and a new customs border.
In my previous post, I looked at the impact of leaving the Customs Union and a repatriated trade policy.

In this post, I will look at the impact of Tariffs / Rules of Origin processing on UK-EU trade.

Tariffs

If the UK leaves the EU's Customs Union and Single Market without sealing a Free Trade Agreement (FTA), then tariffs will apply to future UK-EU trade.

Staying in the Single Market via the EFTA EEA option would allow tariff-free trade to continue, but not for all goods. Article 8.3 of the EEA agreement states the agreement applies to “products falling within Chapters 25 to 97 of the Harmonized Commodity Description and Coding System”, i.e. manufactured goods only. Chapters 1-24 of the Harmonised Commodity Description and Coding System covers agriculture & fisheries products:
  • Section I. Chapters 1-5: LIVE ANIMALS; ANIMAL PRODUCTS
  • Section II. Chapters 6-14: VEGETABLE PRODUCTS
  • Section III. Chapter 15: ANIMAL OR VEGETABLE FATS AND OILS AND THEIR CLEAVAGE PRODUCTS; PREPARED EDIBLE FATS; ANIMAL OR VEGETABLE WAXES
  • Section IV. Chapters 16-24: PREPARED FOODSTUFFS; BEVERAGES, SPIRITS AND VINEGAR; TOBACCO AND MANUFACTURED TOBACCO SUBSTITUTES
Agriculture & fisheries products excluded from the EEA agreement typically attract the highest tariffs. A Civitas study “Potential post-Brexit tariff costs for EU-UK trade” identifies the 10 UK export sectors impacted by high tariff rates (%) (table 3:10) – all 10 are agriculture & fisheries sectors not covered by the EEA agreement – with tariffs of 40% in some cases. High tariffs on agriculture & fisheries would obviously create an initial shock for UK producers and consumers, as indeed there was when the UK joined the EEC in 1973 and lost preferential access to Commonwealth agriculture markets.

Tariffs for manufactured goods are typically much lower than for agriculture & fisheries products, although some manufactured goods would face tariffs above 5%: most textiles, some chemicals, plastics, ceramics and aluminium and most notably a 10% tariff on finished cars. The Civitas study “Potential post-Brexit tariff costs for EU-UK trade” also identifies the top 10 UK exports sectors impacted by value of duty payable (£) (table 2:10), and the car sector is top at £1.3bn (4 of the top 10 are again agriculture & fisheries sectors).

Not that reverting to tariffs for UK-EU trade is all bad news:
  • As identified in a report by the Agriculture & Horticulture Development Board, the UK currently trades at a significant deficit with the EU in many agricultural products, which provides opportunities for import substitution.
  • An expected consequence of the UK and EU failing to agree an FTA would be a lower £, reducing the impact of tariffs on UK exports, while at the same exacerbating the impacts of tariffs on EU exports to the UK. This will also impact UK manufacturers who use imported components – which may in turn provide an incentive to source UK alternatives.
  • Based on current trade, UK exports to the EU would incur duty of £5.2 billion, EU exports to the UK would incur duty of £12.9 billion paid into the UK Treasury - a handy windfall. Although in practice trade diversion and duty relief schemes will reduce these figures.
  • Duty can be reduced or eliminated where imports are consumed in the production of an exported product.

To alleviate the impact of EU tariffs, the UK Government could re-cycle revenue from UK import duty. A cut in corporation tax has been suggested, but this would not target the small number of companies who export to the EU. WTO rules prohibit payment of subsidies direct to exporters, but as described in a Civitas paper on mitigating the effect of UK-EU tariffs, the UK could implement a number of WTO-compliant schemes (provided the UK is outside the EU Single Market restrictive state aid rules) :
  • Implement greater tax incentives for research and development expenditure for all businesses. The cost would be in the region of £2.9 billion, of which £2.1 billion (73%) would go to industries suffering EU-27 tariffs.
  • Operate a more extensive regional aid programme. Using simple rules acceptable to the WTO, areas covering 65% of the population could receive assistance worth £3.8 billion, of which £3.1 billion (82%) would go to exporting industries. At present EU rules limit the UK to assisting areas covering only 27% of the population.
  • Redesign its energy policy. Whatever it decides to do about emissions trading, and wider climate change policy, abolition of the damaging carbon price floor mechanism makes sense in its own right. It would release £1.2 billion in costs, including £392 million for domestic users of electricity.
  • Transitional Assistance Programme (TAP), a discretionary economy-wide scheme making payments to aid adjustment costs arising from Brexit, capped in practice at 1% of the value of a business’ exports. Set at that level, the scheme would not infringe WTO rules on actionable subsidies.

Import tariffs will also impact UK manufacturers and exporters who use components sourced from the EU. In particular, the car industry uses complex supply chains involving multiple channel crossings; UK manufactured cars typically have a high proportion of EU components. However, the WTO Agreement on Subsidies and Countervailing Measures allows for “remission or drawback” schemes (i.e. refund of duty already paid) on imports that are consumed in the production of an exported product. As discussed in the Legatum Institute paper on Brexit and supply chains (chapter 5), the EU's Union Customs Code (UCC), which is to be adopted into UK law as part of the Great Repeal Bill, provides a number of such schemes to provide relief from import duties, e.g.:
Rules of Origin (RoO)

A UK-EU FTA would provide preferential tariff or tariff-free trade, but outside the EU's Customs Union, UK exporters to the EU will face a Rules of Origin (RoO) hurdle. This hurdle applies to all third countries outside the EU's Customs Union, including the EFTA EEA states (Norway, Iceland & Liechtenstein). Staying in the Single Market via the EFTA EEA option does not avoid the RoO hurdle.

Rules of Origin (RoO) are criteria to determine where a product originates from, which determines whether the product qualifies for preferential tariff under an FTA. Products must either be (i) manufactured from raw materials or components which have been grown or produced in the exporters home country, or (ii) have undergone sufficient processing in the exporters home country. This avoids products from 3rd countries who do not have an FTA gaining preferential access “by the back door”.

EEA Rules of Origin are defined in EEA agreement Protocol 4. As described in the EEA Factsheet on Trade in Goods, EFTA EEA states are part of the Pan Euro-Mediterranean (PEM) Free Trade system - a network of Free Trade Agreements (FTAs) with identical RoO protocols. PEM participants are: the EU, All EFTA States (including non-EEA Switzerland), Turkey, signatories to the Barcelona Declaration (Morocco, Algeria, Tunisia, Egypt, Jordan, the Palestinian Authority, Syria, Lebanon, Turkey and Israel) the Western Balkans and the Faroe Islands. All these individual origin protocols are being replaced by a reference to the Pan Euro-Mediterranean (PEM) Convention, a single convention to facilitate on-going revision to modernise and simplify PEM rules of origin.

A key aspect of RoO is “cumulation”. This allows goods incorporating products from 3rd countries to still qualify as an originating product and a preferential tariff. There are 3 types of cumulation:
  • Bi-lateral Cumulation. Input originating (i.e. as per the RoO criteria) in one party to a Free Trade Agreement qualifies as originating input in the other party (e.g. if product imported from first party is incorporated into a product by the second party which is then exported to first party).
  • Diagonal Cumulation. Same as bilateral cumulation, but operates between more than two countries provided they have all concluded Free Trade Agreements between themselves. This promotes longer supply chains, although the full RoO qualifying criteria must be met at each point in the chain
  • Full Cumulation. All stages of processing or transformation of a product within a full cumulation zone count towards RoO qualification. Whereas bi-lateral or diagonal cumulation requires RoO criteria to be met in each country in the chain, full cumulation allows the RoO critera to be distributed across any number of countries within the full cumulation zone – allowing for greater fragmentation of the production process and more complex supply chains.
Within the PEM zone, Full cumulation applies between the EU, EEA, Algeria, Morocco and Tunisia. The remaining PEM countries apply Bi-lateral / Diagonal cumulation only (see EU web page on Cumulation arrangements). Ideally, the UK would remain in the PEM zone with Full cumulation as at present to avoid damaging existing supply chains (including cases where EU/EEA products imported to UK have a production process distributed across EU/EEA). UK exporters to the EU would use the EUR1 form - the EUR1 form is already in use today for UK exports to non-EU PEM states. Similarly, EU exporters would use the EUR1 form for trade with the UK.

UK exporters to the EU will face a one-off cost to modify their supply chain management processes to produce RoO paperwork (although companies who export to countries with which the EU has preferential trade agreements will already be handling RoO). There will also be on-going RoO administration costs, for which there are a wide-range of estimates:
  • The Treasury report produced during the Referendum campaign estimated approximately 50% of UK exports to EU could be impacted (see para 2.62). The same report also quotes a variety of sources for on-going costs of RoO (Box A.1) – with estimates ranging from 3% to 15% of transaction values.
  • A more optimistic estimate was provided well before the Referendum campaign by an HM Government FOI response on EU membership and the costs of new customs controls (including RoO): UK goods would be subject to customs controls (and would have to conform to product specifications outside our control) – a burden on business in addition to current EU regulations estimated at 2% of transaction values”
  • Open Europe's 2014 Brexit Report assumed a RoO cost as 4% of transaction values as input to a dynamic economic model. The model suggested a 1-1.2% GDP loss from leaving the Customs Union, largely arising from RoO costs. A more recent Open Europe article on the Customs Union repeated the 1-1.2% GDP loss and described the figure as clearly not prohibitively high”.
It should also be borne in mind that a great number of manufactured goods will fall into the category of “middle products” (tariff = 1%-5%) or “de minimis products” (tariff below 1%). For these products, the cost of RoO is close to or exceeds the savings via preferential trade, so in many cases the importer will simply follow the non-preferential route, avoid the RoO hurdle and pay the full tariff.

Whatever the cost of RoO, it is dead-weight cost for the economy incurred by leaving the EU Customs Union to regain control of our trade policy and freedom to negotiate our own FTA's. As UK trade becomes more global (UK exports to the Rest of the World overtook exports to the EU some years ago, even as members of the EU), RoO will in any case increasingly become a fact of life for exporters.

Conclusion

Leaving the Customs Union, but staying in the Single Market via EFTA EEA option makes little sense from the point of view of tariffs:
  • Tariffs on manufacturing goods are avoided (typically less than 10%), but the highest tariffs are on agriculture & fisheries products, which are not covered by the EEA agreement.
  • RoO hurdle and cost is encountered, which negates savings on tariffs for middle products” andde minimis products” (i.e. tariffs less than 5%)
  • The UK is still subject to Single Market rules, including state aid rules that are much more restrictive than WTO rules.

While tariff-free trade should always be sought, the imposition of tariffs on UK-EU trade would not be disastrous:
  • There will be opportunities for import substitution (especially in agriculture & fisheries).
  • The impact on supply chains can be mitigated via duty drawback and relief.
  • There is no RoO hurdle or cost.
  • Import duty windfall can be re-cycled to UK exporters via WTO-compliant schemes (provided UK is free from EU state aid rules).
This emphasises the point made by many commentators that non-tariff barriers are more important than tariffs. In my next post, I will look at the potential non-tariff barriers arising from a new customs border with the EU.

Monday, 27 March 2017

Leaving the Customs Union (part 1) - A repatriated trade policy



In 1973, the UK joined the EEC (as the EU was known then) and became the member of a customs union – the so-called “Common Market”.

By contrast, the Single Market is a more recent development. In 1987, the Single Europe Act came into effect and paved the way for the completion of the Single Market in 1992 (in fact it is still not complete even now – but that's another story).

It is perhaps surprising then that so much attention has been given to the Single Market, yet so little attention has been paid to the EU Customs Union. Particularly as leaving the EU Customs Union has potentially greater impacts on UK trade than leaving the Single Market :
  • A repatriated trade policy will need new WTO Schedules and new 3rd country trade agreements.
  • Trade with the EU will face imposition of tariffs or Rules of Origin processing and a new customs border.

In this post, I will look at the impact of leaving the Customs Union and a repatriated trade policy.

WTO Schedules

The UK is a member of the WTO in its own right. But as a member of the EU's Customs Union and the Common Commercial Policy (CCP), the UK has no independent trade policy – all the UK's current WTO trade schedules are registered via the EU's WTO membership. In order to trade as an independent nation, the UK will need to establish it's own WTO schedules.

Prior to the Referendum, WTO director-general Roberto Azev√™do warned that the UK would face “long and difficult” negotiations. It was reported that unanimous consent from all 164 WTO members would be required to ratify new UK schedules – leaving UK in trade limbo for years.

This issue has been fully addressed by Dr Richard North (who takes an apocalyptic vision of UK trade outside the Single Market) and Peter Lilley. Depite the fact that North contemptuously dismisses the “likes of Lilley”, they arrive at a similar view. Lilley describes this as “an exaggerated scare story”. North says it is remarkable that “so much is being made of what is actually a relatively small problem in the grander scheme of things”. Post-Referendum, in a marked change in tone, Robert Azevedo has confirmed that there will be no disruption to UK trade.

Thre reality is, it is possible to trade using draft WTO schedules awaiting full ratification. The EU's schedules were amended following the accession of Romania and Bulgaria but have still not been ratified. WTO members can only raise objections on the grounds that a draft schedule leaves them materially disadvantaged. The UK can adopt a draft schedule based on current EU schedules to present a “no-change” scenario:
  • Tariffs. These are the tariffs that apply to third countries with which the particular WTO member does not have a Free Trade agreement.  The UK should replicate the EU's tariffs schedule (as per the EU's Common External Tariff) into the new UK schedule.
  • Services: Extract the UK schedule of commitments and exemptions on services from the EU schedule (see WTO web page on services schedules).
  • Agricultural Tariff Rate Quotas (TRQ). TRQ's provide lower tariffs on a given product up to the specified quota or volume of imports, after which a higher tariff applies. The UK and EU will need to agree an apportionment of the EU's 87 TRQ's, which will involve some haggling:
    • A protectionist EU might wish to offload a high proportion of these quotas to the UK.
    • In some cases the UK uses a relatively high share of the EU's quotas (e.g. imports of New Zealand butter).
    • Other WTO members may object if the apportionment results in a higher tariff for access to the EU or UK market.
Should the haggling result in an impasse, a unilateral solution would be for the UK to forego TRQ's entirely by abolishing the higher tariff and allowing unlimited imports at the lower tariff.
  • Agricultural subsidies. WTO identify 3 categories of subsidy :
    • Amber-box” (trade-distorting subsidies);
    • Blue-box” (trade-distorting subsidies as part of schemes to limit production via quotas or land set-aside);
    • Green-box” (non-trade-distorting, including payments for environmental protection and regional development).
While Amber-box subsidies are limited (to 5% of agricultural production for developed countries), there are no limits on Blue-box and Green-box subsidies. So the UK and EU will need to agree an apportionment of current Amber-box limits. This is unlikely to be contentious, as the EU has only used €8.76 billion of the €72.2 billion limit agreed with the WTO in 2009/2010. Furthermore, 94% of subsidies paid under the 2010 CAP reforms fall outside the Amber-box limits.
  • Agricultural special safeguards (SSG). The EU has negotiated 539 SSGs, which provide protection against a surge of imports by allowing higher tariffs when import volumes rise above a certain level, or if prices fall by below a certain level. The UK has a case for inheriting these safeguards, but this may prove contentious for other WTO members – it may also be more in line with a liberalising approach to Brexit to forego SSGs.

3rd Country Trade Agreements

Customs Union are not simply Free Trade Zones. The EU Customs Union removes tariffs and import restrictions between member states, but also has a Common External Tariff (CET), set by Brussels. The EU's Custom Union also has a Common Commercial Policy (CCP), which means that Brussels has sole power to broker any new Free Trade Agreement (FTA) with third countries. In short, all external trade policy is the preserve of Brussels, not EU member states.

The Government dossier “HM Government Alternatives to EU membership” emphasised this point during the EU Referendum campaign:

The EU forms a Customs Union, with no tariff barriers between Member States, and a common external tariff on imports from countries outside. Aligning these is an inherent part of any Customs Union and is necessary to ensure consistent treatment of imports into any EU country. For this reason the EU negotiates and agrees Free Trade Agreements with other countries on a collective basis. To date the EU has 36 such agreements covering 53 markets. (page 9, section 2.10)

The process of withdrawal from the EU means that all existing trade deals with third countries would cease were the UK to leave the EU. This means we would no longer benefit from the trade deals which the EU has negotiated with 53 markets like Mexico, South Africa or South Korea, and those which it is currently negotiating with the United States and Japan.(Page 28, Section 3.40)

Free Trade Agreements (FTA's) with 53 nations sounds impressive, until you realise many are very small economies (e.g. Andorra, Monaco, San Marino, Iceland, Lichtenstein, St. Kitts and Nevis, St Lucia etc) or less than stellar performers (e.g. Zimbabwe, Occupied Palestinian Territory). The biggest economies in the 53 are South Korea, Mexico and Switzerland - all of whom are comfortably smaller than the UK's economy. The list of 53 does not include major trading partners like the USA, Japan, Australia etc.

However, these 53 FTAs, which specifically include tariff agreements, are not the full story. The EU has a plethora of “technical” trade agreements with countries around the world which facilitate “frictionless” trade (but do not include agreements on tariffs). The website for the EU's Treaties Office Database shows that the EU has 23 such agreements with the USA categorised as trade agreements. Some of the more important types of agreements include:

Can UK retain EU's 3rd Country Trade Agreements ?

Clearly, the UK would wish to retain current trade agreements with 3rd countries. But as Luis Gonzalez Garcia, Alan Matthews & Steven Peers (among others) point out, the UK’s rights and obligations under these treaties only apply to the UK in its capacity as an EU Member State.
  • Most of the EU’s FTA’s are “mixed” agreements, meaning individual member states are signatories as well as the EU. However, the vast majority of FTA content falls under the Common Commercial Policy (CCP), rather than individual member state competence. When the EU treaties cease to apply to the UK, the rights and commitments conferred under the CCP will also cease to apply.
  • EU FTAs use the term “the territory of each Party” defined as the “European Union and its Member States” with the third country as the other party. A post-Brexit UK will clearly no longer be within the territory of the EU and its member states.
  • Some commentators quote the “presumption of continuity” and the “Vienna Convention on Succession of States in respect of Treaties” as a way for the UK to retain these trade agreements, citing the example of the “velvet divorce” of the Czech Republic and Slovakia. While the EU may be a super-state under construction, it is not yet recognised as a state in it's own right and similarly the UK continues to be recognised as a separate state. Technically and legally the UK is leaving a customs union and cannot claim to be a successor state, so the Vienna Convention does not apply.

There are also technical issues which would prevent these agreements from being adopted “as-is” by a post-Brexit UK:
  • Institutional arrangements created for on-going co-operation and management of the agreement, dispute resolution etc. are of a bi-lateral nature (between EU and third country) and so inappropriate for UK outside the EU.
  • Cumulation. The EU’s FTA’s often contain arrangements for bi-lateral cumulation (e.g. South Korea) – this allows supply chains distributed across the 28 EU member states and the third country to qualify for preferential tariffs under Rules of Origin. To continue these arrangements would need the bi-lateral treaty to be converted to a tri-lateral treaty (rEU27+UK+3rd country) with “diagonal cumulation” allowed.
  • Many EU FTA’s both give and receive market access via TRQ’s. Getting the EU and third party to apportion these TRQs between the rEU-27 and the UK would involve amending the FTA and re-ratifying – which seems unlikely. More probably, the UK would have to negotiate additional TRQ access or alternatively the UK could scrap the higher tariff rate and effectively remove the need for TRQs.

Replacement 3rd Country Trade Agreements

In practice, the UK will need to replace the EU’s FTAs and technical trade agreements.

The good news is that the UK Government is already looking at replacing the EU's FTAs by transitioning current trading terms, with initial focus on the Korea and Switzerland FTAs as they cover almost 80% of UK’s trade by value via EU FTAs. Fortunately it is possible to create WTO-compliant transitional arrangements in line with Article XXIV(5) of the General Agreement on Trade and Tariffs (GATT), which states that,
The provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free-trade area […] Any interim agreement […] shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time.”
A memorandum of understanding between the UK and third country could be deposited with the WTO stating that existing trading terms will continue (with new arrangements for institutions, cumulation, TRQs etc as required) – allowing time for a full FTA to be agreed.

In addition, the UK will also need to agree a continuation of current trading with other trading partners with which the EU has purely “technical” trade agreements. Once again a Memorandum of Understanding should suffice (stating that existing “technical” agreements will be continued with new institutional arrangements as required) and then deposited with the UN rather than the WTO (since these agreements do not cover tariffs).

For some third countries where the EU does not currently have an FTA (e.g. Australia, New Zealand etc.), we may wish to enter into an interim free trade agreement with “zero-for-zero” tariffs alongside the “technical” agreements ahead of negotiating a full and comprehensive FTA.

Conclusions

As a result of leaving the EU's Custom Union and Common Commercial Policy, the UK re-patriates control of trade policy but has to reconstitute all external trade arrangements: WTO schedules; 53 FTAs; and a plethora of technical trade agreements with almost every other WTO member. Staying in the Single Market via the EFTA EEA option does not help one iota with these issues.

Fortunately there appear to be solutions to these challenges - and crucially these solutions are not dependent on agreement with the EU. But it is also clear that Liam Fox as Secretary of State for International Trade has his work cut out in the next 2 years.

Tuesday, 14 February 2017

Sold down the river


One of the most striking images of the EU Referendum was the sight of multi-millionaire Bob Geldof aboard a luxury yacht (which some alleged as being sponsored by Goldman Sachs) giving two fingers to a flotilla of fishing boats campaigning for a Leave vote. 

Bethany Pickering, a young Labour member aboard Geldof's yacht was less than impressed: “we didn’t expect it would be a millionaire being condescending to fishermen" ... “It was very patronising, very much mocking the issue they had, jeering at them, using his ability and his money to drown out what they had to say.” Interestingly, she eventually switched from supporting Remain to Leave on the eve of the Referendum – albeit citing the EU's inability to reform rather than the fishing protest.

Geldof's actions seemed to epitomise a rich metropolitan elite completely out of touch with the lives of ordinary, working-class people. And if any group of workers have grounds for grievance over the UK's membership of the EU, it is surely British Fishermen.


History of Betrayal

The UK has some of the richest fishing grounds in the world. But these have been surrendered  by successive UK governments as outlined in John Ashworth's booklet "The Betrayal of Britains Fishing". I've summarised some of the key points in the history:

Pre-dating the UK's accession to the EEC, the 1964 London Convention granted fishing rights to 31 areas within the UK's 6-12 mile zone: France (15), West Germany (6), Belgium (5), Holland (3) and Ireland (2). In return, the UK obtained rights in 5 areas: France(1), West Germany (1), Holland (1) and Ireland (2). This is clearly an unfair deal which is especially favourable to France – the most plausibly explanation is the UK Government attempting to placate General De Gaulle's hostility to the UK's application to join the EEC.

EEC Fisheries Regulation 2141/70 designated all member states fishing waters a "common resource" and was signed only hours before the UK's formal application was submitted in 1970. Thus, the UK's accession meant sacrificing sovereignty over fishing waters. Prime Minister Edward Heath proceeded with accession talks and misled the House of Commons into believing that the United Kingdom had obtained a derogation which would permanently protect UK fishing interests.

Norway had also applied to join the EEC at the same time as the UK. Edward Heath wrote to the Norwegian Prime Minister asking him to keep quiet about the accession arrangements for fisheries, but the Norwegian Fisheries Minister let the cat out of the bag, which helped persuade Norwegians to reject the EEC in the 1972 referendum. Fisheries was again  a key issue when Norwegians rejected the EU in the 1994 referendum.

In 1973, the Third United Nations Conference on the Law of the Sea (UNCLOS) commenced, which led a number of countries to establish 200-mile Exclusive Economic Zones (EEZs) around their coastlines. In 1976 all EEC members states created 200-mile EEZ's (UK passed the Fishery Limits Act 1976). The UK's EEZ contained approximately 80% of all Western Europe's fish, but these waters were by now "Community waters" .

In 1976, the Commission proposed to manage fishing in "community waters", divided into fishing areas within which a fixed "Total Allowable Catch" (TAC) would be set by species and allocated between member states based on a quota system. After much argument, the policy was finally implemented in 1983 – with the UK the biggest loser in the quota system.

Worse was to follow with the accession of Spain and Portugal. Spain had one of the world's largest fishing fleets but very little marine resource in its own territory. Spain could fish in "Community waters" and took full advantage in exploiting access to the UK's territorial waters. The UK Government tried to protect UK fishermen via the Merchant Shipping Act 1995. But in a famous case, the European Court of Justice upheld a complaint by the Spanish fishing firm Factortame Ltd and levied damages of £100m against the UK Government.

To add insult to injury, EU supporters claim “you need a CFP because fish know no boundaries” and conservation cannot be managed by individual nation states. In fact, the CFP is a classic Brussels cumbersome, bureaucratic, "one-size-fits-all" policy which cannot cope with fish movements and leads to widescale cheating and forces fishermen to discard prime marketable fish (up to 50% of a fishermans catch). The CFP has been an environmental disaster for UK territorial waters. By contrast, Nordic nations such as Norway, Iceland, Greenland & the Faroe Islands who have been wise enough to avoid the CFP all have thriving fishing industries.

The figures reflecting the impact on the Common Fisheries Policy on UK fishing are stark. Under "equal access” rules, 70% of UK fisheries resources worth approximately £1.6 billion are in foreign hands. 60% of the UK fishing fleet has been scrapped and employment in UK fishing has halved. 


UK Government & Fisheries Policy 

Given the tale of woe described above, it is not surprising that Fishing has long been a totemic issue for euro-scepticism. Under William Hague and Michael Howard, it was Conservative Party policy to withdraw from the CFP. In 2005, Shadow Fisheries minister Owen Patterson published a Green Paper outlining how the UK would take back control of its Fishing Waters.  However, David Cameron – having posed as a euro-sceptic during his Conservative leadership campaign - dropped the policy upon becoming leader.  So now that we are leaving the European Union, how does the current Conservative Government intentions match up ? The recent Brexit white paper does not provide grounds for optimism.

Para 1.1 “To provide legal certainty over our exit from the EU, we will introduce the Great Repeal Bill to remove the European Communities Act 1972 from the statute book and convert the ‘acquis’ – the body of existing EU law – into domestic law. This means that, wherever practical and appropriate, the same rules and laws will apply on the day after we leave the EU as they did before.” 

Para 8.16 “In 2015, EU vessels caught 683,000 tonnes (£484 million revenue) in UK waters and UK vessels caught 111,000 tonnes (£114 million revenue) in Member States’ waters. Given the heavy reliance on UK waters of the EU fishing industry and the importance of EU waters to the UK, it is in both our interests to reach a mutually beneficial deal that works for the UK and the EU’s fishing communities. Following EU exit, we will want to ensure a sustainable and profitable seafood sector and deliver a cleaner, healthier and more productive marine environment.” 

This suggests that the Common Fisheries Policy will be converted into domestic law. Worryingly, there is no commitment to restoring UK sovereignty up to the 200 mile limit or rejecting the Common Fisheries Policy. A post-Brexit revival of British fishing needs 2 key policies from the UK Government:

Firstly, the CFP must be repealed and not simply adopted into into UK law.  As a Fishing for Leave spokesman explains “When the CFP (Common Fisheries Policy) ceases to apply on EU withdrawal, the UK can automatically repatriate exclusive competency over our 200-mile exclusive economic zone (EEZ) and all fishing resources within. The EU fleet will be automatically excluded from this area, unless the government adopts the disastrous CFP as proposed in the Great Repeal Bill.”

The CFP and its system of quotas is disastrous for fish stock and the fishing industry. It incentivises cheating & discarding of marketable fish. A system based on “days at sea” would incentivise transparency, accurate reporting, innovation and productivity.  John Ashworth recommends the Faroese system as a good fit for the UK – this is a “days at sea” system and the waters around the Faroes Islands have a diverse fish stock (like UK waters).

Secondly, the UK must reclaim sovereignty over all fishing waters within the 200 mile limit, including the historic “acquired rights” inside the UK's 12 mile limit granted to European nations under the 1964 London Convention. As a Fishing for Leave spokesman explains this offers a “back door access to the six-12 nautical mile band around the UK. … It would allow EU vessels access and, therefore, the ability to claim they had acquired rights under UK law.” 

The London Convention, which came into force in 1966, allows any contracting party to renounce the agreement after 20 years (i.e. 1986). Two years notice is required to activate Article 15 of the London Convention. So to avoid an overlap period and the risk of the EU fleet acquiring rights under UK law, the UK Government must activate  Article 15 of the London Convention at the same time as triggering Article 50 of the Lisbon treaty.


What UK Government must do now

There are elements  in the Fishing industry who have invested heavily in the current CFP Quota system. It seems possible that the Governments attention has been captured by these vested interests. The Government may wish to recompense or provide equivalent access – but the Government must unambiguously reject any idea to adopt the CFP and its disastrous quota system.

The Government also seems to be reluctant to renounce historical access rights granted under the London Convention for fear of upsetting EU member states during the Brexit negotiations – depressingly repeating past failed attempts to curry continental favour via the sacrifice of British sovereignty over its territorial waters. Moreover it would be foolish to give up important negotiating leverage. The UK fishing fleet will take some time to recover capacity, and the UK could choose to grant temporary licenses to foreign fleets under UNCLOS 3 – but this power to choose only exists if historical access rights have been renounced. The Government must trigger Article 15 of the London Convention at the same time as Article 50 of the Lisbon Treaty.

Yet again, there is the distressing possibility of British Fishermen being “sold down the river” by our own Government. Edward Heath betrayed British Fishing and it has lived long in the memory and been a symbolic rallying point for euro-sceptic dissent. Brexit must mean Brexit for British Fishing. Be in no doubt – British fishing will be an acid test for Prime Minister May. If Theresa May delivers on Fishing, she will gain an enormous level of trust in all parts of the UK (notably Scottish Fishermen who are less than impressed with Nicola Sturgeon's stance). If she fails, she could lose the trust of the nation in her ability to deliver any aspect of Brexit.