EU: Trade in Goods (European Affairs Committee Report)

The start of the committee’s inquiry followed just after the Government’s decision in September 2021 to delay the introduction of certain import controls on EU goods. It was the third time that the Government had announced such a delay. The report therefore assessed the causes and consequences of that delay, including the impact of asymmetry in the import controls applied by the EU and the UK, it being the case that GB exporters faced more stringent checks than their EU counterparts. We noted concerns among some businesses that this could create a competitive disadvantage.

At that time, full customs declarations were due to be implemented in January 2022, with sanitary and phytosanitary, or SPS, controls and safety and security declarations due to follow in July 2022. The customs controls were indeed implemented as planned, in January 2022. In their response to the committee’s report in February 2022, the Government said that they would introduce the remaining controls on time. However, the remaining controls were delayed yet again in April 2022 and are now not due to be implemented until the end of 2023 at the earliest. Our committee engaged in correspondence with the then Minister for Brexit Opportunities, Jacob Rees-Mogg MP, in the wake of that delay. He confirmed that the latest decision reflected a more fundamental change in approach, with the nature of the border regime as well as the timetable under review. He was also dismissive of concerns about the impact of asymmetry at the GB-EU border, saying that the Government rejected

“the premise that increasing burdens for importers and increasing costs for British consumers will help our exporters”.

However, there is still uncertainty about the future border regime. We were told that the Government would publish a target operating model in autumn 2022 that would set out in detail how and when the new border regime would be implemented. We still await that document. According to the Department for Environment, Food and Rural Affairs, it is now due to be published in early 2023. Can the Minister provide an update on the UK’s future border control regime and the publication of the target operating model?

Questions have also been asked about the UK’s biosecurity, given the absence of the remaining SPS controls on imported plants and animals from the EU. Last summer the Food Standards Agency said that

“the continued absence of a fully implemented UK import control regime for EU food and feed reduces our ability to prevent foods that do not meet the UK’s high standards being placed on our market.”

What steps are the Government taking to safeguard the UK’s biosecurity in the absence of the remaining SPS controls?

On the overall impact of the end of the transition period, the committee’s report concluded:

“Although the worst-case scenario of widespread disruption did not come to pass, GB-EU trade in goods is now more complicated and expensive than it was before January 2021.”

We noted that SMEs and the agri-food sector were particularly hard hit. In their response, the Government said that the new relationship

“will contain many benefits for individual businesses; but … this involves some change”.

Our committee wrote back to the Government asking them to explain what these many benefits were. In his reply, the then Minister for Europe, Graham Stuart MP, highlighted the TCA’s provisions for zero tariffs. I found his answer somewhat perplexing and disappointing.

The committee’s report identified some more specific problems that traders have faced and proposed several solutions. However, the Government’s engagement with those recommendations, both in their response and in the subsequent correspondence, was mixed. On SPS requirements, the committee highlighted that these had been a major challenge for exporters and called on the Government to seek an SPS agreement with the EU. The government response did not engage with that recommendation. In a subsequent letter, the Minister clarified that the Government were “open to discussions” on SPS, but not on the basis of “alignment with EU rules”.

On customs, the committee called for increased EU-UK co-operation, including exploring a so-called single customs office model. The Government dismissed this recommendation, arguing that the TCA did not provide the legal basis for co-operation of this kind.

On VAT, a major concern for small businesses, the committee welcomed the Government’s efforts to persuade the EU to list the UK for VAT purposes, which would eliminate the need for businesses to engage an expensive fiscal representative when exporting to the EU. The Government have since said that they will continue actively to pursue facilitation in this area.

These and other matters could all be addressed within the plethora of trade specialised committees set up under the trade and co-operation agreement—committees that are operational but not really operating due to the Northern Ireland protocol impasse.

There may be further challenges on the horizon. Businesses that the committee spoke to in the inquiry were not opposed to regulatory divergence, provided that it was carefully considered. However, the Retained EU Law (Revocation and Reform) Bill could produce further divergence between the UK and the EU in an unplanned way and in ways that might interact with the trade and co-operation agreement. What assessment have the Government made of the compatibility of the retained EU law Bill with the UK’s commitments under the trade and co-operation agreement, in particular regarding the level playing field provisions on employment and environmental standards?

There was a lot in our report and, I feel, many clues as to how to improve matters. Trade is always mutually beneficial; I fervently hope that the many trade-specialised committees can be unleashed soon to unlock that benefit. In the meantime, I very much look forward to the debate ahead. I beg to move.

The many trials and travails of political life are evident in the public discomfort of too many Members in both Houses. My first political hero was the late Iain Macleod, followed by a number of noble Lords in this House. Iain encouraged me to listen well, even to those with whom I disagreed. In EU politics, this has been more than a tall order, for the instances of facts being twisted by some politicians and the press are too numerous to list. However, as my colleagues on the various EU Select Committees have identified, we need to remain fully involved with the EU to get the best that remains after our losses from our exit from the union. I have already asked Ministers to take greater action to improve the passage of goods and people at border crossings, for instance. This Select Committee’s work is critically important to ensure that all aspects of the changes are fully understood and well implemented.

Whatever the future of this House, coming generations face a major challenge in contributing as much to reform in British society as has been achieved by those in the Lords today, in their wide range of careers; I have learned so much from them. Politics of any shade need doers who contribute sound examples of improvement, especially for local societies and national charitable work and particularly in the health and social care field, as in all aspects of our public life. My sincere wish is that we can stimulate much more involvement in local communities, which will improve our society. Without that, we are not a really active nation in the way we should be.

I wish all colleagues and staff good health, sound debate and sufficient time away from debates to regain a happy balance between work in your Lordships’ House and recreation time, especially in their later years. I thank all noble Lords for these fascinating years and a really enjoyable career, although sometimes it was a bit tiring.

Many of the recommendations in the report are about clarifying the administrative arrangements at the time, including changes in deadlines that were uncomfortable for business, and the effects on SMEs. One of the interesting points in our report is what it says about the absence of import controls; it is something of a curiosity. We came to the conclusion that the failure of the Government to meet their target date for imposing import controls was causing uncertainty. Perhaps it was, but one of the oddities was that, despite the absence of import controls when there were controls on the other side of the channel on British exports, British exports were doing much better than continental exports from the EU into this country. I think that that underlines the point that not all the problems that occurred were entirely due to Brexit or the Brexit regulations.

Three years on, our economy is undoubtedly facing very considerable problems. Sometimes I feel that almost everything is being blamed on Brexit. The day before yesterday, Mr Verhofstadt said that Ukraine would not have been invaded had it not been for Brexit—that seemed to be a rather extreme statement. Then there was the statement by a distinguished former Governor of the Bank of England, who claimed that in 2016 the UK’s GDP was

“90 per cent the size of Germany’s. Now it is less than 70 per cent.”

That is, as a leading economist in one of the remainer think tanks said, something of a “zombie” statistic. In fact, since 2016, the GDPs of Germany and the UK have grown by almost exactly the same amount. The report emphasises, as the noble Earl, Lord Kinnoull, did, that it is almost impossible to separate the effects of Covid and Brexit—and it was published before the invasion of Ukraine, which has added another complicating factor, making it very difficult to separate that as well.

For example, to take the shortages of labour, which are common to a number of countries, including the United States, but a very severe problem here, if during Covid a restaurant is closed and an Italian waiter decides to return to his own country, Italy, is that because of Covid or because the restaurant was teetering under the hammer from Brexit? Was it Covid or Brexit? It is very difficult to say.

Some people are determined to torture the statistics until they confess up the right answer. One example of that is the so-called doppelganger analysis used by certain think tanks. This is the system that takes a number of countries, which in the past were growing at the same rate in a particular period, and extrapolates that forward to today. It then comes up with the conclusion that, if we had grown at the same rate as these countries, our economy would be 5% greater. This has been recycled repeatedly in a lot of the media. But of course it depends, first, on the period that you choose and, secondly, on the countries that you are comparing yourself with. In the analyses that have been used, the countries that Britain has been compared with in some of the think tanks’ findings have been countries such as Australia, New Zealand and Norway—hardly a very persuasive comparison.

Rather than looking in the crystal ball, one should read it in the book. As the noble Earl, Lord Kinnoull, pointed out, the ONS figures now published give a more encouraging picture for exports. As he said, exports in 2022 in currency terms are at a record level and, adjusted for inflation, at a level not seen since 2019. If you look at the graph, it looks as though exports are broadly back on trend. Of course, we have had recently a much-publicised and gloomy report from the IMF forecasting that the UK economy will shrink this year; it does not actually mention Brexit. Today the Bank of England has said that it expects the economy to shrink this year, but by less than it had previously thought. Sometimes these reports in the recent past have been over-pessimistic for the British economy. But as I said earlier, since 2016 the British economy has grown at much the same rate as that of Germany.

One subject on which there was a lot of debate in our committee was divergence—to what extent regulation should be allowed to diverge from the previous model in the European Union. Some members of the committee were particularly apprehensive about that, clinging to the idea that we should remain aligned in regulation. My view is that we certainly should not make a fetish of divergence—we should not diverge for the sake of divergence—but it is important to have the parliamentary power and freedom to diverge. But those decisions should be driven by industry and commerce. Divergence is very important for new technology. As the noble Earl, Lord Kinnoull, said, we had the arguments around SPS and agricultural products, and our report urges that there should be an agreement with the EU on SPS. Yes, there should be an agreement—but that should not necessarily mean alignment.

The report refers to the review of the TCA due in 2024-25, and rightly urges that the UK Government use the 32 specialised committees, the partnership council and the joint committee to build on the trade arrangement that we have and build on the TCA to get arrangements that are more flexible and comprehensive, to develop a relationship that is mutually beneficial. I remain a supporter of Brexit but that is the past. It is important now to improve our relationship. We can be a third country to Europe, but a good friend, a strong ally and a partner. We should put the past behind us and, as the noble Lord, Lord Hague, said to our committee, we should adjust to the future, rather than attempt to adjust Brexit. I commend the report to the House.

Also, the SPS issue is very important for small companies. We have heard of all the problems with Scottish seafood, plant growers and all that stuff: some of the eminent Members of this House own companies in the plant-growing area. They have faced very considerable problems, yet the Government are taking what I regard as a dogmatic position on SPS. Again, it would be good to hear whether there is any shift from the view taken by the noble Lord, Lord Frost, in the negotiations, which was that, in any circumstances, dynamic alignment with the EU was completely unacceptable. I am not suggesting dynamic alignment in all areas, but it seems to me that to say it could never be acceptable, you have to look at the price you are paying, and I think quite a lot of small businesses are paying a very high price for a bit of Tory dogmatism, to be quite honest. Are the Government going to reconsider that position in the future?

The debate on Brexit is moving on. I was passionately opposed to it, but I regard my position now as asking how we make the best of where we are. I do not see any prospect of an early return to the European Union; for that to happen there would have to be a settled political consensus in the UK—in other words, a very significant shift of opinion in the Conservative Party about its attitude to the European Union. I do not think that our partners would be in the slightest bit interested in a British reapplication while the political debate in Britain is so heated and divided. We had better accept that and try to make the best of it we can. I have detected a sense in which the debate is moving on. For instance, we have moved away from the position where a lot of people who were in favour of Brexit claimed that we would not suffer any problems in trade as a result of leaving. There are undoubtedly bureaucratic barriers that have been erected, and the TCA is the result, and that is now more admitted than it was two years ago.

It is six years since the referendum; it is three years since we left. The Government have been presumably working very hard on trying to define a policy of divergence which would demonstrably improve our competitive position. In my view, they have not as yet produced much of a positive result; this is a very significant failure on the part of those who were the strongest supporters of Brexit. I am unimpressed by the trade deals that we have managed to deliver, in terms of their economic benefits. I am convinced that there are areas where regulatory freedom would be beneficial, particularly, as the noble Lord, Lord Lamont, said, in the new high-tech industries, digital trade and all that. However, we do not see much coming out of the Government, and what I fear about the Bill we are going to debate next week is that there is again a sort of ideological presumption that if we abolish all EU law, somehow this is going to result in a great revival of the British economy. If you are serious about this, you have to do detailed sectoral analysis of where divergence might be beneficial. I see very little evidence of that on the Government’s part, with the possible exception of financial services, and most experts on financial services think that the Government are exaggerating the extent of the divergence that they are recommending. We have to make the best of it, and I hope the Government recognise that this is what they are trying to do.

I would be interested to hear what the Government feel their policy will be for the future of regulation; what their policy will be for the revision of the TCA in two years’ time—we have to start thinking about that—and where they see the possibility of what I would call sovereign alignment. If it is in our interests to align with EU rules, that is a sovereign decision of ours, not the EU imposing anything on us. It is up to us, so we should allow for that possibility. At present, it is just ruled out. I think that is a very big problem.

There we are: we must do our best to improve things. I will always remain a passionate pro-European. I believe that events since 2016, particularly in Ukraine, have underlined the importance of close engagement and friendship with our European friends and partners. While we cannot be members of the European Union in the foreseeable future, I will certainly never give up campaigning for a united Europe.

That is the issue for us: the role of Britain, and the UK. I echo his comments and those of the noble Lord, Lord Liddle, that the UK’s involvement across Europe in the context of Putin’s invasion of Ukraine has started to build those ties and relationships again. That is important after Brexit.

There are three statistics that stand out to me about the UK-EU trade figures and statistics over the last couple of years. First, the UK’s exports to the EU fell by 13% in 2021. Secondly, EU-UK trade is currently 20% lower than if Brexit had not happened. Thirdly, the value of customs duties for UK businesses went up by 64% in 2021. For my brief contribution, I want to look at one area: chemicals. As at September 2022, the UK exported 2.8 billion goods from the chemical sector into the EU, and imported 4 billion—so we are already seeing a continued difference between exports and imports.

I want to focus not on customs duties and other delays and barriers, as others noble Lords have already done, but on the so-called freedoms that this Government have referred to—our ability to create our own rules and regulations and not, to quote many Ministers, blindly follow the EU. The consequences of this policy in relation to chemicals are evident, particularly in how the UK manages the retained EU law and the proposed sunset of all EU laws by the end of this year.

On 21 November, in Grand Committee, we considered the Biocidal Products (Health and Safety) (Amendment) Regulations 2022 and the changes to the certification process following our departure from the EU. It is the first time I have seen, up close, the practical problems that businesses, government and government agencies have faced with having to manage things. The Secondary Legislation Scrutiny Committee noted in advance:

“These Regulations propose to extend the transitional period by five years because HSE has been unable to process the large number of applications for re-authorisation, in particular because much of the data … is stored on databases to which Great Britain no longer has access.”

The committee was concerned about the progress that was being made by the HSE more recently.

I raised this issue with the very helpful Minister at that time, the noble Baroness, Lady Stedman-Scott, in Grand Committee, and I asked her two questions. The first was how the department and the agencies that report to her—specifically, in this case, the Health and Safety Executive—could be protected from the proposed cuts to the Civil Service and other public bodies in order to deliver the extended timescale for an agency that is clearly struggling to manage the new arrangements, where there has to be dual certification, once for the UK under our own system and again for any company exporting to the EU. I also asked her about how much this extra certification was going to cost the Health and Safety Executive, and eventually businesses, because everything is done on a cost recovery system.

The Minister’s responded, on the first issue, that there were some commitments

“to ensuring that health and safety legislation continues to be fit for purpose”,

but she could not give me any more details about the cost more generally. However, on resources specifically for the chemicals division, she told me—and I have to say I was astonished:

“The total budget for the HSE’s chemical regulation division has grown by 39%, from £22.4 million to £31.2 million between 2018-19 and 2022-23, reflecting the HSE’s need for increased resources for its post-EU exit responsibilities.”—[Official Report, 21/11/22; col. GC 239.]

That is an extreme increase in a budget, at a time when the Chancellor of the Exchequer is saying we must cut all public services.

I have three questions for the Minister. He will be relieved, I think, to know that I am not going to ask him about biocidal regulation. First, are government conducting a formal review of capacity relating to all bodies—whether government bodies or arm’s-length bodies—in charge of any retained law being changed that has already diverged, such as this particular biocidal product? We should now have some idea of what extra costs there are likely to be. Secondly, is an assessment being made for all future retained law that is going to diverge in the future and how much it will cost? Thirdly, what prospect remains for cuts to the Civil Service and the arm’s-length bodies in light of this information? It seems to me that the one message we can take from this excellent committee report is that, if this Government want to make the new arrangements work, it is clear that current arrangements are not working in the Health and Safety Executive in an absolutely vital safety area both for biocidal products in the UK and for any we may export to the EU.

I appreciate that some of that might be quite technical, and if the Minister cannot reply today, I hope he will be able to write to me. However, it raises a more general issue about whether this country is prepared to understand the realistic cost of Brexit and how doing things our own way will not be just a wonderful theory. In practice, it will cost money, which means costing our businesses money.

My first question to the Minister is: does he stand by the Government’s extraordinarily complacent assertion in its ministerial correspondence with the committee, on which I also serve, that our trade with the rest of Europe is “generally proceeding well”? If he does, I recommend he say that to any of the trade associations or groups that assert the contrary. He would be likely to get what the great PG Wodehouse called “the bird”.

None of this deprives our debate of its validity and topicality. Many of its main themes have been extremely cogently set out by our chair, my noble friend Lord Kinnoull, who has brought such skill to the management of our committee. I will concentrate on two of them: sanitary and phytosanitary rules, and the predicament of small and medium-sized enterprises, both of which have been referred to by previous speakers and make up important components of our trade with the EU. SPS sounds a pretty arcane subject but those rules, applied to us as a third country, contribute much of the friction which has been imposed on our exports of agri-food products since we left the EU. Trade in those products had grown steadily throughout our period of EU membership.

My first question is: should we not seek to conclude an SPS agreement with the EU, as some other third countries have done—Switzerland and New Zealand, for example? In this way, we would alleviate the burden placed on our agri-food exporters. The case is all the more compelling when you realise that such an agreement would remove some 80% of the problems which bedevil the Northern Ireland protocol. Your Lordship’s committee proposed that course of action several times, and every time the Government rejected it out of hand, as the noble Lord, Lord Liddle, has said. Why? Well, they did not really deign to explain that in any detail. So, my second question is this: can the Minister explain why that common-sense solution should not be adopted? In doing so, it might be relevant to recall that, when our committee took evidence last week for our current inquiry in Wales and Scotland, we were told that negotiating an SPS agreement was a top priority for both those nations. That was the view of all parties—all parties—in Wales and Scotland.

Then there is the case of small and medium-sized enterprises. Their trade association said publicly last week that 20% of the companies that used to trade with the rest of Europe had now ceased to do so altogether, and that many others were struggling with increased bureaucracy and costs. Again, your Lordships’ committee recommended that the Government extend the duration of the scheme they introduced when we left the EU to assist small and medium-sized enterprises, in order to help them overcome these problems. Again, this was rejected, without any serious arguments to justify that. So my third question is: does the Minister not think that decision should be reversed before any more damage is done?

It is not impossible that more bad news could be coming down the track so far as our trade with the rest of Europe is concerned—and we must remember, of course, that that is nearly half our trade. Most obviously, if the Government’s efforts to find a negotiated solution to the problems with implementing the Northern Ireland protocol were to fail, some kind of increase in trade barriers could ensue. That is a pretty obvious one. Also, if the EU’s developing policies of introducing cross-border adjustment mechanisms to take account of carbon content and climate change considerations were to result in more friction in our mutual trade, that would be damaging to us too. The application of the EU’s rules of origin could do the same, and they are due to move into a sharper focus and higher gear in the coming year.

I invite noble Lords to reflect that this is all taking place during a period when the sterling exchange rate’s loss of value, as I referred to before, should have been giving our exports a major boost—it clearly has not done so—and when our place as one of the main recipients of foreign direct investment both from outside Europe and within it has been slipping away. I would argue that there is no ground for complacency here—quite the contrary. Perhaps the Minister will tell us that the Government have shifted from their stated view that things are generally proceeding well. I really hope he will do that when he replies to the debate.

The Government’s response is a very singular document. It is basically a list of their efforts to overcome obstacles to Britain’s trade with its principal trading partner that the Government themselves are responsible for creating. It is a very unusual situation. In saying that, I am not trying to reopen the Brexit debate; as the noble Lord, Lord Liddle, said, that issue is settled. What I am doing is drawing attention to the consequences of the terms on which Mr Johnson and my noble friend Lord Frost negotiated our departure from the EU. It did not have to be this way. The country took the decision to leave the EU, which I personally regretted very much, but the manner in which we did so has created a range of problems that could well have been avoided had we adopted different negotiating tactics and objectives.

As we know, all countries have been hit by the effects of Covid and the consequences of the war in Ukraine. In explaining the problems facing the British economy, Ministers harp to a great degree on these matters but, in those respects, the United Kingdom is in the same position as everybody else. The reason why we are facing additional problems is, as I have just said, the terms under which Mr Johnson negotiated our departure.

Their manifestations are clear for all to see: the fact that the UK is the only major economy still at pre-pandemic levels; the hit to our exports, to which other noble Lords have referred; the fact that business investment has been growing by so much less than the G7 average; the shortage of workers, which all European countries are suffering from but our problems have been made worse than they need have been; and the IMF forecasts that suggest that we will be alone among the major economies in going into recession.

As my noble friend Lord Lamont pointed out, forecasts are not always right and the UK has defied pessimistic forecasts in the past. However, this accumulation of factors is significant. I agree with those who say that Brexit is not the only factor behind them but the terms on which it was negotiated are a very important factor. All these problems were foreshadowed in the committee’s detailed questioning of witnesses and the responses that they received. From the evidence we collected, it was clear that the totality of the individual issues that we identified would cause major problems to the economy.

My party devotes a great deal of time to debating growth and how best to achieve it. Growth is a difficult thing to achieve but one way in which we could certainly contribute to growth would be, as the noble Lord, Lord Liddle, has pointed out, making Brexit work. As this report and the government response shows, one of the best things we can do is set about resetting the relationship between this country and the European Union. It is not a question of returning to the EU. That is not something we should be thinking about at all at the present time. We should be thinking about how this country can deal with the EU on a constructive, equal and mutually beneficial basis. I very much hope that an agreement on the Northern Ireland protocol might prove to be the first step on that road.