Northern Ireland Affairs Committee
Oral evidence: Future of the land border with the Republic of Ireland, HC 700
Wednesday 1 February 2017
Ordered by the House of Commons to be published on 1 February 2017.
Members present: Mr Laurence Robertson (Chair); Mr Stephen Hepburn; Lady Hermon; Kate Hoey; Danny Kinahan; Jack Lopresti; Dr Alasdair McDonnell; Nigel Mills; Jim Shannon; Bob Stewart.
Questions 366-428
Witnesses
I: Michael Lux, EU customs and international trade lawyer; Eric Pickett, EU customs and international trade lawyer.
Witnesses: Michael Lux and Eric Pickett.
Q366 Chair: Mr Lux, Mr Pickett, thank you very much for joining us. As you know, we are looking into the future of the land border with the Republic of Ireland, and we are partway through our inquiry. We are very grateful to you for coming to speak to us today. Could I ask you to introduce yourselves, tell us your areas of expertise and your current work? That would be very useful.
Michael Lux: My name is Michael Lux. I started my career in the German customs administration, first at a regional office in Hamburg, and subsequently in the Ministry of Finance, where I held different posts, in both the customs tariff area and the IT area. Then I moved to the European Commission, and I was head of unit, inter alia, for the customs tariff, for the customs code and for customs procedures. That was my last job.
Subsequently, after my retirement, I became an attorney and consultant in the customs area. I have done that for five years now. I would like to highlight that I do not speak on behalf of the European Commission. I speak only on behalf of myself as an expert, but I have over 40 years of experience in the customs area.
Eric Pickett: My name is Eric Pickett. I am a German lawyer, although I am a US citizen. My area of expertise is WTO law and international trade law. I also advise clients on EU customs law. In particular I advise clients and represent them before the local authorities, customs authorities, in trade remedy instruments, for example anti-dumping, anti‑subsidies.
Q367 Chair: Thank you. We are looking at a fairly narrow issue here, so we may not use all your expertise. The relationships between Northern Ireland and the Republic of Ireland in particular, and between the rest of GB and the Republic of Ireland, are very important. They are an important consideration as we move forward with the Brexit negotiations. Any help and advice you can give us on that would be very useful. What are your initial thoughts on that situation, that arrangement, that relationship?
Michael Lux: The first issue to be settled is what the relationship will be between the EU and the United Kingdom. That decides everything. There are only two options with regard to the land border. Whether the UK remains in the customs union is not relevant, but what is relevant for the border controls is whether Northern Ireland remains within the EU customs union. If that were the case, then nothing would change in the relationship between Northern Ireland and Ireland. That is the first point.
If that cannot be achieved because the UK does not want to have even a part of its territory remain in the customs union, then there are different possibilities for agreements between the EU and the UK. Each of these agreements, whether it is a customs union agreement or a free trade agreement, requires that customs controls take place at the border.
The next point is to differentiate between travellers who travel across the border in a private capacity and commercial movement of goods over the border. For private people crossing the border who do not have a large amount of goods with them, in the EU customs legislation we call that negligible traffic. If there is negligible traffic then people can cross the border without having to go to customs. There might be small paths where there are no customs officials.
There the only question is: what is negligible traffic? This term is not defined in the law. When the term was introduced I tried, as a Commission official at the time, to get a definition, but the member states refused on a definition. I had even proposed to delete that term, because it leads to non-uniform treatment within the Union. Fortunately for your case, this term has remained in the customs code. Ireland is free to define what “negligible traffic” is. I can tell you that in Germany goods of a value of €50 are considered as negligible traffic, but it will probably not be a problem if it is slightly more than that.
This is only for people moving from Northern Ireland to the Republic of Ireland. What the UK does on its side when people come from Ireland to Northern Ireland will be up to the UK to define. This is very important to understand. I can tell you what will happen for traffic moving into Ireland or out of Ireland, but I cannot tell you what will happen on the UK side, because the UK will be free to do whatever it likes.
Q368 Nigel Mills: On the €50 in Germany, is that €50 of goods that are intended to be left in the other territory or sold; or is it that, if my suit or my phone is worth more than €50, I am snookered before I start?
Michael Lux: No, it is if you buy things in the other country and bring them back. The typical example is the Alps and Switzerland. You are in Switzerland, you have bought some food for walking there and then you cross the border. There is no customs office and while you are walking you move on to the German side. As long as what you bought is only up to €50, it is okay.
What people actually do is the following. They buy a Swiss watch, which may be worth €10,000, and try to walk across the border there. If there is no customs official, then the duties and the VAT are evaded. Let us not forget, we are not only talking about customs duties; we are also talking about VAT, and in the case of tobacco and wine, for example, we are talking about excise duty. It is important to understand that it is not only a customs problem. It is also a VAT and excise duty problem.
Q369 Nigel Mills: Just to check, the €50 would only apply to goods an Irish citizen bought while in Northern Ireland and took back into the Republic.
Michael Lux: Yes.
Q370 Nigel Mills: It would not apply to things somebody crossing the border happened to already have in their possession that they intended to keep or take back with them. It is literally purchases you have made while you have been out of the country.
Michael Lux: Yes, so do not worry about the suit you are wearing, because you probably did not buy a suit on the other side. If you did then you would have to throw away the old one. That is not legal advice.
Nigel Mills: That sounds like tax evasion.
Q371 Chair: To clarify, when you talk about negligible traffic, is that just goods, or is there an equivalent for people to travel?
Michael Lux: No.
Chair: It could not really work that way.
Michael Lux: Yes. I am glad you asked the question, because customs law deals only with goods. The people question is not concerned with that. There is one exception: if you swallow goods, which happens particularly with drugs. You swallow the drugs so that the customs official does not find them. Then goods that are within a person are also covered by customs law. Customs can then search, scan you and find out, and force you to release the goods.
Q372 Chair: Is the €50 determined by Germany or the EU?
Michael Lux: No, there is no uniform definition of negligible value.
Q373 Chair: So the Republic of Ireland could say it is €500.
Michael Lux: No, that is not possible. I now come to the next threshold. This is the first threshold, where nothing needs to be done. Then we have a regulation and a directive, which I will quote now. It is directive 2007/74/EC. I have it with me, so if you want you can take a photocopy afterwards, or I will leave it with you. That fixes the threshold for travellers, because now we are talking about private people who cross the border.
The threshold for travellers where you do not have to pay customs duty, VAT or excise duties is €300 per person. If you are under 17 there are special thresholds, but I want to express the principle. The principle is €300 per person if you cross a land border. If you come by air or sea it is €430, but we are talking about the land border. That is €300.
Then for certain goods there are limits. For tobacco there are very specific limits. For alcohol, for example, it is one litre of alcohol and alcoholic beverages, or two litres of alcohol if it is less than 22% volume. That is very specific. You should know if you buy alcohol or tobacco that there are limits you can take duty free.
Q374 Chair: So there are limits to the amounts we can bring back to the UK from the continent as well.
Michael Lux: If you bring it back to the UK, again, that is up to the UK.
Q375 Chair: As things stand now, there are limits.
Michael Lux: Yes, and in principle these limits will also apply to trade between Ireland and Northern Ireland. Of course, the UK is free to change that, but in principle the same rules will continue.
Q376 Chair: Perhaps I could bring Mr Pickett in here, and then I will open it up to other members. What is your general impression of the issues with regards to the relationship between Northern Ireland and the Republic, and the UK and the Republic of Ireland?
Eric Pickett: I agree with my colleague, Mr Lux. One thing that needs to be borne in mind when discussing this is that, once the Brexit becomes effective, Ireland will still remain a part of the EU. It is very important to remember that. That means that it is subject to the customs code. The question of the situation of Northern Ireland still has to be discussed and settled. We do not know what that is. Several different models are available.
Assuming that both the UK and Northern Ireland exit the European customs union, then in that case Northern Ireland and the UK generally are third countries with respect to Ireland and, indeed, the rest of the European customs union. That means that any goods moving from Northern Ireland to Ireland are subject to the European customs code and related legislation. That is a very different situation than we have today.
If somehow Northern Ireland is able to remain in the European customs union, in that case Ireland and Northern Ireland are part of the EU customs union and we have the same situation between those two parts as we have today. In short, nothing has changed. However, one also has to bear in mind that in that case you have an internal customs border within the United Kingdom itself. Any goods moving from Northern Ireland to Scotland, Wales or England are then subject to the applicable customs legislation, which would be the UK legislation.
This shows that there are many, many different moving parts. The only thing that Mr Lux or I, or anyone else, can do is say, “Okay, under these conditions we can expect it to go in this sort of direction. Here is the structure of what we can expect to come out, very basically.”
For example, if the United Kingdom leaves the European customs union and then decides to form a new customs union with the EU—this is often called the Turkish model—you still have border controls. You still have a border, and that border would also apply as between Northern Ireland and Ireland. An FTA, free trade agreement, between the UK and the EU is going to get you the same thing. You are going to have a border control. You are going to have customs border.
There are certain things that you can do to ameliorate the situation, to make it easier. For example, you can have mutual recognition, equivalency requirements applicable to manufacturers, etc, so that the trade between the two parts is facilitated. However, that does not remove the issue fundamentally.
Furthermore, just as a small point, since it is my favourite subject, in the case of the formation of a new customs union with the EU, or a free trade agreement, both of those would have to be compatible with the applicable provisions of the WTO and the covered agreements, in particular Article XXIV of the GATT. I am dubious as to whether it would be consistent with the provisions of Article XXIV of the GATT for Northern Ireland alone to have an FTA or form a customs union with Ireland and/or the EU. In other words, I think it would very likely have to be the whole of the UK and not just Northern Ireland.
However, not all is necessarily lost, because even in that case it might be possible—and I stress “might”—to obtain a waiver. In that case, if a waiver can be obtained, then that particular approach could be possible.
Chair: There are lots of questions. I did promise to bring other people in, so I will do.
Q377 Lady Hermon: It is wonderful to have two experts in front of us this morning. It is not that we have not had experts in the past, but your particular expertise is very useful to this inquiry. I am sure you are aware that the Prime Minister, Theresa May, visited Dublin at the beginning of this week, on Monday. If I remember correctly, after her visit it was suggested that what the UK Government was striving for was a frictionless and seamless border between the Republic of Ireland and Northern Ireland. Is that possible?
Michael Lux: These are nice words: seamless flow of goods. I have used them too in Commission communications on the customs code, but what do they mean? If Northern Ireland is not a part of the EU customs territory, then there is a customs border. So far I have spoken only about private people, and if they cross the border with goods of negligible value they do not have to go to customs.
We are now addressing the issue of commercial trade, and for commercial trade there are customs formalities. You cannot say that the situation will be the same as before. Okay, the Prime Minister did not say that either. I think what she meant was to keep the burden of customs clearance as small as possible. That is how I interpret these words.
There are certainly ways to keep things as simple as possible, but the first thing one has to bear in mind is the following. If goods are brought from Ireland to Northern Ireland, you have to lodge an export declaration. For goods moving, let us say, from Dublin to the border, we have an electronic system for that already, which is mandatory. Goods moving from Dublin to the border have to be declared in Dublin normally for the export procedure, and when the goods arrive at the border the export procedure is closed. You have to present a movement reference number of that export declaration. Then customs closes the procedure, sends a message back to Dublin, says, “Okay, that export procedure is closed.”
Q378 Lady Hermon: Do you mind if I just interrupt you? I am going to ask you, because in fact this is really critical. Have you ever visited the South Armagh border, and the border between Northern Ireland and the Republic of Ireland?
Michael Lux: No, I have not. Today there is not this requirement, because if you bring goods from Ireland to Northern Ireland that is within the union, so the export procedure does not apply.
Q379 Lady Hermon: Yes. I just understood from your earlier evidence that in fact you refer to officials at the border. The difficulty is we do not have officials at the border, and, according to the Prime Minister, we are not going back to the borders of the past.
Michael Lux: Yes, but Ireland has to do so. What you do on your side is up to you. If you feel that you do not need to control the goods that are entering Northern Ireland, and if you do not feel you have to recover VAT, customs duties and excise duties, you are of course free not to do that, but Ireland is obliged to do so.
Q380 Lady Hermon: How could the Prime Minister achieve a seamless, frictionless border? Is it achievable?
Michael Lux: It depends on how you define the team “seamless”. If you define the term “seamless” to mean there are no border controls, the answer is no, at least on the Irish side. Ireland is obliged to apply the Union law.
Q381 Lady Hermon: What I am also asking is: will the UK be required to have checkpoints and checks on goods, commercial goods, and people? We have talked about the value of your suit; your suit does not count. Will there have to be officials at the border in order to manage the customs legislation that still applies to the Republic of Ireland because it remains within the EU?
Michael Lux: If Northern Ireland remains in the customs union then all these issues do not arise. If Northern Ireland is no longer a part of the EU customs union then this is an official customs border of the EU, and Ireland is obliged to apply all these rules. On the UK side, if it is outside the EU, it can do whatever it likes.
What I can tell you as a customs official is the following. There will be a lot of fraud going on, because everything that is cheaper in Ireland will then be sent illegally to the UK. People will avoid VAT and excise duties if you have no control of what is happening, whereas for Ireland itself the goods will be VAT deducted. You export, the goods leave Ireland, so there is a VAT deduction. If there is no control on the other side then the goods can circulate in the UK without payment of VAT, so you will have a serious problem of VAT and excise duty evasion.
Q382 Nigel Mills: Mr Lux, the VAT position will not change between us leaving the customs union and now, will it? There is already a requirement if you move goods from the Republic to the UK to account for Irish VAT, and then effectively recover that in the UK. I am not sure that us not policing the border now means there are huge amounts of VAT fraud that will result if we change the border.
Michael Lux: I am thankful for your question, because the VAT directive provides two means of VAT exemption. One is export: you prove the export via the customs means, and you get your VAT exemption. That will be the case in the future for Ireland.
Then we have the reverse charge system for commercial deliveries. Under that, there is an exchange system if goods are sent from one member state to the other, as today between Ireland and Northern Ireland. Then the other member state is informed, under the communication system which exists between member states. Please do not forget that, the moment the UK is no longer in the EU, this exchange system will not apply, so you will not get this information any more. There will be a big loophole there.
Q383 Lady Hermon: The UK Treasury could not afford and does not wish to countenance any form of fraud or tax evasion at the border between Northern Ireland and the Republic of Ireland. How does the Treasury set about making sure that there is not this fraud that you have referred to, post the UK leaving the European Union?
Michael Lux: That is a good question, and there are two issues here. One is trucks passing by roads at a place where there is no customs office. That is very easy. If this is not enforced by helicopters flying over the border, for example, you could also imagine a camera which shows whether a truck is passing. You then send someone. You can see the number plate of the truck and you can then try to catch the truck. That is one thing. The other thing is people officially crossing the border.
At the Irish side, there will be customs officials. That is for sure, because Ireland is obliged to do that. Even if it does not like it, it has to do it. If there is nobody on the other side, you will have this problem of evasion. It is an interesting question, whether it will be possible to have an agreement between Ireland and the UK that Ireland informs the UK of all exports, so that you can then recover the VAT and the excise duties on that. We had this request from Russia when I was in the Commission. Russia said, “Please give us all the export declarations, because there is a lot of fraud in Russia. We want to have them.” From the side of the Commission, we have always refused this, due to business secrets.
We felt that business secrets from inside the EU should not be shared with countries outside the EU. It is an interesting question of whether this approach can be different with regard to the UK, which is also outside the EU. Given the protection of trade secrets, is it possible to share that with a country outside the EU? I do not dare to answer this question, but it will be problematic.
Q384 Lady Hermon: Problematic is a very diplomatic word. Mr Pickett, would you like to add anything to that?
Eric Pickett: We have a number of different issues with respect to the border. So far, a lot of what has been discussed has been specific to certain aspects of border controls. One aspect that has not yet come up but we need to bear in mind, in my view, is that of prohibitions and restrictions on certain products. That is also an issue for customs control and regulation. For example, you may recall the EU has banned Roundup from Monsanto. We also have the issue of GMOs, genetically modified organisms. Especially in respect of exporting to Ireland, Ireland is obliged to enforce these. How far the United Kingdom decides to follow the EU rules and regulations will also be an issue for these checks at the border.
Q385 Lady Hermon: I am sorry; I have to come back to both of you. How do you think these checks at the border are going to be managed? Mr Lux, there was a suggestion that there was going to be, heaven forbid, a helicopter flying about. In the terms of the border that we are talking about, that would be very sensitive, I have to say. It would be very sensitive. There may be a camera. Physically how are these restrictions, these checks, going to work? The reality is that the Republic of Ireland remains within the EU, no matter how good it wants the relationship to be with the United Kingdom, and it undoubtedly wants a good working relationship to continue. The Republic of Ireland is obliged to apply EU customs legislation. How is that going to work along the border? How are we going to have the checks on people crossing the border or goods crossing the border? How is that physically going to work? What are the obligations?
Chair: If I may just interject, I think the point is that we are told there are up to 300 passing points on the border, and laws are only really useful if they can be applied. I will just interject that as well.
Lady Hermon: Indeed. Thank you.
Chair: How on earth are they going to do it?
Michael Lux: For you it is a new situation. Please do not forget that for most other member states that is a reality. You are now being faced with the reality that exists in most other member states. I come from Germany. In the past there were borders with many more countries. Germany now has only a land border with Switzerland, but these are the rules.
In order to highlight what Mr Pickett just said, it is not only on duties but also on prohibitions and restrictions. We were joking about the case that a Northern Irish person has a walk and takes a dog over the border. There are specific rules on what kind of document you have to have if you bring your dog from outside the Union. You need to have a specific document for that. I have horses. If you bring a horse over the border, even by riding over the border, you must have a specific document with you.
How much Ireland is going to enforce that is a second question. What I can tell you is, if Ireland systematically does not enforce the EU rules, it will risk an infringement procedure.
Q386 Lady Hermon: In reply to that, we have a significant number of farms straddling the border between the Republic of Ireland and Northern Ireland. Speaking as a farmer’s daughter, who was brought up with dogs on the farm, I am quite sure there will be lots of dogs on these farms. I cannot imagine that there has to be a form filled out when a dog runs from the Republic of Ireland to Northern Ireland. This is just unenforceable.
Michael Lux: You are saying so. I am just telling you what the EU rules are.
Jim Shannon: That is why we are leaving.
Eric Pickett: There is also a difference between a stray dog, a dog running away, on the one hand, and actually bringing the dog on a lead across the border. They are two very different situations under customs law. Strange as that may sound, it is true.
Lady Hermon: It does sound strange.
Michael Lux: I would like to finish your question on the farmer, because this is foreseen in our legislation. If there is a farmer who has land on either side of the border, then he is allowed to bring the cows, for example, to the other side without having to inform customs.
Lady Hermon: And the dog?
Michael Lux: Yes.
Lady Hermon: So he could take his dog?
Michael Lux: Maybe you misunderstood me. I have dogs too. When I bring them to Sweden, for example, which is inside the EU, I also need a document from the vet that says my dogs are free from certain illnesses and they have had injections. I have to arrange the injections every two years, and in principle these rules already apply today. If you tell me that between Northern Ireland and Ireland this is not happening, then there is something wrong. Already today these rules exist, even inside the EU.
I am just saying, if the UK is outside, the implementation must be stricter, because the Commission will watch that the rules are applied. Mr Pickett mentioned the dog that strays alone over the border. Then there is no person who can be held responsible for that, but the moment you take the dog on a leash you have to follow the rules.
Chair: There could be said to be a sensible flexibility within—
Lady Hermon: Yes. I do not think people in the Republic of Ireland need to have sleepless nights worrying about the case of a dog.
Q387 Jim Shannon: The moral of this story so far is: do not wear a suit, do not ride a horse and do not bring your dog with you, or you are in trouble. That may be a bit facetious, but it seems to be the main theme this morning.
I want to ask you a very, very serious question in relation to my constituents. I have a very strong and influential agri-food sector. The companies concerned are Willowbrook Foods, Mash Direct, Pritchitts and Rich Sauces. These are four major companies, which employ probably around 1,500 to 2,000 people directly and indirectly. Just to give you an example, they have their perishable chilled foodstuffs that go across the border. Some of those companies do almost 35% to 40% of their trade in the Republic of Ireland, supplying shops and stores.
The Prime Minister has entered discussions with Enda Kenny this week, which were very productive. The body language told you they are people who want to work together. Sometimes I think if we wish to do it then we can make it happen, rather than find a reason why we cannot. I want to be positive, Mr Chairman, in relation to what we do in this matter. In my discussions with the Defra Minister, Andrea Leadsom, she informed us that she was also keen to see it be seamless, and that was her word. It is also the Prime Minister’s word. It is what you referred to, Mr Lux, as well, in relation to your replies to some of the questions so far.
I want to ask this question: how do we ensure the seamless movement of perishable chilled goods across a border every morning, as they do at Newry, and then down south to the central stores and deliveries? How do we make sure that happens? Is it done by paperwork? Is it an email transaction? Is the paperwork in place like it is at this moment in time, so that they do not have to sit at the border for an hour and a half or two hours, or whatever time it will take, and it will be straight down?
There has to be a way of doing that. I say this respectfully. We have to have a mindset that can make it happen, rather than a mindset that says, “No, this is the reason why it does not work.” Let us look at the reasons why it can work and let us get positivity into it.
I want to ask that question, and just a very quick one in relation to the issue of the euro. I want to understand that. You talked about €50. Is that a collective issue? Does this apply to commercial? Maybe it is slightly different.
Michael Lux: No, the €50 applies to non-commercial goods passing the border at a place where there is no customs officer. If you are above the negligible traffic, you are obliged to pass through a customs office. All these trucks that bring goods to the other side from Ireland have to pass via an official crossing where customs is available.
We can certainly talk about simplifications, yes. What I was saying is that there is no way that there are no formalities. Once that is accepted, we can talk about what simplifications can be made. As I said, for Ireland this is an export, so an export declaration must be made. It is electronic. The system is already electronic. At the border, the export must be closed. Each time a truck passes, for each truck the system must be closed. This can take place in minutes. If the customs official knows that it is always the same type of goods, he sees the truck and then gets the number of the export declaration and closes it. Yes, it is possible to do this in minutes.
In my experience of the Mexican-US border, such a procedure exists there as well, and this quick clearance is given to reliable traders. Then what happens is the trader himself is reliable, but the truck driver is not always, and then a lot of drugs are smuggled over the Mexican border. Once the people know this truck is never controlled, then they try to add some other goods that have not been declared. I am just informing you, as a customs official, about this practical aspect. Yes, you can make it seamless, but the danger is that this will be abused if you never have control.
Q388 Jim Shannon: Thank you for that, Mr Lux. That has been most helpful. The issue is that they are already doing it. The people seem to be coming across anyway, so I do not feel it will be any more of a concern than it is now. I am making specific points, Mr Chairman, because they are ones that they have come to me about. Just to follow on from what you are saying, Pritchitts has factories north and south, either side of the border. The milk that is needed for the products processed at Pritchitts in Newtownards, in my constituency, comes across the border.
You actually have three movements. We have a lot of milk purchasers locally that produce the goods, but we need more, so some will come from the Republic of Ireland. It comes across the border. Some of the powdered product goes back down south and then comes back across. In some cases, there are up to three journeys across the border to get the finished product, which then goes out from Northern Ireland to wherever it is. Am I right in presuming that the seamless process of minutes that you have outlined, very factually and very helpfully, would also apply to those transactions? They are coming across from the Republic of Ireland to Northern Ireland, going back down south, then coming back up again north. That is the other question.
Michael Lux: I am grateful that you asked this question, because this will become much more complicated. I was talking about a simple export from Ireland to Northern Ireland, and there simply an export declaration is necessary, which will be treated electronically. This can be done quickly.
At the border itself, you can also have a relatively quick clearance, but the formalities are much more cumbersome, because in future you have, depending on where the movement starts, either to apply for an inward processing or for an outward processing authorisation, on top of what exists today. For inward processing you have to make a bill of discharge: how much was exported, how much came in. The administrative burden will be much, much greater than it is today.
Q389 Jim Shannon: I understand the administrative burden. I understand that that is going to be extra work administratively, but that can be done in such a way that the minutes that it takes to cross the border are kept to that. That is my understanding of what you are saying, and that is my understanding of how the process will work from the Defra Minister, so it is just to make sure that we are saying the same thing.
Michael Lux: Yes. If goods are exported under outward processing from Ireland and arrive in the UK, in the UK it is then inward processing. The UK has to control this customs procedure, so necessarily there must be someone dealing with it. The customs procedure starts when the goods arrive in UK territory.
That is why I do not understand how it will be possible to have no UK customs officials on the other side, for the VAT issue, plus for controlling the inward processing procedure, which starts on the territory of the UK. I cannot understand how that is possible without having a customs official there, who now takes note that the goods have arrived under this procedure in the UK. The procedure has to be discharged in the UK too when the goods have then left again, because these goods arrive under duty suspension.
For a normal import they have to pay the import duty, the VAT and the excise duty, so someone has to get this information in the UK. For inward processing, the goods move under duty suspension, no duty is charged, but you have to control this. Otherwise the goods will just remain on the market, because goods entered for inward processing are no guarantee that they really go out again. That needs to be controlled some way or other.
Jim Shannon: Administration is the issue, I think. The process will be minutes at the border, but the administrative process has to be in place beforehand.
Q390 Danny Kinahan: My question is on a slightly different scale. We know from this week’s meeting with Enda Kenny and Theresa May that they are going to look for certain agreements. When they get an agreement with Ireland, it then has to be agreed with the other 26 countries. It is probably more for you, Mr Pickett. Can you then sit in limbo with that agreement in place while it is being negotiated with all the other countries, or can it not be in place until it has been agreed by the whole of Europe?
Michael Lux: Ireland is not entitled to make agreements on customs issues. This is an exclusive competence of the European Union. Ireland can make proposals to the EU negotiator, which is the European Commission, of what the future agreement should look like.
There I would also like to make a comment. It is very unlikely that in the short period for negotiation there will be a definitive solution to these problems. This is not an issue for this Committee, but I would like to highlight that it is very important to find a transitional arrangement with the EU for what you do until you have the final agreement. All this talk about hard Brexit and “If we do not agree we are just out” is very, very dangerous, especially for Northern Ireland.
If there is not even a transitional arrangement, then all these things I have been explaining have to be implemented from day one. My advice would be to think about how you would like the future agreement, but also to think about transitional arrangements. That is why I have brought in this idea. I do not know whether the EU will accept that idea, but what would solve all your problems during the transitional phase would be if the territory of Northern Ireland remained in the EU customs territory, at least for a transitional phase.
The disadvantage of this is that, if this is limited to Northern Ireland, then movements from Northern Ireland to the rest of the UK would be exports. Then you would have all these troubles that we have explained for such movements. I do not know whether there is more commercial traffic between Northern Ireland and Ireland, or between Northern Ireland and the UK. That is up to you to evaluate, but if there is more traffic with Ireland then it would be an attractive alternative.
Chair: That will take us into deep politics as well.
Michael Lux: Yes, I know.
Q391 Danny Kinahan: If you then have a transitional agreement, how long can you have that before it has to become a formal agreement, i.e. the EU takes action against Ireland for not having things set in place?
Michael Lux: There is no fixed rule in the GATT. On the formation of a customs union, there is an agreement that it is up to 10 years. We could take that as a yardstick to say, “Okay, transitional agreement”. It is just impossible in two years. I am reading all the blogs of different people from the UK and many say, “Within two years, it will be very easy”.
Danny Kinahan: That is why I asked the question.
Michael Lux: I just want to state that it is totally unrealistic to have a free trade agreement negotiated and ratified within two years. People always forget that after the negotiation there is still the ratification. The ratification requires agreement in the Council and the consent of the European Parliament, in the Parliament with a simple majority and in the Council with a qualified majority. That can also take time. It is unrealistic to believe that in these two years it is possible to do this.
Commissioner Barnier, the negotiator, has already declared that the Commission is aiming at a transitional arrangement first. Of course you must know what you want in the long term when you negotiate a transitional arrangement.
Although you said this is politically not good, I would like to mention one example where this has been done already. That was in the case of the German unification. You may not like to hear that. In the first year, when East Germany was not part of the Federal Republic of Germany, the customs territory of the Union was extended to the territory of East Germany. I was working in the working group preparing that. That was only for one year, and then the moment East Germany became part of the Federal Republic of Germany then of course this issue disappeared. There is already a historic precedent where a territory that was not part of the territory of the EU was part of the customs territory of the Union.
We also have the Monaco example, which is of course much smaller. There are two cases where such solutions have existed.
Q392 Danny Kinahan: There was talk in the British-Irish Parliamentary Assembly of whether it was ever possible to have joint borders, i.e. instead of Ireland and Northern Ireland, whether it could be Ireland and the UK sharing customs posts. Is that possible?
Michael Lux: Yes, that is possible. There are two practical possibilities. One is that you build a customs office exactly on the border, so that one part is the Irish clearance, and then you move further and you do the UK clearance. That is one option that does not need any specific act by the EU. If the whole customs office, including where the UK customs officials are sitting, is on the Irish side of the territory then there is no problem either.
However, there is the third possibility that the customs office is on the UK territory, dealing with both Irish issues and UK issues. For that you need an agreement, and such agreement has already been made. It needs the support of the EU, this third alternative. For example, there is the case of the Swedish and Finnish border with Norway, and I quote the Official Journal where this agreement has been published. It is the Official Journal from 7 October 2003. It is number L 253, page 3. There such an agreement has been made. On the Swedish and Norwegian border the customs office is always on one side of the border. When the customs office is on the Norwegian side, Norway is obliged to apply Union legislation there, so they act as if they were a customs official of the European Union. You can read all the details in that agreement.
Q393 Danny Kinahan: I was asking on a slightly different angle. If you flew into Shannon, or you came into Shannon with trade, could you treat it as going into the United Kingdom? Could you have Ireland and the United Kingdom all working together? I am not talking about the Northern Ireland-Ireland border, but actually whether you can group the whole of the United Kingdom and Ireland, so that when you come in to the United Kingdom you can work as if you are coming into Ireland. Can we work both from the same place, but at a remote location?
Michael Lux: No, for the goods, because the goods that arrive in Shannon and are destined for Northern Ireland then have to move from Shannon to the border under a transit procedure. I am glad you are asking that, because there is another simplification that is possible, since you are asking for simplifications.
We have a common transit convention with countries such as Norway, Switzerland and Turkey, for example. If the UK joins the common transit convention, which I would very strongly advise you to do, goods that are untaxed can then move not only to the border, but also to the UK. The transit procedure is then discharged by the UK.
We have a common system, which would not be a big investment for the UK, because the UK has it already. It is called the NCTS, new computerised transit system. The UK is using it, but as a member of the EU. It would then use it as a party to the common transit convention. That would also reduce the burden for traders, for goods that are not to be cleared at the border. One of the issues is whether everything has to be cleared at the border. The moment you join the common transit convention, you can deal with these things at the place where the goods are then really used for a UK customs procedure. That would be my strong advice: to join that convention. I am sure that the Union will not oppose that.
Q394 Danny Kinahan: Thank you, that is very useful. We talk about the common travel area being in place. I know it is more to do with people but is it your understanding that the common travel area is recognised by Europe and therefore something that, when Europe put in its regulations, was annulled?
Michael Lux: The customs law of the Union deals with goods not with people, except the ones who have swallowed goods. You can take, as an example, an airport, which we have today, where people come from outside the EU. The treatment will be exactly the same. If you are below the threshold, which is only €430 in the case of air travel, you can use a green lane. If you have more than €430, you have to use the red lane. One of the proposals that I could make at the land border where there are customs offices is that you have a green lane and a red lane, and by passing the green lane you are implicitly declaring that you do not have goods valued at more than €300, which is the threshold there; so you declare implicitly, “I do not have goods of a value above €300 and I do not have more than the allowed alcohol and tobacco.”
Of course, from time to time, a customs official will stop you and say, “Let’s have a look at what you have”. Firstly, he will ask you, “Have you got any goods to declare?” If you say “no” and you are above the threshold, you will be prosecuted for tax fraud. If you have prohibited goods, even worse, they will be confiscated and you will be fined. Things will therefore be as for any travel from outside the EU today.
It is very easy to imagine: you apply in the UK all these rules and all these rules will now be applied in trade with Ireland as well. It is relatively easy to understand: the same rules will apply.
Q395 Dr Alasdair McDonnell: There are a number of things that I want to touch on. First, you talked about €300 of goods there by land or €430 by air. Is that for goods?
Michael Lux: Yes
Q396 Dr Alasdair McDonnell: Is there any control on currency?
Michael Lux: Yes, €10,000.
Q397 Dr Alasdair McDonnell: Is that within the EU or between the EU and externally?
Michael Lux: Yes, but that also applies inside the Union, except that there are no controls. Yes, that will be controlled too but it is only if you bring it in cash. If you transfer money, it is up to the banks to control that. Yes, customs controls these movements too but only when these movements take place over the border. For example, at the border to Switzerland, there are very strict controls of cash too.
Q398 Dr Alasdair McDonnell: Is there any differentiation between EU citizens and external citizens for goods or for customs?
Michael Lux: For goods, it does not matter. The only thing is that, if a private person resident in the UK is leaving Ireland and going over to the UK, that person can get a VAT deduction. You go with your invoices to the customs office and get a stamp to say that you have now exported these goods. People from the UK who come to Ireland to shop can go to the customs office, get a stamp and get the VAT deducted. It is a big thing at the German‑Swiss border because of the differences in prices. The Swiss franc is so strong that lots of Swiss people do their shopping in Germany, and so the German Administration had a big problem in coping with these huge demands for stamping the invoices. They have now said, “It needs to be above €150 or else we will not stamp it”.
The same thing will happen in trade if there is a big price difference. The nice thing for the people of the UK is that, if they buy in Ireland and if the UK does not monitor this, you can buy all this food and other things VAT free; and, if there is no control on the UK side, you do not have to pay VAT on the entry side.
Dr Alasdair McDonnell: That is called smuggling.
Michael Lux: Yes, you may call it smuggling, but be assured that this will happen.
Dr Alasdair McDonnell: Before the European Union came, smuggling was a national industry in Ireland, both north and south. It has continued. Oil has been smuggled. Oil is a big factor in smuggling.
Michael Lux: Yes. That is why I am saying that I cannot imagine having no control on the UK side. It is difficult for me to imagine that as a former customs official.
Dr Alasdair McDonnell: We have survived here over the last six or seven months in a delusional state and that will continue until we are faced with some of these problems, but it is not possible not to have controls, in my opinion.
Michael Lux: Yes; as a former customs official, I agree.
Q399 Dr Alasdair McDonnell: You mentioned customs duty, VAT duty and excise duty. I understand the VAT. What is the difference between customs duty and excise duty?
Michael Lux: Customs duties are fixed in the customs tariff and they apply only to goods that come from outside the EU or, in your case later, goods that come from outside the UK; whereas VAT and excise duties are a consumption tax so they are also charged internally. For example, if alcohol is sold in Northern Ireland, the seller of the alcohol has to pay the excise duty to the exchequer. Now, if the excised goods are bought in Ireland, at the border you can then be discharged of the excise duty and, if there is then no control on the other side, you will avoid having to pay the excise duty and the VAT as well. It is the same system.
Q400 Dr Alasdair McDonnell: Could I bring it back to something that was discussed here with Jim, my colleague? I do not know how much you know but you probably have a very detailed knowledge of it. In the food industry, one of the benefits of the European Union over the last number of years was that Ireland became one food processing operation. Food, as we talked about with milk, moves around. Beef, for instance, may come from south to north. Lamb may go from north to south. Pigs come from south to north for processing. Milk goes all over the place. Some of the milk, in fact, moves across the border five times because it can be produced in the north and then collected into one big collection point south of the border. As Jim suggested, it can then be moved to his local factory, back into the north again, and it can be part‑processed there. It can go back to the south for further processing and all the rest of it. Is there any solution to that? Is there any way that that can work other than by building vastly expensive processing units north and south?
Michael Lux: There are customs rules that allow all this to happen, but I have told you that for the last five years I have been an adviser for companies. My advice to these companies would be to streamline their processes and to avoid having the same goods in different stages move over the border five times, because the cost of doing all the formalities would be so great that it is cheaper to make sure that the goods only cross the border once or twice. That would be my advice. The logistics have to be reconsidered because, each time the goods cross the border, you have to make the necessary customs declaration.
You may have your own staff to do that. I am always saying to companies, “You need at least two people doing the customs business, if you do it yourself, because one of them may be ill or on holiday and then you will have nobody to do it.” Alternatively, you can use a service provider that is a logistics company. Depending on the complexity, they will charge you between €20 and €80 per declaration; so the cost will increase enormously just due to the fact that, each time you are doing something that involves a crossing of the border, it creates a cost. That will be part of the cost of the milk and, later, of the cheese, and I cannot imagine that anybody will continue these practices. It would just be too costly.
Q401 Lady Hermon: Can I seek clarification on that point? When you say that you do not imagine anyone would continue with these practices, are you implying that the practices whereby milk is gathered from the Republic of Ireland, taken into Northern Ireland, processed in Northern Ireland and then distributed throughout the island of Ireland will be discontinued because people cannot afford to pay for the documentation?
Michael Lux: In the example you mentioned, there are three customs declarations involved. In his example, there are five customs declarations involved. Each customs declaration has a cost, so maybe you are lucky and you manage to keep the costs down to €20 but this will be added to the price. This can all happen under duty suspension, so you do not have to pay duties, but you have to make all these declarations and they come with a cost.
Lady Hermon: That is really quite shocking.
Dr Alasdair McDonnell: We are not getting rid of red tape; we are creating red tape.
Michael Lux: Yes. My approach is to say, “How can we reduce the red tape?” but the principle of customs declarations will remain, even though we have the possibility of making simplified declarations and then, on a monthly basis, a periodic declaration. Sure, all these simplifications are available, but they still come with a cost because someone has to make these declarations. That may be the company itself, but I do not think the milk company will recruit two people who are experts on customs, so it will use a logistics provider or a customs agent. That customs agent or logistics provider will do it for the company but he will ask for a price. If he does it for €20, I would say that you are lucky.
Dr Alasdair McDonnell: Very lucky.
Michael Lux: Yes.
Q402 Dr Alasdair McDonnell: Chair, may I probe one or two more points? Lady Hermon touched on it. We have a border of 500 kilometres and the estimation that the Chair mentioned is that there are close to 300 crossings. My information is that there are about 275 or 280 crossings. 95% of them are unofficial laneways. As Lady Hermon mentioned, some farms straddle the border because they were there before there was a border. There are family farms with half the land on one side and half on the other.
That is complicated further in, for instance, horticulture. Some of the horticulture people in Northern Ireland rent and lease land south of the border in County Louth, because it is good for growing vegetables. They take those vegetables, grown in County Louth, north for handling, gathering or whatever. Some of them are then redistributed back into supermarkets in the south and some are redistributed in Northern Ireland. Is there any customs control over vegetables? This is the minutiae. You are a tremendous inspiration and an expert on this, and these are answers that we could not get otherwise.
Lady Hermon: Of course, the mushroom industry is a really large industry in both the Republic of Ireland and Northern Ireland.
Q403 Dr Alasdair McDonnell: Yes. Mushrooms are a particular example but I was thinking about the broader vegetables. I happen from time to time to bump into a guy travelling to Dublin and County Louth, who is based in Portadown and is the biggest supplier of vegetables to supermarkets north and south. He grows them in the Irish Republic, takes them north for handling—his handling operation is in Northern Ireland—and then redistributes them back into the south. We have nearly every aspect of food. My question is: is there a customs control on simple vegetables?
Michael Lux: The first thing I would like to say is that the border between Sweden and Norway is several thousand kilometres, so the same problem exists there. In preparation for this meeting, I have already suggested that some of you should go to the Swedish-Norwegian border to see how this is handled in practice, because I can only tell you what the law is. Some practical insight into how Sweden and Norway have solved this will be helpful.
Chair: Just on that point, we are considering visiting a border, but Norway probably has a different relationship to the one that we will end up with.
Michael Lux: True, but nevertheless the legal problems will be same. The Swiss-German border is also a good example, because the relationship between Germany and Switzerland is also very good. You should also ask about the stamping for the shopping because that is important. Even though this concerns Ireland in practice, it will be UK citizens who go there for their shopping.
Legally speaking, because I was in charge of the law including the rules that we are discussing here, yes, we have some simplifications for farmers who have fields on either side of the border. They can bring their cattle, for example, and presumably their food from one side to the other.
You were also saying that he sometimes sells the goods in one part and sometimes in the other. A UK farmer who sells goods on the other side has to declare them for export. There are simplifications that are foreseen, but they have to be declared for export. What I am not so sure about is what happens if the foods were harvested on the Irish side and are sold on the Irish side. I am not sure what the right solution is because this question was never addressed to me while I was in charge of this at the Commission.
Q404 Dr Alasdair McDonnell: The point that I would make, aside from politics—which I suppose is the point that we are all trying to get at—is that, with the European Union over the last 35 or 40 years, and particularly over last 20 years, Ireland, regardless of politics, has become a single market for goods and for food. It is its own micro single market, if you like, and stuff moves about so freely. Our dilemma now is that, with Britain leaving the European Union, that simple micro single market will have to be broken up.
Michael Lux: That is correct.
Q405 Dr Alasdair McDonnell: It is about how that is broken up. No matter which way I look at it, it is so complex and so difficult; and it will, in turn, affect the man growing the vegetables and moving them back and forth.
Could I make one point, Chair? I do not want to labour this any further. You mentioned dogs and that was interesting. We have a lot of dogs in Ireland, most of them stray. The other thing that we have, and again this comes back to a concept of a single market on the island of Ireland, is horses. We have horses at two levels. We have thoroughbred horses moving around all over the island for racing purposes. We have one main racecourse in Northern Ireland, a minor one and a number of amateur ones, if you like. About two-thirds to three-quarters of the horses racing at the Down Royal Racecourse during any of the various festivals that they hold come from the south. Are we into export licences there?
Michael Lux: No, there is a customs procedure called temporary admission, whereby you make a declaration for temporary admission. They will possibly ask for a guarantee. If you use the ATA Carnet, a guarantee will definitely be required. It will become more complicated. You will have to make a customs declaration.
Q406 Dr Alasdair McDonnell: At the simpler level of this, many families and children ride ponies and they again are moving up north, south, east, west and all over the place for pony competitions and all the rest of it. On a Saturday or Sunday, there are many horseboxes on the road with ponies in them. Will that affect them?
Michael Lux: I have horses myself and, before we had the single market, I had to do the clearance myself, because my horses are sometimes in Belgium and sometimes in Germany; so I have practical experience of how it was in the past. I think, if a child with a pony goes on a ride and passes the border, there is no problem. I would only say that, at home, you need to make sure that you have the health certificate that is required. Moving from Belgium to Germany, I had a vet’s document that was valid for two years. If you are on a ride and you pass over to the other side, I do not think that a customs official would say, “Please show me the paper”. You can carry the paper with you.
Racehorses are very valuable animals, and you definitely need to make a customs declaration because the customs official must also decide whether to ask for a guarantee. You could otherwise pass with a horse that is valued at €100,000, which in fact is then sold, and you avoid the payment of the customs duty and the VAT. The European Court of Justice decided more or less two years ago that, for horses that are not for food but for other purposes, you have to pay the normal rate of VAT. It is both an issue of customs duties and an issue of VAT. By not controlling this, you would avoid paying the duty.
Q407 Chair: My constituency hosts probably the biggest racing festival every year at Cheltenham Racecourse and lots of Irish horses come across. We also send lots of horses to Ireland for racing purposes. There must be a way of keeping that simple, because they are passported and they are microchipped, so it should not be that difficult.
Michael Lux: No, it is all possible but it comes with a cost, because normally you would charge the logistics provider that carries the horses, if you do not carry them yourself, and you then have a problem. If you ask a logistics provider, he will charge a fee for doing that; if he also has to provide a guarantee, he will include that in his costs. It is all possible. Customs provisions cover almost everything.
Chair: The microchip would be checked at the racecourse anyway.
Michael Lux: Yes, for identification.
Chair: I will not get too deep into that one.
Michael Lux: However, it does not exclude the need to make a customs declaration. That is what I am saying.
Q408 Nigel Mills: Mr Lux, you have given us huge amounts of very useful information. I will ask a slightly cheeky question, if I may. You were clearly a senior official in the Commission. Was it your sense that member states applied the rules quite as literally as you might have liked them to, or are some practices put in place at certain borders to make life easier that you perhaps would not have signed off on but knew existed?
Michael Lux: I cannot answer that question with regards to border controls but I can say, from the last five years that I have been working as a consultant advising businesses, that there is a huge difference between how I saw things from a legal perspective working in the EU Commission and what is actually happening on the ground. That is largely due to the lack of knowledge of the EU legislation; neither the customs officials nor the traders were fully aware of what the EU legislation said. Traders made a mistake because they did not understand the rules and I am now trying to find a way to get them out of their troubles. Comparatively, the customs administration normally still knows more than the poor trader. Take these people who have been moving over the border from Northern Ireland to Ireland and vice versa.
A big information campaign must be launched to make them aware of the new rules. We were talking about fraud. Let us say that you take goods worth more than €300 with you. You might not even be aware that you now have to declare these goods. It is very important to make both the public and the traders aware of the new rules so that there is no criticism that there is a huge amount of fraud.
Q409 Nigel Mills: You alluded to the Norway‑Sweden border and how they have found ways of managing situations. I was just wondering whether what you meant there was that, yes, we know they are meant to have a customs post in place at all times and they are meant to check all lorries travelling over the border, but in practice they can only do that a few days a year and rely on other compliance measures otherwise. Do you agree that that is how it works in practice?
Michael Lux: No, I would not think so. I am just working on a case that the Commission has made me aware of. It was a case against Germany. It did not concern border controls but it shows the way that the Commission acts. Germany was made aware that, for certain imports, there was fraud and Germany did not act on that fraud. It concerned own resources, so it would be duties that would not be covered by Ireland. Germany was then ordered by the European Court of Justice to pay the duties (Judgment of 1 July 2010 in Case C-442/08 Commission v Germany, EU:C:2010:390), which it could no longer recover from the trader because the three‑year recovery period has been expired. If a member state systematically disregards the rules and, as a consequence, duties are evaded, the Commission will calculate the duties and will make the member state pay the evaded duties. This is very serious. You seem to think that it is a remote possibility. It is not a remote possibility.
Q410 Nigel Mills: I was not suggesting that they would turn a blind eye to systematic noncompliance. You mentioned the US-Mexico trade scheme, but you could choose to have a system that will only scrutinise people who you think are at high risk of moving goods that they have not properly declared. You do not have to stop every lorry if you know that they are generally absolutely compliant, but you would stop them occasionally. You do not have to literally stop every lorry and check every crate that is on there; you can apply a green lane, a pre-cleared lane and all manner of stuff, if you want.
Michael Lux: Yes, but let us not forget that, if we are talking about an export from Ireland to Northern Ireland, each export must be declared. Now, at the border the customs official can say “I believe you” and close the export declaration. However, the truck has to stop for a moment so that the export movement can be closed. I think you are overly optimistic.
Q411 Nigel Mills: That is not done electronically yet.
Michael Lux: It can be electronic, yes, but seeing the number plate of the truck will not yet tell you the movement reference number or the export declaration. You can send electronic information that this truck will arrive, but you would have to make investments to be able to do that and, believe me, in two years’ time there will not be an electronic system at the border that checks the truck number, relates it to the MRN of the export declaration and then releases the goods. These things can be done but they need an investment, and that is why I am suggesting solutions on an interim basis that may be politically unappreciated.
Q412 Nigel Mills: I was reading the submission that you both sent us, and it is obviously very thorough indeed. I noted that one of the opening comments was that, since the UK is leaving the EU, it cannot stay in the single market. That is what you view the position to be.
Michael Lux: Yes, that is correct in terms of the single market as defined in the EU treaty. I said that it may be negotiable. I do not know whether the EU would accept that, but we have the models of East Germany and Monaco, where a territory not belonging to the European Union is treated as being part of the EU customs territory. There are two precedents for that.
Q413 Nigel Mills: Yes, the single market versus customs. One option for how we handle customs, which we have talked about a lot, is the UK staying in the EU customs union, which we do not seem to want. There is quite a lot of discussion in your paper about the UK and the EU concluding a customs union between the two parties, which you say could be done in two years. I guess the question I had on that was: if the UK did a trade deal with a fourth party such as India, given that the UK counts as a third party, would it be impossible to let some goods into our market with a different tariff to the EU’s external tariff if we had a customs union between the UK and the EU; or is there a way of saying that we would have to track the origins of goods that came from India and then went on into the EU somehow? That would not be free of duty and there would have to be a calculation. Is that achievable?
Michael Lux: First of all, I would like to say that, if the customs union territory is not extended to Northern Ireland or to the whole of the UK, we are talking about a customs union agreement between the EU and the UK as we have with Turkey. The necessary consequence is that there will be border controls. I want everybody to understand that because, in some of the blogs, people seem to think that a free trade agreement or a customs union agreement means that there are no border controls. That is not correct. There will be border controls. You need to have the right paper. If it is a free trade agreement, you have to prove that the goods originate in the UK. If it is a customs union, you have to prove that the goods have been in free circulation. You need proof and there is normal customs clearance, except that you pay less duty if the conditions are fulfilled.
Taking your example of India and of goods originating in India, if it is a free trade agreement, it does not make a difference because I do not think that you will have a customs union agreement with India. Goods originating in India and imported from the UK cannot benefit from preferences in the Union either under a free trade agreement or under a customs union agreement between the UK and the EU; it does not really matter.
For goods in free circulation in the UK, if you have a customs union agreement with the EU, then you must apply the EU tariff. That is why I do not believe that this is really an option for the UK, because the UK wants to fix its own tariff, at least in the medium term. The free circulation between, for example, Turkey and the EU works only on the goods where you have a common customs tariff. For example, Turkey does not apply the anti‑dumping duties of the EU so, if goods from China come into Turkey, you have this marvellous certificate that you do not have to pay the normal duties between the EU and Turkey, but you still have to pay the anti-dumping duties on top. I am sorry that it is so complicated.
Q414 Nigel Mills: I was just running through the options that you were talking about. If we concluded our own customs union with the EU and we imported chocolate from somewhere, which I think has a 25% tariff from memory, and we gave them a free trade deal where we said that we would only charge 10% on that, are you saying that we then would not be able to export any chocolate from the UK into the EU without triggering a tariff, because we had created a separate tariff on that product?
Michael Lux: Yes.
Nigel Mills: But we would be able to move cars duty free.
Michael Lux: Yes, you could exclude certain goods from the customs union agreement. For Turkey, most agricultural goods are excluded and you are free; but, of course, the rules of the customs union then do not apply. You can have a different tariff but you cannot benefit from the duty free access.
Q415 Nigel Mills: When the Prime Minister says that we may try to conclude a customs union for certain sectors, presumably that means for certain goods or certain classifications of goods in that situation. Is that achievable?
Michael Lux: Article 24 of the GATT requires that it is a substantial part of trade that is covered by the customs union agreement. You cannot just pick certain exports. It must be substantial trade but you can, for example, exclude certain agricultural goods that you do not want to have in the customs union.
Q416 Nigel Mills: Obviously we cannot say that we have a customs union for automotive and not for agriculture.
Michael Lux: No, automotive is too narrow. It would have to be all industrial goods. By the way, I am shocked by the statements that I read in many blogs, because apparently these people have never read Article 24 of the GATT, which says what a customs union is.
Q417 Nigel Mills: Effectively you are saying that the options are either to stay in the customs union, to have a free trade agreement or to have a very encompassing customs union with a few things omitted.
Michael Lux: Yes.
Q418 Nigel Mills: As to the option of Northern Ireland staying in the EU customs union but the rest of the UK leaving, if that was even negotiable, I think the most recent numbers show that Northern Ireland exports about £23 billion worth a year, of which £13 billion comes to the rest of the UK. I think something like £4 billion goes to the Republic of Ireland, a couple of billion goes to the rest of the EU and the balance goes to the rest of the world. On the face of those numbers, that does not look very attractive.
Michael Lux: I understand, yes.
Q419 Nigel Mills: Can you just talk us through what the implication for Northern Ireland is of being in a customs union that is different to the rest of the UK? I assume that any goods that come into Northern Ireland from the mainland have to go through all those customs processes.
Michael Lux: Yes, that is true.
Q420 Nigel Mills: It is on a plane or a ship so that is achievable, I suppose. However, you then have to charge the tariff. You do not get to keep that, do you?
Michael Lux: Yes, it would be the EU tariffs
Q421 Nigel Mills: It gets centrally re-allocated so, if you have disproportionate amounts of cross-border trade, you do not get to keep that money; it gets allocated across the EU under some allocation key. You have that downside in that situation as well. Are there any other member states where parts of the territory are split between two different customs unions? I cannot sense that it is widely used.
Michael Lux: The situation of Germany was different but it was a temporary arrangement.
Q422 Nigel Mills: Are the Canary Islands in it?
Michael Lux: The Canary Islands are in the customs territory of the Union but not in the fiscal territory, which means that, when you move goods inside the customs territory to the Canary Islands, customs formalities apply.
Q423 Nigel Mills: In reality, Northern Ireland being in a different customs union to the rest of the UK looks like it could be very expensive, on the numbers that I have given you. You have all the downsides of the tariffs and you do not have the revenue from them to use. There are the political issues. If the UK tried to do a free trade deal with somebody else, it could not apply to Northern Ireland.
Michael Lux: That is correct.
Q424 Nigel Mills: That would dis‑apply a whole part of it. Is it possible under the WTO rules to have a free trade deal and just dis‑apply a whole chunk of your country from it? Is that legal.
Michael Lux: Mr Pickett said that it is not possible. He said that a waiver would be required. It might be possible. We have a similar situation that is very vague with the Pays de Gex, which is in Switzerland, belongs to France and is only accessible to Switzerland, but it is much smaller and. There is an old treaty from the 19th century that excludes it and says that people can get their food and other provisions from Switzerland without paying the duties. However, it is very small and mountainous, and you cannot have access, so I do not think we can use that as a precedent for Northern Ireland.
Q425 Nigel Mills: To sum that up, your message to people in Northern Ireland who think that staying in the EU customs union, if and when the rest of the mainland leaves, would be an attractive solution is that it is fiendishly complicated and probably has the same downsides, but you are just moving them from one border to another.
Michael Lux: You are right. I have been asked whether there is a way to avoid border controls between Ireland and Northern Ireland. I have said that the only way to achieve this is if Northern Ireland remains in the customs union—so not a customs union agreement but that it remains. The customs code would say, “The territory of the EU customs union includes” and then it would say “the territory of Northern Ireland”. That theoretically is possible.
Q426 Nigel Mills: Can I ask one last question? Are any non-EU members currently a part of the information sharing on cross-border movements, which we talked about earlier? Is Norway in that or are any of the other EFTA members in that exchange?
Michael Lux: We have agreements to exchange information on fraud, so, yes, there is an agreement with Norway. I would advise that, besides the transit agreement that I have already mentioned, the UK would also make an agreement for the exchange of information on fraud. I am talking about the standard procedure where there is no fraud. To my knowledge there is no systematic exchange of customs information data with countries outside the EU.
We have agreements on the exchange of security data. There is one disastrous effect that I have not yet mentioned. The Union requires, before goods leave the EU and before they enter into the EU, a pre-departure or pre‑arrival declaration. In the case of trucks, where the current deadline is one hour, you need to have submitted the data at least an hour before the truck arrives. It is called an entry summary declaration.
I could offer a solution there: with Switzerland and Norway there have been agreements where both parties agreed to apply the same levels of security so that the pre‑arrival declaration need not be lodged. It is also in our paper. If there is no such agreement, then it is not sufficient that the truck arrives at the border and the customs declaration is made there. If the truck comes from Northern Ireland, the declaration must be made electronically one hour before the arrival of the truck, which might be in your interest because then they can already make sure that, when the truck arrives, they can release the goods. They just need the “okay” message with the master reference number, and then the goods can be released. You should be aware that, if the truck journey to the border is less than an hour, you have to make this declaration before the truck starts off.
Q427 Chair: We will have to finish in a couple of minutes; we have Northern Ireland questions. Mr Pickett, you referred briefly to a waiver earlier. I am not quite sure what you meant but, given that Great Britain is an island and the island of Ireland is obviously an island, why can there not be a special relationship allowed by the EU? Why would they not allow us to have a different relationship to the one Ireland would have with France or Germany? What would physically prevent that from happening or is it just a matter of politics?
Eric Pickett: It is a matter of law.
Chair: It is a matter of politics. I want that on the record. It could physically be done, but it is a matter of policy and politics.
Eric Pickett: If the UK wants to form a customs union with the EU, you do not have a problem as such. However, the customs union would have to comply with the provisions of the GATT—the General Agreement on Tariffs and Trade—specifically, inter alia, Article 24. Article 24 refers to the members. If you want to hive off Northern Ireland, that is where you start to have the problems, because Northern Ireland is not a member; it is just a part of the United Kingdom. That is why you have a problem if you want to pursue that particular course of action. Where Northern Ireland, as apart from the rest of the UK, wants to form a customs union –
Michael Lux: “Remain.” Please do not say “form”; “remain in the customs union”. It is very important.
Chair: I am really asking about the ability of the United Kingdom and Ireland to have an agreement, whatever that may be, without going into specifics—on the free movement of people and the common travel area, for example.
Eric Pickett: Movement of people would be a different instrument. That would not be the GATT. The GATT concerns goods. Movement of people would fall under the instrument called GATS, which is the General Agreement on Trade in Services. They are different instruments and they are very different creatures, as it were. What we are talking about here is Article 24 of the GATT.
Chair: I was not particularly; I was just asking—
Eric Pickett: That is what I was talking about.
Q428 Chair: I am trying to come to the fact that, for example, in 1922 and then in 1949 Ireland moved away from the United Kingdom but it was not seen as a foreign country. There was a different relationship. Why is it not possible for the EU to allow Ireland to have a different relationship with the United Kingdom? I understand about GATT, but that is getting into details that are not necessary at this point. There must be a way of allowing that relationship.
Michael Lux: Not for the trade in goods, because the commercial policy and the customs union are in the exclusive competence of the European Union. Ireland and the UK cannot make a special deal on trade in goods.
Chair: That is policy, though. It could change its policy.
Eric Pickett: There is the issue of EU law, which Michael just mentioned. You cannot just have Ireland; you would have to have an agreement under EU law now with the entire EU and the same would apply under GATT. It would be a strict violation of WTO law, so you get into all sorts of difficulties there. As a transitional arrangement, if Ireland for a certain period of time until the final deal is negotiated were to remain, my own suspicion and my gut feeling in terms of the politics is that it might be possible and you might get the waiver. However, from a legal point of view, you would require the waiver. The alternative, of course, would be to simply go ahead and do it, and lose the case before the dispute settlement body, but, by that time, depending on how quickly things go or do not go, perhaps the matter has been settled anyway, in which case the UK will not suffer any consequences.
Chair: Thank you. I am sorry, but we will have to tie it up now. Like I said, we will have to dash to the Chamber. It has been a very useful evidence session. Thank you very much.