27 March 2017

Writing in the Sunday Times, Tim Shipman referred to a leaked document written by HM Revenue and Customs. That paper suggested that the UK could face increased “transaction costs by an estimated 2% to 24% of the value of traded goods.”

Yet that number bears a striking resemblance to a figure in a published document. In April 2016, in the final stage of the referendum campaign and at the height of so-called Project Fear, HM Treasury published their “analysis of the economic impact of EU membership.”

Paragraph 1.26 of that HM Treasury paper noted that the “OECD has estimated that crossing the border, documentation and other delays can increase the transaction costs of trade by up to 24% of the value of traded goods”.

The research is not HM Treasury’s (or HMRC’s) own analysis – it’s drawn from an OECD paper. That OECD paper notes that “crossing the border, documentation and customs compliance requirements, lengthy administrative procedures and other delays can increase transaction costs an estimated 2 to 24% of the value of traded goods.”  HM Treasury misleadingly rephrased this as “up to 24%.”

Putting aside the question of the success record of general OECD analysis and whether they might be considered somewhat parti pris on the Brexit issue, we should note that those figures: predate the UK referendum (the paper was published in 2013), aren’t specific to the UK situation, or even the EU; and are general OECD analysis on trade.

The same OECD paper notes that “despite the considerable amounts of work and interest that have been devoted to the issue of trade costs, providing a comprehensive and directly available measurement of trade costs, for a large number of countries and time periods, remains an incredibly difficult challenge.” So, all figures need to be taken with a very large pinch of salt.

To be fair to Shipman, he and Tommy Stubbington acknowledge (albeit in the Business Section rather than the Main Section story which formed part of the splash) that this paper dates from March 2016 and was produced by the OECD.

Open Europe’s new research paper ‘Nothing to Declare’, published today, recognises that there will be a cost to UK and EU business from leaving the Customs Union. But we are clear that – given the result in June last year – leaving the Customs Union is the only sensible policy choice. And we outline a plan for how those costs will be minimised.

What will those costs be? Well it’s hard to answer precisely for reasons including those which the OECD paper cited. And because we don’t yet know exactly what form the future UK-EU relationship will take. But the 24% figure is totally far-fetched. Higher costs are likely to refer to less developed economies, with complex and arbitrary bureaucracy, and poor customs facilities. The UK by contrast already runs one of the most efficient customs systems in the world. Our customs authorities are already recognised by the EU. And we already apply EU product standards. A separate OECD report from 2005 suggested that possible costs for US trade could be 35 to 70% of goods’ value for a developing country like Kenya. But those costs are far, far lower for Canada or Mexico – around 1 to 3%. Those are of course respectively a highly-developed county and a more developed country, both of which hold an FTA, but not a customs union, with the US.

It’s in the overwhelming interests of both the UK and EU to agree a Free Trade Deal and also comprehensive customs cooperation. So Open Europe does think that that will be secured. In that case, any associated costs will be kept to an absolute minimum and, while far from irrelevant, can be managed by businesses used to trading across free-floating currencies.

There will be costs to the UK economy from leaving the Customs Union, but there will be opportunities as well. Both are hard to quantify, but the costs are likely to be very small if the Government follows the plan which Open Europe set out this morning.