The unnecessary troubles of Reeves and Starmer

Stories from the front line of enterprising businesses show how Brexit has damaged B ritain's economy

Here is a sentence I never expected to write. The most compelling recent newspaper article I have read about Brexit was by Jeremy Clarkson. In his Sunday Times column on February 9 he described the slow, mad process of taking a film crew across the Channel.

As readers may have noticed, I quite like using numbers to make sense of what is going on. Yet sometimes they are not enough. If they were, the fact that Brexit has cost Britain’s economy 4-5% of GDP would be a major national scandal. As a country, we are more than £100 billion a year poorer than we need have been: money that could have been used to keep pensioners warm in the winter AND improve our schools and hospitals AND keep down employers’ National Insurance rates.

What’s more, Rachel Reeves would have had no problem meeting Keir Starmer’s demand for more money to revive our armed forces. In financial terms, the Prime Minister would be able to head to Paris for this week’s emergency summit on European security and lead from the front. Because of the economic damage done by Brexit, his options are limited. The truth he cannot evade is that smooth trade and strong defence are not separate issues. Success in each supports success in the other.

Given how badly things have gone since we voted to leave the EU, why is the Government not at risk of falling?

In one way, we all know why. The hands of Labour’s opponents in Parliament and the media are steeped in blood. They wanted Brexit, they got it, and cannot now admit it was a dreadful mistake.

There is, though, a further reason. Numbers are seldom enough to win a big political argument. We also need the human dimension: stories of things going wrong. This is what Clarkson’s account provided. Curiously, and Rupert Murdoch should be proud of this, a week earlier, the Sunday Times exposed another lunacy of Brexit. It showed how cheese-makers find it much harder to sell to the continent, not least France.

As it happens, I had already embarked on my own attempt to explore the daily impact of Brexit on British business. I have spoken to a selection of executives on the front line of the battle to trade with the EU. They run innovative, small-to-medium-sized companies of which Britain can be proud. Here are glimpses of the frustrations of life outside the Single Marker and Customs Union.

Paperwork gets in the way.

Before Brexit, the only paperwork that most companies needed was an invoice for the customer. Now, typically, they need three forms. Jonathan Duck and Mark Halls of Amtico, a flooring company, told me that they have to supply a sales Invoice for the business partner, a commercial Invoice for Customs along with a packing list and manifest to navigate the journey through Customs. The number of forms multiplies further if the consignment is for different branches of the same customer.

Peter Altmore of Fracino, which makes coffee machines, faces an extra problem. Sales to Northern Ireland go through the same complex process, even though the sale is within the UK. This is because our agreement with the EU requires companies to ensure that sales to Northern Ireland won’t end up crossing the border into the Irish Republic and the EU. This was designed for things such as food, plants and animals, but applies to all sales, including manufactured goods which can legitimately sold to the EU. Even when everything goes well, selling to Northern Ireland adds to costs.

According to Altmore, the forms are completed by hand, then read by computers. They can include 16-digit, sometimes 32-digit codes. If one digit on one form is misread or accidentally wrong, the computer blocks the transaction, and the process has to start again. (Other companies report that slight, obviously innocent, errors affect their sales across the Channel.)

Freight costs have risen

One of the most common problems is the rise in the amounts charged by freight companies. Stuart Johnson of Rutland Plastics, a company which has won awards for its injection-moulding technology, tells a typical story. Rates shot up by 20-30% immediately after Brexit when freight companies were unsure how they would be affected. They have since settled down, but are still 10% up. The extra costs are, in effect, a risk premium in case of delays at Channel ports.

On top of that, companies that use services such as Fedex for smaller sales often pay an extra 12% “clearance administration fee” to deal with customs bureaucracy.

There is another factor. Some of the companies, such as Amtico, now use only EU-owned freight companies, not because they wish to, but because many UK-owned companies have stopped sending lorries across the Channel. The freight business relies on filling their lorries in both directions. This was not a problem before Brexit. Since then, winning business from EU companies has become harder. Lorries started returning to the UK empty. Such one-way business was uneconomic, and stopped. Now most lorries carrying UK exports are EU-owned, operating the return-legs of journeys that started out with EU companies hiring their local freight companies to take goods to the UK.

We wanted to set our own rules and are now paying the price.

Remember “take back control”? Among other things, we were told that we could set our own rules on product standards. Before Brexit, many products sold in Britain needed a “CE” mark to show that they met European safety, health and environmental standards. After Brexit, Boris Johnson’s government promised to replace this with a “UKCA” (UK Conformity Assessed) mark.

Rachael Baker of JJ Smith, a woodworking machinery companies, was one of many business leaders who campaigned to keep CE, for the practical reason that it was not just an EU but, effectively, global standard that British companies had to employ for their exports. If UK and EU rules diverged, either their costs would rise or they would have to stop selling abroad.

After a series of delays, UKCA has been shelved indefinitely. The UK continues to accept CE rules. However, one specific cost of Brexit remains. To obtain a CE certificate for each export consignment, British companies need an EU address. That’s not a major problem for large multinationals; but for smaller ones the extra cost matters. Dave Seaward told me that his company, 3P Innovation, had to set up an office in the Netherlands simply to do this.

Meanwhile, “phytosanitary” trade remains tangled in red tape. Under the Single Market, selling plants to the rest of the EU was as easy selling to the home market. Since Brexit, the UK is a “third country”. Every consignment must be checked. Talks are now taking place to smooth phytosanitary trade by adopting EU standards.

Nimisha Raja of Nim’s Fruit – which sells fruit crisps, and is the only crisp maker to be licensed by Public Health England – told me they used to sell to seven EU countries. Now they sell to none. The trouble is that a phytosanitary deal would not be enough to resuming exporting to the EU. Paperwork and freight costs would still be a problem; moreover…

Some exports face double tariffs.

A number of companies explained how this works. A British company buys raw materials from outside Europe. It pays a tariff, say 6% (rates vary). It then incorporates these into finished products and exports these to the EU. The problem is that when the imported element exceeds a certain amount, the finished product is no longer sufficiently British to cross the Channel tariff-free. In our example, that’s another 6%.

Nim’s fruit was caught by this – for example by importing dragon’s fruit from Vietnam to turn into crisps. Another example was provided by Steve Harrison of Reagans, a company which makes specialist chemical products. It uses chlorinated polyethylene, which is made only in China.

Thus, Britain is caught by the EU’s “rules of origin” regulations. Before Brexit, the EU was part of the UK’s home market. Tariffs had to be paid on imports from outside Europe; but after that, no further tariffs were levied on trade within Europe. No longer.

Customs checks are a random menace.

One of the most common concerns is Customs delays. Sometimes, random lorries are pulled aside and their contents inspected in detail. Other companies report that officials question the labels (e.g. the kind of wood in the case of JJ Smith) or the accuracy of the phytosanitary certificate (Nim’s Fruit again: one batch of lemons entering Britain was held up for so long that they rotted.)

On one occasion, Amtico sought to meet a deadline to sell a significant consignment to a German television company. It was held up for three days at one British port. The company redirected the lorry to another port, where it wasn’t stopped at all. The consignment arrived just in time.

Larger companies can minimise this problem by throwing money at it. Intermediaries check and process the paperwork, and make sure everything is in the shape that customs require. A typical cost is £50-£100 per consignment: a small amount to check a £100,000 consignment, but ruinous for a small company exporting in batches of £1,000 each. Even then, random checks remain a risk.

Good workers have been lost

Far fewer manual workers have come from the EU since Brexit. More than one business leader told me non-attributably that good British-born workers are hard to recruit and, as important, to keep, especially where other local companies offer higher pay. One said that the opening of an Amazon warehouse caused problems when it attracted many of their employees. Before Brexit, EU staff worked hard and stayed loyal. They often formed small, stable communities of workers from particular countries: Estonia in one case, Portugal another. They have now gone.

3P Innovation’s Dave Seaward had a particular problem. He lost some of his highly-skilled specialist engineers, even though they were British. They left because their partners decided to leave Britain. Some were from the EU, others worked for businesses that were suffering from the loss of contracts with the EU. The company took seven years to find sufficiently qualified engineers to replace those it had lost

Conclusion

I asked each of these business leaders what they would say if they could ask Starmer for one specific change when he seeks to “reset” UK-EU relations. Their responses included: sign up to ALL EU standards so that there is no need for customs delays; radically reduce the paperwork involved in trading across the Channel; allow EU workers to come to Britain as easily as they did before Brexit; change the “rules of origin” system so that tariffs are never charged twice.

Here’s the thing. The problems that give rise to these requests are all inevitable consequences of the EU regarding the UK as a “third country” outside the Single Market and the Customs Union. The only way to solve them is to undo the whole package that Johnson negotiated five years ago.

Some in government would like to edge gradually towards a relationship that ends up restoring frictionless trade, but without using the labels “Single Market” or “Customs Union”. They recognise that this is impossible without restoring freedom of movement, an integral feature of the Single Market. Others, currently in the ascendent, fear that to start down that road would be to drive away the “red wall” voters that Labour fought so hard to win back.

As I have argued before, that fear is overstated. Most voters are happy for EU citizens to come to work in Britain. Public hostility is largely reserved for those who arrive in small boats and/or seek the benefits of living in the UK without helping our economy to prosper.

But whatever voters’ views about immigration, the larger truth remains. As long as the basic architecture of Brexit remains, Britain’s economy will underperform and we shall have higher taxes, lower living standards and worse public services than we need.

I do not claim this as an original argument. Business organisations such as Make UK say much the same. Many small businesses have given up trading across the Channel. Britain’s two best-informed journalists on Brexit, Peter Foster and Simon Nixon have been chronicling this saga for years.

For me, the benefit of hearing the day-to-day hurdles that impede our exporters is to understand how their separate specific problems are connected. They must be solved together. Undoing the damage that Brexit had done will be like crossing a fast-flowing stream. It must be done in one jump. Try doing it in stages and we shall end up wet, cold and at the wrong destination.

On May 19, Starmer will host the first of what are intended to be annual summits with the EU’s leaders. The signs are that his initial pitch will be for useful but marginal improvements, such as on phytosanitary rules. This will be just fiddling around at the edges. If the prime minister wants to end the crippling cost of Brexit to Britain’s economy, he must go further. He needs to overrule his cautious advisers, abandon the policy on which he fought last year’s election, and seek to reverse Britain’s “third country” status in relationship to the Single Market and Customs Union.

It’s a binary choice. However much Starmer would like a middle way, there isn’t one.

PS. Alert readers may have noticed that I have not mentioned the elephant in the room next door: Britain’s relations with the United States, and how these effect the Uk’s relations with the EU. I shall discuss these in a future post.