What in happier times might have been a minor irritant in intra-EU relations could, in the context of the negotiations over Brexit, develop into a poisonous wound.
The EU’s fraud fighter OLAF has calculated that the U.K. failed to collect €2 billion in customs duties on textile imports from China. It has recommended to the European Commission’s budget department that that amount should be recovered from the U.K. government.
Additionally, OLAF calculates that, because of the U.K.’s laxity, other member countries have missed out on collecting a further €3.2 billion in value-added tax — again, money that would have come to the EU. Criminal gangs used the U.K. as the entry-point for importing goods into the EU’s customs union that then became the subject of a VAT carousel fraud.
Some degree of caution is needed in assessing the reports. Firstly, estimates of criminal fraud are unreliable and will no doubt be disputed in this case. Secondly, the disclosure may have been made with a political purpose — for instance, to curb the import of foreign textiles. Thirdly, frauds against the EU’s income happen not infrequently all over Europe, though possibly less than Euroskeptic campaigners claim. The primary culprits here are criminal gangs, not the British customs officials or the finance ministry.
That said, the disclosure undermines the complaint — voiced frequently in London and whispered occasionally by British ministers visiting Brussels — that the U.K. observes the EU’s rules while other countries bend or break them. No matter the amount of money involved, OLAF’s charge that the U.K.’s customs service failed to maintain safeguards against fraudulent imports — even when specifically asked to do so — strips the U.K. of its moral sanctity.
The episode also undermines the U.K.’s otherwise valid arguments about the economic benefits of a light regulatory touch. Against the charge that the EU puts too much of a regulatory burden on businesses and creates too much red tape, the U.K. must defend itself from counter accusations that it is undermining its own and other businesses by failing to enforce EU law. Being a soft touch on customs is arguably not so different from being a tax haven.
* * *
If the amounts claimed by OLAF stand up to scrutiny, their size could sour the U.K.’s already difficult negotiations over the cost of leaving the EU. The departing bill has been estimated at €60 billion, which the U.K. will dispute. But why would the remaining 27 EU members be generous to a state whose actions have allegedly deprived the EU of upwards of €5 billion?
Nor is the potential effect on Brexit negotiations limited to the arguments about money. This customs fraud constitutes a reminder to the negotiators that a trade deal with the U.K. will not be without consequences. It seems unlikely that the EU would rush to conclude a free-trade deal with the U.K. if the latter is to be a conduit for dumped goods. More important than whether tariffs are negligible or zero is whether there are reliable mechanisms of customs collection with rigorous enforcement trusted by the trading partners.
The customs fraud gives a glimpse of one possible future for the U.K. in the global economy, albeit a dystopic one, as a consumer of cheap imports. That is not the future that the British people have been promised by Liam Fox, the minister for international trade and an enthusiast for leaving the EU, who has proclaimed the U.K.’s intention to be “a global champion of free trade” and predicted new trading relations with the world beyond Europe. His implication was that the U.K. would find export markets for manufactured goods. The U.K.’s post-Brexit future has to be something more than a mere entrepôt.
The fraud uncovered by OLAF should also serve as a warning for the EU27 about their collective post-Brexit future. It is a timely reminder that the EU economy is built on assumptions about integration and cooperation. The customs union — abused in this case — is one of the most fundamental of the various relationships that bind the EU together.
That union is under constant threat from the criminal gangs, which will, post Brexit, seek other entry points, Rotterdam and Antwerp being likely targets. Unless controls are maintained and enforced by each member country — in the interests not just of that member country but of all — the economy of the EU could start to come apart at the seams.
It is in the interests of all member countries to ensure that there is no weak point in the union and that each meets common standards. Whatever the renewed talk of a multispeed Europe, on some issues the member countries must simply walk in step.
Author: Tim King