Ilona Serwicka is Research Fellow in the economics of Brexit and Charlotte Humma is the Business Manager at the UKTPO.
As the European Union (EU) Withdrawal Bill and the Trade Bill progress through parliament, forming a customs union with the EU has become a key issue. On 18 April 2018, the House of Lords voted to keep open the option of staying in a Customs Union after Brexit, promptly followed by the UK Government reaffirming its intention neither to remain in the EU Customs Union nor to seek to form a new one.
So where does this leave us? As the UK leaves the EU, it will have to leave the EU Customs Union, as typically only EU Member States can belong to that. There are a number of small exceptions: Monaco, Guernsey, Jersey and the Isle of Man are not members of the EU, but are integral parts of the EU Customs Union’s territory. As the UK leaves the EU, however, it can seek to negotiate to form a new customs union with the EU (such as the ones that Andorra, San Marino and Turkey have).
Our video, The Fiction of Frictionless Trade explains how a customs union works. It eliminates tariffs – taxes on trade – between member countries and harmonizes the tariffs charged to countries outside the customs union across all member countries (i.e. it creates a common external tariff). Having a common external tariff on all goods entering the customs union means that goods shipped from one member country to another do not need to be checked at the border for compliance with rules of origin (as is required in a Free Trade Agreement such as that governing the goods crossing between Norway and Sweden).
The opponents of seeking a new customs union with the EU argue that it will curtail the UK’s ability to have its own independent trade policy and negotiate new free trade agreements. However, recently the Government’s own analysis of free trade agreements has revealed their limited value economically. Others, on the other hand, argue that, provided that it is complete, a customs union would go some way towards reducing border formalities.
On the other hand, and recognizing that this is disappointing news for the many of the current advocates of a customs union, it must be made clear that a new customs union with the EU is just a first step towards frictionless trade in goods. On its own, it is not sufficient to solve the Irish Border problem.
A full customs union with the EU is the first and necessary condition for frictionless/borderless trade, but it must be supplemented with a second condition – the full adherence to the Single Market regulations for goods – before it will deliver these objectives. The EU is unique in the freedom it creates for members (sovereign states in their own right) to trade with each other because it has both a Customs Union and the Single Market which provides for regulatory alignment amongst EU member states.
Maintaining a customs union is just one part of the recipe for a successful and smooth trading process post Brexit. If the UK wants trade in goods with the EU to be it ‘as frictionless as possible’ it needs not only a customs union but also the elements of the Single Market that pertain to goods. The customs union vote is just the start of the process.
The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.
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