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1 May 2018

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 Customs Union: The Fiction of ‘Frictionless’ Trade

 

 

 

 

 

 

 

 

 

 

 

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.

Watch: The ins and outs of the Single Market

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.

 

Disclaimer:
The opinions expressed in this blog do not necessarily represent the opinions of the University of Sussex.

8 Comments

  • Jackie Robertson says:

    As we all know, staying in any customs union will leave us tied to the EU and the use of their laws.

    I hate to keep on repeating the terms of the UK referendum but it’s all about taking back control (of our laws and borders) and staying in the customs union gives power back to the EU and keeps us where we were.

    Any new deals will be done once we have regained UK sonereignty and are working with our own laws.

    • Charlotte Humma says:

      The terms of the referendum were very much undefined, although I agree that one aim was to have our own independent trade policy, including an ‘ambitious free trade agreement’ with the EU. A customs union with the EU could be viewed as such and would not tie the UK to EU law, only to maintaining the same external tariffs.

      • What would be the point of a simple customs union without the free movement of goods? Is that what anyone has in mind? Surely everybody proposing it wants something that will get rid of the need for a goods border.

        Then, as you say, you have to adopt the whole product acquis, and I think the whole of ECJ case law re the non-harmonised sector – Cassis de Dijon etc – and presumably continued subjection to the ECJ for new cases (see EU-Turkey 1/95 and 2/97). And this clearly is not compatible with the referendum vote.

        Andrew

    • Keith Macdonald says:

      48% of the public voted to keep our existing relationship with the EU. Of the 52 % who voted to leave, many must have believed the promises of the Brexiteers that the UK would enjoy full access to the EU market and that there would be no physical barriers in Ireland. That means there is no majority for the “no deal” scenario, far less the economic war that the hard right wants.

      I dare say there are people in Britain who would like to wipe out our car industry or restart civil strife in Ireland but they are nowhere near a majority (except perhaps in the Daily Mail newsroom).

    • Cahal Cormican says:

      As soon as you enter into agreements with other countries then sovereignty is diminished. Heaven forbid, when the UK tries to reconstitute all the trade agreements that it is part as member of the EU after leaving (without even starting any new ones), then it will have a myriad of mechanisms to deal with trade disputes as an alternative to ECJ including corporate courts, which are most unpalatable. As John Major pointed out only North Korea has “undiluted sovereignty”.

  • David Roberts says:

    I may be a mistake to assume that being in “a” Customs Union with the EU would eliminate the need for rules of origin. The WTO definition of a Customs Union refers to products “originating” in the members of the Customs Union. To avoid the need for rules of origin, not only normal customs duties have to be aligned but also duties imposed under WTO permitted trade defence meansures (anti dumping duties, countervailing duties and duties imposed under safeguard clause actions). Ideally also the rules of operation of Customs Authorities also have to be aligned. There is also a need from rules of origin if some but not all members of a Customs Unions form FTAs with third countries (as the EU does whilst having a customs union with Turkey). For these reasons, rules of origin do apply in the EU/Turkey Customs Union. So, to be effective as a means of eliminating the need for rules of origin, the UK would have to have a special form of Customs Union and remain in all the EU’s FTAs with third countries with the EU and to resolve fully the Irish border problem we would need also to adhere to the rules of the Single Market (or remain in the Single Market.)
    Whether this is in line with what the public voted for in the referendum it is impossible to say, given that the different proponents of Brexit said different things and people voted for brexit for different reasons, some of which were never mentioned in the campaign. (I know of some who voted “leave” to get rid of David Cameron and others who did so because they wanted to take revenge on the bankers who were seen as causing the financial crash and escaping scot free from the consequences. ) “Taking contol of our laws” was certainly a slogan in the campaign but it’s not clear how many voters were swayed by it. However, it would seem that they did not constitute a majority because any voter who wanted to have influence, let alone control over our laws should also have wanted a voting system that ensured that the Parliament represented the preferences of the electorate. The previous referendum that was held in the UK offered the chance to vote for a (small) step in that direction but the majority turned it down.

  • Peter Holmes says:

    I think most of us at UKTPO would agree with Andrew Keith Cahal and David.
    A “Customs Union” alone would clearly not remove the need for a hard border, above all if it had gaps. But a CU that involves common FTAs, joint policy on trade defence etc is a necessary condition. Combined with signing up fully to single market rules might make border checks unnecessary. EEA would not do it. Customs Partnership by itself probably impossible and needs SM.

  • […] A Customs Union with the EU: A giant step politically but a small step for the economy […]

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