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19 April 2018

Jim Rollo is Deputy Director of UKTPO, Emeritus Professor of European Economics at the University of Sussex and Associate Fellow, Chatham House. Dr Peter Holmes Reader in Economics at the University of Sussex and Fellow of the UKTPO.

On Wednesday this week, the House of Lords voted that after Brexit a customs union with the EU should not be ruled out. If it remains in the legislation, it would require the government to submit a report to Parliament on the Customs Union option. This blog discusses some of the key issues that would need to be considered in such a report.

What is a Customs Union?

A customs union under GATT Art XXIV is an agreement under which partners commit to removing all duties on products originating in each other’s territory and having a common external tariff. This might imply a common collection of customs duties but in some cases (e.g. MERCOSUR) this was not initially done. Customs unions under GATT XXIV cover goods but not services.

A formal customs union may still require border checks, including for tax (esp VAT or other sales tax purposes), technical standards, transport (e.g. cabotage).

A Customs Union with the EU versus membership of The EU Customs Union

We need to remember the difference between being in the European Union Customs Union which only is possible for Members States and territories that are effectively part of a member state (eg Jersey, Monaco) versus having a customs union with the EU, eg Turkey but also San Marino. Even a complete customs union does not by itself achieve frictionless trade amongst signatories.  This is because only a customs union combined with elements of the Single Market would obviate the need for border inspections, although a customs union would go some way towards reducing border formalities.  At the same time, countries that sign up to a ‘complete’ customs union forgo the ability to set their own external trade policy regime.

A UK-EU customs union

The key decision on a UK-EU customs union would be how complete it would be. GATT Art XXIV requires “substantially all trade” to be covered. This is generally taken to mean about 90% of trade but WTO recognised customs unions often are seriously incomplete. EU Turkey does not cover agriculture and allows anti-dumping duties to be imposed between the two parties. Nor is Turkey included automatically in EU Free Trade Agreements.

Issues to be decided in any UK-EU customs union

Would it include agriculture and fisheries? If not Rules of Origin will be required for excluded sectors and costs of compliance and delay will be incurred.

Would Anti-dumping duties be harmonised? If not, borders are needed; if so WTO compatibility issues arise.

How would trade with third countries be addressed? Turkey is not automatically included in EU Free Trade Agreements (FTAs): wherever there is an exception the CET is necessarily incomplete.

How is tariff revenue shared? Turkey and the EU do not share revenue. East African Community and Southern African Customs Union do. MERCOSUR now shares revenue but previously did not. This is not an issue for FTAs.

Implications for Northern Ireland

A comprehensive customs union including agriculture is a necessary, but not sufficient condition to ensure the absence of hard customs facilities and solve the border issue in Northern Ireland.

Single market participation is needed to avoid technical inspections and tax issues would also have to be dealt with.

6 Comments

  • […] In ‘A Customs Union with the EU?’ Jim and Peter respond to the vote this week by the House of Lords that after Brexit a customs union with the EU should not be ruled out. If it remains in the legislation, it would require the government to submit a report to Parliament on the customs union option. […]

  • David Roberts says:

    It might be worth explaining a bit more fully the difference between a Customs Union as defined in Article XXIV of GATT and what you call a “complete” Customs Union. The WTO definition covers Customs Unions that are not “complete” in the sense that they do not necessaily cover all products but also in the sense that they don’t imply common anti dumping duties or safeguard duties. Therefore they only cover trade in products that “originate” in the member countries, which implies the need for rules of origin, andso, by the same token, they don’t totally exclude the possibility of FTAs between some but not all members of the Customs Union and third countries (as is the case today with the EU/Turkey Customs Union, although Turkey has undertaken to progressively align its trade policy with that of the EU). You mention but don’t explore the point that there may be WTO objections to common anti dumping duties (and, by the same token, safeguard duties). If so (and this seems to me to be quite probably the case) a “complet EU/ UK Customs Union post Brexit doesn’t look possible, so rules of origin with be needed, which implies that neither the advantage claimed for the UK making a Customs Union with the EU (solving or helping to solve the Irish border problem) nor the objection raised against it (preventing the UK making FTAs with third countries with whom the EU doesn’t have an FTAs) seem to apply. So the famous Lords amendment may be a fuss about nothing.

    • Peter Holmes says:

      Thanks very much for this. I don’t think we are differing on any important points. As you rightly say we need to expand on the difference between a “complete” CU and something called a CU which may in reality be little more than an FTA with (nearly)the same external tariffs. We would certainly agree that by itself even a complete CU would solve very little of the border problem. It’s also true that the Lords Amendment is very weak, calling only for a report if a CU is not agreed.
      Peter Holmes & Jim Rollo

  • Piris says:

    Monaco independent State not part of an EU member State, but in the custom territory of France and therefore of the EU

  • Peter Holmes says:

    Thanks Jean Claude. I have coincidentally just been looking at a WTO discussion of the EU-San Marino CU. Do you think either of these arrangements have any relevance for the so-called “Jersey Option”?

  • ‘This is because only a customs union combined with elements of the Single Market would obviate the need for border inspections’

    Could you expand on which elements of the Single Market would have to be included – to achieve this free movement of goods? In EU-Turkey, I can see:
    1) the product regulation acquis
    2) General TBT provisions (Annex 19, 1/95). Provision of information etc.
    3) incorporation of TFEU 34-36
    4) jurisdiction of the ECJ with regard to incorporated parts of the Treaties

    I guess one would need to accept Regulation 764/2008 for the non-harmonised sector. There’s more in 1/95 about IPR, competition, etc.

    How about the ‘horizontal’ legislation that one finds in the EEA – environmental laws and so on? Would the EU be more concerned about maintaining a ‘level playing field’ with the UK than they are with Turkey – so that they would ask more from us even than Turkey has to put up with?

    Andrew

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