{"id":2239,"date":"2018-03-29T10:20:25","date_gmt":"2018-03-29T09:20:25","guid":{"rendered":"http:\/\/blogs.sussex.ac.uk\/uktpo\/?p=2239"},"modified":"2018-07-10T10:41:21","modified_gmt":"2018-07-10T09:41:21","slug":"what-can-the-uk-learn-from-existing-customs-unions","status":"publish","type":"post","link":"https:\/\/blogs.sussex.ac.uk\/uktpo\/2018\/03\/29\/what-can-the-uk-learn-from-existing-customs-unions\/","title":{"rendered":"What can the UK learn from existing customs unions?"},"content":{"rendered":"Share this article: <\/em> \"Facebook\"<\/a>\"twitter\"<\/a>\"reddit\"<\/a>\"pinterest\"<\/a>\"linkedin\"<\/a>\"mail\"<\/a>

\"\"\"\"29 March 2018<\/em><\/p>\n

Dr\u00a0Ingo Borchert<\/a>\u00a0is Senior Lecturer in Economics and a fellow of the\u00a0UK Trade Policy Observatory and\u00a0<\/a>Julia Magntorn is Research Assistant in Economics at the Observatory.<\/em><\/p>\n

With one year to go until the UK will leave the European Union (EU), sorting out Britain\u2019s trade relation with the EU is the most important task.\u00a0 Yet the design of the future UK-EU agreement has implications for trade policy towards non-EU countries.\u00a0 On account of this, the British Prime Minister in her Mansion House speech ruled out forming a new customs union with the EU because this \u201cwould not be compatible with a meaningful independent trade policy<\/a>.\u201d \u00a0Indeed, having sovereignty over its external trade policy post-Brexit has been at the forefront of the UK\u2019s negotiation agenda, and consequently, the provision in the current draft Withdrawal Agreement that the UK may commence Free Trade Agreement (FTA) negotiations with other countries during the transition period was perceived as an important concession won.<\/p>\n

At the same time, remaining in a customs union with the EU would entail advantages, starting with eliminating (or at least not re-introducing) trade costs.\u00a0 In particular, though, a customs union with the EU is seen by most people as a necessary part of solving the border issue in Northern Ireland.<\/p>\n

Against this trade-off, we look at evidence from the 16 customs unions currently in existence to see what lessons can be learnt.<\/p>\n

What is the point of being in a customs union?<\/em><\/p>\n

Countries that form a customs union grant each other tariff-free market access for goods, and also agree on a common external tariff (CET) regime for imports from third parties. \u00a0Ideally, the CET is comprehensive in that it not only encompasses a common tariff schedule but also covers anti-dumping actions, FTA negotiations and other aspects of trade policy.\u00a0 Hence, in a complete customs union there is no need for Rules of Origin to deflect trade diversion because the regime for imports from outside the customs union is the same at any point of entry.<\/p>\n

However, even a complete customs union does not by itself achieve frictionless trade amongst signatories.\u00a0 This is because only a customs union combined with elements of the Single Market<\/a> would obviate the need for border inspections, although a customs union would go some way towards reducing border formalities.\u00a0 At the same time, countries that sign up to a \u2018complete\u2019 customs union forgo the ability to set their own external trade policy regime.<\/p>\n

The Wild World of Customs Unions<\/em><\/p>\n

In the real world, customs unions come in all shapes and sizes.\u00a0 Globally, as of March 2018, there are 16 individual customs unions notified to the WTO<\/a> (Table 1).\u00a0 Five of these customs unions are bundled with an Economic Integration Agreement and thereby also include services to some extent. \u00a0Thus overall, and notwithstanding other sources<\/a> that list further customs unions such as the Swiss-Liechtenstein agreement, there exist relatively few customs unions, particularly in comparison with the large number of Free Trade Agreements in existence today. \u00a0<\/strong><\/p>\n

Table 1: Customs Unions notified to the WTO<\/strong><\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Customs Union Name<\/strong><\/td>\nCoverage<\/strong><\/td>\nEntry into force<\/strong><\/td>\nLatest change<\/strong><\/td>\n<\/tr>\n
Central American Common Market (CACM)<\/td>\nGoods<\/td>\n1961<\/td>\n2013<\/td>\n<\/tr>\n
Andean Community (CAN)<\/td>\nGoods<\/td>\n1988<\/td>\n–<\/td>\n<\/tr>\n
Caribbean Community and Common Market (CARICOM)<\/td>\nGoods & Services<\/td>\n1973<\/td>\n2002<\/td>\n<\/tr>\n
Economic and Monetary Community of Central Africa (CEMAC)<\/td>\nGoods<\/td>\n1999<\/td>\n–<\/td>\n<\/tr>\n
Common Market for Eastern and Southern Africa (COMESA)<\/td>\nGoods<\/td>\n1994<\/td>\n1999<\/td>\n<\/tr>\n
East African Community (EAC)<\/td>\nGoods & Services<\/td>\n2000<\/td>\n2010<\/td>\n<\/tr>\n
Eurasian Economic Union (EAEU)<\/td>\nGoods & Services<\/td>\n2015<\/td>\n–<\/td>\n<\/tr>\n
Economic Community of West African States (ECOWAS)<\/td>\nGoods<\/td>\n1993<\/td>\n–<\/td>\n<\/tr>\n
European Union Customs Union<\/td>\nGoods & Services<\/td>\n1958<\/td>\n2013<\/td>\n<\/tr>\n
EU \u2013 Andorra<\/td>\nGoods<\/td>\n1991<\/td>\n–<\/td>\n<\/tr>\n
EU – San Marino<\/td>\nGoods<\/td>\n2002<\/td>\n–<\/td>\n<\/tr>\n
EU \u2013 Turkey<\/td>\nGoods<\/td>\n1996<\/td>\n–<\/td>\n<\/tr>\n
Gulf Cooperation Council (GCC)<\/td>\nGoods<\/td>\n2003<\/td>\n–<\/td>\n<\/tr>\n
Southern Common Market (MERCOSUR)<\/td>\nGoods & Services<\/td>\n1991<\/td>\n2005<\/td>\n<\/tr>\n
Southern African Customs Union (SACU)<\/td>\nGoods<\/td>\n2004<\/td>\n–<\/td>\n<\/tr>\n
West African Economic and Monetary Union (WAEMU)<\/td>\nGoods<\/td>\n2000<\/td>\n–<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Source: WTO.\u00a0 \u2018Latest change\u2019 dates mostly refer the year of accession of new members to the customs union.<\/em><\/p>\n

Members of a particular customs union tend to be geographically proximate (Figure 1), which is in contrast to FTAs that occasionally encompass partners separated over large distances.<\/p>\n

Figure 1: The Geography of Customs Unions<\/strong><\/p>\n

\"\"<\/p>\n

The EU Customs Union is complete and further supplemented by the regulatory alignment derived from the Single Market.\u00a0 By contrast, most other customs unions are incomplete in a variety of respects.\u00a0 In particular, many customs unions (and indeed also FTAs) do not cover all<\/u> goods and thus do not necessarily abolish all internal tariffs within the customs union.\u00a0 For instance, Turkey, Andorra and San Marino each have individual customs unions with the EU.\u00a0 The EU-Turkey customs union does not cover primary agricultural products, coal or steel.\u00a0 Moreover, the institutional structure is lacking with respect to anti-dumping rule<\/a>s<\/a> or a proper dispute settlement mechanism<\/a>.\u00a0 Additionally, Turkey must grant access to all EU FTA partners without necessarily receiving the same treatment in return.\u00a0 Other examples include the Southern Common Market (MERCOSUR), which excludes sugar and motor vehicles, or the Central American Common Market (CACM), which does not cover unroasted coffee and cane sugar.<\/p>\n

Additionally, many customs unions have struggled to fully agree and implement a common external tariff regime. \u00a0In the Andean Community, the implementation of a CET was suspended in 2007<\/a> and parties have instead opted for a less rigid \u2018common tariff policy\u2019. The Caribbean Community (CARICOM<\/a>) and the Central African Economic and Monetary Community (CEMAC<\/a>) both in principle have a CET in place, but with a wide scope for suspensions and national derogations. \u00a0Even in instances in which the CET seems to be largely operational, free circulation of goods inside the customs union is still in some cases hampered by the lack of deep integration required to render border controls obsolete.<\/p>\n

Trade Policy of Customs Union Signatories<\/em><\/p>\n

The adoption of a common external trade regime, which is at the heart of forming a customs union, reduces or\u2014in the case of a complete customs union \u2014eliminates the scope for independent external trade policies by its members.\u00a0 Yet there are examples amongst existing customs unions of individual members having signed bilateral trade agreements with third parties outside of the customs union.<\/p>\n

In the Andean Community, members are allowed to sign trade agreements with third parties when negotiation at the community level is not possible, as long as such agreements do not \u2018jeopardise the Andean legal system<\/a>\u2019. \u00a0As a result, both Peru and Colombia have separately signed a number of bilateral FTAs with, inter alia<\/em>, Canada, the United States and Mexico, respectively. \u00a0Other examples include the Gulf Cooperation Council where both Bahrain and Oman separately concluded FTAs with the United States, whilst the other customs union members have not.\u00a0 Costa Rica is part of CACM but has concluded an FTA with China in 2011.\u00a0 In the case of the Southern African Customs Union, South Africa was the only customs union member to have a trade agreement with the EU until 2016 when the EU signed an agreement covering all SACU members.<\/p>\n

Conclusion<\/em><\/p>\n

The EU Customs Union is unique; it is complete and supported by regulatory alignment amongst EU member states. \u00a0As such, it provides an unparalleled level of frictionless trade compared to other customs unions, which attests to the view expressed by Peter Holmes that \u201can incomplete customs union is a quantum leap away from a complete one.\u201d<\/a><\/p>\n

Beyond the EU case, most customs unions today are incomplete. \u00a0The different nature and purpose of custom unions around the world has produced a wide array of arrangements, some of which involve a country being a member of a customs union and being party to one or more FTAs.\u00a0 However, such outcomes can only reflect the incomplete nature of the customs union in question.\u00a0 Reduced scope comes with reduced gains, perhaps greatly so.\u00a0 And in contrast to other countries, the UK has to consider the border issue in Northern Ireland.\u00a0 The shared agreement to avoid a hard border may not leave much scope for incompleteness.<\/p>\n

 <\/p>\n

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Share this article: 29 March 2018 Dr\u00a0Ingo Borchert\u00a0is Senior Lecturer in Economics and a fellow of the\u00a0UK Trade Policy Observatory and\u00a0Julia Magntorn is Research Assistant in Economics at the Observatory. With one year to go until the UK will leave the European Union (EU), sorting out Britain\u2019s trade relation with the EU is the most important task.\u00a0 Yet the design of the future UK-EU agreement has implications for trade policy towards non-EU countries.\u00a0 On account of this, the British Prime Minister in her Mansion House speech ruled out forming a new customs union with the EU because this \u201cwould not be compatible with a meaningful independent trade policy.\u201d \u00a0Indeed, having sovereignty over its external trade policy post-Brexit has been at the forefront of the UK\u2019s negotiation agenda, and consequently, the provision in the current draft Withdrawal Agreement that the UK may commence Free Trade Agreement (FTA) negotiations with other countries… Read More<\/a><\/p>\n","protected":false},"author":213,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[129970,130195],"tags":[147879,131307,147861,123595,147854,123537,147852],"_links":{"self":[{"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/posts\/2239"}],"collection":[{"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/users\/213"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/comments?post=2239"}],"version-history":[{"count":9,"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/posts\/2239\/revisions"}],"predecessor-version":[{"id":2477,"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/posts\/2239\/revisions\/2477"}],"wp:attachment":[{"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/media?parent=2239"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/categories?post=2239"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.sussex.ac.uk\/uktpo\/wp-json\/wp\/v2\/tags?post=2239"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}