05 July 2017

As politicians debate what sort of Brexit we want, Alex Stojanovic says there is still a lot of confusion on the key concepts of a customs union.

With the election reopening discussions on possible options for Brexit, a renewed debate on the EU Customs Union is being reported in the press. For Labour, both Keir Starmer, Shadow Secretary for Exiting the EU, and Hilary Benn, former Chair of the Committee for Exiting the EU, recently expressed the need for the UK to stay in the Customs Union. Daniel Hannan, Conservative MEP, on the other hand supports the Government’s position that we should leave. However, confusion still reigns as to what this entails and what it means for trade.

There are five key points to be made about a customs unions option for the UK:

1. The UK leaves the Customs Union when it leaves the EU.

The language politicians are using muddles the issue from the outset. “Staying in” the EU Customs Union gives the impression that the UK can retain parts of its membership automatically. But the UK’s membership of the Customs Union is tied to being a member state of the EU. Leaving one automatically means leaving the other.

The Customs Union is embedded in the one of the founding treaties binding member states: the Treaty on the Functioning of the European Union. The treaty comprises just three articles which establish the common external tariff and the European Commission’s responsibilities in managing it. It applies to member states only; therefore, it will not apply to the UK as a non-member state.

2. The EU Customs Union is not the same as Turkey’s customs union agreement.

The EU has several customs union agreements apart from the one embedded in EU treaties. As the House of Lords’ report on trade options makes clear, being part of the EU’s Customs Union and negotiating a customs union agreement are very different.

Turkey, for example, has a partial customs union with the EU. The agreement sets up a common external tariff that covers the majority of its trade in goods but excludes agriculture. For the sectors it covers, the common external tariff prohibits charging tariffs or restricting quantity (quotas) on goods traded within the EU. It establishes a common set of tariffs charged to goods coming from countries outside the customs union. The tariff is set by the European Commission and Turkey must change its tariffs accordingly.

According to a 2014 World Bank report, Turkey and the EU can also apply trade remedies against each other. Where a country feels that imports are unfairly damaging its own producers, it can apply a temporary tariff to the import. This can significantly affect the free movement of goods and is not an element of the EU Customs Union.

3. The UK could negotiate a customs union as opposed to a free trade agreement (FTA).

The UK could have a customs union agreement with the EU. This could be like Turkey’s or it could be similar to what we have now. What would distinguish this from an FTA is the common external tariff. The common external tariff not only avoids the need to collect tariffs from the covered sectors but also means documentation like proof of origin for preferential tariff rates does not need to be administered.

In any option other than a customs union, UK goods seeking to enter the EU with preferential tariff arrangements will have to prove they are from the UK. This can be onerous for exporters to prove and difficult for authorities to assess.

4. A customs union does not solve the issue of a hard border.

A common external tariff doesn’t avoid the issue of a hard border because tariffs are only one of the issues that affects free movement of goods. Regulatory checks for compliance and transport services are also of vital importance.

The EU has strict requirements on controlled goods like food, chemicals and any electrical goods before they enter the EU market. These rules are especially burdensome for countries that are not part of the Single Market.

Where Turkey does not follow EU rules for the production, labelling, movement and storage of these goods, it still faces border checks for compliance, ranging from document checks to testing product samples. The fact that as a member state the UK follows those rules now would not automatically carry over after Brexit when it leaves the Single Market. The UK would need to establish a suitable means of regulatory cooperation or face checks at the border.

Even an agreement that deals with tariffs and some regulatory barriers for goods still falls short of frictionless trade. As the Turkey-Bulgaria border demonstrates, Turkish hauliers routinely suffer traffic congestion, with trucks backed up as far as 17 kilometres. The Financial Times reported that one of the major reasons for this is because Turkey’s agreement does not cover transport services. Turkish hauliers must apply for transport permits for each member state they travel through. These are allotted through quotas, limiting the number of trucks that can pass through.

5. A customs union restricts an independent trade policy in the areas it covers.

An independent trade policy would be restricted by a common external tariff, as Turkey demonstrates. If the EU grants preferential tariff reductions to a country, Turkey must also do so – but without being party to the agreement. Turkey has been unable to reach agreements with Algeria, South Africa, or Mexico following their FTAs with the EU because its tariffs (a key bargaining chip) have already been liberalised. In this scenario, the EU would partly dictate UK trade policy, as the UK would not be present in negotiations that directly affects its market. 

However, in sectors not covered by a customs union, the UK would be able to offer concessions. According to new thinking in Whitehall, a UK customs union “need not prevent it from signing important trade deals” in regards to liberalising services. Since these aren’t covered by customs unions, restrictions don’t apply. But if the UK wanted to liberalise agricultural tariffs, for example, in exchange for services access, this would not be possible if it were covered by a customs union.

A customs union has some flexibility and can reduce important complications at the border with rules of origin. On the other hand, it has implications for the UK’s trade policy and still leaves multiple complex issues to be negotiated. Our upcoming paper will explore these issues in more detail.

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