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Economics

Everything you need to know about the EU Customs Union

BY Ben Kelly | thescepticisle   /  23 January 2018

The debate about what our future trading relationship with the EU should look like rages on, flitting from issue to issue. The latest proposal being floated is for the UK to remain in a Customs Union with the EU. As ever, the debate is causing confusion among people who take an interest but don’t have the time or inkling to read up on the finer details of customs unions and what being in one entails. Here’s an explainer.

Can the UK remain in the EU Customs Union?

To be clear, the UK is leaving the EU and this means leaving the Customs Union. The EU Customs Union has its legal basis in the Treaty on the Functioning of the European Union and is for EU Members States only. Brexit automatically means leaving the EU Customs Union. This process has already begun at the WTO level as we work towards our own quotas, tariffs and customs code.

The UK could, however, negotiate a Customs Union agreement with the EU – as Turkey has done – covering key sectors where disruption to the supply chain would be particularly problematic.

Does that mean we can’t negotiate our own trade agreements?

It is actually the EU’s Common Commercial Policy – a precondition of the EU Customs Union – which gives the EU Commission exclusive control of the trade policy of its Member States. This means that a separate Customs Union agreement would not actually prevent the UK from negotiating its own trade agreements, though a Customs Union would place restrictions UK trade policy.

What is a Customs Union?

The purpose of a Customs Unions is to remove tariffs and import quotas between its members, reducing the costs of trade. Furthermore, they facilitate cross border trade by solving rules of origin issues. Rules of origin (ROO) are the criteria necessary for determining the national source of a product. This is important because the tariff set on a product is often dependent on the source of the import.

For example, if France has zero percent tariffs on US whiskey imports, but the UK has imposed tariffs of ten percent on the same products, then it would profitable to evade the tariff by exporting US whiskey into France and export to the UK from there. Thus, the UK must monitor imports of whiskey from France and impose the appropriate tariffs on US whiskey. A Common External Tariff eliminates the need for this.

Advantages of a UK-EU Customs Union agreement

A Customs Union agreement would simplify trade with the EU as a UK company trading within the EU would avoid the burdensome procedures as they would not need to prove the origin of their products or pay tariffs.  In addition, it would lessen the potential strain on UK Customs systems and reduce the need for investment in physical infrastructure necessary for dealing with customs declarations and checks.

Avoiding customs delays is essential to the ‘just in time’ supply chain model which is especially prevalent in the automotive and aerospace industry.  A Customs Union agreement would therefore address current concerns about potential job losses caused by the increased costs and delays in industries that are crucial to the UK economy.

The UK would still be able to pursue its own trade agreements with other countries and a Customs Union agreement alone would not restrict flexibility in including regulations in trade negotiations. Key areas of potential trade agreements that are crucial to the UK economy would not be restricted by a Customs Union, e.g. services, investment, agriculture and eCommerce.

As the UK would maintain EU set tariffs on areas covered by the Customs Union agreement, the EU would retain control of negotiations on tariffs in these areas.  It could be argued that this isn’t significantly detrimental to the UK because the EU generally aims to negotiate these tariffs down to zero in trade negotiations.  An added benefit, from the point of view of an economic liberal, is that future governments would be prevented from implementing protectionist measures by raising tariffs.

Disadvantages

There is no doubt that a UK-EU customs union represents a curtailment of national sovereignty in trade policy and although there is always a balance to be struck between beneficial economic integration and sovereignty, some will argue that this tips the balance the wrong way.

A key part of many Brexiteers vision of an independent UK trade policy is reaping the incremental benefits of reducing tariffs in each new trade agreement, and improving trade relations with the developing world by reducing the costs of exporting into the UK market. However, in all sectors covered by a Customs Union agreement the UK would have to comply with the EU Common External Tariff and therefore could not adjust tariffs in trade agreements with other countries.

Another risk of being in a Customs Union is that we may face an issue whereby the EU reduces customs barriers and tariffs with a third country in negotiations, meaning that country benefits from liberalised trade when exporting into the UK, but the UK would not benefit when exporting into the third country as it was not involved in the EU’s negotiations and would not be party to the trade agreement it signed.

The Customs Union does not solve border issues

The Customs Union, established in 1958, does not alone abolish border controls. It does not alone lead to “frictionless” trade nor solve the potential Irish border issue. It’s the combination of the Customs Union and the Single Market – a single regulatory area with free movement of goods, capital, services, and labour -that allows goods to cross EU borders in a “frictionless” manner.

Conclusion

This is set to become a key battleground in the Brexit debate, especially with the government yet to reveal its aims for trade. The fact that the official position on this is still unclear, suggests there are many political battles to come, with the potential for unpredictable fallout. Stay tuned.