As the Brexit countdown clock ticks ever louder, (in addition to the recently announced changes to the Home Office) Westminster’s gaze has once again swung around to the issue of whether Britain should remain in a Customs Union.
As the politics of this debate intensifies it is easy to get lost in this “maddening muddle” as it was so aptly described by Matt Chorley in the Times earlier this week,1 and lose sight of the fundamental issues at stake.
In this article, we hope to clear away some of the obscurity and guide you through some easy steps to understanding exactly what EU Customs Union is and what the implications of leaving it are for the UK.
What is a Customs Union?
It is an agreement by a group of countries to all apply the same tariffs on imported goods from the rest of the world and, typically eliminate them entirely for trade within the group.
The European Union (EU) is the biggest customs union in the world and means no customs duties, no quotas or declarations as goods move around member states. By signing up to this, countries can help avoid the need for costly and time-consuming customs checks when trading with other members of the union.
Asian shipping containers arriving at Felixstowe or Rotterdam, for example, need only pass through customs once before their contents head to markets all over Europe and lorries passing between Dover and Calais avoid delay entirely.
What is the Difference Between the European Customs Union and the Single Market?
Whilst the Customs Union eliminates tariffs, quotas or taxes on trade, the Single Market is a broader agreement to also accept free movement of goods, services, capital and people. There are EU-wide regulations covering a whole host of industries and products on everything from food standards and the use of chemicals to working hours and health and safety. The Single Market is an attempt to create a level playing field.
You can be in the EU’s Single Market, but not the EU, this is what Norway, Iceland and Liechtenstein do. Turkey on the other hand is part of a Customs Union with the EU but is not in the single market. All of these deals have required lengthy negotiations and substantial compromises all of which are anathema to staunch Brexiters.
The UK is a member of both the Customs Union and the Single Market but Mrs. May wants the UK to be both. At the same time she wants to avoid a UK/EU customs border so as not to have trade hindered by customs fees and paperwork and she is also insisting that the UK has the freedom to do trade deals with the rest of the world. However, Michel Barnier, the EU’s chief Brexit negotiator says ‘No’. Apparently, the UK cannot continue to enjoy frictionless trade if it leaves both the Customs Union and the Single Market.
So does Mrs. May have a Plan?
“We are leaving the customs union, we will have an independent trade policy and we will strike trade deals around the world,” Mrs. May’s spokesman said last week.
Strong words but her two alternative routes for securing future trade deals and preserving the freedom of life outside a Customs Union have both been branded as unworkable by some.2
The first, called a “Customs Arrangement”, relies on technology and goodwill to limit the impact of new checks. A “trusted trader” scheme and exemptions for small firms in Northern Ireland are intended to put the onus on European business to police itself but would do little to help with other international trade.
The second proposal, a “Customs Partnership” with the EU, is more ambitious and would see the UK continue to act as if it were in a Customs Union when dealing with imports from elsewhere. If they were bound for EU markets, the appropriate tariffs would be collected and passed on. This is seen by Euro-sceptics as so far-fetched that it is part of an elaborate trap and so immensely complicated as to guarantee chaotic failure. Mr. Rees-Mogg has called it “completely cretinous”.3
What are the Advantages of Forging a New Customs Union Relationship?
Britain will have to leave the existing EU Customs Union as a direct legal consequence of Brexit but it could strike a new Customs Union deal that would replicate many of the advantages. Apart from ‘frictionless borders’ continuing, a Customs Union would have the major advantage of ensuring that the North/South Ireland border would remain open and easy to cross. Both sides want to avoid a hard border for goods and movement but so far there has been no agreement on a solution. As the EU is demanding answers on this issue by the time of its next summit in June, time is of the essence to resolve this major stumbling block.
What are the Disadvantages?
Opting to remain in the Customs Union would limit the UK’s freedom to negotiate other trade deals independently of the EU, nullifying one of the great upsides of Brexit. Many are championing the idea of a “Global Britain” striking new agreements across the world although some would argue their particular strain of economics on this subject are inherently flawed.4
Others argue that the UK government could, in theory, diverge from the common external tariff, but foreign importers would know that they could always fall back on EU ports of entry to access the UK market. At best, therefore, it would require close collaboration between the EU and UK when negotiating third-party trade deals. At worst, Britain would lose any new negotiating clout.
Remaining in the Customs Union could also turn the UK into a rule taker, bound by the EU’s trade policy but without a seat at the table to shape it could also possibly be excluded from the benefits of new EU trade deals.
Without a convincing proposal for avoiding a hard border in Northern Ireland, the UK risks seeing wider Brexit talks grind to a halt and giving businesses even more to fret about. Whilst the weak pound has made UK goods cheaper and boosted exports, this next stage of Brexit negotiations will have a huge impact on businesses. With so many fundamental issues about the future relationship with the European Union still unresolved, planning for the future is currently ‘quite difficult, but not unsurmountable’.
If you are considering moving your business into or out of the UK and are concerned about the current lack of clarity and would like further advice, then please contact our team at Baxters International.