A UK-EU customs union: An option most of us could live with?

Michael Barnier laid it on the line today. In a short but direct speech he emphasised that the UK leaving the EU will inevitably increase friction in trade:

Why do our Member States benefit from ‘frictionless’ trade in goods with other Member States?

  •  Because they form part of the internal market. This has made it possible to harmonise rules and ensure their mutual recognition, guaranteeing that goods legally produced in one Member State can be sold in all the others without any other formal requirement.
  • But also because, as members of the EU, they form part of our customs union, with a common external tariff and no customs controls at all between our countries.
  • What would be the point of not having customs duties if, at the same time, divergent national rules prevented the free movement of goods?
  • It is clear that only the combination of the customs union and the rules of the internal market allow this free, ‘frictionless’ trade between our States. One does not go without the other.

By choosing to leave the Union, you move to the other side of the external border that delineates not only the customs union but also the area in which the rules of the internal market are adopted and implemented.

Essentially, there is a balance to be struck between preferential trading agreements and political control. This applies to any trading agreement. Even membership of the World Trade Organisation requires submission to a supra-national arbitration panel in the event of a dispute. As George Magnus explained before the referendum:

There is a trade-off to be made, then. In light of this, you cannot have an abstract discussion about sovereignty without saying what you are going to surrender in terms of economic integration and benefit. Brexiteers are free to discuss “taking back control,” but they are then under an obligation to discuss the potential economic disadvantages of doing so.

Broadly speaking, the further away the UK moves from the EU’s orbit, the more political control it will have but the less preferential the trading conditions will be.

The Institute for Government has produced a handy chart mapping all the things the government says it wants against the various post-Brexit scenarios. Essentially, as you move from left to right, the ticks start to appear in the control bits, like immigration and escaping the jurisdiction of the ECJ but they disappear in the trade bits, like trade in services and the frictionless border.

Given the importance of immigration to the Leave vote, the Norway and Switzerland options must be off the table. Any post-Brexit agreement that doesn’t allow the UK government to control immigration from the EU runs counter to the spirit of the referendum result. Likewise, any arrangement that involves the UK continuing to pay into the EU budget. Frankly, if we remain in the single market and customs union, as some are suggesting, we might as well not bother to leave the EU.

The other stumbling block is the Northern Ireland border. As Mr Barnier says, the moment you move to the other side of the border there will have to be some kind of border control. The EU cannot have a customs border with a hole in it. If there are checks at airports, ports and the Channel Tunnel, the idea that you could still drive across the Irish border without any checks is plainly ridiculous.

Against this background, then, the value-for-money options on this chart would seem to be a customs union, similar to Turkey’s arrangement, or a Deep and Comprehensive Free Trade Area like that agreed with Ukraine. (In both cases, the detail would be different for the UK, given the size and shape of its economy and its previous relationships with the EU.)

The customs union option is making its way slowly up the political agenda. According to  the Guardian:

Officials and business leaders are anxious to puncture what they see as myths about a customs union that have deterred ministers from considering it as a much-needed economic option after Brexit.

While leaving the existing EU customs union is a direct consequence of Brexit, civil servants believe that agreeing a new customs union with the EU is not only possible but still compatible with key aims of Liam Fox’s Department for International Trade.

“There is a crucial difference between the [existing] customs union and a [future] customs union and [chancellor Philip] Hammond understands this now because the Treasury have taken him through it,” said one official familiar with the process.

A customs union with the EU does have some attractions. It removes us from freedom of movement obligations, the European Court of Justice and the requirement to pay into the EU. It would also allow the continuation of tariff-free trade in goods and would minimise the impact of border checks. It would also mean that we still have the benefit of all the EU’s free trade agreements, including the one just negotiated with Japan.

As Charles Grant explains:

Britain will have to leave the customs union of the EU, but could, like Turkey, create a customs union with the EU’s customs union. That would mean maintaining the common external tariff and accepting any changes made to it by the EU. Goods would then move easily across frontiers, as today, without the need for checks to see that tariffs had been paid, rules of origin respected or customs forms filled in. This would be hugely beneficial to firms that use just-in-time systems, notably those making cars and aircraft, and many retailers; to small businesses that have grown used to exporting to the EU without any paperwork; and to farmers who need to move food across frontiers speedily.

Britain should continue to benefit from the 50-odd FTAs that the EU has negotiated with other countries (though concerning the EU’s future FTAs, the UK would have to ask for special arrangements so that it was included; given the size of the UK economy, both the EU and the third country concerned would probably want to include the British). One major dividend of an EU-UK customs union would be to obviate the need to re-establish a hard border between Northern Ireland and the Republic of Ireland; without a customs union, it is hard to see how border controls of some sort can be avoided.

The downside is that the UK’s trade in goods would be determined by EU agreements. We would have to impose the EU’s common external tariff and would not be able to conclude any trade deals in goods with any other country.

But how much of a problem is that, really? How much of the talk of trade deals is just fantasy? According to Vince Cable, many of our supposed deal partners are bemused:

According to the FT, the Treasury isn’t convinced either:

Treasury officials have written an unpublished paper which challenges the DIT to prove it can line up free-trade agreements with non-EU countries that can outweigh the loss of European trade associated with leaving the customs union. Mr Hammond is likely to use the findings of that paper later this year to press home his case for staying close to the customs union.

Others have looked at this and their conclusions are pessimistic. NIESR’s study at the beginning of this year concluded that, even if we had trade deals with the Anglosphere (Australia, Canada, New Zealand, USA) and the BRIICS (Brazil, Russia, India, Indonesia, China and South Africa) it still wouldn’t offset the loss of EU goods trade.

Even with a free trade agreement with the rest of the EU, NIESR calculates a loss of 20 percent of the UK’s goods trade. Without a trade deal that would be 32 percent. The gain on goods trade from other trade deals would total 6.2 percent. Even if NIESR is only half right, that is a lot of ground to make up. It will take a lot to compensate for geographical proximity and 25 years of integrated trade.  These trade deals, about which there has been so much puffed up chest beating, may not amount to much.

That said, a customs union is not a have cake and eat it option. It does nothing for our EU trade in services. There are a number of other downsides, not least of which, is that it would not enable the UK to open up its goods markets in return for access to trade in services. As John Springford says:

The benefits of trade deals are often exaggerated, and may not be enough to offset the cost of leaving the customs union. But the UK’s advantage in services – which now make up more than 40 per cent of total exports – means that services trade policy is unusually important, and Britain would lack the ability to open its goods markets in exchange for other countries opening their services markets. In short, without control of goods tariffs, the UK would have less negotiating power over services trade.

Nevertheless, none of the post Brexit options is without its negative points. A customs union at least gets around the immigration problem with what seems to be the least amount of disruption. Whatever we do, we will have to swap trade terms for political control. If we really must leave the EU, a customs union arrangement may prove to be the least painful way of getting an agreement most of us can live with.



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9 Responses to A UK-EU customs union: An option most of us could live with?

  1. John says:

    Has anyone analysed what UK membership of EFTA would mean in terms of trade in goods and services across Europe?

  2. Dipper says:

    “Michael Barnier laid it on the line today”

    Well, he’s laying it on the line for both sides. Remember that every time he tells us how hard its going to be if we don’t get a deal, he’s also turning round and saying to the 27 that they have a lot to lose in this if there’s no deal. So, it sounds like he is doing his job, which is to get a deal.

  3. gunnerbear says:

    Or the UK could just go for FLEXCIT….

    Click to access flexcit.pdf

    • John says:

      Who has the time to read 406 pages?
      Provide a precis.

      • Dipper says:

        For those who haven’t the time to read 406 pages there is a summary at the front. Here it is.

        Leaving the EU will have significant geopolitical and economic advantages. But we believe it is unrealistic to expect a clean break, immediately unravelling forty-three years of integration in a single step. Therefore, we have set out a process of phased separation and recovery.
        In all, we identify six phases. The first deals with the legal process of withdrawing from the EU, with the aim of concluding an agreement within the initial two year period allowed in the Article 50 negotiations. In this, we seek continued participation in the EU’s Single Market.
        The six phases involve both short-term and longer-term negotiations, to achieve a measured, progressive separation. In the first phase, there are three possible options. One is by rejoining the European Free Trade Association (EFTA) and trading with the remaining EU member states through the European Economic Area (EEA) – the so-called Norway Option. Another is the “shadow EEA” and the third we call the “Australian process”.
        As part of the first phase, we would repatriate the entire body of EU law applicable to the UK, including that pertaining to agriculture and fisheries. This would not only ensure continuity and minimise disruption – and reduce what would otherwise be massive burdens on public and private sector administrations – but also buy time for a more considered review of the UK statute book.
        We would continue co-operation and co-ordination with the EU at political and administrative levels, where immediate separation of shared functions is neither possible nor desirable in the short term.
        These would include the framework research programme (Horizon 2020), the Single European Sky and the European Space Programme, certain police and criminal justice measures, joint customs operations, third country sanitary and phytosanitary controls, anti-dumping measures, and maritime surveillance. Such issues are in any event best tackled on a multinational basis, and there is no value in striking out on our own just for the sake of it.

        Thus, the first phase is limited to a smooth, economically neutral transition into the post-exit world. It lays the foundations for the UK to exploit its independence, without trying to achieve everything at once. Subject to a referendum to approve the initial exit agreement, the basic withdrawal framework could be in place within two years of starting negotiations.
        Even before exit, we would initiate a second phase – the regularisation of our immigration policy and controls. This will include action at a global level to deal with the 1951 Geneva Convention on the Treatment of Refugees, and the 1967 Protocol, as well as at a regional level, modifying or withdrawing from the European Convention on Human Rights.
        We then propose a third phase, which involves breaking free of the Brussels- centric administration of European trade, building a genuine, Europe-wide single market, with common decision-making for all parties. This will be fully integrated into the global rule-making process, through existing international bodies.
        The aim is a community of equals in a “European village”, rather than a Europe of concentric circles, using the Geneva-based United Nations Economic Community Europe (UNECE). It would become the core administrative body, on the lines proposed by Winston Churchill in 1948 and again in 1950. Thus, the exit from the EU becomes the start of an ongoing process, the means to an end, not the end itself.
        Simultaneously, we identify and explore some key areas where independent policy development is required. In phase four, we make a start on this, the work eventually leading to divergence from the EU and the emergence of unique UK policies.
        Phase five comprises a coherent programme to define our wider global trading relations. This comprises eight separate initiatives. The withdrawal settlement has now receded, having served its purpose as the launch pad. The way is now open for the UK to break out of the EU cul-de-sac and rejoin the world.
        Sixth, and finally, we embark on a series of domestic reforms, by introducing elements of direct democracy and the other changes embodied in The Harrogate Agenda – the immediate aim being to prevent ever again a situation where our Parliament hands over our powers to an alien entity without the permission of the people.
        In its totality – the sum of the parts being greater than the whole – we call our exit plan Flexcit, standing for a flexible response and continuous development. This market solution to leaving the EU is a process, not an event. It provides a template for the next twenty or so years of our national development.

        • John says:

          I was an Import Entry Clerk during the 1960s – before the UK entered the European Common Market in 1973 – and I remember claiming EFTA preference along with Commonwealth preference reductions in import taxes.
          I also used to have to complete Purchase Tax forms, which was our fore-runner to VAT.
          The whole system seemed to me to work pretty smoothly back then.
          Why shouldn’t it again?

  4. Patricia Leighton says:

    For the many of us who believe the EU is far more than % gains or losses in trade this is interesting but largely irrelevant

  5. John says:

    It occurs to me that the major reason the UK voted to leave the EU was because of concerns over uncontrolled migration – not helped by Mrs Merkel throwing open the doors to Germany.
    If we could introduce a new system of immigration controls – based on student visas, visitor visas and worker visas – might that not be better?

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