Brexit commentary | 26 Apr 2018

Is a customs union the answer?

Overview

Political pressure is growing for the UK government to change its position on whether the UK should remain in some form of customs union with the EU after Brexit. A (non-binding) Parliamentary vote on the issue is taking place today.  But would a customs union be sufficient to preserve current levels of "frictionless trade" in goods with the EU? And would it be a politically acceptable solution?

A "customs union ++" is needed

The short answer is that a customs union on its own would not be enough. Two further conditions would need to be met if the aim of a future EU-UK customs union was to effectively preserve the status quo in relation to border checks:

  • Comprehensive coverage:  firstly, the customs union would ideally need to cover all goods – including agricultural products and fish.
  • Regulatory alignment:  secondly, the UK would probably need to agree to align its own regulations concerning goods with those of the EU.

The reasons for this are readily apparent if you look at other customs union elsewhere in the world.

Customs unions: some international comparisons

In contrast to the EU Customs Union, other customs unions do not typically remove the majority of controls on the free movement of goods. Often, this is because the relevant customs union only covers some goods, not all – as in the case of the EU-Turkey union, which does not cover primary agricultural products, for example. In practice, this means that some vehicles will be pulled aside and inspected to check that they are not carrying undeclared agricultural produce on which tariffs are payable (even if the vast majority of vehicles are effectively waved through).

Another reason why most customs unions involve controls (often carried out at the border) is the desire to verify that product regulations have been fully complied with, in order to prevent sub-standard goods being placed on the market (which may cause harm to consumers and undermine the position of law-abiding businesses which have complied with the rules). The EU only succeeded in removing such controls at its own internal borders in 1992, after it had harmonised Member State regulations for goods across the EU; this process of harmonisation provided an assurance that goods produced in say, Italy, would meet the same standards as were applied in the UK and other EU Member States.

In this respect, the EU Customs Union is arguably unique because it sits alongside an unprecedented level of regulatory alignment (based on the EU Single Market). That in turn has facilitated an unprecedented removal of internal border checks and related controls, leading to a significant reduction in transaction costs and barriers to trade for business within the EU. Such costs/barriers are often at least as significant as tariffs, sometimes more so.

Is a "customs union ++" politically viable?

If the aim of entering into a customs union with the EU is to preserve current levels of "frictionless trade", then for the reasons explained above, the UK will probably have to effectively remain within the Single Market for goods – which will cross a number of the UK government's red lines. In particular:

  • The UK would probably have to continue to accept an enforcement/supervision mechanism involving the ECJ or, conceivably, a separate court such as the EFTA Court – although only in respect of EU regulation of trade in goods, not services.
  • As widely reported, the UK would not be able to pursue an independent trade policy in relation to goods – although it would be free to make trade agreements with third countries on services.
  • The UK would probably also have to continue aligning itself with the common agricultural and fisheries policies (otherwise any EU-UK customs union will be incomplete, making it more difficult to dispense with border checks and other controls).

At first sight, this might appear to be trampling over so many issues which supporters of Brexit hold dear as to be politically unviable in the UK. However, given that the government does not have a majority in Parliament, much depends on the view taken by MPs – including pro-European Conservative MPs – of what the vote to leave the EU actually meant. Many MPs are concerned about the economic impact of leaving the EU, hence the desire to preserve current trading arrangements wherever possible – even if that involves (as it is likely to do) accepting that the UK will not be "taking back control" in some areas.

That said, an arrangement with the EU focussed around replicating the benefits of the EU Customs Union and the Single Market for goods would allow the UK to "take back control" in relation to services (albeit that in practice, it might well decide that in many sectors, it was in its interests to align regulation with that of the EU). It would also offer a solution to the difficult issues raised by the commitment of both sides to avoid a hard border in Northern Ireland, where the UK's proposed solutions for post-Brexit customs arrangements have recently been rejected by the EU as unworkable (they have also been dismissed by leading pro-Brexit MP Jacob Rees-Mogg, who described them as "impractical, bureaucratic" and "a betrayal of common sense"). Click here for further discussion of the UK's proposals.

For more detail on the problems that the reintroduction of customs controls would be likely to create, see also our Q&A on customs arrangements and our webinar "Is your supply chain Brexit-ready?"

Would the EU agree to it?

Michel Barnier, the EU's chief negotiator, has recently confirmed that if the UK were to change its "red lines", the EU would be open to a relationship where the UK remained in the Single Market (like Norway) and has indicated that this could be combined with a customs union, thus largely replicating the current economic benefits of EU membership. The "customs union ++" arrangement described above would be slightly different from this; it would be broadly equivalent to a "Norway plus" deal in relation to goods (because Norway is not in a customs union with the EU), but would be a "Norway minus" deal in relation to services.

Where such a proposal might run into problems is on the vexed issue of free movement of people. However, as we have pointed out previously, the EU's public insistence on the indivisibility of the four freedoms does not match what it has actually been prepared to agree in practice. Moreover, even if the future relationship used the Norway model of the EEA Agreement as a template, that arrangement provides for stronger safeguards on free movement of people than EU membership (see Q9 of our Q&A on the EEA Agreement). As such, there may be scope for the EU and the UK to reach a compromise on this issue – but only if both sides are prepared to blur their "red lines" to some degree.

What happens next?

The House of Commons is due to debate a Parliamentary motion calling on the government to make it an objective of its negotiations with the EU on the future relationship to establish "an effective customs union" between the UK and the EU. If passed, the motion will not be binding but will increase the political pressure on the government over this issue.  In May, however, MPs are expected to have a chance to vote on amendments to legislation which seek to impose the same objective on the government. If passed, those amendments would require the government to at least explore the possibility of a customs union with the EU.

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