19 April 2018

Jim Rollo is Deputy Director of UKTPO, Emeritus Professor of European Economics at the University of Sussex and Associate Fellow, Chatham House. Dr Peter Holmes Reader in Economics at the University of Sussex and Fellow of the UKTPO.

On Wednesday this week, the House of Lords voted that after Brexit a customs union with the EU should not be ruled out. If it remains in the legislation, it would require the government to submit a report to Parliament on the Customs Union option. This blog discusses some of the key issues that would need to be considered in such a report.

What is a Customs Union?

A customs union under GATT Art XXIV is an agreement under which partners commit to removing all duties on products originating in each other’s territory and having a common external tariff. This might imply a common collection of customs duties but in some cases (e.g. MERCOSUR) this was not initially done. Customs unions under GATT XXIV cover goods but not services.

A formal customs union may still require border checks, including for tax (esp VAT or other sales tax purposes), technical standards, transport (e.g. cabotage).

A Customs Union with the EU versus membership of The EU Customs Union

We need to remember the difference between being in the European Union Customs Union which only is possible for Members States and territories that are effectively part of a member state (eg Jersey, Monaco) versus having a customs union with the EU, eg Turkey but also San Marino. Even a complete customs union does not by itself achieve frictionless trade amongst signatories.  This is because only a customs union combined with elements of the Single Market would obviate the need for border inspections, although a customs union would go some way towards reducing border formalities.  At the same time, countries that sign up to a ‘complete’ customs union forgo the ability to set their own external trade policy regime.

A UK-EU customs union

The key decision on a UK-EU customs union would be how complete it would be. GATT Art XXIV requires “substantially all trade” to be covered. This is generally taken to mean about 90% of trade but WTO recognised customs unions often are seriously incomplete. EU Turkey does not cover agriculture and allows anti-dumping duties to be imposed between the two parties. Nor is Turkey included automatically in EU Free Trade Agreements.

Issues to be decided in any UK-EU customs union

Would it include agriculture and fisheries? If not Rules of Origin will be required for excluded sectors and costs of compliance and delay will be incurred.

Would Anti-dumping duties be harmonised? If not, borders are needed; if so WTO compatibility issues arise.

How would trade with third countries be addressed? Turkey is not automatically included in EU Free Trade Agreements (FTAs): wherever there is an exception the CET is necessarily incomplete.

How is tariff revenue shared? Turkey and the EU do not share revenue. East African Community and Southern African Customs Union do. MERCOSUR now shares revenue but previously did not. This is not an issue for FTAs.

Implications for Northern Ireland

A comprehensive customs union including agriculture is a necessary, but not sufficient condition to ensure the absence of hard customs facilities and solve the border issue in Northern Ireland.

Single market participation is needed to avoid technical inspections and tax issues would also have to be dealt with.