The CBI’s suggestion that such an approach would help business is mistakenby Aarti Shankar / January 26, 2018 / Leave a comment
The Confederation of British Industry (CBI), the UK’s largest business lobby, this week formally called for a comprehensive new UK-EU customs union post-Brexit. This would go a lot further than the government’s official position—to leave the EU Customs Union and either negotiate a customs facilitation agreement with the EU, or voluntarily mirror the EU’s customs approach. The CBI’s announcement not only demonstrates a striking gap between the business lobby and the government in this important area of UK trade strategy, it has also fuelled speculation that the government may alter its established position on the leaving the EU Customs Union. It should not do so.
There is an important difference to note between the EU Customs Union and “a customs union with the EU.” All members of the EU Customs Union have agreed to scrap import tariffs on each other’s goods, and to impose a common external tariff on goods coming from the rest of the world. Only EU member states are part of the EU Customs Union, meaning that the UK would be highly unlikely to remain in this after its withdrawal (Monaco is in the EU Customs Union despite not being an EU member, but this is due to a historical agreement with France). But the CBI’s announcement this week raises the question of whether the UK should establish a new customs union with the EU after it leaves.
A post-Brexit customs union would resemble the current arrangement in important respects. Support for this option is primarily about minimising disruption to existing UK-EU trade. It is true that leaving the EU customs union will entail economic costs—arguably this is a point that the government should be prepared to discuss more honestly. These stem more from time and administrative costs to trade, rather than potential new tariff barriers—which the CBI rightly suggests could be reduced or removed through a free trade agreement. If the UK does strike a trade deal with the EU, the bulk of new admin costs would result from the need to comply with “rules of origin.” These very technical requirements could be particularly problematic in sectors where UK businesses are heavily integrated in European supply chains.
Of course, the government’s proposals for a future UK-EU trade relationship must address business’ legitimate concerns about the potential for disruption to trade. But the CBI’s suggestion would not solve the problem.
It is often taken as given that moving to a new post-Brexit UK-EU customs union would entail no new costs to businesses, but this doesn’t stand up to evidence. The customs unions that the EU has established with third countries do not provide border-free, frictionless trade. For instance, goods covered under the Turkey-EU customs union still need to be accompanied by a specific movement certificate, and, in some cases, proof of origin documentation. Also Turkish transporters are required to produce transport permits at the border for all EU nations they will be travelling through. A recent report found it can take up to 30 hours to cross the border between Turkey and Bulgaria.
“The CBI’s announcement has fuelled speculation that the government may alter its established position”
Importantly, operating in a customs union with the EU post-Brexit would come with high long-term political costs. As a representative from Turkey’s main business lobby said this week, the Turkey-EU customs union is “an asymmetric relationship.” Each time the EU strikes a new free trade agreement, Turkey is required to open up its goods market—tariff-free—to these countries, without receiving reciprocal preferential access in return. It has no decision-making powers over what countries the EU strikes deals with, nor can it represent its interests or exert influence in trade negotiations. This is not a sustainable or suitable long-term arrangement for the UK once it is out of the EU.
Nor would a UK-EU customs union fully solve the question of the Irish border. As has become evident, the operation of an open Irish border relies heavily on continued “regulatory alignment” between Northern Ireland and the Republic. This relates to the relationship the UK decides to strike with the EU single market, not just the customs union. Although the UK has made clear its intention to leave the single market, it may still be possible to maintain an open border if both sides agree to cooperate on regulation relating to the key sectors that trade across this border.
However, if the UK were to call for a new, frictionless customs union with the EU, the EU would likely demand high integration with the full rules and obligations of the single market in return. Once again, Turkey’s relationship with the EU provides a clear example of the trade-off facing the UK on this. The Turkey-EU customs union is restrictive because their broader economic and trade relationship is not deeply integrated: Turkey is not a member of the EU single market; Turkey has not adopted all relevant areas of the EU body of law; both Turkey and the EU operate their own trade defence policy; and the trade relationship is not underpinned by a robust dispute settlement mechanism.
Maintaining a truly frictionless customs union with the EU post-Brexit would entail high political and long-term economic costs for a non-member state like the UK. In essence, it would set the path for continued deep integration with the EU single market and the European regulatory model, but without being able to exert influence or represent its own interests. If this is the long-term relationship the UK strikes with the EU, what would have been the point in leaving?
Brexit Britain: the future of industry is a publication which examines the future of UK manufacturing through the prism of the recently released Industrial Strategy White Paper. The report features contributions from the likes of Greg Clark MP, Miriam Gonzalez, Richard Graham MP and Frances O’Grady.
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