Economics

Britain must totally withdraw from the customs union

A half-in, half-out arrangement is still being discussed—but this would be the worst of both worlds

April 04, 2017
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We learned over the weekend that Whitehall officials are examining the Sweden-Norway border. Why? Well, Norway is outside of the EU’s Customs Union but trades freely with Sweden, which is inside it. With the clever use of technology and reciprocal agreements, the need for physical checks there on cross-border goods traffic is largely obviated.

Last week Open Europe published a report, Nothing to Declare, arguing that the UK should leave the customs union. We highlighted the example of the Norwegian-Swedish border, but also other borders such as the Swiss-EU and Canadian-US. Our view, having looked carefully at the evidence, is that Britain should reject any half-in, half-out option and commit to the maximum possible customs cooperation with the EU from outside the customs union.

No option other than being fully in or fully out would work for an economy like Britain’s. Staying in the customs union would mean Britain could not shape its own international trade policy in any meaningful sense. Theresa May has already, rightly, committed to leaving the EU’s Common Commercial Policy and the Common External Tariff—without doing this we would be unable to sign our own agreements to remove tariffs on trade with key partners, and would be forced to levy the EU’s protectionist tariffs on all our imports. But in January, May suggested she is open to Britain remaining a signatory to elements of the customs union. The prime minister needs to go all-out and commit to leaving it altogether.

Turkey’s half-in, half-out arrangement has received a great deal of attention. The country is tied to the EU’s trade policy but has no seat at the table where decisions are made. Its customs union does not cover all goods, and it is not necessarily included when the EU signs Free Trade Agreements with third countries. This arrangement suited a country that—at the time it was agreed—saw itself as on a path to EU membership. The UK has made a decision to leave and so a Turkish model therefore makes little sense for us.

Others have suggested that we could remain in the EU customs union only for certain sectors of our economy, for example the automobile industry. But such an arrangement would be very hard to negotiate and probably legally vulnerable. There are certainly going to be challenges for some industries, such as car manufacturers, if we leave the customs union. But it is possible to address some of these concerns. A sectoral customs union would also be very difficult to police. How, for example, would the authorities know if a screw or a bolt was destined to be used in a car (which might be covered by the hypothetical sectoral agreement) or for another finished product (which might not covered by it).

Another option, which has been doing the rounds on Whitehall, is a system of parallel tariffs. This would entail the UK leaving the EU’s customs union but then raising the exact same tariffs as the EU on its imports. The thinking goes that the EU would then agree to recognise UK customs checks, so goods imported to the UK would be considered customs cleared by EU members. In return the UK would probably have to continue to send the revenue it raises from customs to Brussels. The proposal is that, if the UK then signed any separate Free Trade Agreements, a company could apply to have tariffs refunded (if a good was imported under such an agreement) provided the good was kept in the UK. Putting aside the political difficulty for the government in sending our customs’ revenue to the EU after Brexit, this would be a very complex set up and would place a huge bureaucratic burden on business. Although such an arrangement would protect some of the advantages of customs union membership it would be fearsomely difficult to negotiate and would not allow the UK to vary its own external tariffs.

Leaving the EU Customs Union will come with some costs (as well as benefits) for the UK economy. But there will also be costs for the EU economy, so both sides have a strong incentive to mitigate these costs by agreeing comprehensive customs cooperation, as part of or alongside a future Free Trade Agreement. The EU has customs cooperation agreements with non-members including Canada and Switzerland so there are strong precedents in place for such an arrangement. And unlike in any other previous discussion, the UK and EU already enjoy tariff and customs free trade with one another. So a deal would protect, not alter, the status quo.

Britain is fortunate in that we currently operate one of the world’s most efficient customs systems. Only a tiny proportion of non-EU goods are physically inspected at the border, and companies can submit relevant documentation online. We need to extend these systems, and update them, to be in the best possible position as we leave the EU. Outside the customs union and the EU, we will be able to decide our own tariffs on our imports. We can design these to suit our economy—rather than a union of 28 states with differing economic needs and different ideas of whether to support free trade or protectionism. And we can also sign Free Trade Agreements with the biggest and fastest growing economies in the world, with which the EU has so far failed to reach a deal—the United States, China, Japan, and India, for example.

Nine months ago the UK voted to leave the EU. As we implement that decision we need to make sure we seize all the potential benefits of it. Leaving the customs union fully is the right choice for the UK.