Once again a Conservative government is learning it is better to be in a customs union

Fifty years on from the customs union’s completion, May should study its history

May 27, 2018
The original Treaty of Rome. Photo:  Vandeville Eric/ABACA/ABACA/PA Images
The original Treaty of Rome. Photo: Vandeville Eric/ABACA/ABACA/PA Images

When Britain voted narrowly to leave the European Union few could have imagined the extraordinary impasse almost two years later at the heart of government about what this would mean for new customs arrangements. Last week Britain’s most influential business lobby called time on the absurdist drama as Theresa May and her ministers continue to debate a choice between two unworkable options. Paul Drechsler, the outgoing president of the CBI, said on Tuesday that “the Brexit negotiation has been held up at customs” and backed staying in a customs union with the EU “unless and until a better alternative can be found.”

Why has the customs relationship become so crucial in defining Brexit? As so often historical perspective provides a guide. The bedrock of the common market launched at the Treaty of Rome in 1957 was the creation of a customs union, completed ahead of time almost 50 years ago, in July 1968. When Britain hitched itself to the European Economic Community in 1973, it was essentially joining a customs union since the broader aim of a common market in services, capital and labour as well as goods remained largely aspirational.

Customs unions are more ambitious than free-trade areas such as the one between Canada, Mexico and the United States. Free-trade agreements get rid of mutual tariffs but members still set their own against other countries. This limits the gains from the free-trade agreement because traders have to show that they are complying with rules of origin. These local content rules prevent the subversion of higher tariffs in any one member through imports routed through a partner with lower tariffs. By contrast a customs union not only eliminates mutual tariffs but also imposes a common set of tariffs on imports from countries outside the trading bloc. Since the charge on imports is the same wherever they enter the union it does away with burdensome rules of origin.

In its quest to rebuild its relationship with the EU through an enhanced version of the free-trade agreement between Canada and the EU (which eliminates almost all tariffs), the government is showing a neglect of history worthy of the Bourbons who neither learned nor forgot. For this was in effect the same response that Britain first made to the European project as its full ambition unfolded in 1956 in the run-up towards the Treaty of Rome. Once the Conservative government realised that the six founder states were in earnest about forming a customs union it tried to muscle into the act by suggesting a wider free-trade arrangement including other European states with the union.

Despite Britain’s far greater influence in the late 1950s than today, the plan got nowhere because of worries—especially in France—that it would undermine the fledgling customs union. After Charles de Gaulle put the proposal out of its misery in late 1958 Britain responded by establishing the European Free Trade Association (EFTA) with smaller countries such as Norway and Switzerland that still belong to it. Yet when EFTA came into force in 1960, with a broadly similar plan to that of the customs union in phasing out industrial tariffs among its seven founder members, it was already clear that this was a second-best venture to the common market with its three big economies of Germany, France and Italy. The following year Britain applied to join the European Economic Community, an endeavour also crushed by the French president, in January 1963.

Although the customs union was for a long time the main concrete achievement of European integration, its economic effect was harder to pin down. The European economy had already been growing fast in the post-war years before the union started to take shape. Tariffs were tumbling round the world through successive multilateral trade negotiations such as the Dillon and Kennedy rounds of the 1960s. Even after they were eliminated within the European customs union in mid-1968, a genuine common market in goods remained elusive. Customs posts remained in place for a variety of purposes such as the enforcement of differing indirect tax regimes. Non-tariff barriers in the guise of differing national technical rules relating to products had become more salient in obstructing trade.

Impatience with the stunted achievement of economic integration spurred European leaders with Margaret Thatcher at the fore to press ahead with a genuine single market in the 1980s. That project, which came to fruition in the early 1990s, swept away customs controls at borders and tackled non-tariff barriers through mutual recognition of standards. The creation of a single market coincided with the expansion of global supply chains, as multinationals such as carmakers sought to maximise efficiency at each stage of production by manufacturing any one product in several countries. That has made the customs union more rather than less significant, since supply chains could burgeon within Europe uninhibited by the constraints of rules of origin.

As Theresa May and her ministers are belatedly discovering, there is no easy solution to protect Britain from the harm incurred by leaving the customs union, which must occur formally as a result of Brexit. The problem is acute in Northern Ireland where the government is struggling to reconcile the irreconcilable—an independent trade policy and departure from the single market with no return to a hard land border with the Irish Republic. Another major concern is the likely damage to manufacturing firms throughout the United Kingdom (especially in the north of England and the west midlands) which are enmeshed in European supply chains.

The two options that have so divided May’s cabinet each try to minimise the harm from leaving the customs union. Brexiter ministers back a solution based on technology to make trade with the EU as frictionless as possible, dubbed “max fac.” That’s short for “maximum facilitation” but the “max” could also refer to costs for businesses, which Jon Thompson, head of HM Revenue & Customs, disclosed last week could be close to £20bn a year. May supports a cheaper “customs partnership” in which Britain would continue to charge EU tariffs at the border and reimburse firms importing for use in Britain if British tariffs were lower.

The dispute in the cabinet is a modern version of the war in  Gulliver’s Travels over which end of a boiled egg to crack open. The essential point is that neither of the two options is feasible for years to come and the EU regards both of them as unrealistic. Once again a Conservative government is learning that it is better to be inside a European customs union than outside it.