Economy

Refresher: What is the customs union and why might the UK leave it?

The British government is split on how close a partnership it should maintain on trade

Theresa May: The prime minister has said the issue of the customs union isn’t a “binary” choice between staying in or leaving. Photograph: Jonathan Brady/PA Wire

Tue Jan 17 2017 - 07:22

British voters last year settled the question of whether or not to leave the European Union by choosing Brexit. But that's not the only stay-or-go question. The government is split over how close a partnership with the rest of Europe to maintain on trade. Some hope to keep the UK in the Europe's customs union, which lets its exporters trade tariff-free with the bloc. Others want Britain to leave so it can land free-trade pacts with countries elsewhere.

1. What does the customs union do?
It requires that its members impose no tariffs on goods traded among each other, and sets a common duty on goods of nonmembers. The customs union has leverage when it negotiates deals with the rest of the world because it speaks for a bloc of 500 million people.

2. How is the customs union different from the single market?
The single market encompasses services as well as goods and is focused on nontariff barriers along with ensuring common standards and regulations. Countries participate in different ways. Turkey, for instance, is outside the EU single market but inside the customs union. Norway is a member of the single market, but not the EU.

3. What would breaking from the customs union entail?
Unless and until the UK negotiates a new trade deal with the EU, its exports will run into the union's common external tariff, which now averages about 5 per cent across all goods, ranging from 10 per cent for cars to 29 per cent for chocolate. Exporters would also be subject to checks at borders with the EU, which they aren't now.

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There would be geographic implications as well. The line separating the Republic of Ireland and Northern Ireland, the only hard border between the UK and the EU, might need to be toughened up. Some worry that could undermine the Belfast Agreement.

4. What is likely to happen?
Who knows? The foreign secretary, Boris Johnson, has said the UK can leave the bloc and still enjoy easy trade, a view rejected as foolhardy by some European officials. The question of remaining in the customs union has also divided the government, with Johnson, Brexit secretary David Davis and trade secretary Liam Fox agitating to leave and chancellor of the exchequer Philip Hammond counselling caution.

In advance of prime minister Theresa May’s speech on Tuesday, speculation is rife that she is prepared to leave the customs union so that the UK can negotiate a new deal with the EU and on its own with others. She also may leave the single market. The EU’s insistence that members of the single market allow free movement of labour means that May can’t control immigration as much as she would like.

5. What is the case for leaving?
So long as the UK is a member of the customs union, it can't sign trade accords with other countries such as China, which may be unwilling even to begin negotiations now, since the UK can't yet seal a deal. This leaves the trade secretary "unable to do his job," as Conservative lawmaker Andrew Tyrie wrote in a September report.

Leaving the customs union would allow the UK to pursue its own deals with 85 per cent of the world and ensure the agreements are calibrated in its favour. The Policy Exchange, a think tank, says staying in the bloc also makes the imports of consumer goods, particularly food, more expensive. Embracing free trade could increase the UK’s long-term gross domestic product by 4 per cent, Patrick Minford, a former adviser to Margaret Thatcher and one of the few economists to campaign for Brexit, has argued.

6. What is the case for staying?
The treasury warned before the June 23rd vote that leaving the customs union would mean the imposition of "significant" administrative costs, such as border checks and certification of where goods come from. Raoul Ruparel, who now advises Davis, estimated in a report for the Open Europe consultancy that quitting the union would lower GDP by 1 per cent, to 1.2 per cent, by 2030.

7. What do countries outside of the EU say?
Some, such as New Zealand and South Korea, have already agreed to hold regular talks on trade policy with the UK. US president-elect Donald Trump said in a January 16th interview with the Times that he would be willing to strike a "fast" pact with Britain. Other countries have signalled a preference for focusing on a trade deal with the EU, while some may be unwilling to engage with the UK until they know what its future relationship with the EU looks like.

8. What are the chances of a UK-EU trade deal?
Canada got a deal with the EU, although it took seven years and, for now, doesn't fully cover services. The odds are that Britain and the EU will eventually find it in their interest to establish a pact, it's likely to take longer than the two years the British have to negotiate Brexit. That's prompting suggestions of a transitional deal for certain sectors.

9. Is there another possible outcome?
May has said the issue of the customs union isn't a "binary" choice between staying in or leaving. The UK could try to join Turkey as a non-EU member of the customs union, though that might be at odds with Britons' new independent streak. Or the UK could leave the customs union and then "opt back'' in for key sectors that import many parts, such as the auto industry.

The EU might resist such a gambit, which might violate World Trade Organization rules.

Bloomberg

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