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Analysis

In or out? Why customs union is key to post-Brexit future

by Luke Lythgoe | 26.06.2017

The election result has reopened the case for a softer Brexit, in particular over whether Britain should stay in the EU’s customs union or even its single market.

For now the government is sticking to its guns. Hard Brexiters such as David Davis, advocates of a softer, pro-business Brexit such as Philip Hammond, and the Queen’s Speech have all insisted the UK is still leaving the customs union.

But with Westminster politics in flux, positions can change. Here’s our guide to how continued membership of the customs union – or an agreement very similar to it – would solve some thorny Brexit issues. We will publish a similar guide to the case for staying in the single market later this week.

What does the EU customs union do?

As part of the customs union, EU members cannot apply duties or quotas to any goods from other members and must let such goods circulate freely within their market. This requires goods to meet EU standards, thus also minimising paperwork and border inspections. Members must then all apply the same tariffs to goods coming from non-EU countries, in line with the EU’s Common External Tariff schedules.

Can the UK stay in after Brexit?

It is unprecedented for a country to be part of the EU customs union and not in the EU. The closest to this position is Turkey, which signed a customs union agreement with the EU in 1995 – but this is incomplete and lacks some key features, making it an inexact model for Britain.

Then again, no country has left the EU before. Some in Europe – such as Christian Lindner, the German liberal leader, a potential future coalition partner to Angela Merkel after the September federal elections – support a continued customs union with the UK. As a former EU member, the UK would also be better placed than Turkey to fit into the EU’s regulatory framework and so get a more complete deal.

Tariff-free trading

The main benefit to the UK of remaining in the customs union would be preventing tariffs from being levied on British goods exported to the EU. For example, the EU imposes a 10% tariff on non-EU imports of cars and 12.8% on beef.

Tariffs as well as new customs procedures would be particularly costly for manufacturers who source parts from across the EU, for example BMW, Nissan, Honda, Toyota, Jaguar Land Rover and Ford who all have car plants in the UK but international supply chains.

At the very least the UK will want to stay within the customs union during any transitional period, while a new tariff-free trade deal is being hammered out in Brussels.

Queues at the border

Being outside the customs union would mean there would have to be customs checks at UK ports. The hours-long waits at Turkey’s border show how undesirable this would be, which is why Britain’s freight industry is keen to keep the customs union in place.

There are hopes that technology could provide a solution, keeping Britain’s freight flowing freely even outside the customs union. But any such electronic border system is unlikely to be in place by 2019, and would take time to achieve broad application.

Not the single market

Some Brexiters could be willing to compromise on staying in the customs union but not the single market. Unlike the single market, membership of the customs union does not require permission for free movement of EU citizens to live and work in the UK, and any consequent rulings from the European Court of Justice would probably be limited to trade.

Trading with the rest of the world

However, Brexiters think staying in the customs union would prevent Britain becoming a great, global trading nation by restricting the country’s ability to make new free-trade arrangements (FTAs) with other countries. Instead we would have to apply the standard EU tariffs to goods from non-EU countries. Worse still, other countries wouldn’t necessarily have to lower their tariffs for the UK once they’d cut a deal with the EU. Being outside the EU, the UK would also have no say about decisions made on the EU’s external tariffs.

The question will be how much weight to put on this argument. Is the EU – with which the UK has half its trade – really holding back the Brexiters’ trading dreams? Other EU members far outpace the UK in exports per capita. Trade minister (and Brexiter) Liam Fox himself blamed UK business for being “too fat and too lazy” to seek new export markets. Meanwhile, future bilateral deals with countries like the USA and India have already hit snags. Hard Brexiters need to provide more evidence that the foregone benefits of bilateral FTAs with non-EU countries would be worth the costs of leaving the customs union.

The Irish border

Trade (not free movement of people) is at the heart of Ireland’s border issue. The Republic of Ireland will remain in the EU’s customs union after Brexit, and if the UK leaves that customs union then goods moving across the border will need to be checked – with all the social, economic and historical baggage such border checks would entail.

This will require some bold thinking. Keeping just Northern Ireland in the EU customs union and checking goods between the island of Ireland and the British mainland would be one solution, but the Democratic Unionist Party propping up Theresa May’s government says it would never allow Northern Ireland to be separated in this way. Staying in the customs union is an obvious solution to a very thorny issue.

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Edited by Bill Emmott