The debate around the UK’s level of involvement in the EU single market after Brexit may lead to a significant u-turn in government policy. Having initially said it would not seek a customs union with the EU after Brexit (after leaving the full, existing customs union), it looks as though the UK government’s position is softening. Given the alternatives to the single market that are available to the UK, a potential u-turn is welcome.
Leaving the single market but agreeing to a customs union doesn’t rule out the UK making its own trade deals. However, it should be careful what it wishes for. Freedom comes at a price. A customs union only covers trade in goods, so the UK would need an umbrella agreement to cover its other arrangements with the EU.
The World Trade Organisation (WTO) sets out the basics in Article XXIV of the General Agreement of Tariffs and Trade (GATT). In essence, a customs union is where tariffs are removed between members of the union, and the tariffs charged on imports coming from outside the union are harmonised across members of the union. This definition seems straightforward but when you dig deeper into Article XXIV, you find that while these rules apply to trade in goods, they say nothing about services – which are of course very important for the UK.
The text is also quite vague about the products that should be covered by the customs union, stating only that “substantially all trade” should be included. Of course, as soon as you start excluding products from your customs union, then borders with frictions, such as border checks, start to emerge. Therefore, the issue of whether any agreed customs union would be complete needs careful consideration. However, it’s clear that the WTO rules are too vague for anyone to claim that the UK cannot create an incomplete customs union if the EU agrees.
What we know is that an incomplete customs union, where product coverage is less than 100% or trade policies are not fully harmonised, could give the UK more freedom to sign its own trade deals. Turkey, an example of a country in an incomplete customs union with the EU, has a number of Free Trade Agreements with non-EU countries. However, if the UK steps outside the EU Customs Union and creates an incomplete UK-EU Customs Union, then embarks on signing new trade deals, there would need to be rules agreed regarding the coexistence of trade agreements. In simple terms, when the clauses in different trade deals start to conflict with each other, there will need to be a way to resolve these disputes.
Freedom at a price
Is all this freedom a good thing? It would take the UK further away from the complete customs union, which is the desire of Brexit supporters. However, signing even very simple trade deals will require considerable capacity and time, with the potential for significant delays even between signing and implementation. The EU also already has a long list of arrangements in place. Those with Japan and Mexico are the most recent examples. The UK is likely to find it harder to make deals when outside a large trade block. Furthermore, signing free trade agreements with non-EU countries would not compensate for losses due to new trade barriers against the EU countries.
Staying close to the EU may also protect the UK from the US government’s trade wars in crucial markets such as metals, fuels and chemicals. As the EU demonstrated in the case of the steel dispute, it can successfully negotiate exemptions from the new protectionist US tariffs. The UK, acting alone, may not have enough economic and political weight to do the same.
An incomplete customs union with the EU will be a step towards minimising the losses of Brexit, while giving opportunities to negotiate new free trade agreements related to particular goods. UK manufacturers selling final goods (transport, electrical equipment, computers, for example) to the EU, depend on the supply of intermediate goods (components for that electrical equipment and computers) from the EU in the first place. If even moderate tariffs are imposed, the flow of intermediate goods from the EU may come to a halt. If agricultural goods are excluded from the new UK-EU customs union, it opens up further possibilities for negotiating new free trade agreements with non-EU countries.
And since the customs union option doesn’t cover services, one option would be to have a broader umbrella agreement, perhaps an economic integration agreement, to also cover services.
A customs union in itself, and certainly one that gives the UK the flexibility to sign its own trade deals with non-EU countries, would not automatically solve the Irish border issue – a complete customs union (going further than even the WTO definition) would be a prerequisite for that. The political compromises, which are being discussed within the Conservative party, suggest a complete customs union is most unlikely. Therefore, even if a u-turn is forthcoming, many other challenges remain.