The UK government is currently considering what relationship it should seek to negotiate with the EU after Brexit. One option on the table is continued participation in the EU’s customs union, but Liam Fox, the new trade secretary, is urging the prime minister, Theresa May, to pull the UK out of it.
When it comes to world trade law, there are clear distinctions between a free trade area and a customs union. Under the law of the World Trade Organisation (WTO), a free trade area means that substantially all of the barriers to trade in goods (there is no WTO equivalent for services) between the countries in the area have been abolished. A customs union goes a step further: the countries concerned not only abolish substantially all barriers to trade in goods, they also have the same rules for trading with the outside world.
Free trade area vs customs union
As a practical example, Canada, the US and Mexico have a free trade deal, known as NAFTA. But the US embargoes trade with Cuba, whereas Canada and Mexico trade with that country. Mexico signed a trade deal with the EU years ago; Canada has just agreed one; and the US is still negotiating one, the Transatlantic Trade and Investment Partnership.
On the other hand, the EU is a customs union. This means its members, including the UK, cannot sign separate trade agreements with countries such as India or China. It is, however, possible for the UK to sign a more general type of commercial “trade deal”, such as selling aircraft to India.
Around the world, free trade areas are more popular than customs unions. But states still do sign customs unions, because having common rules on trade with the outside world simplifies the trade between members of the customs union.
For example, in the NAFTA free trade area, when goods are shipped from Canada to the US, American officials must perform a number of checks. They must check to see whether they are actually Canadian goods (which can enter tariff-free), Cuban goods (in principle banned), or goods from any other country (which are subject to a tariff). Whether a good is Canadian or not depends on complex “rules of origin”, which set out how much of a car (and thousands of other products) must be produced in Canada for it to be called Canadian.
On the other hand, if products from China or Brazil are shipped through EU countries, such as from Rotterdam to Harwich, there is no need to carry out such checks. This is because the products would have been treated exactly the same way when they entered any EU country.
Stay or go?
When Britain triggers Article 50 of the EU treaty to leave the EU, it does not necessarily have to leave the customs union. The EU has signed customs union agreements with some micro-states such as San Marino, as well as with Turkey. So the UK could ask to retain participation in the European customs union if it wants to.
Leaving would have both pros and cons for the UK. On the one hand, it would mean that the UK could sign free trade deals with more countries – although not everyone sees the appeal of such deals. On the other hand, it would mean extra paperwork for British exporters to the EU to prove that their product is fully “made in Britain”.
There is a particular issue with Northern Ireland, too. If the UK leaves the EU customs union, in principle there would need to be checks at the border between Northern Ireland and the Republic of Ireland, because they would no longer be applying the same law on trade with the outside world. If there weren’t checks, and the UK had a future free trade deal with China that was different to EU-China’s trade relationship, Chinese products could be shipped to Northern Ireland and then cross the border into the EU tariff-free, circumventing the EU rules.
In theory, it’s possible for Northern Ireland alone to remain part of the EU customs union – but that would mean creating economic barriers between its six counties and the rest of the UK. Another approach is to adapt an agreement that the EU already has with Switzerland (not in the EU, or the EU customs union) which sets out special procedures to facilitate trade despite the different trade rules with the outside world. That would mean the UK continuing to apply some of the EU’s customs law, however.
Time will tell which approach the UK government prefers – and whether the EU will agree to its requests.