Why a customs union agreement with the EU may be our best option
Economy Watch by Conor Lambe, chief economist, Danske Bank @conorlambe
After a short period of relative calm on the Brexit front, the debate has truly kicked off again over the last few weeks.
Specifically, there have been three significant events that have taken place this year: the Confederation of British Industry (CBI) put forward a case for the UK remaining in a customs union with the EU after Brexit; a government impact assessment of the potential long-term effect of Brexit on the UK economy was leaked to the media; and the European Council published additional negotiating guidelines for the talks on a transition period.
The first two of these events relate to the future, long-term relationship between the UK and the EU.
The CBI called for the UK to remain in a wide-ranging customs union with the EU. But what does this actually mean?
First, it’s important to distinguish between the EU single market and the customs union.
The single market involves the free movement of goods, services, people and capital within the EU. It requires that businesses across the EU operate under the same regulations.
The customs union is closely linked with the principles of the single market, but it really only deals with direct barriers to trade. It does not include any immigration requirements. As part of the customs union, EU member states charge the same tariffs on goods entering the bloc from non-EU countries, but don’t charge any tariffs on trade between EU members.
Another distinction is between ‘the EU customs union’ and ‘a customs union with the EU’. The EU customs union involves all EU member states and applies across all categories of goods. But it is also possible for a non-EU country to be part of a more limited customs union with the EU. Turkey, for example, has a customs union agreement with the EU that doesn’t include agricultural products.
For businesses in the UK and Northern Ireland, remaining in the customs union or agreeing a very far-reaching customs agreement with the EU after Brexit would deliver a number of benefits. There would be no tariffs applied to goods trade with EU economies and there would be less of a burden resulting from rules of origin checks.
It could also go some way towards finding a solution to avoiding a hard border between Northern Ireland and the Republic.
However, a customs agreement wouldn’t completely solve the border question as tariffs are only one of the issues.
Another is product standards and regulations. Border checks may still be needed to check that goods flowing across the border comply with the necessary rules.
But an agreement between the UK and the EU on regulatory standards could deal with this problem. So, while not quite a silver bullet on its own, a customs union between the UK and the EU would certainly be a positive step towards keeping the border invisible.
But a customs union agreement does have a significant drawback. It would greatly reduce the UK Government’s ability to strike trade deals with other countries around the world.
This is because the imposition of common external tariffs would mean that the UK would have to charge the same tariffs on trade with non-EU economies, or third countries, as EU member states.
Put simply, the UK would not have the freedom to offer countries like the US preferential or tariff-free access to the UK market in exchange for access to the US market.
It could also hinder the UK in reaching new agreements with countries that the EU has trade deals with, as those countries would automatically enjoy beneficial access to the UK market through the UK-EU customs agreement. The difficulties posed by a customs union are clear to see, but in my view, a customs union agreement with the EU would be beneficial. I remain to be convinced that striking trade deals around the world would deliver enough of a benefit to offset the costs from increased trade restrictions with the EU after Brexit.
Indeed, the Government impact assessment leaked to the media suggests that these deals are unlikely to bring about big economic gains. We need to treat these numbers with some caution as we haven’t seen the full document, including the details of the assumptions used to generate the impacts. But it is estimated that a trade agreement with the US has the potential to boost the level of GDP by just 0.2% over the long-term, while deals with countries like China, India, Australia
and others, would only increase the level of GDP by around 0-1-0.4%.
However, following a lot of debate on this idea over the last couple of days, the UK Government has stated that it does not plan to pursue membership of a customs union with the UK during the trade negotiations.
With this option seemingly off the table for now, the wait continues for more details to emerge on what the UK’s future relationship with the EU will look like.
The other big development in January was related to the shorter-term transitional relationship between the UK and the EU — the publication of the EU’s guidelines on negotiating the transition deal to come into force after Brexit occurs at the end of March next year.
The EU position here is clear — if the UK wants things to stay the same from a trade perspective during this period, it will have to accept the responsibilities that that entails.
The free movement of people would have to continue as it currently does, EU law would still apply in the UK and any new rules adopted by the EU would also have to be implemented in the UK, the European Court of Justice would still have jurisdiction in the UK and any new trade agreements can’t come into force during this period unless the EU permits it.
The Government has some issues with these guidelines. It wants to have a mechanism for dealing with disagreements on the implementation of new EU laws that it deems to be contrary to the UK’s interests.
It also disagrees with the EU that the same rights should be given to EU nationals who move to the UK during the transition period as those who came to the UK during its full EU membership.
However, given the transition period is temporary and the clock is ticking towards March 2019, I don’t think the Government should waste time trying to force through concessions on these issues.
We saw enough of that during the phase one negotiations, with very limited success.
Trying to find common ground and making some minor amendments in these areas should be the aim. The priority needs to be securing the transition period that businesses across the UK and Northern Ireland need.