What is the EU customs union and why should people care that the UK is leaving it?

Theresa May outlined her strategy on Tuesday, saying that the Government will seek free trade deal with Brussels

Brexit Secretary David Davis has strongly indicated that the UK government is committed to leaving the EU customs union after Brexit.

“After we have left the EU, we want to ensure that we can take advantage of the opportunity to negotiate our own preferential trade agreements around the world,” the government wrote in a White Paper published on Thursday.

“We will not be bound by the EU’s Common External Tariff or participate in the Common Commercial Policy.”

After the paper was published, Mr Davis was asked to clarify what the White Paper says about the customs union, and he confirmed that it meant Britain was “definitely leaving” it.

In her landmark speech at Lancaster House last month, Prime Minister Theresa May announced that the UK would quit the European single market, but left open the issue of future membership of the customs union.

But what is the customs union and what exactly will leaving it mean for people in the UK?

What is the customs union?

The customs union facilitates free trade between EU states by ensuring that they all charge the same import duties to countries outside the union. The countries also agree not to impose tariffs on goods travelling between countries in the union.

The agreement reduces administrative and financial trade barriers such as customs checks and charges.

This is different from a free trade area, which means no tariffs, taxes or quotas are charged on goods and services moving within the area but allows its participants to negotiate their own external trade deals.

It is also not the same as the single market, which is broader, encompassing the free movement of goods, services, capital and people.

The European customs union is the largest in the world by economic output, which gives it considerable negotiating power.

In practice, it is possible to be outside the customs union but still have access to the single market, as Norway is. This means it can negotiate its own trade deals but has to accept free movement of people and must comply with EU legislation - an option that would anger many UK Brexit voters.

Conversely, Turkey, Andorra and San Marino have customs union agreements with the EU but are not part of the single market. These agreements only cover certain goods. Turkey's agreement with the EU for example, excludes agricultural products, services and public procurement.

What would leaving the customs union mean?

The clearest effect of leaving the customs union is likely to be increased tariffs leading to rising prices. EU officials have said that they will not give the UK an easy ride, and the country cannot pick and choose which elements of the union it wants to keep and which it does not.

In practice, this means that if the UK restricts the free movement of people with immigration controls it cannot have completely tariff-free access to the single market. The cost of doing business will therefore rise, with those costs ultimately being passed on to consumers.

Countries Such as Switzerland and Norway do enjoy tariff-free access without being part of the customs union but both accept free movement and make contributions to the EU budget.

The UK could negotiate a free trade deal with the EU, as Canada has recently done, for example. This means the UK would have access to the single market to sell its products but would not be part of it - ie, it would not have to sign up to free movement of people. Agreeing such a deal could take many years. The EU-Canada trade pact signed in October took seven years to negotiate.

How big could the impact be?

A huge 44 per cent of Britain’s exports go to the EU - £220bn out of £510bn - according to the Office of National Statistics. They would be subject to import tariffs as well as extra administrative costs.

If the UK did not negotiate a more favourable trade deal with the EU, it would have to trade on standard tariffs under World Trade Organisation rules.

An analysis by The Independent found that the cost to Britain’s exporters -- in extra tariffs alone -- would be at least £4.5bn per year. This conservative estimate does not include the difficult-to-measure costs of non-tariff barriers, such as the enforcement of different market standards and regulations.

As an example of how damaging a WTO scenario could be, the Nissan plant in Sunderland, which has a workforce of 6,700, exported around 250,000 cars to the EU in 2015, around half of its output. Those exports would face a tariff of up to 10 per cent outside the customs union unless a free trade deal could be negotiated.

The extra costs on companies could force them to relocate UK operations within the EU after Brexit, potentially leading to job cuts.

In Tuesday's speech, Ms May said she would pursue a free trade deal as an alternative to membership of the customs union. Such a deal could significantly lower tariffs though it may not match what the UK currently enjoys inside the customs union.

What will the positive impacts be?

The main positive put forward by hard-liners, such as Secretary of State for International Trade Liam Fox, is that Britain would be free to negotiate its own trade deals with non-EU countries. This could allow the lowering of barriers elsewhere to help to make up for any loss of trade with the EU.

However, trade deals take a notoriously long time to negotiate - far longer than the two years the Government has between triggering Article 50 and leaving the bloc. The UK would also be in a far less advantageous negotiating position.

Being the world’s largest economic trading bloc with 500 million relatively wealthy consumers gives the EU hefty clout which the UK alone cannot match.

The second positive put forward is that the country would not have to pay the £13bn it paid to the EU for membership in 2015, though there would be other, potentially huge, costs to businesses.

European officials have also mooted charging an annual fee if the UK wants access to EU markets to buy and sell its products but remains outside the customs union. The Prime Minister warned on Tuesday that this would a be a "calamitous act of self-harm" on the part of EU member states and threatened to ditch a deal if it was seen as punitive.

Norway is set to pay £140 per head for its access to the single market between 2015 and 2020. The UK currently pays £220, according to analysis by factchecking organisation, Full Fact.

Read the Brexit White paper in brief