Customs union: What is it, what would leaving it mean and what post-Brexit alternatives are there?

Labour backs remaining signed up to a trading bloc, while the Tories have ruled out formal membership

Tom Batchelor,Ben Chapman
Wednesday 06 February 2019 08:07
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Jeremy Corbyn tells Theresa May he might back her Brexit deal if it is 'sensible'

Labour leader Jeremy Corbyn has reiterated his position that any Brexit deal would need to include a new customs union arrangement with the European Union.

Speaking at the Labour Party Conference 2018 in Liverpool, Mr Corbyn addressed the prime minister directly: “If you deliver a deal that includes a customs union and no hard border in Ireland, if you protect jobs, people’s rights at work and environmental and consumer standards – then we will support that sensible deal, a deal that would be backed by most of the business world and trade unions too.

“But if you can’t negotiate that deal then you need to make way for a party that can and will.”

Mr Corbyn’s position contrasts with the government’s stance that the UK should leave the existing customs union - and not be tied to a new bloc it claims would restrict Britain’s ability to strike deals with other countries.

Here we explain the customs union, the cost and benefits of remaining signed up to one and what the alternatives could be.

What is the customs union?

The EU customs union is a 50-year-old agreement between European member states that facilitates free trade by ensuring they all apply the same import duties on goods entering the union. This means goods can then travel freely once they are within the EU.

The countries also agree not to impose tariffs on goods travelling between countries in the union.

The agreement greatly reduces administrative and financial barriers to trade.

How is a customs union different from a free trade area or the single market?

A customs union is different from a free trade area, in which means no tariffs are charged on goods and services moving within the area.

The single market is a broader agreement that encompasses the free movement of goods, services, capital and people.

What will leaving the customs union mean?

It could result in increased border checks, which could wreak havoc on supply chains.

Many businesses, such as those in the car industry, operate just-in-time production, with multiple parts crossing the Channel from mainland Europe each day.

Honda UK told MPs in November 2017 that it relied on 350 trucks arriving from the continent every day. A delay of 15 minutes at its Swindon factory would cost £850,000, the company estimated.

Would leaving the customs union mean higher tariffs?

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

If the UK restricts the free movement of people with immigration controls it is unlikely to be granted completely tariff-free access to the single market. The cost of doing business will, therefore, rise.

The UK could negotiate a free trade deal with the EU, as Canada has recently done. This means the UK would have access to the single market to sell its products but would not be part of it. Therefore, it would not have to sign up to free movement of people. While the deal with Canada removes the vast majority of tariffs there are some significant exceptions, particularly in the services sector – the dominant part of the UK economy.

Dominic Grieve tables amendment seeking to stay in customs union

What impact leaving the customs union have on the Irish border?

Around a quarter of Northern Ireland’s exports go south, while the Republic sends just 2 per cent of its goods north.

So exiting the customs union would impact the Northern Irish economy.

But it would also increase the likelihood of a hard border returning to Ireland, undermining the Good Friday Agreement.

In the divorce agreement reached between the UK and EU in December, Britain promised that “no new regulatory barriers” would emerge between the mainland and Northern Ireland.

But the Government has yet to spell out exactly how it would perform the necessary checks on goods entering Northern Ireland without erecting a physical barrier with the south.

How big could the impact of leaving the customs union be?

Around 43 per cent of Britain’s exports go to the EU, according to the Office of National Statistics. They would likely be subject to import tariffs as well as extra administrative costs.

If the UK did not negotiate a trade deal with the EU before Brexit, 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 estimate does not include the difficult-to-measure costs of non-tariff barriers, such as the enforcement of different market standards and regulations.

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

What will the positive impacts be?

The main positive highlighted by Brexiteers is that Britain would be free to negotiate its own trade deals with non-EU countries.

Opponents of this argument have pointed out that countries such as Turkey are in a customs union with the EU that excludes certain sectors and are free to negotiate trade deals.

Liam Fox, the international trade secretary, has touted China’s economic expansion as a reason to prioritise the UK’s ability to strike deals around the world.

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 long time to negotiate. The UK would also be in a far less advantageous negotiating position on its own.

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 contribute as much to the EU’s budget.

European officials have mooted charging an annual fee if the UK wants access to EU markets to buy and sell its products but remain outside the customs union.

Norway is set to pay £140 per head for its access to the single market between 2015 and 2020. The UK currently pays £220 per capita for EU membership, according to analysis by fact-checking organisation Full Fact. These, however, are gross figures and it is likely that the payments received by the UK from the EU are proportionally higher than those received by Norway. The UK's overall gross contribution to the EU is around £13bn per year; the net figure is around £9bn.

How could we stay in the customs union while outside the EU?

The Brexit referendum asked voters to choose between remaining in the EU or leaving it – and was not a question of whether Britain would remain in the customs union.

But both Labour and the Tories have committed to leaving the current trading pact after Brexit.

There are examples of countries that are in a customs union with the EU while not being a member state.

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.

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.

Where do the main parties stand on the customs union?

Labour says its policy on Brexit has been “evolving”.

The party is split between those who favour remaining in the single market and those who say the UK must leave, with 80 senior figures warning Mr Corbyn that leaving the single market could scupper his efforts to ease austerity.

Last summer Labour announced it was backing an extended “transitional” period after Brexit that would keep existing ties to both the single market and customs union.

And the party appears to have shifted towards remaining part of a customs union, too.

The Shadow Brexit Secretary, Sir Keir Starmer, said Labour had “long championed being in a customs union with the EU and the benefits”.

He said Britain was more likely to strike new deals if it works “jointly with the EU”

Theresa May’s government has insisted that Britain must leave the customs union and single market if it is to honour the June 2016 referendum.

Theresa May announces Britain will not remain full member of EU customs union

But critics say the simple in/out question does not provide a mandate for cutting ties with Britain’s most important trading partners.

And some of those on the Brexit side of the argument promised before the vote that Brexit did not mean exiting those arrangements.

“Absolutely nobody is talking about threatening our place in the single market,” Daniel Hannan, a Tory MEP , said when the referendum was first announced.

“No one has ever suggested in Brussels, and I have been here for 16 years, that if we withdrew from the union we would be excluded from the single market.”

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