A Customs Union by Any Other Name

Anton Muscatelli | 16 August 2017

Port Herriot – Lyon, Jan Buchholtz, CC-BY-NC-ND-2.0

The UK government published the first of the next set of Brexit papers on 15 August, on the future customs arrangements it envisages post-Brexit.

The paper imagines two possible approaches to the customs arrangements with the EU post-Brexit. Both of these are, as the paper recognises, models which are as yet unexplored. The first involves the UK in essence as a third country, outside the EU customs union, but with a suggestion for much greater streamlining of UK-EU trade through the adoption of new technologies to monitor trade flows and to comply with customs procedures. The second model is conjecturing the possibility of a new type of customs relationship between the UK and the EU. It suggests what seems to be a ‘quasi-customs union’ arrangement. It is a model which does not appear to be in existence anywhere else, and the paper itself acknowledges that this is an ‘innovative and untested’ approach.

Each model throws up difficulties. With the first, there are three areas of concern. First, although the paper analyses existing approaches to streamline customs requirements to move goods across borders and through ports and airports such as the Common Transit Convention (CTC) and the use of Authorised Economic Operators (AEOs), it is not specific about the additional ‘technology-based’ solutions which would allow genuinely frictionless trade. Second, these solutions would involve our current EU partners incurring considerable costs to adopt these practices to facilitate UK-EU trade, which they might be reluctant to accept. Third, it would take considerable time, perhaps several years, to put these new solutions into place, even if work started now. In this scenario, an interim or transitory solution would still be required.

For these reasons it is likely that, under this first model, UK-EU trade would be subject to considerable frictions.

Turning to the second model, it is a rather strange hybrid, with the UK essentially operating outside the EU’s common external tariff, but with special arrangements which would avoid a customs border between the UK and EU. For imports to the EU which might be routed via the UK, and indeed where the UK might be part of the supply chain, the UK would be operating as a guardian of the EU’s customs border, and would also need to monitor the EU’s rules of origin requirements.

The main problem with this approach is that it is not clear why the EU27 would be interested in such an arrangement with the UK. It is a complex arrangement, and it is not specified fully in the paper. A bit like Schrödinger’s cat, the UK would be simultaneously outside and inside the EU customs border. The UK would have an advantage over all other third countries with a privileged access to EU markets. This would of course be reciprocated with access to UK markets, but the EU27 would see it as a ‘having your cake and eating it’ solution, with the UK pursuing its own trade policy whilst having a privileged position in trade with the EU.

It would also require a huge amount of trust on the part of the EU27. Suppose the UK were to enter trade agreements with non-EU countries over allowing food imports to the UK which could not be re-exported to the EU because of tighter food regulations. How would the UK guarantee the integrity of the EU’s external customs border? Would there be fears that, without borders checks, the UK’s independent trade policy could undermine EU regulations?

Much of Ireland’s trade with the other EU26 is routed via the UK, and a special customs arrangement which removes the UK-EU customs border might be seen as helpful to it, but it would probably prefer a much more straightforward solution which sees the UK staying within the current EU customs union.

Whilst the paper’s two models for UK-EU future long-run customs arrangements are speculative, the one positive aspect of the paper is the recognition in Paragraphs 46-50 tha,t in the short run, there may be a need for an interim or transitory arrangement. The positive angle here is that there is a clear recognition that UK business faces a cliff-edge after Brexit. The proposal is that the UK and the EU will continue with a (time-limited) customs union with a shared external tariff and common customs processes with the EU. But the UK would want the freedom during this interim phase to negotiate new trade agreements with non-EU countries. These would only be effective after the end of the interim arrangement.

However, it is again not obvious what the EU would gain from this and therefore why it would agree to it. Of course the UK-EU customs union would be maintained during the interim period, to the advantage of both EU27 exporters to the UK and vice versa. But in the meantime the UK would be negotiating trade deals with third countries which might not be to the advantage of at least some of the EU27.

My view has always been that if the UK was aiming for a ‘soft Brexit’, such as membership of the single market through an EEA-type arrangement, then the EU27 might be more minded to look at options for interim arrangements for the customs border. Naturally, it would be even better if the UK also decided to remain in the customs union, but if the UK preferred to pursue an independent trade policy whilst staying in the European single market, there would be a more natural path towards a negotiable solution on customs arrangements. The EU27 would see an interim customs arrangement as necessary for both the UK and EU to make preparations as the UK transitions to an EEA/EFTA status. Alas, this is not what is being proposed here.

It will be interesting to see how the EU negotiators react to these proposals when the negotiations finally turn towards the future relationship. But if the UK is heading for a hard Brexit, as is clearly reiterated in this paper, it is not obvious why the EU27 would wish to provide a smooth path towards that endgame.

The irony about these proposals is that the Leave campaign waxed lyrical about Brexit being about ‘cutting EU red tape’. What we have in this paper is a very good illustration of how a hard Brexit (outside the customs union, outside the single market) requires complex and costly arrangements to mitigate some of the major economic disruption which Brexit will cause: red tape like we haven’t seen for 40+ years.

Anton MuscatelliAnton Muscatelli | Twitter

University of Glasgow

Prof Sir Anton Muscatelli is Principal and Vice Chancellor of the University of Glasgow. He is Chair of the First Minister of Scotland’s Standing Council on Europe and Advisory Board Member of the Scottish Centre on European Relations.