This comes up regularly and is often touted as the answer to all woes, from economic growth to household income and the pound in your pocket. Let’s break it down.
A customs union is defined as a single customs territory with a common external tariff applied to imports and no internal tariffs between partners.
Our current trade and cooperation agreement (TCA) with the EU removes tariffs but includes defined rules of origin to qualify for tariff-free status. A customs union would reduce or remove many of these origin requirements, so it must be a good idea.
One would think so, particularly if you are not involved in customs processes regularly. No tariffs, no rules of origin, no paperwork – this sounds like the answer to all our woes. Not so, I’m afraid.
First the no tariffs. We already have that as part of the TCA. So, no gain here.
Rules of origin? Only because all goods would be subject to the same external tariff….and the rates would be set by the EU. We would not be able to negotiate our own tariff deals unless the duty rate is higher than the figure set by the EU, and that would be a very odd trade deal!
No paperwork? Nope. Paperwork is still required. Before BREXIT, Dover customs agents were mostly doing paperwork for movements from Turkey (EU Customs Union) and Switzerland (EFTA) to the UK. We were in the EU then, and paperwork, like today, was required. A Customs Union does NOT remove the need for paperwork.
The duty rate applied to a good is based on the country of origin and the landed value or weight. Duty is not a government seeing people buying, for example, a lot of bicycles and thinking, “let’s get in on the action!”. Duty is a valve to protect the domestic supply and discourage (too many) imports. It also serves to protect and enhance the relevance of negotiated Free Trade Agreements.
Since leaving the EU, the UK has reduced or removed around 2,000 tariffs, either through negotiated Free Trade Agreements or simply because we are not self-sufficient in the product being imported. This is not possible when in a Customs Union. The domestic supply would include the entire EU. So, a duty rate might be applied to an import in the UK, because Romania, for example, has a thriving business producing those goods, and the EU needs to protect its Member States.
Also worth noting that a ‘common external tariff’ does not always mean there is a duty involved. If the EU completes a trade deal that we might still be working on, we may be required to apply those newly negotiated EU import rates, thus weakening our ability to negotiate rates for our exports and significantly undermining our bargaining power.
It is not just imports, whilst I write, the EU is currently considering an export duty on scrap aluminium to discourage sales outside of the EU, as domestic supplies are running low.
The EU itself is a Customs Union, so it is important to highlight the difference between being in the EU and being in an EU Customs Union. In both cases, the external duty rates would be set by Brussels. In the EU’s case, all funds are paid to the EU, with the collecting Member State retaining around 25% as an admin fee. When we were part of the EU, we collected around £3bn a year in duty, which was sent to Brussels.
Turkey (EU Customs Union) gets to keep the money, but the duty rate is set by the EU.
Today, the UK sets its own tariffs and keeps all the money.
We often use the example of a Teddy Bear from China. Before BREXIT, this might have arrived in Rotterdam, been cleared with duty paid and then moved freely around the EU. Some may have come to the UK. This would show as an intra-EU movement from the Netherlands to the UK. The Dutch authorities would pass the duty to Brussels and keep their admin fee.
Post BREXIT, this same Teddy Bear would not be cleared in Holland as the ultimate destination is the UK (otherwise, duty could be paid twice, once in Holland and again in the UK). The goods would be sent to the UK for customs clearance. This would be recorded as an import from China, whereas before BREXIT it was an intra-EU movement from Holland. Same Teddy Bear!
The duty rate applied by the UK may differ from that applied by Holland (EU), particularly if the UK has a thriving teddy bear industry (high rate) or is not self-sufficient in teddy bears (low rate or even zero).
Not so if we are in a Customs Union with the EU – the teddy bears may as well be cleared in Holland as before, the EU gets the duty, and the UK gets, potentially, a more expensive product as the EU duty is included in the cost and the seller’s mark-up.
They are indeed. But they have much lower labour and energy costs than us. They have far more relaxed employment rights than us. Being in the EU Customs Union has allowed EU Member States to switch production to Turkey, thus benefiting from the lower costs without being penalised by tariffs. You only need to look at white goods, clothing and even car parts, many are MADE IN TURKEY. Manufacturing requires low energy costs and/or low labour costs. We have neither, so comparing ourselves to Turkey is pointless until we address these issues.
According to official HMRC figures, the UK is still the 4th largest exporter in the world and the 4th largest importer. Providing you include goods AND services. Goods exports are generally flat, but services continue to grow. We are also 3rd in the global ranking for Foreign Direct Investment.
Yes. Simpler rules of origin, as ‘free circulation’ comes into play…but that’s it. The UK is currently looking at joining the revised PEM Convention, which, in itself, would allow greater uniformity with rules of origin, even more so than a Customs Union.
Joining the EU Customs Union would not be free; in fact, it would undoubtedly require a significant access fee. We would have no power to negotiate duty rates with other trading nations, making new trade deals almost impossible and existing ones vulnerable. We would have no access to trade deals done by the EU, although we would be required to apply the FTA duty rate to our imports…and get, literally, nothing in return.
Absolutely not, unless rules of origin within the EU are killing your business, yet you somehow manage rules of origin associated with other trade deals. And, again, PEM would help here, not just for EU movements. PEM has 25 contracting parties, including all 27 EU member states, EFTA countries (Iceland, Liechtenstein, Norway, Switzerland), the Faroe Islands, Western Balkans (Albania, Bosnia & Herzegovina, Kosovo, North Macedonia, Montenegro, Serbia), Eastern Partners (Moldova, Georgia, Ukraine), and Mediterranean countries (Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestine, Syria, Tunisia, Turkey).
Join the revised PEM to ease rules of origin constraints. Remove the need for GB export declarations and instead have a monthly return as with imports using EIDR (Entry in Declarant’s Records), have export declarations for controlled goods only (sanction goods, licence goods, firearms, etc). Look at the Customs Union again when our energy and labour costs have reduced.
Ironically, the EU may just save us from ourselves. Negotiations would be slow and cumbersome, and we may have a change of Government by the time pen to paper is required. The EU know that this could be REFORM, in which case the deal would likely be reversed anyway!
Rob Hardy, CEO and Founder of EORI Group
Revolutionising customs with innovative solutions, Rob Hardy, founder of EORI (UK), is known for his exceptional business acumen and deep customs network connections. As the All Ireland Business Man of the Year Award winner, Hardy's strategic thinking and unwavering determination have propelled him to trailblazer status. With 35 years of achievements in European shipping, freight, and customs clearance, his record-breaking accomplishments include running the largest 24hr freight clearance facility in the UK.