The customs union has become a very hot topic over the last 18 months. Many people have suggested that the UK, or parts of it, can remain in the customs union even after the UK leaves.
This is because it sounds seductively attractive in theory, as it would avoid customs checks at our external borders (although it could create them internally if parts of the UK stayed in and other parts did not).
It is also portrayed, wrongly, as being the status quo and that nothing would change if we stayed in it. Even some of the most ardent Brexit supporters claim that the worst thing that would happen if we stayed in would be that we could not do trade deals with the rest of the world.
While this is correct, I can assure you that there is a far worse repercussion that makes customs union membership the worst option of all.
For staying in the customs union does not mean that our trade relations would be controlled by the EU. It is far more accurate to say that access to the UK market for third countries would be controlled by the EU. But the UK would have no external trade policy at all.
To see the reality of this we need to look no further than Turkey, for she is the only sizeable non-EU country that has the misfortune to be in the customs union.
When the EU does a trade deal with a third country, take Canada for example, she agrees to reduce the common external customs union tariff to 0% in many areas in exchange for the Canadians doing the same for EU exports. So the customs union tariff becomes 0% for imports to the EU and Turkey. In exchange EU countries get a 0% tariff when they export. But Turkey doesn’t, she is not part of the EU and therefore her exports do not benefit from the trade deal, even though imports into Turkey do.
Worse than that, because Turkey is now already offering Canada 0% tariff access to her market, there is absolutely no incentive for Canada to offer Turkish exports any sort of deal. Turkey is stuck with no protection on imports and no market access for her exports. Any Turkish company that plans to export to Canada is far better off relocating to an EU county as they have tariff free access to both Turkish and Canadian markets, which they cannot have in Turkey.
The situation gets worse with every free trade deal the EU does. Gradually huge swatches of the earth will have tariff free access to the Turkish market and Turkish companies will have no preferential access in return. The EU will soon conduct agreements with Mercosur, Australia, New Zealand, Mexico and each time Turkey’s relative position gets worse and worse.
Turkey hates this situation and is desperately trying to find a way out of it. It is the primary reason that even Norway and Switzerland will not join the customs union.
Yet if the UK joins the customs union as a non-EU member this will be our future. Fully open to more and more global markets with no access for our exports and the reality that it is far better and more attractive for British companies to relocate to Europe in order to have access to global markets.
The situation for the UK could be even worse, as the existing free trade deals that the EU has with countries like South Korea, Vietnam, and Mexico would also come under the new arrangements. So these countries would continue their access to our market but we would lose our access to their markets when we left the EU, with no realistic possibility of the situation changing whilst we remained in the customs union.
It is for this reason that staying in the customs union outside the EU would be disastrous for the UK, and would involve an immediate closure of much global market access. The only positive point is no customs border with the rest of the EU, but that means we would be even more tied to and bound within the European market, as we would have no preferential access to global markets at all. These huge negatives suggest that no one who truly understands how the customs union works would ever suggest that it is a viable option for the UK to remain in it post-Brexit.
There is an alternative option sometimes floated by the government and hinted at by others, including the Irish Taoiseach earlier this year. That is creating a new customs union with the customs union. The agreement on the first phase of the Brexit talks in effect also left this option open. This approach would have both advantages and disadvantages. On the plus side it could remove the challenge of border checks and trade disruption at our ports, but it would probably require the UK to sign up to similar policy goals as the EU on a lot of regulatory areas, a form of ‘alignment’. Not necessarily exactly the same standards, but a recognition of standards bodies and intents, as well as strong country of origin rules to prevent non-compliant products from third countries entering either market. This approach would still allow the UK to strike trade deals, but would limit some of its negotiating scope, though not really in the area of services where we have most to gain in international trade. Given the limitations posed by the Irish border situation, it may represent the most likely solution to the Brexit trade friction conundrum.