Why staying in the customs union long term will not work

The EU’s customs union is a critical component of the single market, providing its external frontier to the rest of the trading world. As such there has been a lot of discussion over the last year since the referendum in the UK about whether we should remain in the single market and/or the customs union.

However, much of this discussion focuses on potential trade disruption from leaving the customs union, with very little attention paid to the series of significant and binding commitments that being a member of the customs union entails. These should not be overlooked when assessing the possibility of continued membership. Remaining in the customs union means not only coming under the EU’s trade policy, as dictated and negotiated by the European Commission on behalf of EU member states, but also the plethora of product rules and regulations in the single market in order to ensure smooth movement of products once they are inside the single market.

To leave the EU and stay in the customs union is the worst option on the table for any state exiting the bloc, particularly one with an economy the size of the UK’s. It is an option even much smaller economies such as Norway and Switzerland declined to accept as politically and economically unacceptable.

To explain why one simply needs to examine the case of the only country inside the customs union but outside the EU: Turkey.

By any reckoning Turkey’s situation is not desirable, and there are increasing internal and external signals it will not accept the status quo for much longer.

Membership of the customs union means that Turkey has to implement all of the trade deals which the EU has negotiated. That means, for example, that once the EU-Canada agreement (widely known by the acronym CETA) is implemented, Turkey has to apply 0% tariffs to imports from Canada. Yet because the Canadian agreement is with the EU and not Turkey, Canada has no obligation and in fact under WTO rules cannot reduce tariffs on Turkish imports.

This places Turkey in an extremely disadvantageous trading position, with a potentially wide-open domestic market for imports from other countries but no privileged access for its exports to those third countries. Turkish producers are left in a vulnerable position vis a vis their international competitors. Furthermore, whilst remaining a member of the customs union Turkey also has no ability to negotiate a future trade deal with Canada or any other country because it would undermine the integrity of the customs union.

Turkey’s only ability to negotiate trade arrangements with a country such as Canada is in the areas which are not covered by that country’s agreement with the customs union. Notably in services, for example, under CETA, where there remain somewhat limited agreements despite its advanced status, but services are an area where Turkey is comparatively weak and uncompetitive with Canada.

This situation applies to all countries the EU has trade deals with currently, and to any new trade agreements it signs, potentially covering much more of the global economy and further weakening Turkey’s international trading position. At present talks are ongoing with Japan (the world’s 3rd largest economy), early stages are being scoped out in relation to China (2nd largest), negotiations are stalled but still mooted with other major economies such as India (7th largest) and maybe one day, the US (the largest economy in the world). Even given the EU’s growing difficulties in negotiating trade deals due to internal disagreements and growing protectionism, Turkey’s trading window would appear to be closing.

This situation was always designed to be a half-way house on Turkey’s way towards joining the EU and not as a permanent solution. However, Ankara has been drifting away from membership status for some time, in part due to clear objections from France and Germany to it ever becoming a full EU member. So a temporary model designed to speed up the process of joining the EU is clearly not one which the UK would want to replicate in exiting the bloc. For the world’s fifth largest economy, which already has a trade deficit and is seeking to grow new trading relationships, opening ourselves up further to imports but shrinking our global export possibilities would be nothing short of disastrous. Unable to do trade deals with other countries, with our exports at a significant disadvantage compared to those from EU countries, we would be in a much worse position that we are now.

Shipping containers on a ship

That is why the government have been clear they cannot let this be the UK's fate by deciding to stay in the customs union. However, the government has also been emphatic, rightly, that we should not allow a cliff-edge scenario to play out, with significant disruption at ports and entry points upon our leaving the customs union in March 2019. Without sensible arrangements in place businesses on both sides of the channel, as well as across the island of Ireland, would suffer. So a transitional customs agreement keeping current border arrangements in place is vitally important for economic stability as we exit the EU and until new long-term arrangements are up and running. By necessity such a transition period should not last too long, it would hamper the UK’s aims of concluding new trade relationships with non-EU countries, but it is important for certainty in the short-term.

That is why this month the government published the first of its 12 position papers on the Brexit negotiations on the future UK-EU customs relationship, proposing for a limited transition period, a close association with the EU customs union, maintaining a common external tariff with the bloc, but free to negotiate and sign free trade agreements with other countries but not bringing them into force until the end of the transition period. For the longer term the UK government proposes one of two options, either to implement electronic checks and smart borders to minimise trade disruption or to have a customs partnership with the EU, aligning our customs approaches and negating the need for a customs border, effectively a customs union with the customs union.

Both approaches have difficulties but for our long-term future prosperity it is apparent to anyone who studies how the customs union works that no non-EU member state would wish to be a part of it without any say over its rules or a share of the export benefits it brings to full EU members. So the question should not be whether we leave the customs union but what future customs and tariff arrangements we can come to with the EU to enable as free a flow of trade as possible. Despite the EU’s clear wish to discourage other member states from leaving I am confident that when negotiations conclude the economic reality for businesses and citizens on both sides will lead to a sensible outcome.