How a ‘Customs Union’ Could Define Post-Brexit Trade

(Bloomberg) -- Having failed to get her Brexit deal through Parliament, U.K. Prime Minister Theresa May is in talks with opposition Labour leader Jeremy Corbyn to find a compromise on how Britain should trade with the European Union after their split. Remaining in a customs union could be part of the solution. May’s unloved deal already came close to a customs union, though she’s never described it that way. Corbyn, meantime, wants a customs union with modifications to give the U.K. a say in its future trade deals. The main attraction of a continued union is that it would keep goods in European supply chains moving tariff-free, averting some of the most destabilizing disruptions of a Brexit split.

1. What’s a customs union?

It’s an agreement among a group of countries for goods to move freely among them, without tariffs. Those members agree to align certain regulations and impose the same "external" tariffs on goods imported from nations that aren’t a part of the union. That way, once goods enter the bloc, they can be moved without further checks. The setup greases trade flows and provides leverage in negotiating trade deals with the rest of the world.

2. Who is in the EU customs union now?

All 28 countries now in the EU -- including, at the moment, the U.K. -- are automatically members. Some other nations, notably Turkey, which struck a special deal with the EU in 1996, also take part. If the U.K. remained in a customs union, it would try to get a better arrangement than the Turks, who regularly complain they got a raw deal.

How a ‘Customs Union’ Could Define Post-Brexit Trade

3. What has Turkey’s experience been?

Its customs union arrangement allows for tariff-free trade with EU nations in industrial goods but excludes other areas such as agriculture. Since it’s not a member of the single market, Turkey diverges in standards and regulations, making frictionless trade impossible. Turkey must abide by the trade deals the EU strikes with other countries. Dissatisfaction with that arrangement has grown in Turkey, where there are notorious traffic jams at the border (due to the need for permits), and objections to the lopsided nature of the deal.

4. What’s the case for the U.K. being in a customs union?

The U.K. Treasury warned before the 2016 Brexit referendum that leaving the EU customs union would mean the imposition of “significant” administrative costs, such as border checks and certification of where goods come from. Staying in might avert disruptions to cross-border trade crucial to the automotive and other industries. Many officials on the EU side of the negotiations always believed -- and hoped -- that a customs union would be part of the Brexit outcome.

5. What do opponents say?

A key part of the campaign narrative for Brexit was that Britain would go out in the world and forge its own trade agreements. A customs union makes that impossible. The U.K. would be subject to trade accords that the bloc strikes with other countries, while having no say in negotiating them. It could mean having to open U.K. markets unilaterally to countries that strike deals with the bloc, without necessarily getting reciprocal access. Nor could the U.K. on its own remove tariffs on goods coming in from third countries, which some Brexit supporters want to do.

6. Does a customs union enable ‘frictionless trade’?

No. The term refers to an aspiration by the U.K. that trade with the EU would remain seamless after Brexit. For that to happen, the U.K. would have to stay in the single market too, a move that would demand even more politically toxic concessions from the U.K., including allowing free movement of people within the bloc.

7. Was a continuing customs union part of May’s deal?

Sort of. In the Brexit deal rejected by Parliament, a customs union is envisioned as a fallback option designed to avert a hard border between Northern Ireland and the Republic of Ireland. Plan A was that after a two-year transition period and detailed trade talks, Britain would end up in a "free-trade area" with the bloc. It was never very clear what that meant -- the political declaration on the future relationship is intentionally vague -- but the European side reckoned it would end up meaning a customs union.

8. Why is May’s deal so controversial?

Opponents to May’s plan particularly objected to an EU stipulation that Britain couldn’t pull out of the backstop arrangement unilaterally. In addition to the shared customs area, the U.K. would have to stay aligned with some EU rules in areas such as standards for goods, state aid, competition and social and environmental policy, a position some British politicians said would make the country a "vassal state." Northern Ireland would have a deeper customs relationship with the EU than the rest of the U.K. and would be more closely aligned with the EU’s single-market rules: That was unacceptable to the Northern Irish party that props up May’s government and also to many in her own party.

The Reference Shelf

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