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

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Prime Minister Theresa May’s proposed Brexit deal with the European Union raises the prospect of the U.K. being in some form of a customs union with the bloc, perhaps indefinitely. Such an arrangement would keep goods in European supply chains moving tariff-free in and out of the U.K., averting some of the most destabilizing disruptions to business and borders. But it would also risk undercutting some of the key aims of Brexit, making the deal a hard sell for some pro-Brexit British politicians.

1. What’s a customs union?

It’s an agreement for goods to move freely among a group of member countries 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 -- so once the goods enter the bloc, they can move freely without further checks. The setup greases trade flows and provides leverage in negotiating trade deals with the rest of the world.

2. How did it come to this?

Because of the desire on both sides of the Brexit negotiations not to create a hard border between Northern Ireland and the Republic of Ireland -- one of the most intractable problems of the talks. Under the Brexit agreement, the U.K. would sign up to a so-called backstop to avoid the hard border. To make that work, the U.K. would be in a customs union with the bloc indefinitely -- unless a better idea for the border emerges in the next two years. The U.K. would need to stay aligned with EU rules in areas such as standards for goods, state aid, competition and social and environmental policy, a position some British politicians say makes the country a "rule-taker" after Brexit.

3. What do opponents say?

Many Brexit backers say a customs union prevents a country from striking its own trade agreements, and a key part of the campaign narrative for Brexit was that Britain would go out in the world and forge new deals. Being in a customs union would mean the U.K. is subject to trade accords the bloc strikes with other countries, while having no say in negotiating them. It could mean having to open the U.K.’s markets unilaterally to countries that strike trade deals with the bloc, without 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 to reduce prices.

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

The U.K. Treasury warned before the 2016 Brexit referendum that leaving the 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 that’s crucial to the automotive and other industries. Many on the EU side of the negotiations believed -- and hoped -- this would always be the outcome.

5. Has this been tried before?

Yes. Turkey is outside the EU’s single market but inside a customs union with the EU. Its customs union allows for tariff-free trade with EU nations in industrial goods, though excludes areas such as agriculture. Turkey doesn’t have to accept the EU’s freedom of labor movement. But it must abide by the trade deals the EU strikes with other countries. Dissatisfaction with that arrangement has grown in Turkey, where there are traffic jams at the border (due to the need for permits) and chafing at having to follow what the EU decides.

The Reference Shelf

• Confused about Brexit? Read this.
• How the Brexit deal could lock the U.K. into a customs union the EU always wanted.
• What’s the Irish backstop?
• QuickTake explainer on Brexit’s basics.
• Turkey is no model for Britain’s post-Brexit trade policy, Stephen Booth argued.
• Turkey’s current arrangement isn’t very good for Turkey either, in the view of Turkey’s minister of the economy.

To contact the reporters on this story: Ian Wishart in Brussels at iwishart@bloomberg.net;Laurence Arnold in Washington at larnold4@bloomberg.net

To contact the editors responsible for this story: Emma Ross-Thomas at erossthomas@bloomberg.net, Grant Clark

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