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  • Writer's pictureGraeme Macleod

Customs Union & Brexit

A key issue from a trade perspective will be whether or not the UK stays in the EU Customs Union when it leaves the European Union (EU).

The Customs Union is an important element of the EU Single Market. Under its rules, the EU operates as a trade bloc, operating common external tariffs and customs barriers, and negotiating trade deals as one. As a member of the Customs Union, the UK is not allowed to negotiate other bilateral trade deals – which is why Liam Fox has argued that it needs to leave.

What would leaving the Customs Union mean for the UK? On the face of it, customs checks at EU borders, including at the border between Northern Ireland and the Republic of Ireland – something that does not seem to be compatible with Theresa May’s comments about ensuring Brexit works for Northern Ireland. Another implication is that the UK will no longer benefit from the EU’s 56 free trade agreements (FTAs), which provide better access to markets outside of the EU, such as Korea, Mexico and Chile. This may mean that UK exporters face higher tariffs and other trade barriers in these markets.

Of course, there are other possibilities. For example, the UK could leave the full Customs Union and still negotiate some forms of access – Turkey, while not a member of the EU, is part of the Customs Union for industrial goods.

What matters at the moment is that UK ministers appear to be on different pages. The very fact that Liam Fox and his new department have been tasked with striking new international trade deals seems to suggest that the Government does intend to make a clean break from the Customs Union – because, as a member, building these new relationships would not be possible. But the Prime Minister’s comments in Scotland and Northern Ireland suggest a prioritisation of new trading arrangements that are as close to the status quo as possible. At some point soon, these ambiguous signals will have to be resolved.

There is also another important consideration about leaving the EU Customs Union which we haven’t heard much about yet: the UK’s relationship with the World Trade Organization (WTO).

The terms of UK membership of the WTO are currently governed by its membership of the EU Customs Union. So, when the UK leaves the EU, the UK’s existing WTO commitments will have an uncertain status and will need to be redrafted.

The quickest option for the UK would be to mirror its existing commitments. However, other countries could object to this approach. For example, agricultural exporters such as Brazil and Argentina want better access to the UK market, and might see Brexit as an opportunity to push for it. Some elements of the EU’s membership of the WTO, such as the quota for importing New Zealand sheep meat, would also be affected by the UK leaving the Customs Union. So even a simple mirroring of existing commitments could involve complicated negotiations between the EU, the UK and other countries.

Once the UK triggers Article 50 of the Lisbon Treaty, it has two years to negotiate its exit. If the UK leaves the EU without having reached agreement on its new commitments with the WTO, it is likely that the UK will continue to apply its existing trade commitments until the new ones are agreed. This will create uncertainty for UK businesses – over timescales and outcomes.

An important task for the UK will be to start to rebuild its network of trade agreements to replace the ones it will lose if it chooses to leave the Customs Union. Chancellor Philip Hammond recently said that Brexit meant the UK could do trade deals with other countries, including ‘countries like China’. Before he became Secretary of State for Exiting the EU, David Davis said that it would be possible for the UK to negotiate trade deals ‘massively larger’ than the EU.

However, there are big questions about the sequencing of all these negotiations, and how long they will take. Informal discussions could take place, but the UK cannot actually sign new free trade agreements until it has left the EU. The US Trade Representative has said that informal discussions won’t be possible until decisions have been made about the UK and EU relationship. Even then, many countries will want to be clear about the UK’s membership of the WTO before they open negotiations.

There is no doubt that it is important for the UK to signal that it is still open for business. But there are several issues that need to be resolved before it can start signing new trade deals.

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