Photo: Brexit Text License: Editorial Use OK
Following the conclusion of phase one (“the divorce”) of the
Brexit negotiations last December, the United Kingdom and the European Union
have officially entered phase two of the negotiations, discussing the framework
for the UK-EU future relationship and deciding the arrangements necessary
during the period transitioning to that relationship. Frustrated that the
discussions have produced few concrete ideas of what this future relationship would
look like, two weeks ago the EU’s chief negotiator, Michel Barnier, told
UK leaders that the time had come to make a choice — will the UK be in or out
of the EU customs union? Responding to growing concern within the Conservative
Party that she might bend to opposition pressure, last week UK Prime Minister
Theresa May made
her position clear; the UK will “categorically [be] leaving the customs union.”
A Refresher on Customs Unions
A customs union is a type of trading block that unifies the
tariff policy of all members. Customs unions are defined by two key features:
1) a free trade area between members (members do not charge duties on goods
imported from other members) and 2) a common external tariff (any goods
imported from non-member countries are charged the same import tariff,
regardless of which member country the goods enter the union). Here, we should distinguish
the EU customs union from the EU single market. The customs union unifies
external tariffs, but the single market is what allows the free flow of goods,
services, people, and capital. Thus, it is possible to be in the single market,
but not the customs union (like Iceland, Liechtenstein, Norway and
Switzerland), or be in the customs union, but not the single market (like
Andorra, San Marino and Turkey).
May’s Position and the Way Forward
Leaving the customs union risks seriously disrupting the
lion’s share of UK trade. The EU is the UK’s largest trading partner, comprising
43% of all UK exports and 54% of all UK imports. Exiting the customs union will
put up new tariff barriers, depriving UK-EU traders of the duty-free access they
currently enjoy. On the other hand, leaving the customs union would allow the UK
to escape the confines of the common external tariff, thereby making it
possible for the UK to implement its own tariff policy and negotiate its own
trade agreements with non-EU members. As the EU itself has recognized
that 90% of global growth is expected to come from outside the EU, this could
be a worthwhile tradeoff for the UK.
Still, May is holding
on to hopes of both having her trade cake and eating it too. In August of last
year, May’s trade team released a “future
partnership paper” outlining what is still the UK’s stance for negotiating
the future UK-EU trade relationship. Most notable from the paper was the
proposition of a “customs partnership.” Under this scheme, the UK proposed that
it would synchronize its import policies for intermediary goods brought into
the UK that are part of a supply chain for final consumption in the EU. Thus,
for American widgets meant to be consumed in the UK, the UK could charge x%;
but if those same American widgets were to be used in other products that would
eventually be shipped to the EU, the UK would be charge the EU rate, y%.
Unfortunately for May, EU officials are underwhelmed
at the idea, calling the UK’s proposal for a customs arrangement “unrealistic.”
Even more doubtful is whether such an arrangement would comply the WTO’s
non-discrimination principles. As the negotiations proceed, the UK will need to
be warry not to compromise its obligations to the world trading system in the hopes
of maintaining current access to the EU market.
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