Rejoining the Customs Union is a really bad idea

The worst of all Brexit worlds...

The Internet is full of pro-EU discourse, however within it tends to be several distinct favours. Some people are just upset that Brexit broke their internal view of the UK as a cosmopolitan, European country that enabled them to present themselves as ‘cultured’ - these people will spend a lot of time lamenting Brexit, but they are unlikely to cite any economic arguments. Then you have your ‘centrist dad’ types, who will treat Brexit as something that was so clearly a bad idea that it must simply be undone immediately, and no argument to the contrary can ever even be considered. These takes rely on defaulting back to authority figures such as the Bank of England, but as their opinions arise largely through social signalling rather than genuine economic analysis, they are usually unable to defend them and will instead resort to simply dismissing people who disagree with them outright. Finally, you have the actual trade economists, who are generally much more mellow than the other two on the issue. They may still be vehemently against Brexit, but as soon as you press them on any particular aspect they are usually willing to concede it has been nowhere near as bad as people claim. It is amongst these people that it seems to be fashionable to suggest the UK rejoins the EU Customs Union, seemingly because it would be the easiest one to do so. This however is peculiar, as for reasons they themselves ought to be aware of, rejoining the Customs Union alone would arguably be the worst of all possible worlds re Brexit. 

First of all, it’s worth elaborating on what customs unions actually are. According to the IFG, there are currently 16 customs unions around the world, including the Gulf Cooperation Council, the West African Economic and Monetary Union, and most relevant to this piece, the EU Customs Union. Essentially, a customs union is a commitment between its member countries to apply the same external tariffs to any goods entering into the union in exchange for not having to perform checks on the tariff status of goods travelling between member states within the union. They will also typically act as a bloc when negotiating trade agreements, and may also incorporate a series of other measures designed to better facilitate trade between members - for example, the West African Economic and Monetary Union also has all of its members adopt the same currency - the CFA franc. They will also frequently be combined with other measures under a combined economic grouping, such as the European Union for the EU Customs Union, the Economic Community of West African States (ECOWAS) for WAEMU, and the Southern African Development Community (SADC) for the Southern African Customs Union. Membership of these various groups may vary - see below for the Southern African example (Light Green = SADC, Dark Green = SADC + SACU)

Generally speaking however, when people talk about “The Customs Union” in the context of the UK, they are generally referring to the EU Customs Union described above. Compared to the Single Market, which is a complex system of aligning regulations and facilitating free movement, the Customs Union is a relatively simple affair. Member states all apply the same Common External Tariff, and in return goods, passing between member states, do not need to pay any form of tariff, nor do they need to undertake rules of origins checks. This makes trade between member states such as Germany and France, far easier than say, Germany and Canada, as even though Canada has a Free Trade Agreement with the EU that sees most tariffs removed, goods passing from Canada to the EU still need to prove that they are in fact from Canada before they are able to cross over the border, whereas French goods are not subject to the same requirements. To clarify, this does not however mean that all checks are waived at the border for members however - that would instead require membership of both the Customs Union and Single Market. It is also worth noting that like the Single Market, membership of the European Customs Union is not limited to EU member countries - the most prominent example of this is Turkey, who is a member of the Customs Union, despite not being a member of the European Union or Single Market (on the flipside, there are also countries such as Norway, who are members of the Single Market, but not the Customs Union or EU). You do however have to be a member of the Customs Union (and single market) to be a member of the EU.

With that established, we can now analyse the benefits and drawbacks to the UK joining such a system. The first thing to note is that the first benefits of the Customs Union - tariff free trade - would not apply to the UK as, having signed the Trade and Cooperation Agreement with the EU, the UK already qualifies for full tariff-free trade with the EU. Instead, the primary benefit to the UK comes in the form of rules of origin arrangements. Generally speaking when free-trade agreements are signed, they typically come with a large number of caveats and requirements to ensure whatever goods enter the country as a result, do in fact come from the country that the free-trade agreement was signed with. For example, the US has a free-trade agreement with Canada and Mexico (USMCA, formerly NAFTA), but still places a large number of tariffs on EU goods entering the country. In this situation the last thing the US wants is for EU goods to enter Canada tariff-free, slap a Canadian flag sticker on them, and then scoot straight over the border into the US without paying any of the necessary tariffs; hence, to solve this, the US implements requirements that any Canadian goods passing over the US border must prove that they have in fact been made in Canada (or at least that 75% of the content of each item must be Canadian, to use the example of automobiles). For the EU, this takes the form of Rules of Origins (ROO) forms, large documents that must be filled out for each export to prove that the requisite amounts have come from the UK, or from other countries with which the EU has tariff free trade, lest they face tariffs themselves. Entering into the Customs Union would thus enable UK exporters to skip the step when trading with the EU, making trade easier.

In return for this however, the UK would have to adopt the EU’s Common External Tariff on goods entering into the UK, forcing it to adopt tariffs equal to or greater than the EU’s own tariffs on the issue. Historically these have always been reasonably low by international standards on manufactured goods, however this is now beginning to change with the rise of China in the advanced manufacturing sectors. Said tariffs are however fairly high on agriculture still, a key export industry in many countries (though not the UK) and a holdover from the EU’s original purpose to protect French agriculture and German manufacturing from their more efficient neighbour across the channel. Being outside the EU, the UK would also have little control over the levels of these tariffs beyond a few token consultations, and while in theory they do not prevent the UK adopting its own trade policy, as they stand they are incompatible with new agreements such as CPTPP.

With this in mind, this presents a problem for the UK. While as stated being part of the Customs |Union in theory doesn’t prevent the UK from establishing its own deals, in practice it effectively acts as a block on any independent trade policy. The most common form of trade agreement is the classic Free Trade Agreement (FTA) - essentially an agreement between two countries that commits to removing tariffs on most if not all goods, along with increasingly including other provisions relating to areas such as services. Whilst more targeted agreements limited to just services do exist (usually having been created by the UK), these are still rare and are currently usually limited to countries that both have a comparative advantage in the sector (eg the UK and Switzerland). Instead, most trade deals tend to be both be expansive, covering an extremely wide range of goods (the amount of effort that goes into a trade deal usually means anything less isn’t worth the time) and also a tit for tat arrangement - “I’ll make it easier for you to sell services only if you remove tariffs on my goods”. This is a problem, because as we’ve established EU tariffs have the potential to become both wide ranging and are also concentrated in agriculture, a key export sector that other countries are likely to want to receive concessions on. This pretty much rules out the possibility of any large scale trade deal, and so the net outcome of this is that as a member of the Customs Union, the UK would be de facto a member of the EU from a trade policy perspective.

This too presents a problem, as the UK and EU’s priorities are likely to be fairly divergent. First of all, as noted the UK would have no official say on EU trade policy - whilst in theory it might be involved in the odd ‘consultation’, these are likely to be near worthless in the face of a 27 member bloc, so it would be essentially relying on the EU acting in its own interest independently. This however is also unlikely to happen, as the EU’s own interests are fairly separate from the UK’s. As I noted in my piece on Brexit, the UK’s primary exports lie in services, whereas for most EU countries it is a combination of agricultural and manufactured goods. The only EU countries that come close to the UK’s specialty are Ireland and the Netherlands, and these are both too small to make a meaningful impact in trade decisions, and also have their services exports more constrained to the EU, meaning widening the net is less important to them. Furthermore, the EU is also a much more cumbersome trader than the UK - whereas the UK only has one sector to defend and which they are arguably the best in the world at, the EU has 27 sets of competing interests to navigate in sectors that are more vulnerable, meaning trade deals are likely to take longer and be less generous. Finally, the geopolitics of such an arrangement are also not in the UK’s favour - with the election of Donald Trump, the EU is currently gearing up for a trade war, and getting on the bad side of arguably the biggest potential finance and services market in the world is not a particularly good idea. All in all, there are very good reasons to think the UK would suffer in various ways under such an arrangement.

Such problems could be worth enduring if the UK were to receive significant dividends. As it stands however, the only real benefit to the UK lies in these ROO forms. Now, as the likes of Peter Foster point out, these forms are a monumental pain in the arse. Having to record and evidence the exact total of each good that has been manufactured in this country is difficult and time consuming, and has the potential to put off small businesses who don’t have the administrative manpower from exporting. Were the UK an agriculture or manufacturing focused country whose primary export market was the EU (like say Turkey), it would probably be worth swallowing the trade flexibility pain to make exporting easier. However the UK is neither of those things - instead it is a services focused economy whose primary goal is managing financial and informational flows across the entire world, rather than simply Europe. As such, while it would be nice to not have to fill out these forms, the economic benefits are going to be marginal at best - hardly worth sacrificing an independent trade policy for. Rejoining the Customs Union just doesn’t make sense.

The crazy part is, there is part of the EU which could yield more benefits to the UK if it were to join - the Single Market. As alluded to before, whereas the Customs Union is a fairly simple affair based around unifying tariff policy, the Single Market is a more complex system of regulations and agreements designed to remove trade frictions in a far more substantial way compared to a customs union. As such, becoming a member would both yield far more significant increases to the ability of UK firms to trade with the EU, and also improve the ability of UK services exporters to export to the EU, all without compromising its ability to form an independent trade policy. Now, as it happens, I also think it’s a terrible idea for us to join the Single Market for reasons relating to both exports and innovation (our other major strengths), however I’ll save that for a future post.

In sum then, it can be seen that rejoining the Customs Union would lead to the UK having to subordinate its entire trade policy to a bloc wholly at odds with its own interests, for the rather measly gain of having to fill out one fewer form when exporting to the EU. This is not a sensible idea, and for any Remainers looking to craft an easy narrative for UK rapprochement with Europe, I’d suggest looking elsewhere.