The Customs Union: what it does and doesn’t do

Helping business navigate their way through Brexit has become central to what we do at Retail Economics over the past 12 months. The next few years will be extremely turbulent. Whether it’s keeping abreast of the latest developments as they unfold, understanding the potential movement of tariffs or simply gaining a better understanding of how Brexit will affect your customers – we will all be impacted.

The “Customs Union” is getting a lot of airtime at the moment and is being presented as a solution to many of the disruptions that Brexit may cause. A Customs Union would certainly help, but in itself it is not enough.

A Customs Union would deliver three main benefits to importers:

First, tariff-free trade on all goods within the scope of the Customs Union. This is the obvious benefit that commentators have focused on. It is certainly true that a Customs Union would be the simplest way to ensure continued free trading with the EU. However, do not assume that all goods would be covered – the EU’s Customs Union with Turkey explicitly excludes agricultural trade, to which significant tariff barriers apply. To ensure that agricultural trade is covered in any UK/EU Customs Union the UK is likely to have to agree to continue to observe EU rules on environmental protection, animal and plant health and animal welfare. The EU may even press for continued compliance with EU rules on agricultural support (CAP) as a condition.

Second, a Customs Union operates without rules of origin. In practice, this means that there is no need to prove that goods meet a local content threshold in order to enjoy duty-free status. For example, garments made up in Romania from fabric made in China could be imported to the UK free of duty under a Customs Union, whereas they would not get this tariff free treatment under an arrangement (i.e. free trade agreement) that included rules of origin, because not enough of the value (content) of the product would have been generated within the EU.

Third, and of particular significance to importers, membership of the Customs Union means that the UK would be required to continue to apply the EU’s Common External Tariff. In practice this means that the UK would be obliged to apply exactly the same preferential terms to imports from outside the EU as it does now. For example, if the EU offers duty free access to South Korea (as a result of the EU/Korea free trade agreement) then the UK would be required to apply the same duty free treatment. At a stroke, the Customs Union would secure all of the preferential importing arrangements UK importers currently enjoy. Of course, the much mentioned downside of this aspect of the Customs Union is that it effectively removes any independence for the UK in setting its own trade policy.

We also need to be clear what the Customs Union does not do.

Firstly, and stating the obvious, the Customs Union only applies to trade in goods. A Customs Union is all about tariff treatment and as there is no such thing as a tariff on services, it really has no bearing at all on the UK’s future relationship with the EU on trade in services.

Second and, deep breath, a Customs Union does not remove customs red tape. All trade with the EU/Turkey Customs Union requires customs declarations and must undergo customs clearance procedures. Advances in customs technology and systems means that this does not necessarily have to hold up traffic through the port, but nevertheless it is an additional cost which is not currently incurred on trade with the EU.

Thirdly, and of enormous significance in the area of food, the Customs Union simply does not cover a range of other regulatory functions that would be delivered at the border post-Brexit. The issue is most serious in the area of plant and animal health where checks apply to all “imported” foods and, in the case of meat, result in an average wait at the port (in the UK) of 3 days for veterinary clearance. (Veterinary controls already apply to trade within the EU, but they are not applied at the border). There are potential solutions to this problem, but they would have to be agreed in addition to an agreement on the Customs Union.

The government, and business need to be crystal clear about what the Customs Union can and cannot deliver. They need to be clear that they are willing to pay the price of the Customs Union, which will go beyond losing independence for trade policy. They need to be clear that they can make the necessary investment in technology and infrastructure to be able to deal efficiently with new customs clearance procedures. Finally, they need to be clear that additional agreements will need to be struck in order to avoid new non-customs barriers arising at ports post-Brexit.

The Retail Economics Brexit service helps to inform, develop and enhance your understanding of what’s in the pipeline and how Brexit is likely to impact your business. There’s been a noticeable shift in the conversations I’m having with retailers which has turned into planning for the worst and hoping for the best. If you don’t have a strategy on how you may mitigate these risks, you need one.