Keeping the borders open

The question of whether Britain should remain in the EU customs union has emerged as one of the central quandaries of Brexit

What constitutes a customs union?

It’s an agreement between a group of countries to abolish customs controls and tariffs (import taxes) on goods crossing each of their shared borders, in order to facilitate trade. The first known example is the Zollverein, which ended tariffs between German states in the 1830s. The EU (or EEC as it then was) set up its own version in 1968. Such agreements require a high level of coordination: participating states have to agree similar customs controls and a common trade policy, including uniform tariffs for imports into the union so goods can circulate freely inside it. The EU, for instance, has a common external tariff of 10% on cars, and of 54% on dairy products, to protect its own producers and to raise revenue.

What would be the advantage of staying in?

The Labour Party, which last month stated its support for staying in a customs union with the EU, said that it was “the only way” for the UK to get tariff-free access to the EU’S single market – a central objective for British business – while avoiding the need for border controls. And it could achieve this without committing Britain to all the rules of the single market, such as allowing the free movement of people and requiring large payments to the EU budget. Turkey, for instance, while not a member state, is in a customs union with the EU covering manufactured goods (but not agricultural produce). As a result, the diesel engines made in Dagenham by Ford can travel across the EU into Turkey, where they are fitted into Transit vans in the town of Gölcük, and can then travel back to the EU to be sold – without paying any tariffs.

What are the disadvantages of a customs union?

Customs unions require all members to commit to common external tariffs, so staying in the EU’S customs union would lose Britain one of the main benefits of Brexit: the opportunity to make trade deals with other countries and to set our own tariffs on imports (enabling us, for example, to benefit from cheaper food prices on world markets). That’s why the Government is opposed to it. Furthermore, if Britain were no longer an EU member it would probably have no say in setting these tariffs. Turkey is required to “align itself” not just with tariffs, but also with customs union product rules on safety and quality. Yet it has no role in deciding how such rules are set. In addition, while Turkey has to open up its markets to countries with which the EU has trade deals, it does not automatically get access to those countries’ markets for its own goods, because it isn’t an EU member. With a view to making trade smoother, Labour wants to stay in a customs union, but still be able to strike trade deals “jointly” with the EU, although it seems rather unlikely that Brussels would agree to this.

Would it make trade smoother?

Not necessarily. The main crossings from Turkey to the EU are far from frictionless. At the border with Bulgaria there are queues of trucks kilometres long. Every driver needs

a number of documents: an export declaration; invoices for the products they are hauling; transport permits for EU nations they wish to drive through. There are also spot checks to prevent migrant and drug smuggling. According to a 2015 study, some s3bn is lost to delays and bureaucracy. The EU has agreed open-access road transport deals with Switzerland and Norway (which aren’t in the customs union), but they are premised on acceptance of single market rules, including free movement of people.

Is there a better option?

The Government’s policy is to leave the customs union and negotiate a free-trade agreement with the EU – with the aim of agreeing zero or near-zero tariffs on goods moving between the UK and EU. This would give Britain the freedom to negotiate its own trade deals with other countries. But even if the EU did agree to this, it would still require additional customs controls. Imagine that after Brexit, Britain decided to allow cheap Chinese steel into the UK tariff-free. The EU, which taxes it at up to 28.5%, would want to stop us re-exporting that steel to Ireland or France, thereby undercutting local producers. Complex “rules of origin” arrangements would be needed to prove that exported goods using steel components were indeed made in Britain – and to slap tariffs on Chinese steel and on British products partly manufactured with it.

So how will the Government avoid a hard border?

To secure “the freest and most frictionless trade possible in goods between the UK and the EU”, it has proposed two options. The first is a “highly streamlined customs arrangement”: number plate-recognition cameras would be used to avoid long queues at ports such as Dover, while customs declarations of goods crossing borders would be done online in advance. Such arrangements work well on the Us-canada border (see box). Under the second option, a “new customs partnership”, Britain has proposed keeping its trade with the EU borderless, and applying two different sets of tariffs at its own borders, depending on whether the goods are destined for the EU or for Britain.