Jack Simpson weighs the merits and flaws of a Customs Union in the North East
The European Union (EU) and United Kingdom have agreed to extend Brexit negotiations for another six months (I can hear the cheers now), but the question of what next persists. Members of the Chamber have generally been in favour a customs union post-Brexit, so what is it, and how would it benefit the North East economy?
Post-Brexit Customs Union
In its most basic sense, a customs union is when states come together to remove the goods tariffs between them, whilst setting a common tariff for outside parties. Overtime, these trade blocs begin to align competition law and industrial standards, to further facilitate movement of goods.
The UK is currently part of the Customs Union with the EU, but is set to leave via Brexit, unless otherwise agreed. Joining a post-Brexit customs union would help secure free trade with the EU, which the North East relies on for roughly 60% of total trade, whilst leaving without would see new frictional tariff barriers on UK-EU trade.
In this instance is estimated by Government that prices could rise from as much as 2-24% as a result of leaving the customs union, and due to the region’s high reliance on EU trade, it is unsurprising that a No Deal scenario could reduce regional GDP by 16%.
Members of a customs union can also rely on other member states input to comply with Rules of Origin (RoO). RoO allow goods with a certain percentage of domestic content to benefit from preferential treatment in certain markets and free trade agreements (FTA). For example, South Korea gives reduced duties for EU goods made of 55% EU content.
By leaving a customs union, the UK would no longer be able to count EU input as domestically sourced. It is estimated by the Automotive Alliance this would result in a 16% drop in domestic content, with cars to south Korea dropping from around 60% to 44%. UK goods would then have to pay a higher duty to access these markets.
On the other hand, critics claim that by being in a customs union, the United Kingdom would lose the ability to set its own trade policy, a key promise of the Leave campaign. A common external tariff means the UK couldn’t lower their tariffs unilaterally without undermining the customs union, otherwise external products, say from America, could enter the free trade area via the UK at a reduced rate.
Furthermore, a common external tariff can restrict domestic industrial policy. If the UK wanted to use tariffs to protect an emerging industry, or boost a declining one, it would again be unable to do so without undermining the integrity of the customs union.
However, being in a customs union does not mean that the UK cannot strike its own trade deals. For example, the EU does not sign trade deals on behalf of Turkey, but this means goods can enter via an EU member state, say Greece, and enter Turkey tariff free, while Turkey would still face tariff barriers to that external market. Turkey must sign its own deals in this instance.
A New Approach
But, when we talk “trade policy”, we too often think solely of the movement of goods, which would be covered by a customs union. But trade in services, movement of people and procurement processes would not be covered by the customs union, allowing the UK to have more sovereignty in these areas, and sign more bespoke details.
Many in London highlight the UK service sector as a global leader, and one of the main areas to benefit from an independent trade policy. Joining a customs union would not restrict the UK’s ability to strike service based trade deals across the globe and would permit a new bespoke approach to UK trade talks, while also maintaining the vital trade in goods with our European neighbours.
A customs union would restrict, but not prevent, an independent UK trade policy. We would have to negotiate and build our own customs union from a base point, and map out which areas we want independence in, but that is the beauty of the strategy.
I believe we must be realistic in thinking about trade. The EU is our closest trading partner, the North East trading 4.7x more to Europe than the next market (Asia & Oceania) in 2018 and will naturally continue to be so. It is surely logical that we should do everything to support these trading relationships.
While not perfect, a customs union could allow us to protect the precious trading relationships we have with Europe, comply with complex rules of origin, and potentially let Government maintain a manner of independence that respects the vote of 2016.
Chamber Council has instructed the Chamber to judge our future EU relationship by the arrangements we currently have as EU members. This is not antagonistic, members were promised a brighter future, and should expect no less.
Whatever happens next, the clock is ticking, and loudly. Government has six months to find a route forward, and it is clear a new approach is needed. Using this time to constructively engage with business and map out a negotiating platform, and by honestly assessing a customs union on merit, not by headlines, then maybe, just maybe, it won’t be as scary as it seems.
If you would like to learn more about International Trade, the Chamber is holding a breakfast workshop on May 10th, providing insight to new and existing global traders: https://www.eventbrite.co.uk/e/exporting-importing-post-brexit-workshop-tickets-60527291759