Leave the EU’s customs union and go for a free trade agreement

September 27, 2016

Neither the UK nor the post-Brexit EU would wish to see major disruptions to their long-established trading relations, so a UK-EU customs union post-Brexit is a superficially attractive policy option.  Those on both sides who would like to see a Brexit light – or Soft Brexit – are advocating for a customs union.

Remaining in the customs union preserves the UK’s current benefits.  With nearly half of the UK’s exports destined for other EU economies, this is an important consideration.  Moreover, many of these exports are from non-EU-based corporations that invested in manufacturing in the UK to serve the whole of the EU common market.  Some may decide to relocate to the EU in view of it offering a bigger market.  Remaining in the customs union would help keep these firms in the UK.

Transaction costs of leaving the customs union are another reason to remain.  If the customs union relationship is replaced by a free trade agreement (FTA), exporters on both sides of the deal will need to comply with the FTA’s rules of origin (ROOs).  Compliance with ROOs can be costly (in terms of record-keeping and red tape) and depending on how the ROOs are crafted, could lead some UK-based manufacturers to change their current supply and production arrangements.

However, staying in the customs union would be inconsistent with the Prime Minister’s mantra that “Brexit means Brexit”.  Setting aside the politics of Brexit, there may also be some strategic benefits if the UK leaves the customs union.

The UK would miss an historic opportunity to have more liberal trading arrangement than exists under the WTO with its bound EU schedule of commitments.  Stepping away from EU protectionist WTO commitments would be in the UK’s and the EU’s interests.  The way forward, then, is through a UK-EU FTA

Leaving the customs union enables the UK to benefit from a dramatic reduction in current barriers to imports imposed by the machinery in Brussels.  Applied average tariffs on imports of dairy products, for example, are 32 percent with some rates as high as 165 percent; the highest rates for livestock and meat reach 192 percent and in horticulture the highest rate reaches 197 percent.  Clearly, British consumers would benefit substantially from lower prices and greater choices with these barriers reduced or eliminated.

In addition to such high tariffs, the EU currently applies 97 anti-dumping measures to protect industries located in EU countries, other than the UK, thereby penalising UK consumers.

A telling case is the EU-Turkey customs union.  Turkey is a non-EU economy that participates in the EU’s customs union, which could be the same status as the UK post-Brexit.  Turkey’s participation in the EU customs union –  a price paid for the fast receding prospect of future EU membership –  is on terms which protect EU industries. Turkey lost a WTO dispute settlement action in a dispute brought by India when Turkey imposed trade measures it thought were justified by its EU customs union.  The WTO found this to be in breach of Turkey’s WTO obligations.

The UK needs to take back control of its trade policy by leaving the customs union.  In doing so, it gains the freedom to have a trade policy which more closely reflects its contemporary circumstances and so advances its interests.

In the WTO, the UK’s departure from the EU customs union will permit a re-definition of UK relationships with other members.  In exchange for lower barriers at the UK border, the UK will be able to argue for improvements in others’ WTO commitments to the UK. Resulting changes in trade remedies (anti-dumping, subsidies/countervail & safeguards) will also benefit the UK.  Immediately, EU trade remedies that do not protect UK industries and penalise UK consumers will be removed.

Moreover, UK-based industries will be able defend themselves from unfair competition that may be quite specific to their particular circumstances without having to established the threat to EU-wide industries that may bear little relation to UK circumstances.

Of course, the main reason to leave the customs union is the UK re-gaining the ability to be in charge of its own international trade policy and negotiations.  The first place where London needs this authority is in the context of negotiating what we expect will be an FTA with Brussels, re-defining its trade relations with the EU.

It will be in both parties’ interests to preserve as many of the existing benefits as possible.  But for the UK, while initial adjust costs may be high, regaining control over trade policy offers significant opportunities. By avoiding the trap of being in a customs’ union, UK consumers will benefit from lower prices and increased consumer welfare, more effective trade remedies against unfair completion that reflects more closely the UK’s unique circumstances, and a wide range of trade policy options, including FTA’s with significant and relatively open economies.

Moreover, a trade-independent UK could make a significant contribution to the WTO.  The UK has been far too long silent in the WTO.  With the rise of populism and the anti-globalisation sentiments, the UK’s liberal trade voice would be most valuable in the WTO at this time.   It’s been far too long since the UK has been in a position to influence the direction of the multilateral system.

Post-Brexit, those committed to an open, liberal, rules-based multilateral trading system, will be able to look to London to participate constructively in future multilateral goods and services negotiations, as well as in plurilateral and “critical mass” agreements envisaged or now underway.  The UK will also be a force for bringing WTO-plus issues such as investment and competition policy into the system.  It is a moment of great opportunity for the UK to refashion global trading arrangements.

To sum up, arguments in favour of the UK remaining in the EU customs union post-Brexit collapse in the face of the benefits of an independent trade policy.

This article first appeared on Reaction.

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