EU (Withdrawal) Bill: what next for the customs union?

The EU (Withdrawal) Bill (“the Bill”) is currently progressing through its Report Stage in the House of Lords.

The EU (Withdrawal) Bill (“the Bill”) is currently progressing through its Report Stage in the House of Lords. Since this stage commenced on 18 April, the Lords have challenged the Bill’s provisions and voted through a number of amendments. Further challenges are expected between now and 8 May, when the Report Stage is scheduled to close.

One such amendment would require ministers to report to Parliament on the steps taken in negotiating towards a UK/EU customs union.

The Government has however so far ruled out a retaining a customs union, indicating instead a preference for some form of bespoke “customs agreement”.

What is a 'customs union'?

As the Commons is invited today to vote in favour of the Government’s policy of leaving the customs union, it may be useful to consider briefly what membership of a customs union means for the UK and its international trading position. We should be aware, of course, that this vote will not be binding and will merely indicate the hurdles which the Government must overcome to complete the parliamentary process of approving the Bill.

As a starting point, it is important to note that the Lords’ amendment does not require the Government to pursue a customs union, but rather to report to Parliament on the steps that it has taken in negotiating towards a customs union. At first glance, this may seem odd, in view of the Government’s stated intention not to pursue a customs union at all. However, it appears that the Government is committed to some form of (as yet undefined) alternative customs arrangement, to which the Lords’ amendment will doubtless have some relevance.

In addition to its stated aim to regain control of the UK’s borders, the Government opposes a traditional customs union, as this would prevent the UK negotiating favourable trade deals with other countries outside the EU (such as the USA and China).

As non-EU goods are currently subject to the common external tariff when imported into the EU, regardless of point of entry, the UK would have to impose a similar tariff on its post-Brexit imports (for example, from the USA) as a condition of membership of a UK/EU customs union.

Against this, a customs union would allow goods to flow freely without tariffs, which many traders regard as essential, given the proportion of international trade that the UK currently transacts with the EU. It may also help (albeit only partially) to resolve the Irish border issue.

A customs union must be distinguished from the “single market”, which removes non-tariff barriers to trade by harmonising the rules that goods must satisfy if they are to be sold in the EU – such as rules on labelling and product safety. The single market goes beyond free movement of goods, to guarantee also free movement of services, capital and people. Given its scope, the UK is not pursuing continuing membership of the single market.

The Irish border issue cannot therefore be fully resolved by membership of a customs union alone, as our departure from the single market will require that checks are made at the border to assess conformity of UK goods to EU regulatory standards – unless an alternative mechanism can be agreed.

As an aside, it is worth noting that a customs union may be partial only – and apply only to certain classes of goods. The arrangement that Turkey has with the EU is such an arrangement. The Eurosceptics within Government would not, however, accept even a partial union, and the Prime Minister is likely to need their support to push a Brexit deal through.

The Government is therefore seeking a bespoke customs agreement, which would allow the UK to dictate its own trade policy without influence from Brussels, whilst enjoying free cross-border trade with the EU. This solution would, the Government suggests, involve the use of technology to make border controls unnecessary, a solution which has been described by some in Europe as a “fantasy island unicorn model”.

There is clearly some work to be done on the cross-border trade issue over the coming months. Watch this space for updates.

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