Blog Post

Getting accustomed to Brexit – UK and the customs union scenario

The Labour Party’s support of customs union membership has the potential to change the course of Brexit, with 13 months left to close negotiations. This week we review the commentary around the possibility of a post-Brexit EU-UK Customs Union.

By: Date: March 5, 2018 Topic: European Macroeconomics & Governance

Monday, 26th February 2018, 10.56 AM. Speaking about Labour’s vision for Britain after Brexit, Jeremy Corbyn communicates the party’s support for a future customs union:
“Labour would seek a final deal that gives full access to European markets and maintains the benefits of the single market and the customs union (…) with no new impediments to trade and no reduction in rights, standards and protections.”

The debate around the shape that trade relations between the EU and the UK will take after Brexit is not new. Concerning Labour’s position in particular, the BBC’s Laura Kuenssberg notices “the party’s tip toes towards this policy have been long anticipated”. In the blogosphere and the media, the conversation has been revolving around the existing trade agreements between the EU and third-countries, so as to try and understand which existing agreement could better provide a model for negotiations.

As André Sapir explains: “At the momentthe UK by virtue of being a member of the EU, is a member of both the European Single Market and the European Customs Union. The Customs Union and the Single Market are two different ‘animals’. Being in the Customs Union means that basically, there are no customs duties, no tariffs in trade between the UK and the rest of the EU; Being a member of the Single Market means that, in addition, there are also no regulatory differences between the UK and the EU.” 

The possibility of an EEA-type of solution (the “Norway” solution) has been raised. André Sapir clarifies that: “Norway is not a member of the EU but it belongs to the European Single Market. However, Norway does not belong to the EU Customs Union.” What this means is that “there is a border, there are customs duties, but there is no paperwork as far as the regulation is concerned”Jean-Claude Piris, among others, has pointed out that this would involve contributing to the EU budget, abiding by the rules of the single market and ultimately giving up some sovereignty. These countries have formally accepted the four freedoms and have agreed to be bound by the judgments of the EFTA court. In case of divergence with the EU court on internal market law, the EU court would prevail.

Turkey can provide an alternative source of inspiration, as Wolfgang Münchau writes for the FT: “The UK cannot stay in the European customs union simply because it is only available to member states. But the UK could have a bilateral customs union agreement with the EU, perhaps one that is similar to the deal the EU has with Turkey (…) [thoughthe EU would impose tough rules on Britain because its economy is much bigger than Turkey and geographically closer to the EU’s economic centre.

Dan Roberts from The Guardian says: “The catch, however, is that a customs union automatically implies a common external trade tariff with third-party countries. […] Such a diminution of international influence would be a tough sell for any British government.[…] But insisting that Brussels continues to consult the UK when it negotiates with countries such as the US and China is not quite as far-fetched as some critics have been suggesting in the wake of Corbyn’s speech. A deal struck between the EU and US that failed to involve the UK and that subsequently also led to the unravelling of the post-Brexit cross-Channel trade arrangements would be almost as undesirable for future Brussels trade negotiators as it is now. A genuine alliance of UK and EU negotiators operating as a unified bloc may also stand a much better chance of getting what it wants in Washington or Beijing than either could hope for operating alone.”

But a tailor-made bilateral customs union agreement is far from a silver bullet for all Brexit problems, the most salient being the Irish border. Put very simply by Sapir: “Customs union [without a] single market means that a border would remain.” Former UK deputy prime minister Nick Clegg argued on Twitter that: “Up to 17km queues and 30-hour waits at the Turkish/Bulgarian (EU) border show that a Customs Union only gets you so far. Customs Union without Single Market, just as Single Market without Customs Union (see checks at the Norway/Sweden border), leads to delays and queues.”

A reduction of regulatory barriers to trade is likely to be highly priced by the EU, judging by the recent positions on issues of state aid, taxation and labour and environmental standards, claims Aarti Shankar. Simon Wren Lewis goes further: “The UK was always going to stay in a customs union with the EU the moment that the EU put the Irish border as one of the three items to be settled at the first stage of negotiations. (…) To avoid a hard border Northern Ireland has to be in a customs union with the EU and in the Single Market for goods. (…) If this is helpful for goods, why not services which are the UK’s comparative advantage?”

Outside the scope of future trade relations, Chris Dillow adds that it is “poor management; lack of entrepreneurial spirits; insufficiently skilled workers; lack of investment; credit constraints; a lack of price competitiveness; and so on”, that are keeping the UK from exporting more – not membership of a customs union.

Thus far Theresa May has ruled out the possibility of a customs union. On the other side of the Channel, the president of the European Council, Donald Tusk, said on March 1, 2018:“London has definitively confirmed its red lines, including ‘no customs union’ and ‘no single market’. We acknowledge these red lines without enthusiasm and without satisfaction. But we must treat them seriously. With all their consequences. And one of the possible negative consequences of this kind of Brexit is a hard border on the island of Ireland. The EU wants to prevent this scenario. 

“Hence, if no other solution is found, the proposal [is] to ‘establish a common regulatory area comprising the Union and the United Kingdom in respect of Northern Ireland’. And, until now, no-one has come up with anything wiser than that. […]There can be no frictionless trade outside of the customs union and the Single Market. Friction is an inevitable side effect of Brexit. In a few hours I will be asking in London whether the UK government has a better idea.

Facing this, there are four scenarios on the table, as summarised by Guntram Wolff: (a) either UK remains in customs union and single market or (b) has a creative new idea or (c) accepts some form of border control between UK and Northern Ireland or (d) goes back onfudge and accepts a border within [the] island of Ireland.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article

Parliamentary Testimony

European Parliament

The role of independent expertise in legislative process

Testimony before the European Parliament Committee on the Internal Market and Consumer Protection (IMCO).

By: Zsolt Darvas and J. Scott Marcus Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: July 18, 2018
Read article More on this topic More by this author

Blog Post

Economy of Intangibles

Economists have been discussing the implications of the rise of the intangible economy in relation to the secular stagnation hypothesis, and looking more generally into the policy implications it has for taxation. We review some recent contributions.

By: Silvia Merler Topic: Finance & Financial Regulation Date: July 16, 2018
Read article More on this topic More by this author

Opinion

A Brexit deal is still not achieved

The UK paper should be seriously considered. While it breaks a number of European red-lines, it is also an attempt to solve some issues. The question is whether the EU will be ready to seriously negotiate. Geostrategic considerations suggest that it is time for the EU to do so.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: July 13, 2018
Read about event More on this topic

Past Event

Past Event

Designing a new institutional framework for UK-EU relations

Finding the right way forward for the EU and the UK.

Speakers: Raphael Hogarth, Jill Rutter and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 13, 2018
Read article More on this topic More by this author

Blog Post

World Cup Economics

As we approach the final rounds of the tournament, here are some recent contributions about the economics and economic impact of the World Cup.

By: Silvia Merler Topic: Global Economics & Governance Date: July 9, 2018
Read article More on this topic More by this author

Opinion

Ubu ou Machiavel?

L'administration Trump veut imposer une approche transactionnelle des relations économiques gouvernée par le rapport de force bilatéral en lieu et place du contrat multilatéral. Un défi d'une ampleur inédite pour l'Europe.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 6, 2018
Read article More on this topic More by this author

Blog Post

EU income inequality decline: Views from an income shares perspective

Over the past decade, the income share of low earners has increased in the EU while that of top earners has slightly declined. Although the upward convergence of the impoverished central European population is impressive, the southern European poor have faced a major setback while the southern European rich have hardly suffered.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: July 5, 2018
Read article More on this topic More by this author

Opinion

Griechenland braucht einen Neuanfang

This was first published by Die Zeit. Acht Jahre nach Beginn des ersten Hilfsprogramms für Griechenland ist es soweit – Griechenland soll wieder auf eigenen Füßen stehen. Die Eurogruppe soll heute das Ende des dritten Hilfsprogramms beschließen und die Modalitäten für die Zeit danach definieren. Ziel sollte es jetzt sein, einen tragfähigen Ausstieg aus dieser für alle Seiten […]

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: July 3, 2018
Read article More on this topic More by this author

Blog Post

US tariffs and China's holding of Treasuries

China has the biggest bilateral trade surplus vis-à-vis the US but is also a top holder of US government bonds. While China has started to counteract US trade tariffs, economists have been discussing the case of China acting on its holdings of US Treasuries. We review recent contributions.

By: Silvia Merler Topic: Global Economics & Governance Date: July 2, 2018
Read article

Blog Post

Trading invisibles: Exposure of countries to GDPR

This blog post identifies provisions of the EU’s General Data Protection Regulation (GDPR) that affect foreign companies, and discusses implications for trade in services with the EU. The authors provide a novel mapping of countries’ relative exposure to these regulations by a) measuring the digital maturity of their service exports to the EU; and b) the share of these exports in national GDP.

By: Sonali Chowdhry and Nicolas Moës Topic: European Macroeconomics & Governance, Global Economics & Governance Date: June 28, 2018
Read about event More on this topic

Past Event

Past Event

Euro tragedy: a drama in nine acts

This event will feature a presentation by Ashoka Mody of his new book, which argues that the Euro is at the root of the problems the European Union faces today.

Speakers: Maria Demertzis, Ashoka Mody and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 27, 2018
Read article More by this author

Parliamentary Testimony

European Parliament

The potential impact of Brexit on ICT policy

Testimony before the European Parliament's Committee on Industry, Research and Energy (ITRE).

By: J. Scott Marcus Topic: European Parliament, Innovation & Competition Policy, Testimonies Date: June 27, 2018
Load more posts