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 Download PDF

Policy Contribution

European Parliament

Hybrid and cybersecurity threats and the European Union’s financial system

The authors document the rise in hybrid threats and cyber attacks in the European Union. Exploring preparations to increase the resilience of the financial system they find that at the individual institutional level, significant measures have been taken, but the EU finance ministers should advance a broader political discussion on the integration of the EU security architecture applicable to the financial system.

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance, European Parliament, Finance & Financial Regulation, Testimonies Date: September 12, 2019
Read article More on this topic More by this author

Opinion

Economic priorities for new EU leadership

Europe is no longer in crisis mode. However, it remains vulnerable; it is unprepared and it is procrastinating. Following European elections this May, new leaders are about to take their positions at the main European institutions for the next 5 years. They have the power in their hands to take action. But more importantly, they have the power to convene 28 states, which, if united, can play a significant global role. What are the urgent challenges that require collective European action?

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: September 10, 2019
Read article

Blog Post

How long is the head table?

An empirical assessment of concentration in global collective action

By: Jan Mazza and Jean Pisani-Ferry Topic: Energy & Climate, Global Economics & Governance Date: August 28, 2019
Read article More on this topic More by this author

External Publication

La Banca centrale europea

This external publication delves into the new responsibility given to the European Central Bank: supervision on banks in the euro-area. It tells its history and illustrates its functions, structure and responsibilities and the exceptional answers to respond to the "perfect storm" of the crisis.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: July 31, 2019
Read article More on this topic

Blog Post

Talking about Europe: Die Zeit and Der Spiegel 1940s-2010s

An on-going research project is seeking to quantify and analyse printed media discourses about Europe over the decades since the end of the Second World War. A first snapshot screened more than 2.8 million articles in Le Monde between 1944 and 2018. In this second instalment we carry out an analogous exercise on a dataset of more the 500 thousand articles from two German weekly magazines: Die Zeit and Der Spiegel. We also report on the on-going work to refine the quantitative methodology.

By: Enrico Bergamini, Emmanuel Mourlon-Druol, Francesco Papadia and Giuseppe Porcaro Topic: European Macroeconomics & Governance Date: July 18, 2019
Read article More on this topic More by this author

Opinion

Brexit banking exodus creates a dilemma for Dublin

Irish consumers’ interests may not coincide with the needs of banks relocating here.

By: Rebecca Christie Topic: Finance & Financial Regulation Date: July 10, 2019
Read article Download PDF More on this topic

Policy Brief

The European Union energy transition: key priorities for the next five years

The new members of the European Parliament and European Commission who start their mandates in 2019 should put in place major policy elements to unleash the energy transition. It is becoming economically and technically feasible, with most of the necessary technologies now available and technology costs declining. The cost of the transition would be similar to that of maintaining the existing system, if appropriate policies and regulations are put in place.

By: Simone Tagliapietra, Georg Zachmann, Ottmar Edenhofer, Jean-Michel Glachant, Pedro Linares and Andreas Loeschel Topic: Energy & Climate Date: July 9, 2019
Read article More by this author

Blog Post

It’s hard to live in the city: Berlin’s rent freeze and the economics of rent control

A proposal in Berlin to ban increases in rent for the next five years sparked intense debate in Germany. Similar policies to the Mietendeckel are currently being discussed in London and NYC. All three proposals reflect and raise similar concerns – the increase in per-capita incomes is not keeping pace with increases in rents, but will a cap do more harm than good? We review recent views on the matter.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: July 8, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Priorities for the new ECB president

In this Director's Cut of 'The Sound of Economics', Guntram Wolff talks to two of the authors of Bruegel's memo to the new ECB president, Maria Demertzis and Grégory Claeys, to specify the most important issues at the beginning of this eight-year cycle and to clarify the parameters within which the new incumbent will have to work.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: July 4, 2019
Read article Download PDF

Policy Brief

The threats to the European Union’s economic sovereignty

Memo to the High Representative of the Union for Foreign Affairs and Security Policy. The authors describe the current context and the increasing interlinkages between economics and power politics and the role to play in reinforcing and defending Europe’s economic sovereignty.

By: Jean Pisani-Ferry and Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: July 4, 2019
Read article Download PDF More on this topic

Policy Brief

Preparing for uncertainty

Memo to the president of the European Central Bank. Grégory Claeys, Maria Demertzis and Francesco Papadia present the challenges that the next ECB president will face during the upcoming mandate, reinventing monetary policy in a system riddled with uncertainties.

By: Grégory Claeys, Maria Demertzis and Francesco Papadia Topic: European Macroeconomics & Governance Date: July 3, 2019
Read article More on this topic More by this author

Blog Post

The breakdown of the covered interest rate parity condition

A textbook condition of international finance breaks down. Economic research identifies the interplay between divergent monetary policies and new financial regulation as the source of the puzzle, and generates concerns about unintended consequences for financing conditions and financial stability.

By: Konstantinos Efstathiou Topic: Finance & Financial Regulation Date: July 1, 2019
Load more posts