Henry Newman is Director of Open Europe.
Last week’s shock election result has given succour to those still hoping to overturn or dilute the result of last year’s referendum. Remarkably, the question of whether the UK should remain within the EU’s Customs Union appears to be back on the table, as we approach the first anniversary of the vote to leave. Rumours are circulating that Philip Hammond is preparing a new demarche for a so-called “soft” Brexit, and his predecessor has used the Evening Standard to describe leaving the Customs Union as “a major act of protectionism”.
The EU Customs Union allows goods to be moved between members without customs checks or duties being levied. Goods entering the Customs Union are all subject to a Common External Tariff: in other words, all member states impose the same customs duties and quotas. The entire Customs Union negotiates trade agreements together, so individual members cannot sign trade agreements themselves. The EU has reached dozens of trade deals, but has failed to do so with the world’s biggest economies, including the United States, China, and Japan.
Earlier in the week, newspapers were briefed that Philip Hammond was preparing to push the Prime Minister to change tack on leaving the Customs Union, and that the Treasury was in “street-fighting mode”. He was also supposedly planning to use his Mansion House speech to argue for an approach to Brexit that “put jobs and the economy first”. Following the Grenfell Tower tragedy, the Mansion House dinner was delayed, but the Chancellor spoke yesterday before the meeting of European Finance Ministers, ECOFIN. He said: “we’ve set out very clearly our desired outcome in the Prime Minister’s Lancaster House speech and in the Article 50 letter that we’ve sent”. This was interpreted to mean that the Treasury was still committed to leaving the Single Market and Customs Union.
Yet perhaps Hammond is leaving himself some wriggle room. After all, he did not refer to the undertaking in the Conservative manifesto to leave the Customs Union. Instead, he pointed to Theresa May’s January speech which made no clear promise to take the UK out of the Customs Union. Open Europe learned at the time that 10 Downing Street had agreed to keep options open on the union in that speech, in order to secure agreement from a more reluctant 11 Downing Street to take the UK out of the Single Market.
At Lancaster House, the Prime Minister said she wanted the UK “to be able to negotiate its own trade agreements” and thus that it should leave both the Common Commercial Policy and the Common External Tariff – the key elements of the Customs Union. Yet she explicitly left the door open to the UK becoming an “associate member of the Customs Union” or “a signatory to some elements of it”. Then, she was flexible, saying it is “not the means that matter, but the ends”. A return to a pragmatic approach to Brexit by the Government would be welcome, and a sensible response to the election result. But calls to re-open the decision to leave the Customs Union are misplaced.
In our report, Nothing to Declare, Open Europe examined the evidence and concluded that – given the vote to leave the EU – a commitment to leaving the Customs Union was the only logical step for the UK. Otherwise, the UK would be unable to shape its own trade policy, and would miss out on many of the potential benefits of Brexit. We would remain bound by the EU’s protectionist tariff structure, and have our trade agreements determined by institutions on which we were not represented. Negotiating on behalf of a 28-member bloc does give the EU clout with potential trade partners. But it also necessitates a one-size-fits-all approach that can tend towards the lowest common denominator. And, as we saw with the Canadian trade deal, an entire agreement can be held up by the minority interests of one tiny part of the Union.
It’s not even clear how the UK could stay in the EU Customs Union as a non-member: that’s a status which only Monaco really enjoys. Turkey has a partial Customs Union with the EU Customs Union, but this limits its ability to be incorporated into the trade deals signed by the EU. The a la carte approach to the Customs Union which May floated at Lancaster House would surely be a negotiation nightmare, and fall foul of the EU’s neuralgia about cherry picking.
Leaving the Customs Union will come at some cost to business in the UK and the EU, and with some complications. But those costs can be mitigated by a UK-EU free trade deal that includes a comprehensive customs agreement. Such an agreement would be in the overwhelming economic interests of businesses and governments on both sides of the Channel. The recently-signed Canada-EU trade agreement (CETA) offers a model, but we could go further. Of course, countries do not need a customs union to trade: goods are easily moved across the borders of the EU Customs Union already, between Switzerland and its neighbours, and over the Norwegian-Swedish border.
Calls to stay in the Customs Union will surely continue. An editorial in Thursday’s Evening Standard suggested that there is now “no parliamentary majority for leaving the EU’s customs union”. Yet all Conservatives stood on a manifesto committing them to leaving the Customs Union. And the DUP’s manifesto included a promise to make “progress on new free trade deals” and to reach a “comprehensive” customs agreement with the EU.
Bizarrely, the newspaper edited by George Osborne, also claimed that leaving the Customs Union would be an act of protectionism. In fact, outside the Customs Union, the UK could set its own more liberal tariff schedules in the World Trade Organisation and could strike new free trade agreements. That would be liberalising for the UK and the world economy.
As the Government reacts to the surprising result of last-week’s election, Open Europe will continue to advocate leaving the Customs Union. There’s a strong case to be made for remaining within the Customs Union for a transitional period, but in the medium-term the case for leaving is overwhelming. An assertive Treasury defending the interests of industry and the economy, and standing up for jobs, is certainly to be welcomed. But it’s time to shut down the debate on the Customs Union, and deliver business the certainty it needs to plan for the future.