In my view, as recently former Minister for Trade Policy, being in a Customs Union with the EU – but outside of the EU – would be the worst possible Brexit policy choice for the United Kingdom. I say this as a former Remainer from 2016, but one who believes that Brexit can and will work, if set up correctly. Today and tomorrow, on the Taxation (Cross Border Trade) Bill (which is sometimes known as the Customs Bill, and for which the Treasury leads) and the Trade Bill (for which the Department for International Trade leads ), there are amendments on staying in the Customs Union or joining a Customs Union with the EU.
All EU countries are automatically in the EU Customs Union. Norway, Liechtenstein and Iceland are in the European Economic Area (EEA), but are not in the Customs Union. Switzerland is not in the EEA or the Customs Union, but is otherwise closely aligned with the EU through a myriad of treaties, including on trade. The EU Customs Union sets a common external tariff (and schedules deposited at the World Trade Organisation, or WTO), and reserves most trade agreements to be an EU competence.
Being in the Customs Union is dependent on being in the European Union itself, so the UK is definitely leaving the Customs Union in March 2019. But it would be possible – though highly undesirable – for the UK to be in a customs union with the EU. There are at least three principled arguments against being in a customs union with the EU.
First, the only other country which does this, Turkey, shows the huge disadvantage.
Second, that the UK would no longer have an independent trade policy, including the ability to have its own trade defences.
Third, that being in a customs union could mean surrendering some aspects of the control of our NHS and other public services to the European Union, whilst having no voice.
The Turkey Example shows us why this is not a good choice for Britain
The only significant country which is in a customs union with the European Union, but is not an EU member itself, is Turkey. Turkey is in a customs union for most goods, except agricultural ones. Turkey entered into a partial customs union with the EU in 1995, as part of their long-term aspiration for full EU membership. Turkey, however, has no seat at the table when the common external tariff is set, nor when EU trade agreements are negotiated.
Current amendments before the Commons instruct us to join a partial or full Customs Union with the EU, similar to Turkey. However, Turkey in 1995 saw itself as on the way into the EU: we are moving in the opposite direction. Next, being in a Customs Union with the EU – but not within the EU itself – means that Turkey has no say over either the tariff set, nor on any Free Trade Agreements the EU negotiates.
Even worse, when the EU negotiates in a Trade Agreement with a third party to reduce an EU tariff in return for some tariff reductions or other market access preferences with the third Party, Turkey must reduce its own tariff (as part of the EU Common External Tariff), but does not necessarily gain the market access pledged by the third country in return (because it is not an EU member, and therefore not a party to the Free Trade Agreement).
Turkey must then negotiate its own Trade Agreement with the third party – but with the substantial disadvantage that it has already given the third Party access to its market through the reduction in the EU Common Tariff. In fact, it is even possible for countries to negotiate a Free Trade Agreement with the EU, and then to refuse to do the same with Turkey, comfortable in the knowledge that they have already achieved the access to Turkey which they need. South Africa and Algeria are understood to be in this category.
Therefore, there is a real risk that by being in a customs union with the EU, but without being members of the EU, we would have to allow access to our markets (as agreed by the EU) without ever having a seat at the table, or even any guarantee that what was agreed by the EU in terms of reciprocal access would be given to us. For more on the Turkey example, see this excellent article by my predecessor as Minister for Trade Policy, Mark Price.
Being in an EU Customs Union means surrendering an Independent Trade Policy
Being in a customs union with the EU would effectively surrender any prospect Britain has of having an independent trade policy, one of the most important opportunities given by Brexit.
Our common external tariff would be set by Brussels, and Britain, as we have already seen, would have no seat at the table. Britain has had its trade policy conducted by the EU since we joined in 1973, but at least for the last 45 years we have been at the table.
In fact, for the last year, that voice at the table has been me. I can tell you that, ironically, my voice, of all the EU-28 in that time, has been the most in favour of the EU’s own trade agreement agenda, whether with Japan, Mercosur, Mexico, etc. Now, if we were in a customs union and outside of the EU, we would have neither our own policy nor a voice at the table. It would be possible to enter into trade agreements, but without the ability to offer lower UK tariffs (since they will be set in Brussels): this would remove at a stroke much of our ability to offer much in return.
Being in an EU Customs Union could mean surrendering control of our NHS and other public services
For the same reason, the EU could make trade agreements which allow foreign countries and foreign firms access to our public services, and the UK wouldn’t necessarily be able to prevent the UK being included.
For example, were the UK to continue to be a member of the WTO Government Procurement Agreement only through the EU, then access to NHS procurement might be out of our own hands. Equally, EU Trade Agreements, which allow access to EU markets, might include UK markets, either intentionally or inadvertently. This could mean that the EU could negotiate access to the UK NHSs, without the UK having any say over the access whatsoever. Even Labour’s own Trade Spokesman, Barry Gardiner, made this argument last year.
Leaving the EU, but remaining in a customs union with it, would be the worst of all worlds. Our relationship with the EU and its trade agreements would be horribly assymetric – not only with the EU would we be rule-takers, but this would also be the case beyond. The NHS could be at risk. The UK would have all the challenges of Brexit (how to preserve our trade with the EU) without many (if any) of the opportunities, like having its own trade policy.
We British often like a good compromise. But staying in an EU Customs Union is the wrong compromise. We would lose any opportunity of having an independent trade policy; despite being the world’s fifth largest economy, our tariffs would be set by others and we would have no seat at the table, and we would put at risk our domestic right to regulate in areas like the NHS. This is not a choice for the UK.