Dominic Walsh is a policy analyst for Open Europe.
MPs have once again rejected every Brexit option, following “indicative votes” that were far from indicative of a workable route out of the impasse. However, in a warning shot for Brexiteers, Ken Clarke’s motion in favour of a “permanent customs union” with the EU lost by just three votes, while the Kyle-Wilson second referendum plan fell short by twelve. It is clearer than ever that if the Commons does not pass the deal, the likely outcome is a softer Brexit – or no Brexit at all.
It is unclear what will happen next, but there is much speculation that one or more of the options which did the best will be pitted against the Government’s deal in a ‘run-off’ vote. Even here, it is unclear which option is the real ‘plan B’. The customs union option lost by the fewest votes, but the second referendum option received the most votes in favour (though both received less than the Government’s deal did on Friday).
Of these two, the customs union option would be easier for this Government to accept, and therefore deserves further attention. There is a huge level of confusion in the current debate about what a customs union does and doesn’t do, and what it would mean for the UK to be in one with the EU after Brexit.
Customs unions: what they do and don’t do
Customs unions are a form of trade area in which countries do not impose tariffs on each other’s goods, but agree on a common external tariff on goods from elsewhere. There are several customs unions in operation around the world today – the EU itself is one, and the arrangement between the EU and Turkey is another (though this is a partial customs union which does not cover agricultural goods). Other examples of customs union include the Southern African Customs Union (comprising South Africa and four of its neighbours), as well as Mercosur (which comprises Brazil, Argentina, Paraguay and Uruguay). A more comprehensive explanation of customs unions – and why, in the long-term, it makes sense for the UK to trade with the EU from outside a customs union – can be found in Open Europe’s 2017 report, Nothing to Declare.
Customs unions eliminate the need for checks on Rules of Origin (RoO). RoO checks are used to establish whether a product is really where it claims to be from – and thence whether it qualifies for preferential treatment. However, customs unions do not remove the need for other border checks – regulatory controls, VAT, excise and so on. As such, a customs union alone would not prevent a hard border in Ireland. The backstop contains a customs union, but it also contains a whole host of provisions related to regulations in order to meet its objectives. For this reason, any long-term UK-EU customs union would be as well as, not instead of, the backstop in the Prime Minister’s Withdrawal Agreement.
It has also become received wisdom that, if the UK was in a customs union with the EU, it would not be able to sign its own independent trade deals after Brexit. This isn’t strictly accurate either. Being in a post-Brexit customs union would still mean more trade policy independence than the UK enjoys as an EU member, though this independence would be limited compared to non-customs union forms of Brexit. In a customs union, the UK would not have to be in the EU’s Common Commercial Policy; it would therefore be legally able to sign independent trade deals (which we cannot do now). We just wouldn’t be able to vary our tariffs from the EU in order to do these deals, so any trade deals would be limited to non-goods areas – services, investment, data, procurement, labour mobility and so on.
Could the UK have “a say” in EU trade deals as a member of a customs union, as Labour Party policy proposes? To an extent – but it depends on what one means by a say. A voice at the table is certainly possible. Turkey has a (weak) consultation mechanism as part of its customs union with the EU, and the UK could certainly seek a more robust version of this. UK negotiators could join the EU’s delegation for future FTAs, which would add heft to the EU’s negotiation team. However, what is far less likely to be on offer from the EU is a formal veto for the UK, a non-EU member, over the EU’s trade policy.
A customs union is not Single Market membership, and it is certainly not EU membership. It would not require the UK to accept free movement of people, and nor would it require full alignment with single market regulations – though some alignment in goods would be required under the backstop to make the customs union operational and, in particular, to keep the Irish border open. Nor would a customs union require membership of the Common Agricultural Policy or the Common Fisheries Policy – the backstop, which contains a customs union, entails neither of those things. Customs unions are often accompanied by so-called level-playing field requirements on issues such as state aid (indeed, Labour’s policy of a comprehensive customs union without harmonisation on state aid is unlikely to be on offer) – but the same is true of most standard trade deals, including the much vaunted EU-Canada trade deal (CETA). If our goods exports are to be granted tariff-free access into the EU’s market, then measures to limit unfair competition are not unreasonable.
How would a ‘permanent customs union’ as the future relationship be different to the backstop?
If it were accepted by the Government and won a majority, a version of the customs union proposal from last night could be written into the Political Declaration on the future relationship – with the Withdrawal Agreement left intact. The Political Declaration, of course, is non-binding; a commitment to negotiate a customs union would not necessarily bind a future government with a Parliamentary majority against this. This is true even if the negotiating objective was written into domestic law via the Withdrawal Agreement Bill (WAB) – since no Parliament can bind its successors, a future Parliament could remove this commitment. In that sense, it is unclear in what sense a customs union could be made “permanent” now – although naturally, a commitment to negotiate one would have political and moral force.
From the Government’s point of view, a customs union as the long-term relationship with the EU is an inferior option to the temporary customs union contained in the backstop. The latter envisages the UK having a fully independent trade policy at some point in the future – on the condition that any “alternative arrangements” that replace the backstop also prevent a hard border in Northern Ireland. Thanks to the Joint Instrument agreed with the EU at Strasbourg, the EU cannot hold the UK in the backstop against its will – the UK would only remain in the backstop if it failed to propose any workable alternatives. Conversely, the Clarke proposal would see the UK remaining in a customs union by choice. In the long run, it is not clear that this level of alignment with the EU on trade policy would be politically sustainable.
Moreover, the main benefits of a customs union – at least in the medium-term – are already contained in the backstop. The backstop would prevent customs checks on the Irish land border and in the Irish Sea, would preserve manufacturing industries embedded in cross-border supply chains by eliminating the need for new checks on rules of origin, and could only be replaced by an alternative which met the same objectives.
Neither is it the case that a customs union would fully supersede the backstop. Indeed, from a Unionist perspective the most controversial elements of the backstop are the potential regulatory barriers to trade between Great Britain and Northern Ireland – and a customs union would do nothing to address these.
It is also unclear whether some of the other protections the UK won in the backstop would be preserved if a customs union became the long-term goal of the Government. For example, the UK could technically mount a legal argument against having to apply all EU trade deals in the backstop. Whilst it cannot unilaterally apply lower tariffs than the EU, there would be an arguable legal case for the UK maintaining EU external tariffs on a third country if the EU lowers its own tariffs with that country. This gives the UK some valuable wiggle room – it isn’t the case that the EU can simply sell other countries access to our market without our control. Whether such a loophole would be sustainable in a long-term customs union with the EU is far less clear.
Overall, a customs union in the Political Declaration would be neither a silver bullet nor a disaster
Adding a customs union to the Political Declaration, therefore, seems rather unnecessary in policy terms. It adds very little in the medium-term that the deal does not already contain, would not wholly replace the backstop, and loses the key benefit of being envisaged as a temporary arrangement. Moreover, the political advantage of a customs union – that it might win a majority in Parliament – is far from clear, on last night’s evidence. Many of the MPs who did not vote, including at least half the Cabinet, would likely vote against a customs union if the choice was forced.
However, precisely because it would be a rather unnecessary addition to the current deal, it is hard to argue that a customs union would be the disaster for Brexit that it is often made out to be. As discussed, a customs union cannot meaningfully be made “permanent” now. Whatever is written into the Political Declaration, a future Conservative government could leave a customs union, if it met two tests: a parliamentary majority for doing so, and a credible alternative for the Irish border. While the trajectory set by a customs union would indeed be somewhat inferior to the current deal, it is hard to sustain the argument that it would be exponentially worse. Hundreds of Conservative MPs have voted three times for a deal which contains a temporary customs union. Why should a non-binding commitment to a more long-term customs union be a deal-breaker for these MPs, to the extent that risking Brexit itself would be preferable? The debate within Westminster and the Tory party has become so febrile that people risk losing their sense of perspective. An outcome which would be sub-optimal but ultimately superfluous is painted variously as either a total betrayal of Brexit or as the missing solution the country needs. The truth is that it is neither.