Sir Lockwood Smith is a former New Zealand High Commissioner to the UK.
In New Zealand’s experience, the clear answer is – not to be. We are not part of a customs union anywhere in the world, and for good reason.
A country cannot benefit from a smart global trade strategy if its ability to negotiate leading edge trade agreements is hamstrung by membership of a customs union where the least progressive member can prevent progress.
New Zealand’s Closer Economic Relations (CER) agreement with Australia is one of the deepest and most comprehensive trade agreements in the world, but it is NOT a customs union. That’s been an important element in the economic success of both our countries.
Earlier this century, New Zealand was the first developed country in the world to negotiate a free trade agreement with China. It’s been hugely successful. But had we been in a customs union with Australia, our FTA with China would not have been possible at that time.
Because of our ability to pursue our own global trade strategy, we now also have free trade agreements with both Hong Kong and Chinese Taipei, the only developed country in the world to have done that.
Likewise, Australia has benefited from its ability to pursue its own trade strategy. Free trade agreements with both the USA and Japan would likely have been less readily obtained had Australia been a customs union with New Zealand.
Not only do customs unions make more difficult that key component of economic success, a smart global trade strategy, but they also kill the vital economic competitive dynamic that is so powerful in the pursuit of an ever more successful trade strategy.
In New Zealand and Australia’s case, when one country achieves a breakthrough on the trade front, the other country has to smarten up its strategic trade efforts in order to remain competitive. And that’s a good thing.
But to maximise the benefits from avoiding the constraints of a customs union, New Zealand and Australia have had to be innovative in dealing with both customs issues and regulation.
While our free trade agreement with Australia saw all tariffs on goods between our two countries gone within a decade, it became clear that tariff elimination alone wasn’t enough. To get CER working effectively, behind the border regulation had to be addressed.
Australia and New Zealand did it the smart way. We accepted that both countries sought have high standards even if regulations involved in supporting them differed between us. We could see that the important thing was the outcome, not the regulation itself.
We negotiated what became known as the Trans-Tasman Mutual Recognition Agreement, or TTMRA. It took effect in 1998. Essentially, goods sold legally in one country could be sold in the other regardless of different standards or other sale related regulations. What’s more, someone registered to practice an occupation one country was entitled to practice an equivalent occupation in the other.
The TTMRA became the cornerstone of the free market between our two countries. It lowered business costs, lead to more competitiveness as manufacturers had to meet only one standard, gave consumers greater choice, led to greater cooperation between our regulatory authorities and last but not least, saw a greater discipline on our regulators contemplating the introduction of new standards, regulations or occupational registration requirements.
Much of the thinking behind the Trans-Tasman Mutual Recognition Agreement has now been carried forward into the world’s latest major free trade agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership – CPTPP. It beckons the UK with such opportunity post-Brexit.
CPTPP is an exciting prospect as it covers almost a third of the global economy. But it’s hard to see how a country could join CPTTP if it didn’t have control over its own regulatory practice, let alone were it to be tied into a customs union.
Mutual recognition, or an equivalence approach to regulation, should be readily agreeable between the UK and the EU. After all, both parties start from a position of common regulation. And the EU does have existing equivalence arrangements.
For example, New Zealand’s veterinary agreement with the EU, and the UK, means New Zealand’s red meat hygiene standards are recognised as being equivalent to those applying in both the UK and the EU. As a consequence, inspection procedures are minimised.
Our CER agreement with Australia has also developed almost frictionless border arrangements, despite not being a customs union. A single digital window system means that exporters can lodge customs documentation in one place and have it turned around in minutes.
The trusted trader regime also means that inspections at the border are minimised. Combined with the mutual recognition agreement on regulation, these developments mean that our countries benefit from an almost frictionless border, without the constraints of a customs union.
After the UK leaves, the EU will still remain its most important trading partner. Consequently, mutual recognition or regulatory equivalence arrangements will be vital, as will frictionless border arrangements facilitated by new digital technology.
The big prize from Brexit for the UK is the ability to pursue an independent, smart global trade strategy. It would equip the UK to participate more actively in developing and promoting the adoption of international standards that through progressive trade agreements can continue to raise both UK and global well-being.
As the fifth biggest economy, the world needs the UK to step up. While it is totally the UK’s choice to be or not to be in a customs union, “to be” would seriously undermine any “global Britain” aspirations. Don’t waste this opportunity.