As the UK exits the EU, it will leave the EU’s customs union. Yet with just months remaining of the article 50 deadline, the government still doesn’t have a clear customs policy. It has not endorsed either of Whitehall’s two existing options, which the EU has pre-emptively dismissed. Theresa May needs to break the impasse at her Chequers Brexit cabinet meeting.
Meanwhile the Labour party and some Conservatives demand a new customs union with the EU. Together they may have a majority in parliament, although this has not been tested. Whatever Labour claims, a permanent customs union would mean outsourcing trade policy to Brussels (where we would no longer have a seat at the table), and allowing the EU to sell access to our markets without our control. That’s not a sustainable long-term position.
On the other hand, some Brexiteers too readily dismiss the serious and legitimate concerns of business, especially those with supply chains crossing the continent. Equally, both the UK and EU have agreed that Northern Ireland’s unique circumstances require specific solutions to avoid a hard border.
A few weeks ago, the Brexit cabinet refused to back May’s preferred option of a new customs partnership, which would mean the UK collecting EU customs levies. The alternative – maximum facilitation (“max fac”) – would have to work as part of a broader customs agreement with the EU and will reportedly not be ready by the end of the transition. A possible third way on customs is due to be discussed at Chequers, but will need to address concerns of business and the Irish border.
After Brexit, EU goods trade will cross a customs frontier. If efficiently managed – as much global freight already is – declarations can be completed electronically before goods arrive. Currently just a tiny proportion of non-EU shipments are physically inspected. Future EU trade should be no different. Importers can use bonded warehouses and other schemes to help further alleviate friction, but problems will still need to be resolved.
When the UK becomes what EU treaties define as a “third country”, Brussels would require regulatory checks to ensure imports comply with its rules. The non-partisan and independent policy thinktank Open Europe, which I am director of, has proposed that the UK aligns with EU goods regulations (which many British industries will choose to do anyway). This would mean being a rule taker in those areas, but mutual recognition would allow goods to move freely with the EU. It seems likely that the government will endorse our plan at Chequers.
A UK-EU trade deal would remove tariffs on goods, and matching rules should eliminate the need for regulatory checks. But the issue of rules of origin remains, which would also have to be checked. These require exporters to demonstrate the proportion of a product’s value that is local. If the proportion “originating” in the UK – made or transformed there – falls below an agreed floor, the product would no longer count for preferential trade.
These rules of origin are intended to prevent unfair trading practice. The EU might worry that a future UK-US trade agreement could mean cheaper American car parts ending up in British cars, that then undercut European manufacturers. Rules of origin limits and checks won’t matter much for some product types or industries. But for companies with complex supply chains, they will be an important consideration as well as a potential source of disruption at the border.
So for certain industries – cars and chemicals for example – the government could commit to matching some of the EU’s own external tariffs and relevant aspects of its trade policy for a time-limited period after Brexit. The purpose would be to achieve, in return, the most liberal and light-touch regime possible on rules of origin for those sectors.
If the government chose to align tariffs in particular sectors, that would reduce opportunities to reduce domestic prices on those products. But the UK would be able to reduce tariffs in non-matched sectors.
Future UK customs arrangements will rely on technology that is not yet operational. Reports yesterday that Eurotunnel is developing a new system to clear lorries automatically as they drive through its terminal are encouraging. But it seems likely that UK customs infrastructure will be not ready for the end of the standstill transition, given the government’s slow progress. On that basis it may be necessary, as I’ve already suggested, to remain in lockstep with EU customs policy for a little longer, then to liberalise aspects of our trade policy while agreeing to match specific sectors for a decade or so to help protect those industries.
Some will worry that committing to match EU tariff levels on some industries would limit our ability to negotiate trade deals. But this compromise approach, which would work alongside other options to facilitate trade, is clearly preferable to a full customs union which would leave the UK tethered to all EU tariff lines or indeed to an unwieldily customs partnership. It might make sense in the longer-term to pursue general tariff liberalisation but with a hung parliament, and nervous businesses delaying investment, the government needs a way through on customs – and this might just be it.
• Henry Newman is the director of Open Europe
