The Labour party leadership has finally accepted that protecting the interests of British business requires, at the very least, keeping the UK in a customs union with the European Union after Brexit. Indeed, the overwhelming majority of British businesses have been calling for this since the referendum took place. The government continues to refuse to respond positively to those business calls. It argues that a customs union would make it impossible for the UK to negotiate its own free-trade agreements with non-European countries.
That is just not true.
A customs union is an agreement between countries to eliminate customs duties. The beauty of customs unions is that they eliminate not just customs duties themselves, but also a great deal of costly and lengthy bureaucracy and customs restrictions. Given today’s rapid pace of trade, that can make a huge difference to businesses’ competitiveness, specially for those that operate with integrated supply chains.
Countries within a customs union apply the same external duties to products imported from abroad – this is the so-called “common external tariff” in the EU. For example, all EU countries apply a 2.5% tariff on petroleum imports regardless of where the imports enter the union.
The EU also has customs union agreements with San Marino, Andorra and Turkey. Those agreements are, in Theresa May’s parlance, “bespoke”: the one with Turkey excludes agriculture products, the one with San Marino covers all products except for coal and steel, and the one with Andorra initially covered industrial products and was then updated to cover counterfeits and exports of cultural goods.
San Marino, Andorra and Turkey can negotiate with third-party countries provided the EU common external tariff is respected. For example, Turkey has agreements with 20 countries, including Malaysia (which has no agreement with the EU). Turkey can negotiate duties with Malaysia on industrialised products provided they are not lower than those applied by EU. It can apply lower duties on agricultural products. And it can freely negotiate on services, and eliminating regulatory restrictions on services and goods.
If the UK were to enter into a customs union with the EU, the UK could leave out of the union any goods that may be of strategic importance for the UK to negotiate agreements on with other countries. However, this would require ministers deciding what are those “strategic” goods are. When the prime minister claims that she cannot accept a customs union without restricting the UK’s capacity to conclude other agreements, she should be asked: what products exactly do you consider important leverage to negotiate agreements with other countries? Beyond agriculture products, I suspect the answer would be “very few”.
The reason for this is that the UK is already bound to very low tariffs on non-agriculture products by the World Trade Organisation. The average applied tariff for the EU – and therefore for the UK – is barely 2.8%. Thinking that the UK is going to be granted outstanding market access to key non-European countries in exchange for eliminating tariffs of such low level on industrial products is disingenuous at best, delusional at worst.
If the government thinks it can negotiate substantial access to key third-party countries by offering access to agriculture products at reduced rates, it can always exclude agriculture products from the customs agreement with the EU, as Turkey has done. But the government faces a serious dilemma, regardless of whether agriculture products are included in a customs union or not. The more the UK government offers reduced tariffs on, for example, olive oil, to countries such as Tunisia, the less attractive the UK market will look to olive oil producers from Greece, Italy and Spain – and the less access the UK will get to the EU in other areas in exchange.
The UK’s main tools for negotiating with other countries are not further lowering tariffs on industrialised goods, or even offering reduced tariffs on agriculture products. They are the areas outside any customs unions, in particular the opening up of services and the regulatory restrictions on services and goods. What key trading partners such as the US, China, India and Canada will be wanting from the UK is preferential conditions on services and on regulatory areas.
We already had a taster for this in the trade mission trips that Theresa May recently made to India, China and the US. India wants to be able to send more nationals to work in the UK (what in trade jargon is called “mode four” of the provision of services). The US wants the UK to allow its products in, even if they meet lesser health safety and environmental standards (as evidenced by the chlorinated chickens saga).
And China wants the UK to refrain from taking a tough line on intellectual property requirements, and to allow Chinese companies to obtain preferential treatment on public procurement related to the new Silk Road. None of these requests are covered by the customs union – at all.
The government’s argument that the UK cannot get into a customs union with the EU so that it can negotiate freely with third-party countries might sound convincing. But in reality, it is nothing more than yet another fake Brexit claim.
• Miriam González Durántez is a former EU trade negotiator
