Chancellor confirms we will be leaving the Customs Union

The Chancellor has today confirmed that we will be leaving the Customs Union in exchange for a customs co-operation agreement. This was implicit from the Prime Minister’s Lancaster House speech, but this is the first explicit commitment. This – in brief - is what it means.

  • Increased customs capacity needed at the border. Countries outside the CU have to classify their goods and pay a customs duty and need to ensure their goods meet EU regulatory standards. Checking these duties and standards takes time and increases bureaucracy. It has been reported that the Government is preparing for 350m declarations a year, up from 50m today.[1] Such an increase in customs declarations will mean the capacity of existing systems – both computerised and physical check at the border – will also need to increase substantially. It is concerning that the budget for HMRC is being cut at this time of increased demand for their services and Ministers will need to demonstrate their preparedness.
  • A ‘hard’ Northern Ireland border. Outside the Customs Union, friction at the North-South Irish border is almost certain. The Government have given no indication of how this will be avoided. Their White Paper says, “When the UK leaves the EU we aim to have as seamless and frictionless a border as possible between Northern Ireland and Ireland, so that we can continue to see the trade and everyday movements we have seen up to now.” This means that the new arrangements will minimise friction, rather than eradicate it as at present. Today’s statement only underlines this point.
  • New FTAs won’t make up for lost trade. The principal rationale for leaving the Customs Union is to be able to seek new Free Trade Agreements with other countries. Economic experts have shown, however, that potential gains from future hypothetical deals will not compensate lost trade from leaving the Single Market. NIESR have shown “that leaving the single market will be associated with a long term reduction in total UK trade of between 22% and 30%, depending on whether the UK concludes an FTA with the EU or not. The estimated increases in trade from concluding FTAs with all of the BRIICS, are much smaller at just over 2%, while concluding FTAs with all the Anglo-American countries (USA, Canada, Australia and New Zealand) is associated with a long-term increase in total UK trade of less than 3%.[2] This will also take time as the UK will have to have its WTO schedule in place and may well prioritise seeking to roll over existing FTAs.
  • Existing FTAs will have the be renegotiated as weaker deals. Countries within the CU are members of the EU’s Common Commercial Policy and are therefore party to the EU’s FTAs with over 50 other countries. When the UK ceases to be an EU Member State we will no longer be party to these FTAs, which will have to be renegotiated as bilateral agreements. As the Foreign Office has said.[3] In theory the UK, EU and third party countries could amend these FTAs to note the UK's new status and continue on current terms, but this could only be possible if the UK's trade arrangements remain constant, ie within the single market, which the Government has rejected. As our trade with the EU will be more restricted than at present, we will be more unattractive partners to signatories of those agreements. This will also take time. The UK will likely have to wait until it has left the Common Commercial Policy, has finalised its WTO schedule and has sufficient internal expertise capable of undertaking such a task. Then, deals designed for a market of 500 million consumers and 28 nations will be renegotiated for the UK alone. 
  • Business bureaucracy bombshell. Outside of the Customs Union, UK exporters would face additional costs from Rules of Origin regulations, which compel exporters to determine where a product originated. This would result in a £12.7bn a year bill for British businesses, according to new figures calculated by researchers at the Open Britain campaign.[4] This was highlighted by the Japanese Government as a primary concern.[5] Open Britain has also shown the amount of new red tape that could arise.[6]
  • Tariffs. Countries with customs co-operation agreements with the EU still face some tariffs on some goods – even those within the European Economic Area. Taking Norway as an example, it faces tariff duties on agriculture and fisheries products. Now the UK has decided to leave the Common External Tariff, some of these tariffs are likely to apply to some products. The 100% tariff elimination we enjoy today as members of the Customs Union is unlikely to continue.

Notes:

[1] https://www.ft.com/content/3876648e-9905-11e6-8f9b-70e3cabccfae

[2] http://www.niesr.ac.uk/blog/will-new-trade-deals-soften-blow-hard-brexit#.WMEaPG-LTX4

[3] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/504661/Alternatives_to_membership_possible_models_for_the_UK_outside_the_EU_Accessible.pdf

[4] http://www.open-britain.co.uk/soubry_leaving_customs_union_would_land_british_businesses_with_12_7bn_red_tape_bill

[5] ‘Japan’s Message to the United Kingdom and the European Union’, http://www.mofa.go.jp/files/000185466.pdf

[6] http://www.open-britain.co.uk/leslie_brexit_the_beginning_of_an_avalanche_of_paperwork_for_businesses