APPG Briefing: Customs Union Debate

Top Lines

  • Remaining in the Customs Union is vital for the UK economy, for jobs and for avoiding a hard border in Northern Ireland.
  • There is a growing majority in Parliament against leaving the Customs Union, and Ministers should listen to this opposition by dropping their ridiculous red line.
  • The Government has failed to provide any credible solutions to the issue of the Irish border, putting the negotiations in jeopardy and potentially threatening the Good Friday Agreement.
  • New trade deals will take years to negotiate, we will be pushed around by the likes of President Trump, and no amount of new deals will compensate for the costs of Brexit.
  • This House of Commons debate is an important opportunity for MPs to discuss the issue, but the real votes on the Customs Union will take place next month and into the summer.

The Motion

The non-binding motion, which has been tabled by chairs of the Liaison Committee, calls for “the establishment of an effective customs union”. It notes that:

"the EU is the UK's largest export market for goods, accounting for a total of £145bn of exports and £241bn of imports in 2016; further notes the Government's expressed aim to secure the freest and most frictionless possible trade in goods between the UK and the EU after 29 March 2019; notes the importance of frictionless trade without tariffs, customs or border checks for manufacturers and businesses across the country who trade with the EU; further notes that the free circulation of goods on the island of Ireland is a consequence of the UK's and Republic of Ireland's membership of the EU Customs Union; in addition notes the Government's commitment to (i) in the UK-EU joint report on progress during phase 1 of the Article 50 negotiations, the maintenance of North-South cooperation and the all-island economy on the island of Ireland, (ii) the Belfast Agreement implemented in the Northern Ireland Act 1998 remaining a fundamental principle of public policy and (iii) the continuation of unfettered access for Northern Ireland's businesses to the whole of the UK internal market; and therefore calls on the Government to include as an objective in negotiations on the future relationship between the UK and the EU the establishment of an effective customs union between the two territories."

The Political Context in Parliament

  • This debate is an important opportunity for the House of Commons to consider the benefits of the Customs Union, and the drawbacks of leaving, but any vote will be non-binding.
  • The first really significant votes on the Customs Union will take place when the Trade Bill and the Taxation (Cross-border) Trade Bill return to the House of Commons for report stage. Key amendments to those bills that are backed by the APPG are:
    • Trade BillNew Clause 5, tabled by Anna Soubry and Chuka Umunna
    • Taxation (Cross-border) Trade Bill New Clause 1, tabled by Anna Soubry and Chuka Umunna
  • There will now also be a further vote when the Withdrawal Bill returns to the Commons, after the Government was defeated last week on an amendment tabled by Lord Kerr that would require ministers to report to parliament “outlining the steps” it has taken to secure “an arrangement which enables the UK to continue participating in a customs union with the European Union”. See full text here.
  • The amendment was carried by a majority of 123 with the support of 24 Conservatives, including three former ministers.

 

The Political Context in Brussels

  • Having reached a deal on both the withdrawal and transition agreements, British and EU officials opened talks on the future relationship on Wednesday 18 April.
  • However, the talks are being held up by failure to reach agreement on the question of the Irish border. Negotiations on the Irish question will continue over four rounds of talks in May and June before a crunch EU summit on 28-29 June.
  • Last week the Telegraph reported the Government’s customs proposals had been subjected to “a systematic and forensic annihilation” by EU negotiators.[1]
  • The UK and the EU agreed three options on Northern Ireland in the joint report on Brexit signed in December. Option A was that a solution would be found in the wider deal, option B was a bespoke arrangement and option C the backstop solution of full alignment of regulations on both sides of the border in the event of talks breaking down. However, there is disagreement over what this would mean in practice, with the UK having rejected the EU’s draft legal text.

 

Impact of Leaving the Customs Union

Below is a summary of key arguments against leaving the Customs Union. A longer analysis can be found in the APPG on EU relations report on the subject, drafted by Open Britain.

Economic impact

  • The UK’s current annual goods trade with countries within the Customs Union is £466 billion.[2]
  • Leaving the Customs Union could cost the UK an estimated £25 billion every year until 2030, according to the Brexit Secretary’s Special Adviser, Raoul Ruparel.[3]
  • The cost of new tariffs alone could be at least £4.5 billion per year for UK exporters, according to research conducted by The Independent.[4]
  • Analysis by HMRC suggests new customs checks could increase the cost of imported goods by up to 24%.[5]

 

Sectoral impact

  • Automotive sector: The Society of Motor Manufacturers and Traders (SMMT) are calling for continued membership of the Customs Union, warning that leaving the Customs Union and trading with the EU on World Trade Organisation (WTO) rules would see a 10% tariff on vehicles and an average 4.5% tariff on car components. According to SMMT analysis, tariffs would push up the cost of the average car by £1,500.[6] Honda have recently warned that “outside of the Customs Union, there is no such thing as a frictionless border”.[7]
  • Agriculture sector: Leaving the Customs Union would increase food costs if tariffs became applicable. The National Farmers Union (NFU) have described such a scenario as being “absolutely disastrous”.[8] Research from Rabobank has shown that the price of imported food into the UK could rise by as much as 8%, a cost which could be passed on to consumers.[9]
  • Pharmaceuticals sector: The Association of British Pharmaceutical Industries (ABPI), has called for free trade with the EU “equivalent to those of a full member of the Customs Union”.[10]
  • Chemicals sector: The Chemical Industries Association (CIA), have said that “the best way to guarantee no adverse disruption to business and trade during a transition period, and to guarantee only one adjustment before reaching a final agreement with the EU, is to seek to retain our existing membership of the Single Market and Customs Union”.[11]
  • Shipping sector: The UK Chamber of Shipping have warned the UK faces an “absolute catastrophe” if it fails to ensure a “frictionless and seamless” border at Dover and other ports.[12]

 

Non-tariff costs

  • Leaving the Customs Union could see UK companies having to comply with high levels of new bureaucracy and additional costs. Meeting the EU’s requirements on Rules of Origin alone would add significant extra burdens to businesses in terms of time, effort and money.[13]
  • IT systems will need to be upgraded and improved and the UK will find itself in the position of having to deal with a huge increase in the number of traders making customs declarations, from the current 141,000 to 273,000. This would include approximately 132,000 traders making customs declarations for the first time.[14]
  • The National Audit Office estimates the number of customs declarations per year increasing from 55 million to 255 million if the UK leaves the Customs Union.[15]

 

Ports and infrastructure

  • Infrastructure improvements will be required at ports to deal with the potential increase in the number of vehicles carrying EU goods, which will need to be parked at ports to await clearance, rather than “driving straight through” as is currently the case.[16]
  • Britain’s ports are currently not equipped with the physical infrastructure or parking bays required to deal with this level of checks on freight entering and departing the UK. This could lead to gridlock around busy UK ports like Dover and Holyhead and could damage the trade in perishable goods.[17]
  • At some ports, including Dover, as much as 99% of traffic relates to trade with the EU.[18]
  • James Hookham, deputy chief executive of Britain’s Freight Transport Association, has said: “If you add an average of two minutes to customs processing, you get a 17-mile queue [from Dover] almost back to Ashford. Another four minutes takes the queue back to Maidstone, six minutes back to the M25, eight minutes and you are up to the Dartford crossing and Essex.”[19]
  • An example of the potential consequences of delay at ports was demonstrated in July 2015 when a strike by French ferry operators resulted in huge delays and traffic jams in Kent and the activation of ‘Operation Stack’.
  • A recent IfG report notes that the requirement to implement Operation Stack in 2015 resulted in businesses losing £21 million in stock and the economy in Kent losing £1.5 million a day.[20]

 

Northern Ireland

  • The UK’s membership of the Customs Union is essential for the maintenance of the currently invisible border between Northern Ireland and the Republic of Ireland.[21] The lack of customs checks and border posts is crucial to the economy of Northern Ireland and the Republic alike, and has profound historical significance.
  • The Irish Foreign Minister has said that leaving the Customs Union is “incompatible” with avoiding a return to a hard border on the island of Ireland.[22]
  • An estimated 177,000 lorries, 208,000 vans and 1.85 million cars now cross the border every month. Around 30,000 people cross the border each day.[23]
  • There are concerns that leaving the Customs Union, and the subsequent creation of different customs regimes between the UK and Ireland, will create incentives for increased smuggling across the Irish border.[24]
  • In its position paper on customs last August, the Government set out two proposals for a future relationship in an attempt to avoid the imposition of a hard border:
    A streamlined customs arrangement, based highly optimistic technological solutions.
       2. A customs partnership (in which the UK would apply two different sets of tariffs at its
           external borders, depending on whether the goods are destined for the EU or for the UK.
  • Both proposals have been widely discredited, and last week the Telegraph reported the Government’s plans had been subjected to “a systematic and forensic annihilation” by EU negotiators.[25]

 

The Government’s Trade Agenda 

UK trade with Europe

  • The EU is, by some distance, the UK’s largest trading partner. In 2016, it was the destination for some 43% of UK exports in goods and services.[26]
  • This is largely due to the frictionless-nature of trade within the Single Market and the Customs Union. It is also a matter of simple geography – Europe is on our doorstep.
  • In addition, the EU has nearly 40 trade deals with more than 65 countries around the world covering a further 15-17% of UK trade in goods, according to the University of Sussex UK Trade Policy Observatory.
  • The EU has trade deals in place with more countries than the US (20), China (23) and Australia (19) combined.

 

Benefits of new trade deals

  • Many of the countries often talked up as targets for future free trade agreements are on the other side of the world, eg, Australia accounts for just 1.7% of UK exports, India 1.7%, Indonesia 0.2% and New Zealand 0.2%.
  • The Government’s own secret analysis shows that they believe new free trade deals will add between 0.2% - 0.7% to UK GDP, compared to a 5% hit from leaving the Single Market.[27]
  • The long-term benefits of a free trade deal with the US are said to be between 0.1% - 0.3%. This is despite the repeated claims by ministers that a free trade deal with the US is the great prize of Brexit.
  • According to analysis by NIESR, the estimated increases in trade from free trade agreements with Australia, Brazil, Canada, China, India, Indonesia, New Zealand and the US would be less than 5%. By contrast, leaving the Single Market will be associated with a long-term reduction in total UK trade of between 22% and 30%.[28]
  • In its latest Economic and Fiscal Outlook, the OBR predicted that export growth will slow this year and flatten off altogether by 2022 “as growth in UK exports eases and Brexit weighs on the UK export market share.”[29] They also anticipate that imports will slow due to Brexit.[30]
  • Sir Martin Donnelly, former Permanent Secretary at the Department for International Trade, has described leaving the Single Market and Customs Union to seek new trade deals as “like giving up a three-course meal for the promise of a packet of crisps in the future.”[31]

 

Impediments to signing new trade deals

  • Trade deals take many years to negotiate – an analysis by the Peterson Institute for Economics found that it takes the US on average more than 3.5 years from beginning trade talks with a country to implementing the agreement.[32]
  • Big countries with large markets have the whip-hand in negotiations. For example, the Switzerland-China trade deal signed in 2013 gives China immediate access to Swiss markets but Switzerland has to wait 15 years for access to Chinese markets.[33]
  • In talks with the US, negotiators will demand that the UK lowers its environmental and food standards and accepts products like hormone-treated beef, GM crops and chlorinated chicken.
  • US Commerce Secretary Wilbur Ross said in London last year that any deal with Brussels to maintain European standards and regulations might “hinder development of a closer post-Brexit US-UK relationship”.[34]
  • US healthcare companies will again lobby for the right to bid for NHS contracts.[35]
  • During the TTIP negotiations, legal advice showed the NHS was not protected, and the Prime Minister has declined to rule out putting it on the table.[36]


Existing trade deals with third countries

  • The Government has failed to explain how the UK will replicate trade agreements the EU has with more than 65 countries around the world by March 2019.
  • Rolling over these FTAs will need to be done by March 2019 because their application to the UK lapses as the UK leaves the EU. But no country has agreed to simply roll over these deals, and some have requested changes to the terms.
  • Renegotiation will be complicated because of Rules of Origin, clauses tied to services sectors and investment flows, and because of issues to do with mutual recognition and tariff-rate quotas.
  • For more information about this see this paper from the UK Trade Policy Observatory.[37]

Quotes

Below are some useful quotes from the Prime Minister and senior government ministers:

The importance of the Customs Union


"My preference would be that we should remain within the Customs Union of the EU. The advantage would be that our manufacturers would not face complex and punitive “rules of origin” tariffs if parts of their products were made in, say, China. That would also be the arrangement that would allow true free trade in both directions across the Channel, so Continental manufacturers would benefit and therefore prefer it."[38]

David Davis, Speech in 2012 

 

“Leaving the EU, on the other hand, might make it considerably harder. First, we would have to replace 36 existing trade agreements we have with non-EU countries that cover 53 markets.  The EU trade deals Britain has been driving – with the US, worth £10 billion per year to the UK, with Japan, worth £5 billion a year to the UK, with Canada, worth £1.3 billion a year to the UK – would be in danger of collapse.”

Theresa May, Speech, 25 April 2016

 

The likely benefits of new free trade deals

"We export more to Ireland than we do to China, almost twice as much to Belgium as we do to India, and nearly three times as much to Sweden as we do to Brazil. It is not realistic to think we could just replace European trade with these new markets."[39]

Theresa May, Speech, 25 April 2016

 

“I would expect the negotiation phase of most of them to be concluded within between 12 and 24 months. So, within two years, before the negotiation with the EU is likely to be complete, and therefore before anything material has changed, we can negotiate a free trade area massively larger than the EU.”[40]

David Davis, Conservative Home, 14 July 2017

 

"Liam's going round the world. He's going to be making trade deals - huge trade deals, all over the place... And we'll get a very, very, very large trade area, much bigger than the European Union - probably ten times the size... Well, I'm not going to set Liam targets, but a multiple of the size of the European Union. And the moment we leave, they'll all come in. Now that's actually an enormous upside to this thing."

David Davis, Sky News Murnaghan, 17 July 2016

 

"I hear people saying 'oh we won't have any [free trade agreements] before we leave'. Well believe me we'll have up to 40 ready for one second after midnight in March 2019."[41]

Liam Fox, Conservative party conference, 2 October 2017

 

Avoiding a hard border in Ireland


“If we are out of the European Union with tariffs on exporting goods into the EU, there’d have to be something to recognise that, between Northern Ireland and the Republic of Ireland. And if you pulled out of the EU and came out of free movement, then how could you have a situation where there was an open border with a country that was in the EU and has access to free movement.”[42]

Theresa May, BBC, 21 June 2016

 

[1] https://www.telegraph.co.uk/politics/2018/04/19/exclusive-eu-rejects-theresa-mays-brexit-irish-border-solution/

[2] https://www.oxera.com/Latest-Thinking/Publications/Reports/2017/Brexit-ports.aspx#_ftn1

[3] https://www.theguardian.com/politics/2016/oct/11/government-adviser-leaving-eu-customs-union-uk-25bn

[4] http://www.independent.co.uk/news/business/news/brexit-latest-cost-uk-leaving-eu-without-trade-deal-exports-negotiations-david-davis-a7325326.html

[5] https://www.thetimes.co.uk/edition/business/brexit-customs-checks-could-land-uk-with-24-price-rise-q7d8sslnl

[6] https://www.smmt.co.uk/wp-content/uploads/sites/2/1207-SMMT-position-on-UK-Brexit-negotiations.pdf

[7] https://www.theguardian.com/politics/2017/nov/14/honda-uk-warns-mps-of-consequences-of-leaving-eu-customs-union

[8] http://uk.businessinsider.com/hard-brexit-nfu-national-farmers-union-disastrous-agriculture-minette-batters-2017-1

[9] https://www.theguardian.com/business/2017/mar/29/brexit-fruit-vegetable-prices-uk-eu

[10] http://www.abpi.org.uk/our-work/library/industry/Documents/UK-EU-Steering-Group-Report.pdf

[11] https://www.cia.org.uk/news/details/Government-making-transition-too-complicated-says-top-manufacturing-exporter

[12] https://www.theguardian.com/politics/2017/apr/12/catastrophe-looms-at-ports-after-brexit-shipping-industry-warns

[13] https://publications.parliament.uk/pa/ld201617/ldselect/ldeucom/129/129.pdf

[14] https://www.nao.org.uk/wp-content/uploads/2017/07/The-Customs-Declaration-Service-Summary.pdf

[15] https://www.nao.org.uk/wp-content/uploads/2017/07/The-Customs-Declaration-Service-Summary.pdf   

[16] https://publications.parliament.uk/pa/cm201719/cmselect/cmhaff/540/540.pdf

[17] https://www.theguardian.com/uk-news/2017/feb/20/post-brexit-customs-gridlock-could-choke-uk-trade-experts-warn

[18] https://publications.parliament.uk/pa/cm201719/cmselect/cmhaff/540/540.pdf

[19] https://www.ft.com/content/7ff7c97c-b33c-11e7-a398-73d59db9e399

[20] https://publications.parliament.uk/pa/cm201719/cmselect/cmhaff/540/540.pdf

[21] http://www.bbc.co.uk/news/uk-northern-ireland-42015406

[22] http://www.bbc.co.uk/news/uk-northern-ireland-41990220

[23] http://bruegel.org/2017/06/brexit-and-the-future-of-the-irish-border/

[24] https://news.sky.com/story/brexit-fuels-smuggling-fears-on-the-irish-border-11041595

[25] https://www.telegraph.co.uk/politics/2018/04/19/exclusive-eu-rejects-theresa-mays-brexit-irish-border-solution/

[26] https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/timeseries/l7d7

[27] https://www.parliament.uk/documents/commons-committees/Exiting-the-European-Union/17-19/Cross-Whitehall-briefing/EU-Exit-Analysis-Cross-Whitehall-Briefing.pdf, p 14.

[28] https://www.niesr.ac.uk/blog/will-new-trade-deals-soften-blow-hard-brexit

[29] Ibid, p 74

[30] Ibid p 74

[31] https://www.theguardian.com/politics/2018/feb/27/uk-economy-at-risk-outside-single-market-warns-former-trade-chief

[32] https://www.weforum.org/agenda/2016/07/how-long-do-trade-deals-take-after-brexit/

[33] http://www.cbi.org.uk/business-issues/brexit-and-eu-negotiations/eu-business-facts/10-facts-about-eu-trade-deals-pdf/

[34] https://www.theguardian.com/business/2017/nov/06/trump-ross-says-uk-us-trade-deal-eu-brexit-chlorinated-chicken

[35] http://www.independent.co.uk/news/uk/politics/liam-fox-food-chicken-challenge-video-chlorine-washed-food-standards-brexit-us-trade-deal-a7858206.html

[36] http://www.independent.co.uk/voices/chlorine-washed-chicken-liam-fox-trade-deal-us-ttip-deregulation-a7860706.html

[37] Ibid.

[38] http://www.daviddavismp.com/david-davis-mp-delivers-speech-on-the-opportunities-for-a-referendum-on-europe/

[39] https://www.conservativehome.com/parliament/2016/04/theresa-mays-speech-on-brexit-full-text.html

[40] https://www.conservativehome.com/platform/2016/07/david-davis-trade-deals-tax-cuts-and-taking-time-before-triggering-article-50-a-brexit-economic-strategy-for-britain.html

[41] http://uk.businessinsider.com/liam-fox-promises-to-sign-40-free-trade-deals-the-second-after-brexit-2017-10

[42] https://www.independent.co.uk/news/uk/politics/brexit-latest-theresa-may-northern-ireland-customs-union-a8234766.html