4.2 Staying in the EU Customs Union after exit

Parties’ attitude to the Customs Union

The 2017 General Election Conservative Manifesto proposed that the UK should seek “a comprehensive free trade and customs agreement”, but should not remain in the EU customs union or single market. UKIP’s Manifesto also rejects staying inside the EU customs union or single market. The DUP Manifesto took a similar line to the Conservative Manifesto, so in theory an absolute majority of the House of Commons, consisting of the Conservatives and the DUP who support the government under a confidence and supply agreement, reject customs union membership after we have left the EU.

By contrast, the Liberal Democrat and Green Parties and the SNP argued, and still argue, for the UK to negotiate to stay inside the European Union’s Customs Union after the UK ceases to be an EU Member State. The Labour Party has gone through a series of evolutions, initially apparently being opposed to customs union membership at the time of the 2017 election, but in a speech by Jeremy Corbyn on 26 March 2018 has apparently switched to backing post-Brexit membership of a customs union with the EU, although on conditions which seem impossible to achieve, notably that it “would need to ensure UK has a say in future [EU] trade deals” and that it “would depend on Britain being able to negotiate agreement of new trade deals in our national interest.”

Both conditions appear impossible to achieve. It is inconceivable that the EU would be prepared to allow the UK as a non-Member State to have a legal right to direct or control its own external trade policy and the best that could be obtained is some form of vague right to be consulted. And for the UK to have the right to negotiate new trade deals in its own national interest is quite impossible from within a customs union, for reasons explained in detail in What is the EU Customs Union?

In truth it would appear that Labour leadership’s posture on this issue is one of cynical ambiguity designed both to paper over internal divisions within the Labour Party and also to allow Labour to vote tactically against the government on the issue with the aim of gathering support from Conservative rebel backbenchers, a number of whom have expressed support for the idea of staying permanently in a customs union with the EU.

Those who argue for such an arrangement all seem to imply that doing so would be good for the UK economy and/or jobs. However, none explain why staying in the EU Customs Union would be economically superior to the alternative of a free trade agreement, which would also achieve zero tariffs on trade between the UK and the EU. Nor do they confront the issue of the increased costs for UK consumers if we were to stay inside the Customs Union as a result of being required to continue to levy high tariffs on many kinds of goods which are available more cheaply on world markets, particularly the kinds of goods where there is no significant domestic UK industry to protect and instead any producer benefit of the artificially high tariffs goes entirely to producers in other parts of the EU.

The economic arguments against staying in the EU Customs Union are important and compelling, but the political and constitutional consequences are even more profound, yet seem to be completely ignored by those who argue for negotiating to stay inside the Customs Union. As explained below, remaining in the EU customs union would have profound implications for the ability of the UK to govern itself as an independent nation, and would deprive it of the ability to decide its own laws over swathes of domestic policy extending far beyond customs controls themselves.

It would also prevent the UK from exercising an independent trade policy or concluding its own trade agreements with states outside the EU, and would inevitably result in the UK being subject to the continuing jurisdiction of the European Court of Justice (ECJ) over the interpretation and application of the common rules which regulate the customs union.

The reasons why these are the inevitable consequences of remaining in the customs union will now be explained.

What about a UK-EU post-exit customs union?

It might be argued that Turkey was in a weak position to negotiate an agreement with the EU and the grotesquely one-sided nature of the agreement, therefore, might be corrected in a UK-EU deal where the UK would have more bargaining power. Leaving aside the political question of whether the UK would actually have greater bargaining power if it were to seek to remain inside the EU customs union after exit, it is worth examining the practical question of whether it would be realistically possible for the EU to agree a less one-sided arrangement and still maintain the integrity of the customs union.

The problem is, that for the reasons already explained in What is the EU Customs Union?, it is not possible to operate a customs union in which the individual members are allowed to diverge in tariffs or in the myriad of other matters subject to customs controls. Such divergence is simply not something which the EU is in a position to negotiate or agree to.

This leads on to two further very serious problems.

One is the issue of future changes to the rules of the common customs union. If in the future the EU modifies or adds to those rules, a mechanism has to exist to maintain the application of harmonised rules at all the frontiers of the customs union. That then entails an explicit one-way obligation to follow the EU rules (like Turkey) or a disguised compulsion to follow (like under the EEA Agreement where EEA members are effectively forced to follow changes made by the EU to internal market rules without being allowed a vote on them).

The second very serious problem is the impact of the customs union on the ability of the non-EU member of the customs union to conclude trade agreements with third countries. It would not be able to agree FTAs involving zero tariffs on goods from a non-Member country because those goods would then enter and circulate around the customs union and avoid the tariffs which would be applicable if they had been sent directly from the third country to an EU state. For this reason,  Turkey has been prevented from entering into any FTAs, other than FTAs which parallel the EU’s FTAs. To add insult to injury,  Turkey is obliged to permit the import of goods from the EU which enter the EU tariff-free under an EU FTA with a third country, even where Turkey is unable to obtain an FTA with that country to permit the tariff-free export of its own goods there.

Since the EU customs union extends beyond tariffs and applies to many other non-tariff rules, the obligation to follow future changes in EU rules applies equally to non-tariff controls. For example, it would not be possible for the non-EU member to enter into an agreement with a third state under which that third state’s technical standards or, for instance, food health controls, would be recognised as compliant for imports to the UK, if those differed in any significant way from the common EU standards and controls.

It is also difficult to see how the UK could then diverge from these standards under its internal law if wished to do so. It is a breach of obligations under WTO rules to require more stringent standards of imported goods than of domestic goods, so any EU-mandated rules applying to imported goods under a customs union agreement would have to be applied to domestic production as well.

Given that in third country trade talks the Department for International Trade would be unable to offer concessions either on tariffs or on a wide range of non-tariff measures embodied in common EU customs rules, it is very difficult to see what it would have to offer our prospective trading partners in return for enhanced access for our goods and services to their market and therefore how any meaningful trade agreements could be concluded.

Harmonisation and sovereignty

The fundamental problem is that a system which requires all countries to closely follow a set of common rules (including future changes to them) and interpret and apply them in a uniform manner, necessarily severely curtails the internal and external sovereignty of customs union members. While we are EU members it can be argued that this is an area where sovereignty has been shared, in that we have a vote on these matters and have representation on the ECJ. This will cease on exit, and the argument that sovereignty had been “shared” will no longer apply.

It seems unlikely that the EU would be willing to agree to anything other than a system under which the EU gives orders and the UK takes them, if the UK wishes to remain inside the customs union.  In theory, there are the following possible mechanisms for maintaining a harmonised approach:

(1)    Explicit subservience, in which the non-Member State explicitly adopts and follows ECJ interpretations of the common rules and probably also administrative decisions and opinions by the Commission;

(2)    Disguised subservience, in which the non-Member State follows rulings of a body which is nominally independent but in practice will follow ECJ rulings. This is the model under the EEA Agreement, where the so-called EFTA Court in practice follows the ECJ. While in theory under the EEA Agreement the EFTA Court is entitled to depart from post Agreement ECJ rulings (although not pre-Agreement rulings which it must follow de jure) in practice it always follows the ECJ even to the extent of reversing its own jurisprudence where it has decided a point in advance of an ECJ decision on it. The further problem with this model is that as a fall back if there is a failure to ensure interpretation consistent with the ECJ, then the EU can declare the Agreement non-applicable to the sector concerned.  In the context of a customs union agreement (which the EEA is not), this would entail the re-introduction of customs controls, including rules of origin or even imposition of tariffs, if the non-Member State were to depart from ECJ rulings.

(3)    Higher neutral court. This model would involve the harmonisation function being performed by a higher level court or body which has the power to rule on both the EU and the non-EU Member States. This model would not provide independence of action but a degree of co-decision comparable to current EU membership. While this might, in theory, mitigate some of the serious imbalance and loss of sovereignty for the non-EU Member State within the customs union, it seems fanciful to suggest that the EU would accept such a solution at a political level, and even in the unlikely scenario that such a scheme was politically agreed, it would be very likely indeed that the ECJ would rule that the resultant agreement was incompatible with EU law and with the exercise of its own powers under the Treaties.

Conclusions

Staying inside the EU Customs Union after ceasing to be a Member State would necessarily entail a severe and continuing curtailment of the UK’s powers to govern itself as an independent state and would subject it to the continuing effective jurisdiction of the ECJ. In particular:

1.    The UK would be obliged to operate a system of external tariffs according to the Common Customs Tariff decided by the EU and would be obliged to follow future changes made to the Common Tariff, while not having a vote on those changes.

2.    The UK would not be allowed to enter in to trade agreements involving reduced or zero tariffs with non-Member countries, making it impossible in practice to conclude meaningful trade agreements. It would in practice be obliged to follow the terms of trade agreements reached by the EU with non-Member countries or blocs, without having a vote on those agreements or on how they are negotiated.  It is hard to see what useful purpose would be served by having a Department of International Trade.

3.    The UK would be obliged, either directly or via an indirect mechanism similar to that of the EFTA Court under the EEA Agreement, to remain bound by past and future decisions of the ECJ on the interpretation of the common rules of the customs union.

4.    If the continuing customs union with the EU extends to non-tariff customs controls (such as certification of compliance with technical or safety standards, health requirements for food, etc) the UK would be obliged to follow the EU’s future rule changes on all these matters as well as interpretations of the rules by the ECJ.

5.    Having to follow the EU’s common rules on such non-tariff customs controls would (1) mean that the UK would be unable to negotiate changes to such controls with non-Member countries in order to facilitate trade with them and (2) make it in practice very difficult indeed for the UK to change its own rules for goods in its domestic market to differ from those applicable to imported goods under the Customs union common rules.

6.    Overall, the UK would be significantly worse off than it is at present as an EU Member because it would be bound by the common rules of the EU customs union over wide areas of policy, be unable to operate an international trade policy independently of the EU, but have no vote on these matters.

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