Staying in the EU Customs Union after exit
When Brexit doesn’t mean Brexit (Part 1)
It is being argued in certain quarters that the UK should remain inside
the European Union’s customs union after the UK exits from the EU. It
appears that this question is viewed by some as primarily an economic
and technical issue.
In fact, it is nothing of the sort. Remaining in the EU customs union
would have profound implications for the ability of the UK to govern
itself as an independent nation and deprive it of the ability to decide
its own laws over very wide fields of domestic policy extending far
beyond customs controls themselves, prevent the UK from exercising an
independent trade policy or concluding its own trade agreements with
states outside the EU, and 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 is the EU customs union?
The EU customs union is a system under which all the Member States
follow a set of common rules in exercising customs controls over goods
entering the EU from the outside. The core of this system of controls
is the levying of tariffs and the imposition of trade quotas under the
EU’s Common Customs Tariff; but the controls exercised by customs
extend far beyond tariffs to a huge range of other matters, such as
checking food for compliance with health standards and checking that
consumer goods comply with safety rules (such as the rules limiting
lead in children’s toys).
The very nature of the EU customs union requires that the common rules
be interpreted and applied in a uniform manner by all Member States. If
this were not done, it would result in goods entering the EU via the
ports of a Member State with laxer controls and then circulating freely
inside the EU into the markets of other Member States. Obviously, this
cannot be tolerated under a system where no systematic customs controls
are exercised on the flow of goods inside the EU between Member States,
especially since importers might be tempted to “game the system” by
diverting their imports into the EU to flow through the ports of a
Member State where they had found a weakness.
If the weakness involves failing to impose tariffs in a uniform manner,
that would have economic and fiscal effects in allowing lower-cost
imported goods into the whole EU market; if the weakness is in safety
or environmental standards the effects on consumers could potentially
be very serious.
The European Commission makes no bones about the nature of the customs
union on its website.
“About the EU Customs Union
The Customs Union is a foundation of the European Union and an
essential element in the functioning of the single market. The single
market can only function properly when there is a common application of
common rules at its external borders. This implies that the 28 Customs
administrations of the EU must act as though they were one.
These common rules go beyond the Customs Union as such - with its
common tariff - and extend to all aspects of trade policy, such as
preferential trade, health and environmental controls, the common
agricultural and fisheries policies, the protection of our economic
interests by non-tariff instruments and external relations policy
Today, customs are facing new challenges: they must ensure the smooth
flow of trade whilst applying necessary controls on the one hand,
whilst guaranteeing protecting the health and safety of the Community's
The basics part 1: features of a customs union
The European Union’s customs union means that goods which come into the
EU from outside are subject to a common external tariff, but once they
have entered through an external port and paid any duty which is due on
them, they can then circulate freely inside the customs union.
And goods which are made inside the customs union can likewise
circulate freely without being subject to tariffs at the internal
borders within the customs union.
The main problem with a customs union is that it requires all its
members to operate external tariffs which are identical. This means
that each country of the EU must implement the common tariff even where
that is contrary to its own economic and national interests. An example
of that is that the UK has to levy high tariffs on many kinds of
foodstuffs which are not grown in the UK, but are grown elsewhere in
the EU mainly in Southern Europe. Even assuming for the sake of
argument that tariff protection can be beneficial (a proposition
strongly disputed by knowledgeable economists) it makes absolutely no
sense to levy high tariffs on goods which you do not make inside your
own country. This just drives prices to consumers up above world
prices, but such benefits to producer interests as this tariff wall
brings go solely to the benefit of producers in other countries
elsewhere in the customs union.
The requirement that each customs union member must have the same
external tariffs causes a further problem. That is that
individual members of a customs union cannot negotiate trade
deals with non-member countries which involve reductions or waiving of
tariffs. The reason is that goods could then flow in from the
non-member state with which the deal had been done without paying the
external tariffs, and then circulate inside the customs union into
countries who are not parties to the trade deal. Therefore only
the customs union as a whole, and not any individual member state, can
enter into any form of trade agreement involving tariff concessions
with non-member countries.
The obligation for member countries not to conclude individual trade
agreements with non-member countries has been embedded in the EU
treaties since the original Treaty of Rome, which conferred “exclusive
competence” on the European Commission to negotiate external trade
A further consequence of operating a customs union under the EU system
is that it leads to collection of the tariff revenue into a common
central pot. This is because when tariffs are collected at a port of
entry, it is unknown where the goods will end up inside the EU and
therefore which consumers in which country will ultimately bear the
tariffs. This system of sharing of tariff revenue is particularly
disadvantageous to the UK because it has the highest percentage of its
trade outside the EU of any Member State. (See the Eurostat trade statistics table in Brexit - doing a deal with the EU).
It should be appreciated that these restrictions on the rights of the
individual members of a customs union are intrinsic in the very nature
of a customs union. They cannot be negotiated away, or it ceases
to be a working customs union.
For these reasons, there are not many customs unions in the world
between substantial countries apart from the EU itself. There are quite
a number of customs unions where very small states or territories form
a customs union with a neighbouring or surrounding big state. But the
more usual form of trading relationship between larges states is the
free trade area.
The basics part 2 - free trade areas
Despite the fact that many people do not understand the difference
between a customs union and a free trade area and tend to lump them
together, they operate differently. A free trade area also
achieves reduced or zero tariffs on trade in goods between its members.
But it operates in a different way, which allows its individual members
to operate their own differing external tariffs on imports from
non-members, or indeed to conclude trade deals with non-members which
provide for zero or reduced tariffs.
Free trade area agreements typically apply zero tariffs to goods which
originate within a member, but not to goods from outside which are
simply imported into and pass through another member of the FTA.
This means that a country’s own tariffs are not subverted by goods from
outside the FTA which pass through the ports of another FTA
member. There is however an administrative cost, in that customs
controls between the FTA members are needed to check whether or not the
goods originate within the other FTA member according to “rules of
origin”, and levy tariffs if they do not originate within the FTA. Such
rules of origin controls are not needed inside a customs union.
The EU is itself a customs union, but it has free trade area relations
with almost all European states outside the EU. The non-EU EEA States,
Norway, Iceland and Liechtenstein, have a free trade area relationship
with the EU, not a customs union. This means that despite being inside
the single market, they do have autonomy on external tariffs and
therefore are able to operate an independent trade policy from that of
the EU. Switzlerland has a separate bilateral FTA agreement with
the EU, and in addition has zero tariff arrangements between itself and
Norway and Iceland via EFTA (which as its name implies is a free trade
area and not a customs union). Most other European territories
(apart from Belarus) also have FTAs with the EU.
So, whether to enter into a customs union or an FTA agreement involves
a trade off between the administrative costs of operating rules of
origin controls within an FTA, and the economic and political
costs of being forced to operate inappropriate tariffs and not being
able to conclude international trade agreements with non-member
In the case of the UK leaving the EU, it is also obvious that the
disadvantages of being in a customs union with the EU increase markedly
once we cease to be an EU member. While we are an EU member, at
least we have a vote in setting the common tariffs and in the EU’s
attempts at negotiating and concluding external trade agreements. Once
we cease to be an EU member, if we remained a customs union member, we
would simply have to take and follow the EU’s policies on tariffs and
external trade without having any effective means of securing that
these would reflect our own interests.
Customs union - the control mechanisms
It is inherent in the nature of a customs union that there must be very
tight harmonisation of the interpretation of the common rules. This is
because a weakness in interpretation of the rules by one customs union
member compared with others may well result in goods of the kind in
question flooding in through the ports of the member which applies the
weaker treatment and then fanning out throughout the customs union
because of the lack of internal controls between customs union members.
This issue applies most obviously to tariffs, where even seemingly
small differences in treatment (e.g. categorising certain goods within
a lower tariff category) can have this kind of effect. If the customs
union also applies to non-tariff customs controls such as technical
standards or e.g. health checks on imported foodstuffs then those
controls will also have to be harmonised in detail.
Within the EU, the harmonisation of the rules and of their
interpretation is carried out at the first level by the European
Commission which operates the common tariff (and special variations to
the tariffs such as anti-dumping duties), and gives legal and
administrative guidance to national customs authorities. At the next
level, the interpretation of the common rules is carried out by the ECJ
on preliminary references from courts and tribunals of Member States.
One example is Case C-338/95 Wiener SI GmbH  ECR I-6495
ECJ was asked by the Bundesfinanzhof (German Federal Tax Court):
“Is the term "nightdresses" within the meaning of tariff heading 60.04
of the 1985 Common Customs Tariff, specifically tariff subheading 60.04
B IV b 2 bb, to be interpreted as covering exclusively "other" under
garments which, in view of their characteristics, are clearly intended
only to be worn as nightwear, or does it also cover products which, on
the basis of their appearance, are intended mainly, but not
exclusively, to be worn in bed?”
Despite a suggestion by the ECJ’s Advocate-General Sir Francis Jacobs
that the Court might decline to rule on this question because it was so
detailed and trivial, the Court did rule, apparently because it was
essential for the ECJ to give this kind of detailed ruling for the
proper functioning of the Common Customs Tariff across all Member
States. In a 23-paragraph judgment, which included reference back to a
previous case in which it had ruled that ‘pyjamas’ covered clothes
mainly worn in bed as well as clothes only worn in bed, the ECJ ruled
that the term ‘nightdresses’ in the Common Customs Tariff “must be
construed as covering under garments which, by reason of their
objective characteristics, are intended to be worn exclusively or
essentially in bed.”
This apparently somewhat comic example illustrates how detailed needs
to be the system of interpretation of the common rules of the EU’s
Being a member of the EU customs union outside the EU
The only major state which is not an EU member but is inside the EU
customs union is Turkey. (There are some micro-States, e.g. the Vatican
and Andorra, in customs union with the EU). In fact, the customs union
with Turkey is not complete since it does not extend to most
The agreement between the EC (as it then was) and Turkey under which
the EU-Turkey customs union operates is set out in a 1995 Decision of
the EC-Turkey Association Council. Its provisions are
one-sided, as can be seen from its final Article on interpretation:
Turkey is required to “align itself with Common Customs Tariff”
(Article 13(1)) and also to “adjust its customs tariff whenever
necessary to take account of changes in the Common Customs Tariff”
(Article 13(2)). Turkey has no right to be involved in the EC’s
decisions on changing its the Tariff, but under Article 14(1) is to be
“informed” of such decisions “in sufficient time for it simultaneously
to align the Turkish customs tariff on the Common Customs Tariff.”
The provisions of this Decision, in so far as they are identical in
substance to the corresponding provisions of the Treaty establishing
the European Community shall be interpreted for the purposes of their
implementation and application to products covered by the Customs
Union, in conformity with the relevant decisions of the Court of
Justice of the European Communities.”
More generally, Article 56(1) says:
“1. Where it adopts legislation in an area of direct relevance to the
functioning of the Customs Union as defined in Article 54 (2), the
Community shall immediately inform Turkey thereof within the Customs
Union Joint Committee to allow Turkey to adopt corresponding
legislation which will ensure the proper functioning of the Customs
Similar provisions require Turkey to adopt EU Regulations and ECJ case law
in the area of competition law (Article 39 (1) (a)).
Turkey of course has no vote on such legislation, merely a right to
have Turkish experts “informally consulted” on occasions when Member
State experts are consulted (Article 55(1)).
Regarding trade with non-Member countries, Turkey is required by
Article 16 to harmonise its commercial policy (i.e. trade deals with
non-EU countries) with that of the EC. Thus Turkey is obliged to grant
tariff free access to goods from a country with which the EU has
negotiated a free trade agreement, without having a vote or a say in
However, this does not mean that Turkey will then necessarily get
tariff-free access for its goods into the market of that non-Member
state. That is dependant (Article 16(1)) on Turkey being able to
negotiate a parallel trade agreement with that non-Member state.
Nor can Turkey negotiate its own free trade agreements with non-Member
states. Doing so would breach the requirement to align its tariffs with the
Common Customs Tariff.
For these reasons, the Turkey/EU customs union agreement has been
compared by critics to the Capitulations of the Ottoman Empire, under
which traders from Western countries entering the Ottoman Empire were
exempted from local prosecution, local taxation, local conscription,
and the searching of their domicile.
The manifest inequalities in the relationship between Turkey and
the EU under the customs union agreement has led to a World Bank
Report. Its recommendations have not been implemented.
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 really have greater bargaining power if it were to
seek to maintain itself 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, 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 the EU in future modifies or adds to those rules, a mechanism
has to exist to maintain the application of harmonised rules at the
frontiers of the customs union. That then entails an explicit one-way
obligation to follow the EU (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 round the customs union and avoid
the tariffs which would be applicable if they had been sent direct from
the third country to an EU state. The sanction for operating such a
non-EU FTA would be the reimposition of rules of origin controls on
goods flowing from the non-EU state into the EU. Turkey has been
deterred by this consideration 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 matters, the need 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 e.g. 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
It is also difficult to see how the UK could then diverge from these
standards in its internal law if were to wish to do so.
Given that in third country trade talks the Department for
International Trade would be unable to offer either concessions on
tariffs or concessions on a wide range on 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 where all countries must
closely follow a set of common rules (including future changes to them)
and must 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 would cease on exit,
and the argument that sovereignty had been “shared” would no longer
It seems unlikely that the EU would be willing to agree anything other
than a system under which the EU gives and the UK takes, 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 also probably administrative decisions and opinions by the
(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 it is entitled to depart from
post Agreement ECJ rulings (although not pre-Agreement rulings which it
must follow de jure) in practice it always follow 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 in the event that 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 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 in
theory this might mitigate some of the serious imbalance and loss of
sovereignty for the non-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
were 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.
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,
which would make it in practice impossible 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 continue to be 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
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.