Brexit choices: the EU Customs Union and the Single Market?
by Martin Howe QC, 25th July 2017
Brexit is happening, but the big question now is: “What kind of
we seek to stay in the EU’s Customs Union and/or its Single Market, as
the LibDems, some Labour MPs and Scottish and Welsh Nationalists
propose, or instead seek a wide and deep Free
Trade Agreement as the Government and the Labour front bench propose?
There are clear and very important differences between these kinds of
arrangements, which profoundly affect the future of the country.
But these differences are not well understood by the public, by parts
of the media -- and indeed, we suspect, by a number of politicians who
are expressing views on the subject. So we hope that this guide will
help public understanding of the pros and cons of the different
arrangements and allow voters to make an informed choice.
The EU Customs Union -staying in after exit
The effective choice is between seeking to stay in the
EU Customs Union or, on the other hand, seeking a Free Trade Agreement
with the EU. (Nobody is proposing as an alternative not seeking either
of these arrangements and just trading with the EU under "Most Favoured
Nation" WTO rules with tariffs, although this is the fallback if it
does not prove possible to reach an agreement with the EU).
Either Customs Union or FTA alternative would result in there being
no tariffs levied on goods exported from the UK into the EU or on EU
goods exported to the UK. So, understandably, many people are not
able to say what the difference is between these alternatives and
therefore what the pros and cons of these alternatives are.
In fact, although both solutions lead to the end result of zero tariffs
on trade between the UK and EU, they achieve this by different
mechanisms. The Customs Union approach dispenses with customs controls
at the internal borders within the customs union, but can only achieve
this by requiring every member of the customs union rigidly to apply
the identical tariffs and the identical non-tariff customs controls on
imports from outside the customs union. This means that the UK would
not be free to set its own tariffs at levels which suit our own economy
and trading interests, but would have to implement across the board a
tariff schedule set for the benefit of EU industries: for example, we
would be required to impose a 16% tariff on oranges in order to protect
the interests of Spanish orange growers. Further and even more
importantly, continued membership of the EU customs union would prevent
the UK from entering into its own trade agreements after Brexit,
because we would be prohibited from offering the tariff reductions or
zero tariffs which are an essential part of any trade deal.
On the other hand, a Free Trade Agreement operates by granting zero
tariffs to goods which originate within the parties to the FTA.
But to do so it is necessary to operate customs controls at the
internal borders between the members of the FTA in order to check that
the goods do originate within the FTA member and so are entitled to the
zero-tariff concession. Otherwise an importer could channel goods from
the rest of the world via the FTA member with the lowest external
tariffs and then circulate them across internal borders within the FTA.
It can be seen that customs controls at the internal borders of an FTA
are a necessary consequence of the freedom which an FTA gives to its
members to operate independent trade policies with regard to external
So the basic choice offered is between customs union membership, which
prevents trade agreements with outside states and would require the UK
to follow and apply EU tariffs upon which it would have no vote and
which would not be set in the UK’s interests, and a Free Trade
Agreement which would involve some form of customs controls between the
UK and the EU. However, customs controls do not necessarily require
old-fashioned physical customs posts staffed by customs officers in
peaked caps rummaging through consignments of imported goods. There are
a number of ideas for “frictionless” and “virtual” borders involving
electronic clearance of goods which have been developed for example at
the Sweden-Norway and USA-Canada land borders - both instances where
the parties are in an FTA but not in a customs union. These ideas are
particularly relevant to the strong desire on all sides to avoid
physical customs controls on the Northern Ireland-Irish Republic land
Quite apart from economic questions, continued membership of the EU
Customs Union would impose serious
legal and constitutional
restrictions on the UK as compared with an FTA. These are:
1. As a member of the EU Customs Union, 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 all
future changes made to the Common Tariff, while not having a vote on
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 impossible to conclude meaningful trade agreements.
The UK would also be effectively 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. Trading with the EU after exit under a Free Trade Agreement
(FTA) would not entail tariffs but would entail customs controls
between the UK and EU in order to check that goods originate within the
parties to the FTA and so are entitled to the zero tariff concession.
This would entail administrative costs but these could be mitigated by
modern customs procedures such as electronic pre-clearance and
“virtual” border arrangements.
7. 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. Staying inside the EU Customs
Union after ceasing to be an EU Member State would necessarily entail a
severe and continuing curtailment of the UK’s powers to govern itself
as an independent state.
Membership of the EU Single Market
Apart from customs union membership, the next big question on which
there are differing opinions is whether the UK should seek to
belong to the so-called Single Market. As with the Customs Union, the
alternative to Single
Market membership being pursued by the Government is that of
seeking “a deep and special partnership including a comprehensive free
trade and customs agreement.” In fact, the Labour manifesto was not
totally clear on this point, since
it said that Labour would replace the government's policy "with
fresh negotiating priorities that have
a strong emphasis on retaining the benefits of the Single Market".
However, both the Leader and Labour's Shadow International Trade
Secretary Barry Gardiner MP have clarified that this would not involve
the UK remaining a member of the single market, but rather the UK
seeking to maintain maximum access to the market without actually being
Here again, and quite understandably, many people - public, media and
politicians - are not fully aware of what the differences would
actually be between single market membership, and a free trade and
customs agreement giving preferential access to the Single Market. Most people are aware that continued
membership of the Single Market would require the UK to continue to
follow the EU rules on free movement of persons. This is correct, but
it is far from being the most important consequence if the UK were to
remain a member of the Single Market after EU exit, and is also far
from being the most damaging of those consequences.
The EU Single Market includes three non-EU Member States who are
outside the customs union, namely Norway, Iceland and
Liechtenstein. These are joined to the EU by the European
Economic Area Agreement of 1992. Switzerland is not in the EEA and has
its own separate bilateral free trade agreements with the EU.
The nature of the Single (Internal) Market
Most people do not understand that the EU Single Market operates in a
fundamentally different way from a Free Trade Agreement. The
Single Market’s correct name under the EU Treaties is in fact the
“internal market”. “Internal market” is an accurate description of what
the Single Market rules set out to create: a market in which rules and
regulations are made the same across all the countries in the Single
Market, as if it were a market within one giant country.
By contrast, a Free Trade Agreement is concerned with regulating trade
in goods and services passing between the parties to the FTA, but it
does not dictate the rules and regulations which apply across the whole
of the internal markets of the parties. An FTA typically will allow
the parties to change the rules and regulations which apply in their
respective internal markets, although typically it will require them
not to discriminate - so a change in regulations must be applied
equally to imported and domestic goods and services. Typically,
an FTA will facilitate market access by a system of mutual recognition
of the parties’ standards relating to goods and services.
The consequence of trading under an FTA is that exporters of goods and
services need to comply with the standards agreed or recognised under
the FTA, or failing that, with the standards in the country of
destination. But those rules do not directly apply to every business in
the internal market of the parties, or to businesses exporting to third
countries. By contrast, belonging to the EU’s internal market means
that not only goods and services exported to the EU, but the
whole of the domestic economy, including also many goods and services
exported to third countries, must be subject to the rules and
regulations of the internal market.
Much of the public discussion about the Single Market is based on a
failure to understand this simple and fundamental point. This
fundamental difference has the following inevitable consequences if we
stay in the EU Single Market after we exit from EU membership:-
1. Keeping three-quarters of
EU laws: We would not be allowed to change our laws after exit on
any of the
huge range of matters covered by Single Market rules, however desirable
that change might be and however much our electors were to vote for it.
interpretation and supervision: Those rules would be subject to
rigidly harmonised interpretation
and supranational enforcement by the EFTA Surveillance Authority and
the EFTA Court. While we would escape the direct control of the EU
Commission and the ECJ, the corresponding EFTA bodies effectively
mirror their actions and decisions and would produce the same end
result in terms of compulsion.
3. Obligation to follow
future new EU laws and amendments: We would have to make future
changes to our law to mirror any
changes made by the EU to any Single Market related legislation. The
difference is that we would no longer have the right to vote on those
laws, giving us the worst of all worlds. This would be particularly
catastrophic for the City and financial services, where we would have
no control at all over the imposition of legislation damaging to the
4. Continued free
movement of persons: The rules on free movement persons are part
and parcel of the set of
rules which govern the internal market under the EU Treaties and the
EEA Agreement. We would be required to maintain free movement for the
5. Interference with trade and
trade agreements with non-EU countries: The rules of the Single
Market would interfere with trade between
the UK and third countries. Single Market membership would not be a
complete show stopper like membership of the EU Customs Union, but it
would severely interfere with the UK’s trade agreements with third
countries by preventing us from agreeing to mutual recognition of goods
and services from other countries which departed from the relevant
Single Market rules.
6. No right to stay in
the EEA unilaterally: Contrary to ill-founded suggestions which
have been made by some
commentators, the UK has no right to stay automatically in the EEA
after exit from the EU. Continued EEA membership could be secured only
by agreement of the EU itself, and of each EU member state and each EEA
member state with ratification according to its own constitutional
requirements. This rules out using EEA membership as a temporary refuge
from exit from the EU, and would make it effectively impossible to
negotiate and get ratified EEA membership on modified terms which would
remove from it elements such as free movement of persons which are
regarded as an important and integral part of single market membership
in many member states.
“No Deal” with the EU
There are differences of view on whether, if
necessary, to countenance “no deal” with the EU if the EU does not offer
acceptable terms. Labour's manifesto went so far as to say that it is “the worst
possible deal for Britain” and that “We will reject ‘no deal’ as a
viable option”. This raises the serious question of how a Labour
government would respond to, for example, EU demands for ongoing
payments of huge sums into the EU budget after exit and long term
hegemony of the ECJ over the rights of millions of EU citizens resident
in this country (and their descendants). Having publicly signalled
deal’ is not a viable option”, it seems that a Labour government would
put the country in the catastrophic position of having to accept
terms are offered by the EU, however bad they are.
The Manifesto positions adopted by the Liberal Democrats and the Green Party
were, if it were possible, even worse, since they proposed holding a
referendum in which the people would be offered the choice between
accepting the deal offered by the EU and returning to EU membership.
This would positively encourage the EU to offer the worst possible
terms in order to induce the UK to return to membership: under
conditions of supplication in which the UK could be stripped of its
hard-won budget rebate and its existing opt-outs.
Martin Howe QC is Chairman of Lawyers for Britain.