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 also 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 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 failed to occur, 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 routine 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 risk to 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. To achieve that, the 28 national customs administrations of the EU 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 measures.
Today, in an era where terrorism and other serious crimes operate on a cross-border and trans-national basis, customs authorities are increasingly called upon to carry out non-fiscal tasks aimed at improving internal EU security. The customs are thus facing new challenges: they must ensure the smooth flow of trade while applying necessary controls on the one hand, and also guarantee the protection of the safety and security of the Community’s citizens on the other hand.”
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 any duty which is due on them has been paid, they can then circulate freely inside the customs union. And goods which are produced 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 identical external tariffs. 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. For instance, 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 some 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 any benefits to producer interests from this tariff wall go solely to 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. To be specific, 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 States 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 agreements.
A further consequence of operating a customs union under the EU system is the 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 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 which contain 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 larger states is the free trade area.
The basics part 2 – free trade areas
Although 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. Similar to a customs union, a free trade area also achieves reduced or zero tariffs on trade in goods between its members. However, 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 required in order 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. Switzerland 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 countries.
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 were to remain in a customs union with the EU, 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 where the 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 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 undergarments which, by reason of their objective characteristics, are intended to be worn exclusively or essentially in bed.”
This somewhat comic example illustrates how detailed needs to be the system of interpretation of the common rules of the EU’s customs union.
Being a member of the EU customs union outside the EU
The only major state which is not an EU member but in customs union with the EU is Turkey. (There are also 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 agricultural goods.
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 extremely one-sided, as can be seen from its final Article on interpretation:
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.”
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 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.”
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 Union.”
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 the negotiations.
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 dependent (under 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 have led to a World Bank Report. Its recommendations have not been implemented.
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