There is a case for staying in the customs union

ARGUMENTS rage over whether post-Brexit Britain should try to stay in the EU’s single market, perhaps by joining Norway in the European Economic Area (EEA). This week a report for Open Britain, a pro-EU lobby group, by the Centre for Economics and Business Research gave warning of the high costs of leaving the single market. Theresa May is keen not to rule anything out. But the prime minister also knows that EEA members have to accept free movement of people, rulings by the European Court of Justice (ECJ) and payments to the EU budget, all of which are anathema to Brexiteers.

Boris Johnson, the foreign secretary, and Liam Fox, the international-trade secretary, have suggested that Britain must leave the customs union as well as the EEA. Turkey, Andorra, Monaco and San Marino are outside the EEA but in a customs union with the EU. The Turkish model has clear drawbacks. It is meant as a move towards EU membership, not away from it. It covers industrial goods only, not agriculture or, crucially, services, which account for almost 80% of Britain’s GDP. It has its own obstacles, such as testing and certification checks on exports. And, perhaps most upsetting to Brexiteers, it means applying the EU’s common external tariffs without having any say in them, and it precludes free-trade deals with third countries.

Yet there may be political advantages to being in the customs union and not the single market. In particular, it does not require acceptance of free movement of people, budget contributions or being subject to the ECJ (though dispute settlement with Turkey is a controversial issue). It also avoids rules-of-origin checks on exports to ensure that they do not include parts from third countries. These impose heavy costs on Norway and other EEA members, which are not in the customs union. One trade lawyer says rules of origin can be so burdensome that sometimes companies prefer to pay export tariffs.

The customs union offers trade benefits as well. Remaining in it might allow Britain to stay in the EU’s free-trade agreements with 53 third countries, which it will otherwise have to renegotiate. It would avoid the risk of a hard border and customs controls with Ireland, which Mrs May is keen not to impose. Blocking separate free-trade deals would certainly annoy Dr Fox, because it would largely do him out of a job. Yet in today’s political climate, free-trade deals are increasingly hard to strike and even harder to ratify. And Dr Fox is widely seen as the most dispensable of Mrs May’s Brexiteer ministers.

Then there is the Nissan case. The government has given the carmaker unspecified assurances about keeping barrier-free access to the EU market. These may include a promise to stay in the customs union, at least for cars, which would explain why Mrs May said in Parliament recently that the customs union was not a “binary choice”. Yet the idea of sector-by-sector membership is problematic. The EU has made plain its dislike of cherry-picking. And Jim Rollo of the UK Trade Policy Observatory (UKTPO) at Sussex University notes that it may be against the rules of the World Trade Organisation (WTO), which requires free-trade deals or customs unions to cover “substantially all the trade” among contracting parties.

Turkey would welcome Britain as a fellow member of its customs union, because, with its own hopes of joining the EU fast evaporating, it wants to renegotiate terms. The two countries could, for example, demand greater say in future EU trade negotiations that affect their interests. It might even be possible to add services trade in some form.

The customs union may not be a suitable long-term home after Brexit. But it could offer a transitional one that minimises the risk of falling off a cliff into trading on WTO terms alone at the end of the two-year time limit for Brexit set by Article 50 of the EU treaty. The UKTPO reckons it would take at least five years to negotiate and ratify a comprehensive free-trade deal with the EU after Brexit. Staying in the customs union during that time might not be such a bad idea.

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