Why the UK Could Leave EU Trade Bloc Before Brexit

As the U.K. continues grappling with the terms and procedures for withdrawing from the European Union, its government is at odds over whether to remain part of the EU’s customs union. If the U.K. is headed inexorably to a break from the EU single market, one argument goes, it should leave the trading union now to begin negotiating its own deals. On the other hand, doing so would impose costs on exporters, which could hurt the economy.

1. What’s likely to happen?

Foreign Secretary Boris Johnson said that the U.K. can leave the bloc and still enjoy easy trade, a view rejected as foolhardy by some European officials. The question of remaining in the customs union has divided British Prime Minister Theresa May’s government, with Johnson, Brexit Secretary David Davis and Trade Secretary Liam Fox agitating to leave and Chancellor of the Exchequer Philip Hammond counseling caution.

2. What does the customs union do?

It provides that its members impose no tariffs on goods traded among each other, and sets a common duty on goods of non-members. The customs union has leverage when it negotiates deals because it speaks for a bloc of 500 million people.

3. How is the customs union different from the single market?

The single market is focused on non-tariff barriers and ensuring common standards or regulations. Turkey, for instance, is outside the EU single market but inside the customs union.

4. What would breaking from the customs union entail?

Unless and until the U.K. negotiated a new trade deal with the EU, it would run into the common external tariff, which now averages about 5 percent across all goods, ranging from 10 percent for cars to 29 percent for chocolate. Exporters would also be subject to checks at borders with the EU which they aren’t now. There would be geographic implications as well. The line separating the Republic of Ireland and Northern Ireland, the only hard border between the U.K. and EU, might need to be toughened up. Some worry that could undermine the Irish peace deal.

5. What’s the case for leaving?

So long as the U.K. is a member of the union it cannot sign trade accords with other countries such as China, which may be unwilling even to begin negotiations since the U.K. can’t seal a deal. This leaves International Trade Secretary Liam Fox “unable to do his job,” Andrew Tyrie, a Conservative lawmaker, wrote in a September report. Leaving the customs union and embracing free trade could increase the U.K.’s long-term gross domestic product by 4 percent, Patrick Minford of Cardiff Business School, a former adviser to Prime Minister Margaret Thatcher and one of the few economists to campaign for Brexit, has argued.

6. What’s the case for staying?

The Treasury warned before the June 23 Brexit vote that leaving the customs union would mean the imposition of “significant” administrative costs, such as border checks and certification of where goods come from. Raoul Ruparel, who now advises Davis, estimated in a report for the Open Europe consultancy that quitting the union would lower GDP by 1 percent to 1.2 percent by 2030.

7. What are the chances of a U.K.-EU trade deal?

Canada got a deal with the EU, although it took seven years and, for now, doesn’t fully cover services. While the odds are that the U.K. and EU would eventually find it in their interest to establish a pact, it’s likely to take longer than the two years the British have to negotiate Brexit. That’s prompting suggestions of a transitional deal for certain sectors.

8. Is there another possible outcome?

May has said the issue of the customs union isn’t a “binary” choice between staying in or leaving. The U.K. could try to join Turkey as a non-EU member of the customs union, though that might be at odds with Britons’ new independent streak. Or the U.K. could leave the customs union and then “opt back’’ in for key sectors with supply chains, such as cars. The EU might resist such a gambit, which also could violate World Trade Organization rules.

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