Is a customs union worth it?

With debates about whether the UK should enter into a customs union with the EU resurfacing, Joël Reland explains what a customs union actually is and how one would, or wouldn’t, benefit the UK.

Brexit is back in political fashion. Three times last week the Prime Minister publicly bemoaned the costs of Brexit, after the Chancellor made similar remarks in the run-up to the budget. There are now even murmurs that some in No. 10 would like to pursue a customs union with the EU, to undo more of the economic damage which Brexit has created.

Many might welcome this. But a customs union is far from being a silver bullet for the UK’s economic woes, and it does have some potential downsides. A healthy dose of reflection would be welcome before any talk gathers steam.

A customs union, simply, would mean the UK charging the same tariffs on imports as the EU. If the EU slaps major tariffs on Chinese or American goods, the UK must do likewise. The main benefit is that a common ‘external tariff’ removes the need for goods traded within the customs union to prove where they come from.

This would eliminate a chunk – but by no means all – of the trade bureaucracy which Brexit has created. No longer would UK exporters have to prove that they meet complex ‘rules of origin’ to qualify for tariff-free trade with the EU, reducing administrative costs.

Proving compliance with these rules is estimated to add 2-8% to the cost of exporting goods, and some companies have stopped trading with the EU as a result, while a sizeable minority prefer to pay EU tariffs than absorb the admin costs. The burden is generally higher in heavy industry and lower for agrifoods.

A customs union does not, however, remove the need for border checks and other paperwork which stems from the UK being outside the single market. Rejoining the single market is the single-biggest lever the government could pull to boost economic growth – but a customs union is perhaps more politically viable as it does not (in principle) require accepting freedom of movement.

The precise economic benefits are hard to determine, because the UK would not – contrary to the widely-used phrasing – be rejoining the EU customs union. That club is only open to members of the single market (plus a couple of microstates and territories). The UK would instead have to follow the lead of Turkey, Andorra and San Marino by signing a customs union with the EU from scratch.

There is no off-the-shelf model to go for. Turkey, for instance, has harmonised its tariffs on most, but not all, goods (primary agricultural products, coal and steel are excluded) and aligned much of its technical goods regulation with the EU, removing most additional checks for industrial goods.

The UK would have to consider the scope of its own putative agreement. Does it want to cover all sectors? And should it also commit to regulatory alignment on goods? Which could significantly enhance the economic benefits but means more ‘rule-taking’ from Brussels.

The EU would also likely drive a hard bargain (as recent SAFE negotiations show) and could insist on conditions like budgetary payments or freedom of movement – even though they are not strictly necessary.

The one clear sacrifice is over trade policy. The government would have to review or unwind some – if not all – of the trade deals it has concluded since Brexit; as it could not offer more favourable tariff rates to partners than the EU does.

At the same time, the UK would not benefit from liberalised access to markets with which the EU signs a new trade deal – unless secures its own deal in parallel. The UK’s ability to negotiate new trade deals would largely be limited to mirroring what the EU does.

So, are those losses worth the gains? The widely–cited claim that a customs union would boost UK GDP by 2.2% should be taken with a pinch of salt, as this is in fact based on a scenario where the UK has ‘deep alignment on goods and services’ with the EU – an unrealistic option which is in effect the single market without freedom of movement.

Nevertheless, there would likely be a net economic benefit from a customs union. The new trade deals which the UK has signed since Brexit are estimated to add half a percent per year to UK GDP towards the end of the next decade. Meanwhile, pre-Brexit government analysis found that leaving the customs union would reduce long-run GDP by about 1%. So the (very rough) net customs union benefit might be 0.5% of GDP, or £15bn a year. A deal involving regulatory alignment on goods would provide a bigger boost.

For this Labour government, the key questions are whether those gains justify giving up control of its independent trade policy (of which it appears rather fond), and whether, if it is to take a political risk and breach its red lines, it should go for the relatively modest economic returns of a customs union, or for something more ambitious.

By Joël Reland, Senior Researcher, UK in a Changing Europe.