6 November 2018

Why remaining in an EU customs union would be a serious mistake

Originally published by Conservative Home.

It’s been suspected since the very beginning of the Brexit negotiations that the EU would be most satisfied with a Brexit deal which binds the UK as closely as possible to its current arrangements, but without the UK having a seat at the table after next March, and for the UK to pay as much as possible for this diminished arrangement.

A key part of this goal has been for the UK to be bound into a customs union. Note that this is beyond what even Norway or Switzerland have, which are both outside of the EU Customs Union. As I have written before on this site, the only significant country which is outside of the EU, but in a customs union with the EU, is Turkey. Turkey ended up in this very unsatisfactory state because it thought at the time (the mid-1990s), it was on its way into the EU. We, on the other hand, have voted to leave.

Despite a proposed customs union being defeated in the Commons in July, the issue has never entirely gone away. Some argue that a Customs Union can solve some difficult issues: there would be almost no need for an Irish backstop, and it would bring lasting satisfaction to those in the car industry understandably vexed by the prospect of supply chains being disrupted.

It also might appeal to those who urge compromise. The British love a good compromise. And many would note that few of the 17.4 million who voted to Leave would have said their reason was that the UK should have its own customs arrangements. I voted to remain in 2016, but often Leave has been abbreviated to control over “laws, money and migration” (but not “customs” or “tariffs”).

Hence the potential attraction – being in a customs union with the EU wouldn’t seem to be against the verdict of the Referendum. But for an economy the size of the United Kingdom, it would be a serious error, and one of the worst policy choices we could make. It would be a serious surrender of sovereignty over huge parts of our economy. Here are five good reasons why:

Being in a customs union, even if only on a temporary or renewable basis would greatly disincentivise the EU to ever allow us to break free and have a fully independent trade policy, making trade agreements with friends or rivals around the world. The EU would control our trade policy broadly, and our tariff and quota policy in particular. Being in a customs union would more or less prevents us from negotiating free trade agreements elsewhere.

Indeed, the situation would be worse than that: the example of Turkey shows a frightening asymmetry. When the EU implements a trade agreement, Turkey must open up its markets to the third-party exporter (as it is part of the EU’s Customs Union), but better access for Turkish exporter to the third country doesn’t happen (as Turkey is not a party to the agreement, as it is not in the EU), unless Turkey separately negotiates it.

The EU would also most likely run our trade defences. MPs representing constituencies of steel or ceramics producers, to name just two, for whom trade defences are incredibly important, would wonder why we had not only surrendered control over these, but without even getting a seat at the table. It would even be possible for Brussels to make a decision which was actually harmful for the UK, particularly if that product was only made in the UK (and so might find no defender) or wasn’t made in the UK (and might get a heavy tariff, thereby harming the users of the product for no UK gain for any producers).

The EU would also determine our trade preferences for the developing world. At the moment, Least Developed Countries (LDCs) enjoy full access to EU markets for “everything but arms”. That is good, and the UK was big part of this. But many very important countries are Middle Income Countries, and are part of other EU schemes like GSP and GSP+. Pakistan and Sri Lanka, for example, are in GSP+, and Bangladesh may join them. Here, the decision to grant preferential treatment is more subjective, and is decided by the European Commission, with input from the European Parliament and member states.

From March, we will be represented in neither institution. The EU has often threatened to revoke or diminish the access of Pakistan or Sri Lanka. Sometimes this is done in the name of human rights, but it can also be done to protect things like the garment industry in Mediterranean Europe. Most importantly, the UK would have no say in whether or not to grant such trade preferences: that would be entirely a matter for Brussels, with no seat at the table for the UK. I cannot imagine this being tenable in constituencies with big Pakistani, Sri Lankan or Bangladeshi diasporas (of which there are many), who would be appalled that their UK MPs and Government have no say over this at all.

The EU would also run our trade policy at the World Trade Organisation (WTO). This is, of course, the situation today, but we have a seat at the table when the EU decides policy (it was me in the seat until June!). After March, this will be gone. Yet the WTO determines, for example, quotas for American beef, Thai rice, South African citrus fruits and much more. It is very likely that our interests would not be the same as the EU in these areas.

Readers might be thinking that these do not sound like big problems, or that they might sound collectively smaller than the problems which would be faced by, say, the car industry, in the absence of a significant customs agreement. But the five issues above are only some of the difficulties. And all have a common feature: a complete loss of UK sovereignty in very important parts of our economic and international economic policy. And at a time when international trade policy is growing in importance. Some will ask “Trump versus China: where does the UK as the world’s 5th largest economy stand?” and the answer will be “Ask Brussels, as the UK isn’t allowed to have a trade policy of its own”.

This might work for a small economy. But not even Norway or Switzerland want to be in an EU customs union. And most small countries can rest somewhat assured by being a small economy, where it would be unlikely that Brussels would have a direct interest in wanting them to falter. I couldn’t say this with the same confidence in relation to the United Kingdom, with big producer and consumer interests in trade, some of which would inevitably conflict with the EU-27.

The loss of sovereignty over our economic policy might be acceptable for a short period, in return for a larger gain. But I believe that it would be politically and economically unsustainable for any period beyond some months, and certainly for any period longer than the already agreed implementation period, set to end in December 2020.

I bow to nobody in my desire for good relations with our neighbours. But we mustn’t forget that we are both friends and competitors when it comes to our economies. And we mustn’t forget that no economy the size of UK’s has ever ceded decision-making of its economic policy to its competitors, without even a seat at the table.

Greg Hands

Greg Hands is MP for Chelsea and Fulham, and a former Minister of State at the Department of International Trade