In her wide-ranging speech on Brexit on Tuesday, Theresa May tackled one of the long-running question marks over her approach to leaving the EU.
As she became prime minister in August, May created a new department for international trade, and made Liam Fox its secretary of state. The department exists to negotiate trade deals and promote trade across the world – but while the UK remains part of the EU customs union, it is banned from doing so.
May refused to be drawn on whether or not she intended to leave the union – until today. Here’s what’s happened, and what might happen next.
What exactly is the EU customs union?
An EU briefing note describes the customs union as “the skin of the body”: It serves as the trade border of its members, controlling and monitoring what comes into EU countries from outside the EU.
The crucial part is once goods have passed this border in any one of the 28 EU nations, they may then be freely traded and sold anywhere in any of the nations without further checks.
This takes more than just standardising how border checks work: It also requires all of the countries to share an identical system of tariffs (taxes levied on goods which are imported) – known as the “common external tariff”.
It also involves agreeing in common a large set of other safety standards and regulation, which stand throughout all participating countries. This means the EU has standardised regulators in areas such as medicine and product safety, which the UK would need to re-establish were the UK to leave the customs union.
Finally, because the countries agree tariffs and free trade, any country in the customs union is barred from conducting its own free trade agreements (as part of the “common commercial policy”). This is because a country might set lower tariffs or safety requirements in trade with another country, then use this to then trade or re-sell the product elsewhere in the open customs area – risking undermining the common standards.
So what has Theresa May said about the customs union?
In her address, May for the first time acknowledged that her plan for the UK to negotiate its own trade deals is not compatible with being a “full” member of the customs union, saying this would have to be replaced – but was unspecific about what else she might do.
This is what she said:
I know my emphasis on striking trade agreements with countries outside Europe has led to questions about whether Britain seeks to remain a member of the EU’s customs union. And it is true that full customs union membership prevents us from negotiating our own comprehensive trade deals.
Now, I want Britain to be able to negotiate its own trade agreements. But I also want tariff-free trade with Europe and cross-border trade there to be as frictionless as possible.
That means I do not want Britain to be part of the common commercial policy and I do not want us to be bound by the common external tariff. These are the elements of the customs union that prevent us from striking our own comprehensive trade agreements with other countries. But I do want us to have a customs agreement with the EU.
Whether that means we must reach a completely new customs agreement, become an associate member of the customs union in some way, or remain a signatory to some elements of it, I hold no preconceived position. I have an open mind on how we do it. It is not the means that matter, but the ends.
Is there such a thing as an “associate member” of the EU customs union?
The nearest thing to this is the deal the EU has with Turkey, which is quite narrowly limited to cover just industrial products and processed agricultural products.
A deal like Turkey’s wouldn’t cover many of the UK’s key exports (which are largely services), but more significantly comes with a lot of catches which would likely be unpopular (if not unacceptable) to the UK.
Most significantly, Turkey is forced to accept any free trade arrangements the EU signs, while taking no benefit from them. In other words, if the EU signs a free trade agreement with, say, Canada then Canada gets the right to sell its goods in Turkey – but Turkey doesn’t get the right to sell its goods in Canada.
Turkey is also forced to accept – without any say in agreeing them – a large volume of the EU’s trading rules.
Such an option is almost certainly not what the UK would seek (it hardly matches the mantra of “take back control”), but does indicate what sort of associate membership the EU has been willing to offer up until now.
What about if the UK just leaves the customs union and negotiates a new deal?
Some new deal which fell short of a customs union but involved the trade of goods and services might therefore seem more likely – though free trade agreements can take years or decades to negotiate.
This option would require the UK to set up new versions of multiple regulatory bodies currently operated by the EU, and would also run the risk of shutting some UK industries out of EU markets for months or years until deals and joint standards were agreed. However, this option would give the UK much more autonomy over what it did or did not sign up to – essentially one of the hardest Brexit options.
The EU does have some customs cooperation deals short of a customs union with a range of states, including Canada, China, Hong Kong, India, Japan, South Korea and the United States.
These, the EU says “simplify and harmonise customs procedures, which in turn reduces the administrative burden and costs for European companies”.
This is promising for the UK as it suggests some form of deal on customs as well as free trade is possible, but on the flipside also means the UK would upon leaving the EU lose the benefit of those existing agreements, which it would have to renegotiate.
What’s the worst case scenario?
The genuine answer is that no-one is really sure, but the scenario most commonly suggested as the “hardest” of Brexits, or the no-deal exit is that the UK would fall back onto the most basic global trading terms which have been agreed by all nations, known as World Trade Organisation (WTO) terms.
At present, the UK’s membership of the WTO is held through the EU. Pro-Brexit voices have suggested the UK could simply transfer its existing terms and baseline tariffs into a new WTO membership in its own right as a routine matter.
This would not mean everything was smooth sailing: The UK would face higher tariffs on its exports than it does at present, would be subject to more customs checks, and would not automatically be able to trade in, for example, financial services – one of our main exports.
However, there is also no guarantee the UK could quite so simply transfer its current WTO terms, as an Institute for Government briefing warned, as negotiating WTO membership requires consent from all other members.
“The quickest option for the UK would be to mirror its existing commitments. However, other countries could object to this approach,” the blog states. “For example, agricultural exporters such as Brazil and Argentina want better access to the UK market, and might see Brexit as an opportunity to push for it.
“Some elements of the EU’s membership of the WTO, such as the quota for importing New Zealand sheep meat, would also be affected by the UK leaving the customs union. So even a simple mirroring of existing commitments could involve complicated negotiations between the EU, the UK and other countries.”