Trade, Development, and Immigration

We can disagree on the merits of the Single Market – but there’s no case for staying in the Customs Union


News over the weekend that Theresa May might be considering a customs union with the EU post-Brexit was baffling to life-long Eurosceptics.

For years before the referendum, would-be Brexiteers painted two economic pictures of life outside the EU.

The first was a Thatcherite Britain – one seeking to reverse swathes of EU regulation and immigration law, cut tariffs, and pursue global free trade.

The second was merely “political independence”, leaving the EU’s governance structures, but remaining within the Single Market.

Yes, these two visions contradicted each other sharply, but neither considered it desirable to remain within a formal customs union.

The costs in terms of lost control were too high. Customs union membership prevents not just independent free trade agreements, but other commercial partnerships, independent tariff setting, and regaining our WTO seat, which is why there was such outrage at the prospect that such a model might still be up for consideration.

Since the latest rumours surfaced, Number 10 has come out and reiterated its commitment to leaving the customs union. But the question remains: why is this issue even being debated?

For all the hand-waving by vested interests, it’s certainly not for economic reasons. Look at Switzerland, a country outside the customs union that manages to trade with relatively little friction with the EU.

It complies with almost the entire EU regulatory framework for goods, and Swiss experts estimate that the border friction cost is approximately 0.1 per cent of the value of goods traded.

Applied to British goods traded with the EU – worth 12 per cent of UK GDP – this implies total frictional border costs amounting to 0.01 per cent of GDP.

As the economist George Yarrow mused on Twitter, “Compare the Sweden-Finland or Sweden-Denmark border with the Sweden-Norway border. Sure there are some extra barriers at the latter, but the question is: how significant are they?”

The Swiss evidence tells us “not very”. Remaining locked in an institutional arrangement where Britain cannot sign independent free trade agreements as global trade gravity shifts eastwards is certainly not a price worth paying.

No, the customs union has become a political, rather than economic, fault line – and one skilfully exploited by the EU and unreconciled Remainers.

Desperate for talks to move beyond transition and towards a trade deal, the UK government tried to fudge the question of the Irish border. To prevent a physical border, it agreed that, in the absence of other solutions, the backstop would be for the UK to remain, in essence, within a customs union.

It didn’t take Nostradamus to predict that, although Britain saw this as a last resort, the EU would reject Britain’s proposals and insist the backstop was honoured. This was, after all, Brussels’ desired outcome.

For the Remainers, too, insistence that we remain in the customs union is a first step in their strategy to later say: “Brexit is not worth it – even the purported benefits of new free trade deals cannot be realised”.

As if to almost admit this self-reinforcing partnership, an EU source told a British newspaper this weekend: “We won’t move forward with the negotiations until we have a clear idea as to whether there is British parliamentary support for leaving the customs union. We don’t think there is – that sentiment is changing.”

The Prime Minister must be aware that the public can see through this. This may be the reason for her emphatic denials on Sunday – she knows giving way on this would result in her own political defenestration and a pro-Brexit revolt within her party.

This is a totemic issue – Brexiteers cannot accept chopping away such an important repatriated freedom. Many would prefer no deal in the short term to this, and would vote accordingly.

With the Article 50 clock ticking, now is not the time to be playing with customs union fire.

 

This article was first published by City AM.

Ryan Bourne occupies the R. Evan Scharf Chair for the Public Understanding of Economics at Cato. He has written on a number of economic issues, including: fiscal policy, inequality, minimum wages and rent control. Before joining Cato, Bourne was Head of Public Policy at the Institute of Economic Affairs and Head of Economic Research at the Centre for Policy Studies (both in the UK).


5 thoughts on “We can disagree on the merits of the Single Market – but there’s no case for staying in the Customs Union”

  1. Posted 24/04/2018 at 12:38 | Permalink

    The UK Government’s contradictory red lines of leaving the customs union but insisting there will be no hard border in Ireland cannot be realised – believing harder in Brexit doesn’t magic away this impossibility. Combine that with the fact that no amount of free trade agreements outside of the EU would make up for the loss of frictionless trade within the EU, it makes complete and utter sense to remain in the customs union. Does this version of a soft Brexit mean Brexit is not worth it at all? Yes. Brexit was always a bad idea, now the difficult practicalities are finally emerging, perhaps common sense will prevail. No doubt the Brexiters will have a hissy fit if the UK votes to stay in the customs union. Let them revolt, it won’t change the Commons arithmetic, ‘No deal’ is one of the least likely outcomes.

  2. Posted 24/04/2018 at 14:17 | Permalink

    Disingenuous as Switzerland accepts freedom of movement within Schengen, ECJ jurisdiction and pays into EU budgets. Customs Union and/or Swiss option isn’t Customs Union or not.

  3. Posted 26/04/2018 at 08:35 | Permalink

    Leuvenrich: ‘the fact that no amount of free trade agreements outside of the EU would make up for the loss of frictionless trade within the EU…’
    This isn’t a fact and therefore your argument is nullified.

  4. Posted 26/04/2018 at 11:17 | Permalink

    @Leuvenrich: “…the fact that no amount of free trade agreements outside of the EU would make up for the loss of frictionless trade within the EU”

    You miss the point. Leaving the Customs Union will allow the UK to import many goods quota and tariff-free, which it cannot do within the EU Customs Union. This will lower prices and costs to industry and is the principal advantage of leaving the EU Customs Union. It does not require any free trade agreement.

  5. Posted 26/04/2018 at 17:41 | Permalink

    I need an explanation of what the border checks on the Nor-Swe border are actually for. It seems to me that they are to check if tariffs are being paid or avoided. It can’t be to stop illegal goods crossing as there are surely illegal goods crossing the invisible border in Ireland and the smugglers can be dealt with at other locations.
    So the solution for the NI-RoI border is for the UK to declare no tariffs or quotas for anyone. Problem solved from the UK’s point of view. The EU has an easily avoidable* problem whether they want to erect a border on their side, a decision over which the RoI would have less influence than say Greece due to Greece’s larger voting rights in the bloc.
    *The EU could also declare unilateral free trade.
    There must be a fault to this logic, as none of those superior people we elect are saying it.

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