Open Europe: A plan for UK-EU trade outside the Customs Union

27 March 2017

In a new report, Open Europe concludes that leaving the EU’s Customs Union is the only logical step for the UK to pursue an independent trade policy and achieve a truly ‘Global Britain’ outside the EU.

A dozen key points on customs

1. The UK should leave the EU’s Customs Union (EUCU). The UK Government has stated its intention to leave key parts of EUCU (the Common External Tariff and the Common Commercial Policy). Open Europe’s assessment is that leaving these and EUCU overall is correct. Brexit means the UK must be able to shape its own trade policy. It can only do so outside of EUCU.

2. The UK should not seek a ‘half-in, half-out’ arrangement, which would be the worst of all worlds. The UK should leave EUCU entirely to maximise opportunities. Prime Minister Theresa May has suggested that she is open to being an “associate member” of EUCU or remaining a signatory to elements of it. Open Europe believes that, while it is sensible to keep an open mind, no ‘half-in’ option is better than being fully out. Nonetheless, the UK should consider retaining membership of some relevant conventions.

3. It is in both the UK’s and EU’s interest quickly to secure full cooperation on the practicalities and administration of customs as part of a comprehensive Free Trade Agreement (FTA). Such an agreement could be a chapter in a UK-EU FTA or an accompanying, discrete customs facilitation agreement. The EU already has agreements on customs facilitation with non-members, including Switzerland and Canada. A comprehensive UK-EU FTA will ensure the continuation of tariff-free UK-EU trade and minimise customs delays.

4. There will inevitably be a degree of cost to the UK economy associated with leaving EUCU. Some costs will be one-off adaptation costs (e.g. technology investment which may have benefited the UK anyway); other costs will be on-going frictional costs to UK-EU trade. These costs can be minimised and may be offset by trade liberalisation with non-EU partners.

5. The UK must take action now to minimise costs and seize new opportunities. Some steps are unilateral, domestic reforms; others are bilateral with specific EU members (above all Ireland); other negotiations need to happen at EU level, or indeed more broadly.

6. There will also be costs to the EU economy and these costs will be much greater if full customs cooperation with the UK is not secured. The costs to the EU economy will be greatest in those countries and industries which export the most to the UK. If comprehensive customs cooperation and an FTA are secured, these costs will be minimised.

7. There are challenges and opportunities from leaving EUCU but these vary from sector to sector, and even between companies in the same industry. Individual companies will need to look carefully at their supply chains and consider making adjustments where appropriate.

8. Free trade does not require a customs union and over half of UK trade happens without it. Most UK trade (51.5% in 2015) is not with the EU. Non-EU trade takes place without a customs union and is growing faster than trade with the EU. In 2015, the US was the largest recipient of UK goods exports (16.6%). There is no EU-US FTA, let alone a customs union.

9. Companies with complex supply chains can trade without a customs union. For example, automotive supply chains cross the US-Canada border. Both countries are North American Free Trade Agreement (NAFTA) members, but are not in a customs union. Nonetheless, leaving EUCU will challenge companies with complex supply chains. To address challenges, the UK and EU need an FTA to eliminate tariffs, to agree liberal cumulation so more products transformed in either the UK or EU can be considered as originating anywhere else in the UK or EU, and to cooperate and use technology to minimise bureaucratic delays and costs.

10. The UK should ‘grandfather’ – i.e. replicate – the FTAs that the EU has concluded with third countries. The UK, as an EU member, is currently party to over 30 FTAs with over 60 non-EU countries. The Canada-EU FTA, CETA, is one example. Discussions on how to ‘grandfather’ these agreements should be underway bilaterally between the UK and third countries but also need to engage the EU. Protecting these agreements will secure the freest possible trade, safeguarding existing global supply chains, and supporting growth in global trade.

11. There is an extremely strong economic case for full UK-EU customs cooperation; the question of whether it is achieved or not is primarily political as much as practical. Reaching a comprehensive UK-EU customs agreement will be technically easier than other trade agreements. As an EU member, the UK’s customs systems are already fully recognised by EU members and the UK already applies EU product standards. Businesses across the EU are used to tariff-free trade – so there will be less pressure to defend specific industries.

12. The UK and EU should consider a transition period to extend the UK’s EUCU membership for one or even two years. Theresa May has suggested “phased implementation” for new arrangements on customs systems. The two-year Article 50 timetable is a challenging limit for negotiations. A transitional period would increase chances of a favourable deal for both sides, and minimise potential disruption to UK and EU business. It would also give governments and business time to adapt, including by upgrading customs procedures and IT. Agreement on a transition period is most useful early in the Brexit negotiations to reduce the risk of companies making rushed decisions on changes.

Full UK-EU customs cooperation is preferable to being ‘half-in, half-out’ of EUCU

• None of the alternatives to the status quo guarantee frictionless UK-EU movement of goods. There are various options available for UK-EU customs cooperation. The core trade-off is integration versus control. The more integrated the UK remains with the EU, the less control it will have over its trade policy. The best solution is for the UK to leave EUCU and conclude a comprehensive UK-EU FTA with full customs cooperation. This is in line with the direction of global trade negotiations, which now focus largely on Non-Tariff Barriers – including customs.

• The UK should reject the ‘Turkish model’ or a ‘sectoral’ customs union. One ‘half-in, half-out’ model is Turkey, which itself has a customs union with the EU. This agreement covers industrial but not agricultural goods. The ‘Turkish model’ suited a country on a path to EU membership; the UK is heading the other way. Another option is a bespoke ‘sectoral’ customs union, whereby only industries with integrated EU supply chains (e.g. automotive, aerospace, chemicals) would be in a customs union. This would be complex, legally difficult, and probably unnegotiable. These options would minimise UK-EU trade disruption at the expense of obstructing non-EU trade.

• A ‘parallel tariffs’ model is too clever by half. A suggestion circulating in Whitehall is that the UK leaves EUCU but levies ‘parallel tariffs’ identical to EUCU’s Common External Tariff. By agreement, goods imported by the UK but destined for the EU would be considered customs pre-cleared by the EU – with the probable proviso that duties collected by the UK would be largely sent to Brussels. UK companies could reclaim duties for goods for UK use if they were imported from countries with which the UK had signed FTAs. Such a system will be hard to negotiate, overly bureaucratic for both business and government, and politically very difficult.

• The most radical option sees the UK leave EUCU without any successor deal. The so-called ‘WTO option’ would grant the UK maximum freedom for trade policy but with maximum UK-EU trade disruption. Open Europe will consider the ‘no deal’ option in a forthcoming paper.

What would intensive UK-EU customs cooperation look like?

• Various issues could arise from the UK leaving EUCU and will need to be addressed when negotiating UK-EU trading and customs arrangements. These issues will depend on whether an FTA is concluded or not. If there is no FTA, customs duties will need to be applied according to WTO commitments. If there is an FTA, compliance with Rules of Origin (RoO) is key.

• A priority for UK-EU agreement should be minimising compliance burdens for Rules of Origin. If the burden of compliance is too high, business may choose not to use the lower tariffs available under an FTA, preferring to avoid paperwork by simply paying WTO tariffs. Minimising Rules of Origin burdens will save business money and time, particularly for those companies with complex supply chains which could need proof of origin for numerous components. The Canada-EU FTA, CETA, provides a framework but the UK and EU can go further.

• The UK and EU could agree to scrap all Rules of Origin requirements for certain low tariff goods. Various goods are subject to low WTO tariffs. These goods may have lower, or zero, tariffs under a UK-EU FTA, but the compliance burden for business may put them off using the FTA even if it is available. The UK and EU could agree to waive origin requirements on all products below a threshold determined by the cost of transporting goods between them.

• The UK and EU should conclude a Mutual Recognition Agreement (MRA) on product standards and conformity assessments. The EU has sectoral MRAs with the US, Canada, Switzerland and Japan. These countries do not apply EU law but – for particular sectors – their standards are considered sufficient by the EU. The UK may diverge with EU standards over time and the question of standards harmonisation will be considered by Open Europe in a forthcoming paper.

• The UK should consider retaining membership of a number of EU conventions to facilitate further the movement of goods. The Convention on a Common Transit Procedure ensures non-EU goods are exempt from duty payments and multiple customs checks. The Community Road Haulage Licences means UK hauliers only need one permit to move goods within the EU. As part of UK-EU customs cooperation, the UK could also maintain access to the EU’s Customs Information System (CIS) to allow the exchange of data in customs investigations.

• Delays at customs borders are a major political and economic risk, and avoiding these must be a priority for the UK and EU. Business relies on the certainty that their goods will not be arbitrarily or unexpectedly delayed at borders. Delays at border points (e.g. lorries queuing in Kent to access Dover) could not only be politically difficult for the UK Government, but could also disrupt EU companies exporting to the UK. Cutting the volume of information needed at entry/exit points will be crucial in avoiding longer waiting times at the border.

• Technology can help minimise friction at the customs border. Physical inspections of non-EU shipments are currently extremely rare. Almost all customs declarations are received electronically and can be lodged before goods arrive in the UK. The same approach should be extended to shipments from the EU. This would help reduce the potential for delays.

• The UK already runs one of the world’s most efficient customs systems. Last year, the World Bank ranked the UK fifth in the world on customs performance. But there is room for improvement and there are measures the UK can adopt unilaterally to become top of the class.

• Intensive bilateral cooperation will be required with key EU trading partners. In 2015, France and Spain were the second- and eighth-largest trade routes for major UK ports. However, they ranked 17th and 24th respectively on customs performance according to the World Bank. The UK should work intensively to support key trading partners to upgrade their customs systems.

• The UK needs to accelerate upgrading its computer systems for electronic customs declarations. The timetable for computer upgrades should be accelerated, with close ministerial scrutiny, to allow for proper testing before Brexit. The UK should largely replicate the Union Customs Code (UCC) in domestic legislation after Brexit, to facilitate UK-EU computer system interoperability and streamline customs clearance. The UK should also unilaterally implement a ‘Single Window’ system – a one-stop shop where traders can lodge all customs documentation – to replace the separate platforms for customs, excise, and VAT.

• The UK and the EU should enable self-assessment for Authorised Economic Operator (AEO) traders. Government and business groups need to encourage more UK importers and exporters to obtain AEO status. AEO traders are pre-approved by relevant authorities as trusted operators. Already 60% of UK imports and 74% of UK exports are by UK companies with AEO status. Encouraging AEO status should be a priority for Government which should also consider specific support for smaller businesses. Self-assessment could allow trusted importers to pay customs duties in arrears, rather than shipment-by-shipment. Payment of VAT, which brings in significantly greater revenue, already works on this basis for EU imports.

• Businesses in the UK and EU will need to prepare for the transition. Businesses may need to make sure employees are appropriately trained to deal, among other things, with the new IT systems. The UK government should prioritise providing information and assistance to SMEs.

The UK-Irish border is the UK’s only land border

• The UK-Irish border is particularly sensitive, but there is strong political will to find a solution. A customs border will be required but the border can be almost invisible. A number of measures can be adopted to reduce its visibility – notably drawing on the experience of EUCU border between Sweden and Norway.

• The free movement of people – rather than goods – need not be affected by a customs border. Movement of people between Ireland, Northern Ireland and Great Britain is provided for by the Common Travel Area which pre-dates the EU. This should be maintained.

• The UK and Ireland should use technology to pre-clear almost all goods so trucks can cross without needing to stop. Inspections – when exceptionally required – should take place at dedicated zones away from the border, with UK checks recognised by Ireland and vice versa. This would remove the need for checkpoints or the presence of customs officials at the border.

• We do not support creating a customs border around the whole of the British Isles, or around the external border of the island of Ireland. Both such options would entail significant political (and other) complications and would almost certainly be unnegotiable.

• Management of the UK-Irish border will require long term political cooperation and investment. A specific UK-Ireland Border Working Group should be established – alongside existing high-level cooperation – as a forum to plan, supervise and evaluate progress. This should bring together the UK and Irish governments and the Northern Irish executive. Mindful of the political sensitivities and significance surrounding the UK-Irish border, the EU should be especially flexible regarding allowing closer UK-Irish bilateral customs cooperation.

Full report

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