Trade: From European Union to Customs Union

This has been another week where much has happened in the world of Brexit, but little has materially changed. Nonetheless, businesses must continue to keep abreast of the situation to ensure that they are ready to meet whatever challenges and opportunities may arise.

On Friday 5 April, the Prime Minister wrote to the European Council to request a second extension to the Article 50 deadline, this time to 30 June but with the option to shorten the time frame if the Withdrawal Agreement is finally approved by UK MPs. At the time of writing, all eyes are turned to Brussels to see whether, on Wednesday 10 April, the EU27 will agree another deadline and its terms. The Prime Minister will then take the EU27 offer back to the UK, to be voted on in parliament.

In the meantime, cross party talks continue. There is currently much media coverage of a permanent customs union potentially being agreed as the foundation of the future trading relationship between the UK and EU. The EU has indicated that such a move could be welcome as it looks to benefit many EU businesses exporting goods to the UK.

So what would a permanent customs union really mean for business?

At its most basic level, a customs union is simply an agreement between two or more countries to charge a common tariff for all imports coming into the union from outside, and eliminate tariffs on goods movements once inside. There are currently 16 in force worldwide, including between EU-Turkey, EU-San Marino and EU-Andorra. Keeping trade to and from the EU tariff free would be good news for many businesses.

I asked Caroline Barraclough, who leads Deloitte’s Global Trade Advisory team in the UK for three examples of where differences for business could arise in a customs union:

“UK companies would need to comply with new customs formalities after any transition period. If we take Turkey as an example, a customs declaration is still required in addition to a document, called an A.TR, which confirms the origin of the goods. There are issuing and handling fees for each A.TR form downloaded from Chamber International of £53.88 plus VAT. Import/export declarations need to be completed for every consignment and run to 54 data points (as opposed to the dozen or so for the monthly aggregated intrastat returns currently needed). These are usually submitted using a third party customs broker.

“Being in a customs union is not the same as being in a free trade area like the EU Single Market. To avoid the need for goods to be checked at the border, the UK would also need to apply common product standards with the EU. There are advantages and disadvantages to this kind of regulatory alignment. On the one hand, common standards between the UK and the EU would avert stringent checks on, say, food and agricultural products whilst allowing the UK to develop its own agricultural and fisheries policies (a cornerstone of the Referendum campaign). On the other hand, the need for UK companies to follow EU food regulations if they want to sell their products into the EU would create a barrier to the UK setting its own food standards, or agreeing to import food from third countries with different standards.

“A customs union would not apply to trade in services or cross-border procurement, so would only cover a little less than half of the UK’s trade with the EU, but the part of the economy where the UK has a trade surplus – £26 billion in 2017. Financial services, professional services, hospitality and tourism, engineering, research, education would all be excluded. It’s worth noting that the UK is the world’s second largest exporter of services, and as such this would leave a significant number of UK services businesses facing new non-tariff restrictions on their ability to trade into the EU.”

What else is there to bear in mind?

Trade Policy: Entering into a customs union with the EU would not automatically give the UK a formal say in the EU’s future trade agreements. Currently EU members get to influence and determine EU trade policy, but Turkey does not. What might be possible for the EU to agree is an enhanced consultation mechanism, for which there are precedents with the EU’s close neighbours.

Irish border: As the main sticking point of the Withdrawal Agreement, a customs union is unlikely to settle the Northern Irish border entirely, as a customs union does not, in itself, remove the need for all customs formalities or physical checks. The UK and EU could pursue additional ways of cooperating to ensure that physical trade crossing the border remains as frictionless as possible.

Summary

In summary, businesses should assume that if they trade services their landscape will change as the terms of the future trading relationship are agreed. For those trading goods they should be cognisant that if a customs union is agreed, trade process and procedures will change; they will need to identify compliance requirements and adapt their business models accordingly.

For further insight into the latest Brexit trade developments, see our article here: Brexit - UK Trade Policy Technical Update.