Customs unions might be described as a form of free trade agreements (FTA) in which parties to such an agreement agree to provide each other with certain trade benefits such as no tariffs on trade in goods within such a union.
Parties to a customs union agree to do two things:
- to allow free trade on products within the customs union.
- to a common external tariff with respect to imports from the rest of the world.
Customs unions remove the need for ‘rules of origin’ for goods imported into the trade area from third countries. These rules of origin are highly complex and are designed to ensure that goods (and sometimes components of goods) attract the tariffs for which they qualify.
Members of the World Trade Organisation (WTO) can set-up a customs union in accordance with Article XXIV of the General Agreement on Tariffs and Trade (GATT).
Under WTO agreements, members cannot normally discriminate between their trading partners. Where a country wishes to give another country preferential treatment (for example by providing it with more favourable customs rates on certain products) it must to do so for all other WTO members. This is referred to as Most-Favoured Nation (MFN) treatment. MFN means treating trade partners equally. Customs unions are a departure from the principle of MFN. However, Article XXIV of the GATT (and Article V of the General Agreement on Trade in Services (GATS)) allow for the creation of FTAs and customs unions subject to certain conditions.
Goods imported into any given member country of a customs union from outside that union are subject to the same import tariffs. The goods can then generally be imported or exported between the members of the customs union without any tariffs.
A customs union is certainly not a panacea and border controls may still be needed for the collection of other taxes, controlling the movement of persons and the enforcement of other legal requirements such as health and safety standards.
In addition to setting the CET and administering the CET, customs unions are focused on goods and they do not generally assist trade in services. Customs unions principally eliminate tariffs and do not facilitate trade in services as services often face “non-tariff barriers”.
A distinction between goods and services brings complications because much trade today consists of good and services bundled together.
A country may prefer to pursue a customs union over a FTA, including to facilitate trade and as a first step towards closer economic cooperation. Customs unions face challenges such as to agree the CET and members of a customs union forfeit their ability to set their own trade policies.
The EU Customs Union and Brexit
The EU’s customs union applies a common tariff to goods entering member states from outside the EU.
Member states cannot negotiate their own free trade deals with non-EU countries. Trade agreements are coordinated through the EU’s Common Commercial Policy (i.e. the EU’s policy for trading with non-member states).
Article 207(1) of the Treaty on the Functioning of the European Union provides that:
"The Common Commercial Policy shall be based on uniform principles, particularly with regard to changes in tariff rates, the conclusion of tariff and trade agreements relating to trade in goods and services, and the commercial aspects of intellectual property, foreign direct investment, the achievement of uniformity in measures of liberalisation, export policy and measures to protect trade such as those to be taken in the event of dumping or subsidies. The common commercial policy shall be conducted in the context of the principles and objectives of the Union's external action."
The EU handles negotiations in the WTO on:
- levels of tariffs on goods being imported to EU member states from non-EU countries;
- concluding trade agreements with non-EU countries
- deciding on how to deal with goods ‘dumped’ on the EU market
The EU customs union has four principles:
- no customs duties at internal borders between the EU member states
- common customs duties on imports from outside the EU
- common rules of origin for products from outside the EU
- a common definition of customs value
These rules were consolidated in the Community Customs Code, adopted in 1992. On 1 May 2016, the Unified Customs Code entered force.
At the heart of the EU's position on Brexit is the preservation of the EU's internal market and the Good Friday Agreement (GFA) in relation to Ireland and Northern Ireland.
The EU’s single market is an extension of its customs union. The single market was first introduced in the Treaty of Rome, which came into force in 1958. The Treaty aimed to create a “common market”, covering the whole territory of the then European Economic Community. The common market required members to commit to the free movement of goods (i.e. a single external customs tariff and the abolition of duties between member states). It also included provisions on the free movement of capital, services and people which goes beyond a typical customs union. This is at the core of the internal market.
The UK wants to be able to sign its own FTAs without being tied to the EU customs union.
The current Brexit negotiations between the EU and the UK are seeking to find a mechanism to address these different requirements in the context of future customs arrangements between a Member State (i.e. Ireland) and a soon-to-be third country (i.e. the UK).