Results of the European elections held in the UK on 23 May resulted in a significant defeat for the ruling Conservative party and a win for the Brexit Party, a single issue political group seeking for the UK to withdraw from the European Union. Several contenders, including former Foreign Secretary Boris Johnson, are taking a hard-line approach to Brexit and have pledged that under their leadership the UK will leave the EU with or without a deal on Brexit day. Other candidates, such as Environment Secretary Michael Gove and Home Secretary Sajid Javid, promise to unite Brexiteers and Remainers and “deliver Brexit”. Whomever succeeds May will inherit a daunting task. For business, the latest developments mean prolonged uncertainty and an increased fear of an abrupt departure from the EU with trade on World Trade Organization terms.
In an attempt to create a majority in the UK Parliament to ratify the withdrawal agreement she negotiated with the EU, Prime Minister May intended to made certain concessions. Among them was the idea of negotiating a new and separate customs union with the EU that would take effect when the UK is no longer part of the EU internal market. The Brexit Party rejects this proposal and it may not be tenable for the next Conservative Party leader. Nevertheless, pressure to avoid a hemorrhaging hard Brexit, may yet result in further consideration of a separate customs union with the EU. It is useful then to consider what a customs union without single market access and EU membership might look like and how it could affect business.
The main arguments for an EU-UK customs union are that it guarantees reciprocal tariff- and quota-free access for goods, as well as avoids customs and rules of origin checks and costs. This would significantly reduce red tape for companies and helps to keep supply chains intact. Whether this would be possible from a position outside the EU internal market is questionable. The EU would most likely require single market membership to ensure regulatory alignment to rule out border checks between the UK and the EU.
Even if possible to negotiate a separate EU-UK customs union as a third country outside the internal market, there are potential drawbacks. First, an EU-UK post-Brexit customs union is unlikely to be as far-reaching as the internal EU customs union, which covers all goods. The EU-Turkey customs union, for instance, covers trade in industrial goods but not most agricultural products, steel and coal products, public procurement, and services. Thus, depending on the nature of any future EU-UK customs union, some goods might not be covered and would be traded between the EU and the UK on WTO terms, which involve higher tariffs. The EU and UK could negotiate separate bilateral preferential agreements in those areas not covered by a customs union, e.g. services, but this could take several years of negotiation and businesses in the meantime would lack visibility on what might be agreed at the political level. Additionally, a customs union does not guarantee frictionless trade as it is the UK’s current membership of the single market which ensures harmonization of safety and quality standards and avoids delays due to border checks. Businesses should therefore be prepared for some trade disruption even in an EU-UK customs union scenario.
Second, as the UK leaves the EU, it will no longer be able to participate as a Member State in free trade agreements (FTAs) between the EU and third countries. This is significant as the EU has in place, or is negotiating, trade agreements with several global economic heavyweights, including Japan, Canada, Singapore, MERCOSUR, Mexico, and Australia. Benefits granted through EU-third country FTAs, including duty-free access to EU partner markets, will not automatically apply to the UK. The UK would need to negotiate its own trade agreements with third countries to gain preferential access to their respective markets post-Brexit. Depending on the terms of any EU-UK customs union, states may lack incentive to strike wide-ranging individual trade deals with the UK. Businesses may accordingly need to consider disruptions to their market access and supply chains even if a post-Brexit EU-UK customs union is agreed.
Third, under any EU-UK customs union, the UK would be required to apply the bloc’s external tariffs and, so, would not be able to formulate independent trade policy. This is significant because goods from EU trading partners would be able to flow freely into the UK via an EU-UK customs union after entering the EU at reduced or zero tariff rates under EU trade deals. Reciprocal rights would not automatically apply for UK exports to the same countries, however, putting UK businesses at a disadvantage in relation to EU and EU partner country companies. If the UK also has little to offer potential trade partners on the goods side in terms of trade concessions, bilateral UK-third country trade deals may be limited in scope and the UK likely would have reduced bargaining power in negotiations even if it is an attractive market, i.e. with a highly developed and regulated economy. Additionally, an EU-UK customs union for the UK likely would involve significant regulatory alignment with the EU without direct participation in its decision-making mechanisms on trade policy, which again could undermine the UK’s bargaining power in any future trade negotiations. It nevertheless could be argued that the UK remains a prized market and that it has sufficient economic clout to negotiate lucrative trade deals with third countries e.g. on services, regulatory barriers to trade in goods, public procurement, data, and intellectual property.
Should the UK decide that it is in its interest to have a separate custom union with the EU, this would be done as part of future negotiations with the EU. The EU has been crystal clear that the withdrawal agreement already negotiated with May’s Government is not open for re-consideration. Whether or not it wishes to pursue a UK-EU customs union in future, the UK will crash out of the EU on WTO terms on 31 October 2019 unless the UK Parliament ratifies the withdrawal agreement or the EU grants it more time to do so. At this stage, each of these contingencies could not be more uncertain.