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EU Customs Union - Next Steps

  • United Kingdom
  • Brexit
  • Competition, EU and Trade

04-05-2018

On 15 August 2017, the Government published its position paper on ‘Future Customs Arrangements’ (Position Paper), setting out two scenarios for the UK’s future customs relationship with the EU to ensure that the UK-EU trade is as ‘frictionless’ as possible. The two options were:

a highly streamlined ‘customs arrangement’ between the UK and the EU, which the Position Paper describes as a continuation of some of the existing arrangements, putting in place new negotiated and potentially unilateral facilitations to reduce and remove barriers to trade, and implementing technology-based solutions to ease compliance with customs procedures; and

a new ‘customs partnership’ with the EU, which focuses on aligning the UK’s approach to customs with the EU’s procedures in a way that removes the need for a UK-EU customs border. The Government’s vision is that, in essence, in relation to goods coming into the UK and destined for the UK, the UK would continue to apply the EU’s Common External Tariff and the EU’s rules of origin. The UK would also afford such goods preferential treatment where they fall within the scope of any free trade agreement that the EU has in place. The UK would, however, be free to impose its own tariffs on goods imported from other countries into the UK as a final destination.

Despite rumours that the Government may be changing its position on the issue, it has recently confirmed that the UK will be leaving the EU Customs Union. Remaining in the Customs Union would certainly help preserve the existing free trade agreements which the UK (through its membership of the EU) has with third countries. However, it would not achieve frictionless trade with the EU in the absence of a comprehensive free trade agreement or membership of the EU Single Market. (NB. In a customs union, although tariff-free, trade in goods usually does not cover all sectors and is subject to compliance with regulatory requirements, while trade is services is no easier than under WTO rules.)

Out of the two proposals set out in the Position Paper (on which we commented in our briefing available here), the ‘customs partnership’ has been severely criticised by Brexiteers, who urged Theresa May to abandon it as, according to a leaked document issued by the European Research Group, it would make meaningful trade deals “impossible” to forge and render the UK’s International Trade Department “obsolete”. The Government has decided to delay for now the decision on the UK’s customs arrangements post-Brexit after failing to reach an agreement on the customs partnership issue this week. Theresa May has asked MPs to draw up ‘revised proposals’ for ministers to reconsider the different options for UK-EU customs relationship.

Even if the ‘customs partnership’ option were to receive more support, it is far from clear how the UK could avoid the imposition of a customs border with the EU post-Brexit without remaining in the Single Market. It seems that the Government’s proposal envisages setting up two separate customs regimes: one for goods destined for the EU and the other for goods imported into the UK as a final destination. This is likely to increase, not decrease, the administrative burden on UK businesses, and it is unclear how this two-tier system would operate in practice. Moreover, in order for the EU to agree to such a proposal, the UK would need to impose a robust enforcement mechanism concerning rules of origin to make certain that the UK is not used as a means to avoid the EU’s tariff levels for any goods on which the UK unilaterally decides to impose a lower tariff (i.e. trade deflection).

Similarly, the UK would need to ensure that the two-tier system was not used to avoid paying tariffs due on imports into the UK of goods destined for domestic consumption, in particular where falsely declaring that goods are intended to be transferred to the EU would enable an importer to take advantage of zero tariffs under a free trade agreement which the EU (but not the UK) has in place with the country of origin. The Position Paper sets out a number of ideas in respect of how this could be done, including a tracking mechanism and a repayment mechanism. However, a good deal more thought would need to be given to the practicalities of the two-tier system and to the prevention of any abuse.

At this stage, it seems that the idea is controversial; leading Brexiteers and the Government may indeed finally be defeated on this issue if a different proposal for moving away from the EU’s international trade policy gains traction. This is certainly something to watch closely in the near future.

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