A potential new Labour government has indicated that it wishes to improve the trading and political relationship with the European Union. Yet Keir Starmer suggests Labour would not adopt a policy to take the UK back into the EU customs union or single market. So what are the options?
There is the customs union and the internal market, but a rethink might come up with a slightly different opportunity combining these options. I’ll explain that here, and the differences between a customs union and the internal market.
A customs union means tariff-free trade
A customs union is defined as a free-trade area where two or more countries agree to abolish restrictions on trade, and set up a common system of tariffs and import quotas that apply to non-members, (a ‘common external tariff’, or CET). There are different customs unions in the world but the most important is the EU one – the most comprehensive in the world. According to Article 28 of the Treaty on the Functioning of the European Union (TFEU) the EU customs union “shall cover all trade in goods, and … involve the prohibition between Member States of customs duties on imports and exports and of charges”.
There are three criteria of the EU customs union:
- EU member states are automatically members.
- Trade in goods between member states is tariff-free.
- All member states treat imports from third countries in the same way by applying the CET.
The EU internal market includes free movement
A customs union does not, however, on its own, create ‘frictionless’ trade in goods. To achieve that the UK would need to conclude a comprehensive new agreement with the EU to rejoin significant parts of the internal market. The EU internal market is wider in scope than the customs union, and in theory constitutes a single integrated economic space where goods, services, investment, and people move freely across borders (according to Article 26(2) TFEU). The EU has pursued significant efforts to harmonise legislation across the single market, adopting 90% of the legislative acts listed in the 1985 EU White Paper.
New agreement on UK access to internal market and customs union
In order for the UK to gain more comprehensive access to the EU’s internal market, a new agreement would need to include provisions of the internal market, covering the customs union, goods, the right of establishment, services, capital (including key flanking EU policies such as competition policy), state aid, taxation policy, provisions on the common commercial policy, and harmonisation of national laws.
If the UK were to conclude such a comprehensive agreement of deep integration with EU policies, it would probably be characterised as an association agreement, creating privileged links between the EU and a non-EU country including wide-ranging co-operation, reciprocal rights, and obligations between the parties (see Articles 217–218 TFEU).
But the key obstacle with association agreements is that they require the unanimous approval of all EU member states. Also they are generally ‘mixed agreements’ – meaning they must be ratified by the European parliament, European Council, and all 27 member states. (As in the comprehensive EU–Ukraine trade deal, which took six years to negotiate).
So does that mean joining a customs union would be easier?
Thus, the path of least resistance for the UK would be rejoining the EU customs union. This would require payment of a modest financial contribution to the EU budget for specific programmes, and would eliminate customs border checks for products included in the agreement. Rebooting customs cooperation in this way would be an easy win for the new government, reducing the worst friction caused by the current Trade and Co-operation Agreement (TCA), and give the UK access to all the EU’s agreements with 53 other markets around the world (European Union Committee: Brexit: the customs challenge). The impact on GDP would be positive for the UK in comparison with the current TCA arrangement.
How about a comprehensive association agreement?
However, joining the customs union is only one step to resolving the UK’s post-Brexit barriers to trade. The UK’s most logical option – to increase growth, exports, and investment in the economy – is to re-enter the EU internal market either through the European Economic Area (EEA) or a separate agreement with the EU. To ensure more comprehensive access to the internal market, the UK would need to agree a comprehensive association agreement with the EU wherein it accepts EU laws in areas including competition law, social policy, the environment, consumer protection, and other cross-cutting ‘flanking policies’ (Öberg, ch 3; EP, Internal Market). This option brings, however, clearly better economic outcomes for the UK than the current TCA.
But either option would legally entail a fundamental rewriting of the TCA and, in the internal market option, the creation of a completely new association agreement like the EEA agreement. Furthermore, based on recent experiences with the EU negotiating other similar agreements (for example, with Ukraine) we are looking at a time horizon of 5–10 years before such a comprehensive association agreement would be in place.