28 Feb 2018

Trading places? Both major political parties are suffering contortions over the Customs Union

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The EU Customs Union has been the flavour of the week in the latest stage of the Brexit saga. On Monday, Jeremy Corbyn delivered a speech in Coventry on the matter which, he insisted, was not a repositioning on the issue but simply a ‘firming up’ of existing party policy. Precisely how one can ‘firm up’ what is essentially a blancmange is a matter to be explored later. It means, nonetheless, that the Leader of the Opposition and the CBI are located in the same place but which of these is the more embarrassed by this is debatable.

In response, yesterday, Liam Fox, Secretary of State for International Trade, denounced any attempt to keep the UK in the Customs Union, by whatever device, as a “sell out” of the national interest and the decision to quit the EU, although whether this oratorical broadside was aimed exclusively at the Labour leader or also at certain of his Cabinet colleagues (not least the Chancellor and the Business Secretary) is a matter of speculation.

The Customs Union is also expected to figure large in the speech that Theresa May is scheduled to offer on Friday, which is scheduled to be the most detailed yet on what the Government’s preferred ‘end state’ for the UK’s post-transition relationship with the rest of the European Union might be.

So, the Customs Union is the centre of attention. Labour is now basically for it (with exceptions) and the Conservative Party is basically against it (with exceptions). The wider British public, needless to say, has virtually no idea what this argument is about and why it matters. What is really going on?

The Customs Union: A Guide

The Customs Union is the spine or core of the European Union. At heart, it comes down to three firm principles. First, that no duties will be levied upon goods travelling within in. This explains why BVCA Insight readers of a certain age will remember that when the UK signed up to the then EEC in 1973 it was popularly referred to as the ‘Common Market’. Second, there is a shared external tariff on all goods which enter the Customs Union. Finally, as part of the package individual member states can no longer negotiate outside trade deals on their own but delegate this to the European Commission.

This ‘Holy Trinity’ is the absolute mission of the EEC/EC/EU over the years. It dates from 1958. In that sense, it is much more the oxygen of the ‘European project’ than the single market which did not come into existence until some 35 years later and remains incomplete in a number of respects. On that logic, asserting that a nation is determined on leaving the EU but insists upon staying in the Customs Union is akin to contending that an individual is dedicated to ending a marriage but wants to carry on with the sleeping together aspect. It is hard to see the logic in the suggested strategy.

That observed, there are some anomalies in the current Customs Union worthy of mention. It is, for example, possible not to be a member of the European Union and yet be inside the Customs Union. Monaco is a full-blown Customs Union member despite not being in the EU (indeed, courtesy of its 1963 Treaty with France it is a de facto element of the Schengen Agreement and deploys the Euro). The British dependencies of Guernsey, Jersey and the Isle of Man are all in the Customs Union but not in the EU, as are our military bases at Akrotiri and Dhekelia in Cyprus. Andorra and San Marino have, in effect, subordinated themselves in trade terms to the EU as has, since 1995, Turkey, but its arrangement is partial, has a number of significant exceptions to it, and generally thought imperfect.

It is also, to add to the fun, feasible to be inside the EU but not in the Customs Union. It is very much a minority sport, however. Those in this camp include Gibraltar, the two Spanish territories which are in Morocco (Ceuta and Melilla) and then the real pub quiz material, Busingen am Hochrheim, a German exclave surrounded entirely by Switzerland (an EFTA country outside the Customs Union), Campione d’Italia (a small Italian town which is also completely within Switzerland), Livigno (which is in Italy but for much of the year can only be reached via Switzerland) and my favourite, Heligoland, which is a small set of very isolated German-owned islands stuck in the North Sea.

So what is Labour’s position now then?

According to Mr Corbyn, Labour believes that the UK should stay in the Customs Union for the time that we are in the transition period, and then when that is over we should cease to be in ‘the’ Customs Union (as that would make a nonsense of departing from the EU) but move into being in ‘a’ Customs Union ‘with’ rather than ‘within’ the European Union. Whether the UK would be able to organise its own trade treaties with, for instance, the United States as part of this bargain is not clear, although in fairness to Mr Corbyn, the notion that reaching such a settlement with Donald Trump would be a real priority compared with, to cite something, the nationalisation of air, is of itself somewhat surreal.

This policy shift does, though, have some advantages for the Labour leader even if it is something of a struggle to work out what on Earth it could involve or what model might be identified for it (Andorra? Turkey? A vast version of Akrotiri and Dhekelia?). First, in terms of the House of Commons it provides the possibility of a coalition between Labour, the Lib Dems, SNP and anti-Brexit Conservative rebels on the question (I would not hold your breath on that one working). Second, it appeases various factions in his own party (young Corbynites, Blairities and sections of the trade unions) who want a ‘softer Brexit’ stance. Third, it has enabled him to harden his opposition to remaining in the single market (where the EU’s State Aid rules would impede renationalisation). This is, to put it mildly, a somewhat contorted policy to advocate, but such is political life today.

So what is Labour’s position now then?

Although there have been hints of interest in the concept of ‘a’ Customs Union on the Conservative side as well, that notion has been snuffed out. The Remain faction at the Cabinet level accept that it would be hard to reconcile with the referendum result, that the only faintly plausible model out there, Turkey, is not seductive and would rather fight over the matter of maximum single market access instead. To that degree, Dr Fox said nothing that strayed beyond official orthodoxy. The UK will leave the Customs Union but seek to hammer out the equivalent of a ‘non-aggression pact’ with it as part of the deep and comprehensive free trade agreement that will be its end state with the EU.

Which is at least intellectually credible. The policy challenge for the Conservatives is that it is hard (but not quite impossible) to reconcile this position with their pledge not to allow the recreation of a physical trading border between the Republic of Ireland and Northern Ireland. On any conventional reckoning, in the absence of the Customs Union, there would have to be some form of checks on certain sorts of products as material moves within the island of Ireland. They might not have to occur at the border point but they would have to happen somewhere.

It is difficult to imagine that they could be really frictionless, yet this is precisely what ministers have committed themselves to achieving by some means or another as part of the deal reached on the exit provisions in December, an accord which is now being translated in to legally bulletproof wording before it is presented as a central element of the overall exit package that will be submitted to the UK and EU Parliaments to be agreed in advance of an orderly UK departure from the EU on 29 March 2019.

In truth, if there is sufficient goodwill on all sides, a form of fudge could occur on the Irish border dilemma in which all sides pretend that there is a technological solution out there that is more theoretical than actual. Absent such an informal agreement, the Customs Union is a real headache for the UK Government.

Tim Hames
Director General, BVCA


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