There is, it is said, an intense dispute in the Cabinet about whether Brexit should mean that the UK leaves the EU’s “customs union”.
Turkey, which is the only country outside the EU that has a customs union with it, has been mentioned as possible model for Britain: some think it shows how the UK might remain in the customs union and still be able to strike its own trade deals with countries outside the EU. In fact the Turkish experience is no template for UK trade after Brexit.
First, it’s important to understand the difference between a customs union, which is what the EU is, and a free-trade agreement. A customs union is a trade bloc within which members remove tariff barriers on each other’s goods. They also adopt a common external tariff and trade policy for countries outside the union.
Conversely, within a free-trade agreement, countries remove tariffs on each other’s goods but they do not have a common policy for third countries. So within a free-trade agreement you need customs barriers and “rules of origin” to check whether a product really comes from your preferred trade partner or whether it is from another country, in which case it is not entitled to tariff-free access under the agreement.
The attractiveness of trading within a customs union is that there is less bureaucracy involved for products manufactured and shipped within it as it doesn’t involve stopping to check goods or components at internal borders. Open Europe has put the administrative cost arising from being outside the EU’s customs union at around 1 per cent of UK GDP over the long term. These costs clearly aren’t insurmountable and can be offset by an independent trade policy.
By contrast, Norway and Switzerland are both outside the EU’s customs union but do the vast majority of their trade with it. And the most obvious reason why retaining a customs union with the EU is unsuitable is that it would be incompatible with Theresa May’s desire to ensure Britain is a “fully independent, sovereign country”. Viewed in this context, Turkey’s experience is telling.
Turkey has little or no freedom to develop trade policy with other countries across the world and its relationship with the EU is therefore asymmetric and dependent.
Yes, Turkey has around 20 free-trade agreements, but they are ultimately a one-way street that can put Turkish firms at a competitive disadvantage. Turkey has to open its markets to any country the EU strikes an agreement with. But it doesn’t get any say over how that agreement is formed and doesn’t even get the same immediate duty-free access to that country’s market that EU members do.
In theory, Turkey could conclude its own trade agreements for sectors that are not covered by its customs union with the EU, such as agriculture. But in practice, this is so complicated that Turkey has not reached an agreement of significance with any country outside the EU’s current network of trade deals.
In addition, Turkey has to go along with the EU’s position in the World Trade Organisation, despite the fact that its priorities for global trade may differ substantially. There are growing calls within Turkey to revisit the customs union.
If the UK were to go down this road, it would be deprived of a fully independent voice when dealing with other trade partners and at the WTO, where Britain’s first objective should be to shape the future of global trade policy in favour of freer trade, since this is where the long-term economic opportunities from Brexit lie.
Some have suggested Britain adopts the customs union approach to cover only certain sectors, such as the automotive industry. This might be a temporary, transitional option but risks overcomplicating a simple fact. There were valid arguments for remaining in the EU in order to exert influence over its policies, including on trade. But UK membership of a customs union without political control of the rules or its external trade policy would be the worst of both worlds. The sooner the Government is clear about this the better.
- This article first appears on Open Europe