15 May 2018

Beware nonsense claims about the customs union and Ireland


If there is one issue that defines the muddle that the UK and its political classes have got into over Brexit, it is the customs union.

An unnecessary saga is ongoing partly because it is misunderstood, often because those seeking economic continuity promote it, but primarily because opponents of separation are manipulating it.

A new customs union will not resolve the Irish border issue, and nominally pragmatic economic arguments to retain a customs union are unavoidably political, as it is a vital plank of European integration. There seems little doubt that many opponents of withdrawal are aware of this and are disingenuously promoting the policy as part of a so-called “soft Brexit” in the hope that it will prevent separation, or perhaps position the UK for eventual re-entry.

The initial completion of the Customs Union in 1968 was a major landmark in Europe’s economic integration and the creation of what became the EU trade bloc. What it means is that EU states jointly agree tariffs to impose on goods entering the Union. With the Common Customs Tariff in place, there are no further tariffs due when goods move across internal EU borders.

The misapprehension bedevilling the debate is that the Customs Union created frictionless trade. As Eurosceptic researcher Richard North has shown, that was not the case.

Tariffs are paid by the importer and, nowadays, electronically, so they do not create a physical trade barrier at the border. The primary reason for border checks was always smuggling and differing national regulations. It was only the development of the Single Market that harmonised rules in areas such as food standards and licenses for truck drivers, and created a system to enforce them, which eventually eliminated customs controls in the 1990s.

This is why the Customs Union, which only deals with tariffs, is not a major factor in the Irish border problem. Instead, the vital element is the Single Market and, specifically, whether there is a need for structures at the frontier — a “hard border” — to check for regulatory compliance. Yet, bafflingly, and tellingly, this realisation hasn’t permeated the UK debate.

Consequently, we have the Labour party and Tory rebels calling for a new customs union, the Confederation of British Industry (CBI) and other business groups lobbying for one, the House of Lords urging the Government to consider such an arrangement, and even Cabinet ministers still arguing for the hybrid “customs partnership”.

Along with the fallacy that the Customs Union creates borderless trade has been a desire for economic continuity in order to mitigate Brexit’s inherent risks. Yet what continuity advocates like the CBI and Greg Clark gloss over are the political ramifications. If invisible trade borders are the objective, then there is also a need for the UK to stay in the Single Market. That means joining Norway and others outside the EU but in the European Economic Area (EEA), which entails accepting the freedom of movement of people.

“The current debate simply paves the way for the Single Market discussion. The customs union issue has been pinpointed as the crux of the debate on how integrated we shall remain with the EU,” said Aarti Shankar, a policy analyst at Open Europe think tank.

While there has been an understandable focus on exaggerated Brexiteer claims regarding the trading prospects for “Global Britain”, this “soft Brexit” positioning ignores the salient point: the Customs Union and the Single Market are two key building blocks of European integration, a process the UK opted out of when it rejected the Euro. Prioritising economic continuity as the UK leaves the EU would involve retaining existing levels of integration, while existing voting rights would be forfeited.

Moreover, an autonomous trade policy would be highly constrained by remaining bound by the Common Customs Tariff. There is little sense in losing influence while staying part of the EU economic and trade unit. If it did become policy, the case for staying in the EU would be boosted, and the Remain clamour would grow ever louder.  “Soft Brexit”, therefore, looks designed to melt into no Brexit.

That elite-engineered reversal of the referendum would further poison British politics and embolden the radical right. So, rather than simply being a reckless “hard Brexit”, as opponents frequently claim, there is clear political logic to the government policy of ending economic integration but establishing a close relationship with the EU, particularly as this gives it more control over immigration from Europe.

Of course, that still leaves the Irish question, which requires close regulatory alignment on agriculture to eliminate the need for EU Approved Border Inspection Posts, a strengthening of the GB-NI border, maximum adherence to the EU Customs Code, and declaration approvals and checks away from the land frontier at bonded warehouses and importers’ premises.

That necessitates concessions from all sides, including by EU governments who have concerns about a soft-touch Irish customs border allowing the skirting of Rules of Origin requirements. They worry it will allow goods with preferential access to the UK to evade the common EU tariffs by posing as British products, which should still have tariff-free EU access post-Brexit. “For a Slovakian factory, the threat of Chinese imports is more imminent than the re-emergence of The Troubles,” a European negotiator bluntly told me.

But while pro-Remain commentators in lockstep with Brussels dismiss the type of technological solutions applied on the Norway-Sweden border, the customs posts there do not check consignments against Rules of Origin declarations. Instead, they mainly guard against contraband, according to the European Free Trade Association (EFTA), which manages the EEA for EFTA nations.

“Legally there is the possibility of checking everything at the border including Rules of Origin, but practically this is done less and less. That is made possible by a combination of risk assessment and electronic declarations,” said a former customs expert at the EFTA secretariat. “ROO checks take place after the goods cross the border at random, or more often after requests by the EU and other preferential trading partners.”

This demonstrates that even without the pressing demand created by Ireland’s political circumstances, a relatively open Norway-Sweden customs border is considered sufficient for tariff-related issues. Therefore, the absence of a customs union is simply not the problem the current debate suggests it is. Of course, intelligence-led anti-fraud operations and intensive market surveillance will be needed to mitigate the risks of a porous Irish border, which means heavy investment and strong commitments from the UK to try and win the trust of EU governments.

So rather than presenting a logical alternative to current policy, the House of Lords’ customs union stance appears little more than an effort to undermine withdrawal, while the incoherence of Labour’s policy also suggests cynical political opportunism. It is revealing that this allegedly “soft Brexit” campaigning has been focused more on the Customs Union than the Single Market, which is a nonsense. Leave campaigners like North, who want a gradual decoupling, argue that staying in the Single Market through the EEA would remove most economic risks and largely resolve the Irish border problem without any need for a customs union.

That, however, is not the position of Brussels. According to the EU’s proposed special arrangements for Northern Ireland, if no other solution is found, a customs union is a necessary part of the backstop. This indicates that the EU is playing hardball and taking advantage of the domestic politicking to try and hug the UK tightly as it leaves.

The negotiating parties are on a collision course over the Irish border issue, given that the Government is highly unlikely to backtrack on ending existing economic integration. As with many Brexit issues, there are no good options, but the least the UK’s opinion-forming elite could do in these volatile times is demonstrate a clear grasp of the customs union issue and then articulate a coherent, and honest, policy.

William Davison is a freelance journalist.