[Skip to Content]

Register to receive the weekly OMFIF Commentary, on the stories behind global economic and financial news.

* Required Fields

Member Area Login

Forgotten Password?

Forgotten password

Analysis

Folly of leaving EU customs union

Britain’s great trading future is an illusion

by Denis MacShane in London

Fri 14 Jul 2017

Of the many claims about Britain’s exit from the European Union, the most odd is that leaving the EU customs union opens the door to a massive expansion of exports and will allow the UK to create new trading alliances around the globe.

There is nothing to stop Britain trading and exporting worldwide from within the customs union at present. All that is needed are good products, energetic – and multilingual – business leaders and pro-export government policies, notably in terms of export credit guarantees.

Suggestions that leaving the customs union will benefit poorer countries is wrong too. No fewer than 49 of the world’s least economically developed nations already have tariff-free access to the EU.

Being in or out of a customs union does not in itself guarantee enhanced trade. Of EU member states, Britain lies 15th in terms of exports per capita according to latest estimates. The Netherlands, in first place, exports four times more per head than the UK. Slovakia twice as much, putting it ninth. Last year German exports to China were worth $85.4bn while the UK managed $18.4bn.

On leaving the customs union, the UK will have to renegotiate hundreds of trade and regulatory agreements with non-EU countries. This is achievable but will take a long time and require a massive new bureaucracy funded by taxpayers.

The UK has been trying for years to get India to lift its 150% tariff on Scotch whisky. The Indians are willing but in exchange want, among other concessions, the right for Indian students to study in the UK and work there after leaving university. This is unacceptable to the anti-immigrant hardliners in British government circles.

On its website, the UK Foreign Office warns of ‘some challenges’ in doing business in Canada, including ‘difficulties for law firms… due to heavy regulation’. The reality is that many services are not covered by free trade agreements and do not fall under World Trade Organisation rules.

In the EU all public sector contracts above a certain value are open to competition, and any UK firm can participate. By contrast, the Buy America Act in the US is highly protectionist, and President Donald Trump wants to safeguard the Jones Act, which prevents airlines from the UK and other foreign countries competing inside the US. Despite the North American Free Trade Agreement, Mexican lorries should off-load their pallets of Corona beer on to American trucks when they arrive at the US border.

The UK runs a trade surplus with the EU in services, but not in goods. Yet free trade agreements tend not to cover services such as air transport or finance – two areas where the UK profits handsomely from trade with the EU27. If UK firms are willing to set up subsidiaries in another EU nation they will be within the customs union but this is a costly option given that, for now, they can trade unfettered in the EU market.

A poll last month for the Mail on Sunday newspaper, by the market research agency Survation, showed that 69% of Britons questioned were opposed to leaving the customs union. As Article 50 negotiations proceed, Britain should signal acceptance that such a move is not a priority. This would have the advantage of keeping the border between Northern Ireland and Ireland as it is, which is one of the EU’s prime concerns.

There would be some squealing from hardline Brexiteers but business would heave a sigh of relief, and Britain would earn goodwill among the EU27.

Denis MacShane is a former UK Minister for Europe, a Senior Adviser at Avisa Partners, Brussels, and a Member of the OMFIF Advisory Board. His book Brexit No Exit. Why (in the end) Britain Won’t Leave Europe was published on June 30.

 

Tell a friend View this page in PDF format