Customs Union or Trade Agreement – why does it matter?

One strand of the Brexit debate has been whether the UK should seek continued membership of the Customs Union or negotiate a free trade agreement. At a practical level, why does it matter?

 Much of this rests on:

  1. The nature of customs agreement
  2. The range of tariff and non-tariff barriers
  3. Resulting procedures and how they are applied

A customs union allows free trade between members.  It also applies a common tariff to non-members allowing ease of transit between members states.  For those involved, it has the look and feel of a domestic market.

A free trade agreement allows for cooperation between countries, including the reduction in tariff barriers between them.  A good example is the European Free Trade Area (EFTA) where Switzerland, Norway, Iceland and Liechtenstein cooperate with the EU.

The table below presents a high-level summary of procedures used for customs under different scenarios. 

 

Export

Transit

Import

EU

INTRASTAT

-

INTRASTAT

EFTA

Single Administrative Document

Single Administrative Document

Single Administrative Document

Rest of the World

Single Administrative Document

Transport Internationaux Routier or Par Chemin de Fer

variable

Definitions and more detailed description of these procedures are available in unit 21 of Trade & Export Online.  However, the key point is that the documentation required changes at the customs point of exit, transit and entry, depending on the underpinning agreement.

Tariff barriers vary and can include: duty, tax, excise, levy, licensing and quotas.  Non-tariff barriers include: technical, health & safety and a range of specialised requirements.  At its simplest level an agreement may allow export to the EU free of duty for many items, but for tax (such as VAT) to be applied in a destination market.  But so much depends on the detail of the agreement.

Some good news is that over recent times a range of initiatives have taken place to streamline processes including those specified in the above table, which have become more automated.  That benefits both the customs union and free trade agreement models.

So where does this leave us?

One clear point is that export procedures will change if the UK ends up outside a customs union. 

If we move to a free trade agreement, then there are ready precedents from the EFTA example.  So for those who already trade with Switzerland and Norway, for example, there may well be elements that can be readily applied. 

However, there will be devil in the detail.  Uncertainty remains in the scope of any agreement (what is in; what is excluded) and any resultant tariff and non-tariff barriers that do not currently exist.

About the author

David Millett is a coach and trainer who works regularly for RWA. He has a long experience in trade issues with a background in banking, where he was Head Of Trade Product Management for the Royal Bank of Scotland, before becoming Head of Business Development for UK Export Finance’s short-term business. David is a Fellow of the Institute of Export and former Council Member for the International Chamber of Commerce UK and the British Exporters Association.

Get RWA Insight In Your Inbox

Regular business news and commentary delivered direct to your inbox each week. Sign up here