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The Customs Union and the Single Market - what do they really mean?
14 May 2019
What is the Customs Union?
It is an arrangement between countries who form a trade bloc in which a free trade area is created. This removes duties paid on goods that are sold internally and sets up a common external tariff that will be applied to goods entering from outside the area.
There are 16 different customs unions around the world today. The EU customs union covers all goods, whereas the customs union the EU has with Turkey does not cover agricultural goods or coal and steel products.
The advantage of a customs union over a normal Free Trade Agreement is that it removes some bits of bureaucracy like the onerous documentation for Rules of Origin. Rules of Origin mean that traders must prove the country of origin for each individual part of a product. For example take a car arriving from Japan — the trader would have to prove that the majority of the car’s pieces were sourced and manufactured in Japan. A very difficult and time-consuming process, which is particularly difficult for goods like cars or electrical devices where global supply chains are complex.
Do you still need border checks under a customs union?
A customs union does still involve border checks, which although less bureaucratic, still requires traders to produce a fair amount of documentation; advance declaration for a security check, a movement certificate, invoice and transport documents to list a few.
What’s more, at the border traders await a multitude of checks from authorities: regulatory checks, VAT checks, veterinarian and food sanitary checks as well as smuggling checks.
For the UK, this means a customs union alone would not solve the problem of how to honour the Good Friday Agreement to retain a frictionless Irish border.
What does a Customs Union mean for services?
Whilst the Customs Union covers the trade of goods, it does not cover services, as you can’t put a tariff on them. This has a major impact on London, with services making up 80% of its exports, and on the rest of the UK where services make up 45% of exports.
So, what would be a good solution for London’s and the UK’s services trade?
The Single Market
The EU has created a single internal market for all its member states which has removed almost all barriers of trade for goods, capital and services so they can be traded as freely across EU borders as domestically and allows workers to freely chose where to work.
Whilst the single market for services is not as fully developed as it is for goods, it has created the most liberalised services trade area in the world. This is vital for the UK — a huge service exporter with a massive trade surplus in services, unlike goods where it has a deficit.
The Single Market has helped London become Europe’s capital for financial, professional and legal services as well as technology. The UK, and London in particular, have a real advantage in these fields over other cities and countries.
A recent Bertelsmann study has shown that the per head benefit of being in the single market has been around 1,000EUR per head per year. For hubs like London the monetary gain has been over 2,700EUR per head per year, which is why many businesses would prefer to stay in the Single Market.
What happens if we leave the Single Market?
The EU is the UK’s key trade partner in services, 40% of British service exports go to the EU, 2/3 of these are provided directly cross-border made possible by the Single Market. This means that the UK’s leading service industries will take a real hit if we leave the EU’s Single Market. Financial services alone are likely to lose 60% of their service exports, areas like insurance would be hit with 20% reductions and other business services with about 10%.
This does not just affect London. There will be knock-on effects including less jobs, not just in these industries, but in supporting industries – the caterers, cleaners, event managers associated with those sectors. This ultimately affects the national economy – less tax from businesses and workers means less to spend on vital services across the country.
Evidently, there is a lot to lose by leaving the Single Market. Although a customs union would preserve some of the benefits, for a service-based economy like the UK, this won’t do much to soften the blow.
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