Wednesday, 13 December 2017

Brexit Briefing - Customs

As part of a continuing series of posts examining the Single Market and Norway/Flexcit option (as expressed in a "Brexit Briefing" blog post by Pete North) this post will examine claims made regarding the Customs Union.

Customs Agreement

North refers to requiring a customs agreement in addition to Single Market membership. Which is a tacit admission that EFTA EEA does not address issues arising from leaving the EU’s Customs Union, as I covered in an EU Question blog post.
  • The EEA agreement does include 2 protocols on customs matters (Protocols 10 & 11), but these are just basic framework & mutual assistance agreements common to many EU customs co-operation agreements with 3rd countries.
  • As EFTA's web page on Customs Matters states: “The EEA is not a customs union, thus most of the activities in the customs field are not relevant to the EEA Agreement …. Norway and Switzerland were able to find simplified solutions through bilateral negotiations”.
  • Norway and non-EEA Switzerland have concluded Mutual Recognition Agreements under the EU’s Authorised Economic Operator (AEO) scheme, whereby authorised operators can benefit from simplified customs procedures and “fast-track” through customs controls. The EU AEO scheme is based on the WCO SAFE framework, which encourages all WCO members to enter into such mutual recognition agreements. The EU has number of AEO agreements with third countries.
  • Norway and non-EEA Switzerland have also concluded bi-lateral customs security agreements, relieving traders of the obligation to lodge an ENS declaration at the customs office of first entry
  • The Common Transit Convention is a key pan-european treaty which allows goods to move though territories with customs formalities suspended until the goods either reach their destination or are exported outside the territories of the signatories. Signatories include non-EEA Switzerland, Turkey and non-EU Balkan states..

EEA membership neither provides these arrangements, nor is EEA a pre-requisite for a customs agreement. Participation in the Single Market is only marginally more relevant to customs co-operation than participation in the Eurovision song contest.

Rules of Origin (RoO)

North suggests we need a customs agreement that deals with Rules of Origin (RoO). Rules of Origin (RoO) paperwork proves where a product originates from, based on where raw materials are sourced from or where substantive processing took place, in order to determine whether goods:
  • Qualify for a preferential tariff under a Free Trade Agreement (FTA).
  • Fall subject to Trade Defence Measures, e.g. products containing Chinese steel are subject to anti-dumping measures and hence a high tariff.
  • Count towards a Tariff Rate Quota, e.g. meat from New Zealand is subject to a lower tariff until a certain quantity has been imported, when a higher tariff applies.
North suggests we can avoid RoO by harmonising our tariff regime with the EU's Common External Tariff (CET). Clearly that is insufficient, we will also need to harmonise Trade Defence Measures and continue to share TRQ's with the EU.

Moreover, North has got very confused with regard to third country agreements, suggesting (wrongly) that the UK signing new FTA's with third countries risks higher rates of inspections to check compliance with single market product rules. As per the EU Blue Guide, importers will ensure manufacturers have fulfilled their obligations regarding conformity assessment – there is no constraint on where materials are sourced from. Manufacturers / importers with established track record of compliance will continue to be considered low-risk unless market surveillance feedback or other intelligence suggests standards have been breached.

The real issue is that goods from third countries might circumvent EU tariffs if shipped via the UK – which is precisely the point of RoO. It is also why to escape RoO, UK trade policy would have to be subordinate to the EU's trade policy. The UK would only be able to agree preferential trade with a third country in so far as it mirrors the EU's agreement. Moreover, the EU could sign new FTA's with third countries meaning that goods from said third country would have preferential access to the UK without reciprocal access for UK to the said third country market.

To avoid RoO, the EU would be trusting the UK to maintain its customs border in line with EU policy, preventing third country goods circumventing EU tariffs. The EU will likely demand continued oversight via OLAF (EU's anti-fraud body) and European Court of Auditors (ECA) and that the UK continues to send the bulk of import duty collected to Brussels.

Frictionless Border ?

Outside the Customs Union, import VAT also applies at the border (although importers can usually reclaim this). This could be avoided by staying in the EU's VAT union, which would mean the UK remaining fully subject to the EU’s VAT rules and a proportion of UK VAT being paid to the EU. Customs Declarations will also be required. Trade facilitation measures can reduce these administrative burdens (e.g. AEO scheme and Union Customs Code provides for monthly self assessment), but they are not eliminated.

It seems to me the only way to maintain the current “frictionless border” with the EU is to remain in the EU Customs Union, which in turn requires membership of the EU. Turkey, which has a partial Customs Union “with” the EU, still has a customs border where Customs Declarations, RoO, Import VAT all apply.

So a transition period that maintains the current border arrangements will require the UK to remain "effectively" in the EU by adopting the EU acquis in the areas of the Customs Union and Common Commercial Policy (not covered by EFTA EEA). The vital difference would be that the UK will regain competence to negotiate future trade agreements (both with the EU and third countries) while continuing to benefit from current trade arrangements with the EU and third countries. Which is why an Article 50 extension is not suitable for transition, as the UK would still be an EU member and would still not have competence to negotiate UK trade agreements.

A longer term arrangement shadowing the EU Customs Union seems infeasible. The EU has no such arrangements with any third country (including the EFTA EEA states). Continuing to forward a proportion of VAT and Import Duty to the EU, remaining subordinate to the EU's VAT and Trade policy would be in conflict with the Government's stated aims. The UK Government must make preparations in terms of customs infrastructure and trade facilitation to mitigate the impact of our inevitable departure from the EU Customs Union.


  1. Another very good article Paul. On rules of origin there is some interesting recent WTO research suggesting traditional estimates of their cost to firms may be exaggerated. See link below

  2. Many thanks. I will take a look at the link.

  3. Thanks Paul, another great explanation of a complex subject. I see bits of this mentioned on twitter, but really useful to have it all put in context.

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