International Trade – the Customs Union and the UK

First of all, apologies in advance if we’re teaching our grandmother to suck eggs. However, we thought it would be helpful to set down a “simple” explanation of one of the current issues of our time – the Customs Union.

The Single Market is not the same as the Customs Union.  The Single Market is about trade within the EU trying its best to make trade between EU member states free of Customs Duty, Tariffs and other blockages to trade. The Customs Union is a fence around the EU member states, and a few other countries, and other countries cannot send goods through that fence unless agreeing to play by the rules, which on occasions means paying an entrance fee.

The position until March 2019 is that nothing has changed – the UK is still in both the Single Market and the Customs Union.

However, there already seems to be some confusion as to what happens in respect of issues such as Customs Duty and Quotas for trade between the UK and other countries after Brexit.

Trade between other countries (“third countries”) and the UK continues under existing rules, may be subject to trade agreements between the EU and the third country, and may well be subject to import duties both on goods coming into the UK and on goods going into third countries from the UK. It is also possible that “quotas” may be applied – quotas is a system whereby only a certain amount of goods can be imported within a specific period of time.

It seems likely that the current Government will be returned after the 8 June General Election in the UK. The current UK Government seems committed to leave the Customs Union as well as the EU’s Single Market.

Accordingly, right now, the most likely position from March 2019 onwards is that exports from the UK (which will then be a third country) and the EU, as well as exports from the UK to third countries will, at least for the time being, fall back on World Trade Organisation (“WTO”) rules – the agreements made between the EU and third countries will no longer be valid for exports and imports. And, of course, the UK will no longer have a favourable trading status with the EU.

Similarly countries exporting to the UK will no longer do so under EU trade rules, but instead will also be reliant on WTO rules until and unless trade agreements are made between the UK and that other country which say otherwise. That applies to both EU exporters and third country exporters. Trade agreements between the EU and third countries (the UK) typically take several years to agree. The same is generally true of other bilateral trade agreements.

The EU already has trade agreements with many of the countries with whom the UK Government expects to do more business after Brexit. Those trade agreements will fall away after Brexit. Until and unless new bilateral trade agreements are entered into with those countries, the terms of trade between those countries and the UK will be, in the main, worse than they are now. Hence, somehow, new trade agreements will need to be entered into in record time. Some existing suppliers, say to the car industry in the UK, will be met with trade barriers which will increase the cost of their goods in the UK – that applies equally to EU and third country suppliers – which in turn will push up the costs of UK car manufacturers and assemblers.

The EU does not, and never has, inhibited any member country’s ability to trade with a third country – despite what various UK politicians seek to imply. There are trade embargoes, much as with those arising from membership of the United Nations, and I would imagine that most people in the UK and the EU would be happier not trading with “rogue states”.

However, what is done, as within any trading bloc, or with any country seeking to protect its own market, is that trade barriers are put in place to protect the home market (and they may also raise tax revenue!). Currently the rules are clear (but complex) for both imports into the UK from third countries and exports to third countries from the UK. New rules will be equally clear (but complex) after Brexit.

We know that some large companies intend to advance purchase goods (finished goods and components) from the EU in particular prior to Brexit, and we understand a stockpile of six months goods is typical.

We’re sure that there is much more that needs to be considered for individual businesses, but what we hope to illustrate is that the impact of Brexit on international trade will not be simple, there will be grey areas and nuances, but whilst the UK seems intent on ignoring an EU offer of a transitional period, there could be a significant cliff edge effect for many businesses exporting from the UK and exporting to the UK. It is clear that all businesses need to start planning for Brexit now, if they haven’t done so already (like the ones planning to stockpile).