The UK government has today released its future partnership paper on UK-EU customs arrangements post-Brexit. The report suggests that the UK will formally leave the EU’s Customs Union as it withdraws from the EU in 2019, but will seek to establish an “interim period of close association with the customs union that would allow for a smooth and orderly transfer to the new regime.” One option under consideration for this interim deal is a temporary UK-EU customs union. The paper also suggests two possible long-term models for UK-EU customs arrangements. Under the first, the UK would manage a new streamlined customs border with the EU, with “negotiated and unilateral facilitations which reduce and remove barriers to trade.” Under the second, the UK would propose a “new customs partnership” with the EU, based on the alignment of UK and EU customs regimes, “which would negate the need for a customs border.”

An interim like-for-like arrangement is sensible

Suggestions for a temporary period of “close association,” which looks largely to retain the status quo for UK-EU customs arrangements, are sensible. This will provide the necessary breathing space for any new systems and infrastructure to be put in place to manage bilateral trade in goods in the future. It will also provide business certainty that they can continue to operate under the same customs rules for the near future, and will only need to adapt to new procedures at the end of a transition stage, rather than in 2019. Also, while the government is clear it “intends to pursue new trade negotiations with others” during this interim period, it recognises that it will not be able to “bring into effect any new arrangements with third countries which were not consistent with the terms of the interim agreement.”

Other questions remain unanswered on the transition. For instance, the paper makes no mention of how long the interim period is expected to last, although Brexit Secretary David Davis this morning stressed that it must be completed before the next election in 2022. Nor is it clear what payments the UK is prepared to agree to as part of interim deal, or what relationship the UK intends to hold with the EU single market or the European Court of Justice (ECJ). These are likely to be important details for the EU when it comes to agreeing an interim arrangement. However, overall, a like-for-like model would appeal to the EU as it ensures least disruption for EU businesses.

UK-EU customs facilitation agreement is the preferable long-term option

The first of the paper’s two proposals for a long-term arrangement suggests managing a new customs border with the EU, simplifying requirements on EU goods entering the country as much as possible and providing border “facilitations” to reduce and remove trade barriers.  Open Europe’s paper on customs, Nothing to Declare, proposed a similar model for UK-EU customs cooperation post-Brexit.

There are already international precedents for customs facilitation arrangements– the EU already holds agreements on customs facilitation with Switzerland and Canada. The World Trade Organisation also recently implemented its own Trade Facilitation Agreement, which addresses methods to expedite movement, release and clearance of goods. Examples of procedures contained in such agreements include waiving the need for entry and exit declarations; agreeing mutual recognition of registered ‘trusted traders’ to expand access to simplified customs procedures and fast-tracked safety and security checks; and implementing technology-based solutions to ensure rapid release at borders.

Under this arrangement, the UK would no longer be bound by the EU’s tariff regime and would be free to conduct a genuinely independent trade policy. Such a customs cooperation agreement could either be standalone, or could accompany a broad UK-EU free trade agreement.

The government’s second long-term option for a “new customs partnership with the EU” suggests the UK could “mirror the EU’s requirements for imports from the rest of the world where their final destination is the EU.” This would mean the UK would choose to “apply the same tariffs as the EU, and provide the same treatment for rules of origin” on goods that transit through the UK to the EU. The paper suggests this could remove the need for any customs procedures for goods moving between the UK and the EU, as the UK will enforce EU duties and requirements on this trade. It also suggests this solution would allow the UK to apply its own tariffs on trade from other countries destined for the UK only.

However, as the paper itself acknowledges, this is a complex and untested proposal. It would require a “robust enforcement mechanism” to ensure all goods exported to the EU complied with EU trade policy. It could also mean “a repayment mechanism” where traders are required to pay the higher of either the UK or EU tariff, and subsequently claim a refund if their good was sold in a country charging the lower rate.

As we outlined in our customs paper, this risks creating a powerful force for inertia, where any deviation from the EU tariffs and trade policy would mean increased complexity for traders and administrators – therefore creating obstacles to the government’s aim to pursue a truly independent trade policy. It would also require huge political capital to negotiate – the EU is likely to be wary of the possibility for undercutting, where goods cleared for use in the UK under lower tariffs are able to be shipped into the EU.

Of the two long-term models under consideration, Open Europe believes the option for a UK-EU customs facilitation agreement is preferable. This best balances safeguarding barrier-free UK-EU trade with ensuring that the UK is best able to conduct a genuinely independent trade policy once it leaves the EU. It will also likely be easier to negotiate given it follows existing international models for bilateral cooperation in customs procedures.

Government position paper is welcome, but customs is only one piece of the puzzle

Today’s publication is a welcome development. It offers the business community grounding for greater engagement, and signals an upcoming wider dialogue with industry in the lead up to negotiations on a future UK-EU relationship.

Responding to today’s publication, the EU said, “We take note of the UK’s request for an implementing period and its preferences as regards the future relationship, but we will only address them once we have made sufficient progress on the terms of the orderly withdrawal [which include the citizens’ rights agreement, the financial settlement, and the Northern Irish border].” This is not a sustainable position – the EU must recognise the inherent interconnection of many of these issues. For instance, it is notable that the government has stressed the association between UK-EU customs procedures, trade, and arrangements for the Irish border – it is also set to publish a new position paper on the border tomorrow.

As we have previously argued, the EU cannot hope for further progress to be made on the issue of the Irish border until it opens negotiations on a free trade deal and other future relations. Similarly, as today’s paper recognises, customs is only one piece of the puzzle – greater detail is still required on expectations for regulation, supervision and arbitration post-Brexit in order to achieve the government’s aim of securing as frictionless as possible trade between the UK and EU.