A Word About the EU Customs Union

What does losing access to the Customs Union mean?

The European Union Customs Union (EUCU) is a customs union which consists of all the member states of the European Union (EU).  It is different from a Single Market agreement as well as being very different from having a Free Trade Agreement (FTA) linking countries for trade purposes.  To operate under a customs union, countries agree to have a common external tariff, in other words, they have the same rules, regulations and customs duty rates.  But it is more than just having harmonized regulations. 

The EUCU operates as a single country for trade purposes and countries not part of the Customs Union is known as third countries.  Third countries export to the EU and once goods have been declared to customs and duties paid at the EU place of arrival they can freely circulate around all member without any additional customs controls, paperwork or taxes being paid.  This Free Circulation of goods also applies to goods produced within the member states.  In effect this is an internal market making trade between EU countries no different than sending something within the UK from Birmingham to Bristol, for example.

We have been trading with the Customs Union for so long now (since 1993) that many businesses are unaware of the special and unique trading relationship we have.  Before the Customs Union agreement was fully in place there were still border controls on goods, security inspections, the requirement for paperwork (including licences) and the payment of customs duty and VAT on imports.  When the UK leaves the EU full access to the Customs Union without paperwork and controls will go, regardless of the deal we negotiate.

The cost of trading with the EU27 will increase for UK businesses; for some businesses this will include the cost of paying customs duties but customs duty rates are low for many commercial and industrial goods but the costs that will affect all businesses will be the additional administration and documents that will be required.

Can non-EU member countries be part of the Customs Union?

Currently the EUCU has member countries that are not part of the EU through separate agreements.  These are Andorra, San Marino, and Turkey (though this excludes certain goods).  Monaco and some British territories, while not full members of the EU, are part of the customs territory (British Territories are: Guernsey, the Isle of Man, Jersey and Akrotiri & Dhekelia).  In addition, ssome territories within the EU do not participate in the customs union, usually as a result of their geographic circumstances; these include Gibraltar and Ceuta & Melilla.   

It is very complicated but if we consider Turkey for a moment they are members of the Customs Union without being part of the European Union so, apart from trade, they do not come under the “Four Freedoms”.  But to be part of the EUCU Turkey must adopt EU customs regulations as their own without currently being party to any debate on the way these laws are written or implemented.  Also, as Turkey is not a member of the EU all trade requires customs declarations, paperwork and security inspections.  Actually, to work within the Customs Union an extra piece of paper is needed – an ATR Form.  The issuing of this form is based on specific regulations, it is needed at the point of import into Turkey or the EU and permits goods “in free circulation” to be imported without customs duty being charged (payment of VAT is still required).

What is the Single Market?

Though the Single Market agreement and a Customs Union can appear very similar there is one key difference – to trade within a Single Market companies must produce paperwork, make customs declaration and require a specific certificate to legally avoid the payment of customs duty. 

Norway, Liechtenstein and Iceland are members of the European Economic Area (EEA) along with the EU member states; the EEA contains provisions for adopting the four freedoms and is continuously amended to reflect changes in the EU. Nearly 9,000 legal acts (directives, regulations, mutual recognition agreements and decisions) have so far been incorporated into the EEA Agreement.

So, Norway for example has a Single Market agreement with the EU and must standardize its customs and some commercial regulations in-line with EU requirements.  But goods moving to and from Norway from the EU are subject to customs declarations and the payment of customs duty, unless the import can be supported by a preferential trade declaration (EUR1 Form), commonly call a Free Trade Agreement (FTA).  FTAs have complicated Rules of Origin (ROO) which need to be understood and there are financial penalties for issuing these declarations without meeting the rules.

What are the trade options for the UK?

In the Article 50 letter the UK Government said that we would not remain part of the Customs Union or the Single Market but will seek a special, meaningful relationship.  This means we will be a third country though we might have a kind of Regional Trade Agreement, similar in principle to a FTA for trade.  Looking at current examples this will also mean seeking Mutual Recognitions Agreements (MRA), etc across the board, perhaps leading to 9000 pieces of legislation using the EEA as an example.  For companies trading between the EU27 and the UK this seems to indicate that we will be operating under Rules of Origin and will need to provide evidence that the goods meet these rules to claim a zero-duty rate as well as the requirement for normal export/import customs paperwork.  If a company has no experience of trading outside the EU this will be a strange and complicated world – a recent survey of large and medium sized businesses said that it cost them on average £5,000 to administer and control trade under FTAs so often they don’t use them. 

Article written by Sandra Strong Managing Partner of Strong & Herd LLP

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