Leaving the Customs Union (part 4) - A Comprehensive Customs agreement

It is perhaps surprising that so much attention has been given to the Single Market, yet so little attention has been paid to the EU Customs Union. Particularly as leaving the EU Customs Union has potentially greater impacts on UK trade than leaving the Single Market.

In my previous posts, I looked at how leaving the Customs Union results in:

• A repatriated trade policy requiring new WTO Schedules and new third country trade agreements.
• Imposition of Tariffs / Rules of Origin processing on UK-EU trade
• Imposition of a new Customs Border on UK-EU trade

In this post, I will look at need for a comprehensive customs agreement to mitigate the impact of a new customs border.

What agreements are needed ?

The UK will need to continue a number of European agreements / arrangements as a third country outside the EU. I've listed those I know of to date below:

• Economic Operator Registration and Identification numbersEconomic Operator Registration and Identification numbers (“EORI”) Continued recognition of these registrations by both EU & UK.
• EU Security Area. Switzerland and Norway have bi-lateral customs security agreements with the EU where they agree to take similar protective measures on imports as the EU - effectively forming an “EU Security Area” with the EU28 – relieving traders of the obligation to lodge an ENS declaration at the customs office of first entry.
• Authorised Economic Operator (AEO)  The EU’s AEO programme (based upon the WCO SAFE Framework of Standards) allows authorised operators to benefit from simplified customs procedures and “fast-track” through customs controls. The current EU AEO scheme administered by UK Govt will need to be converted into an independent UK AEO scheme and an AEO mutual recognition agreement secured with the EU.
  • WCO recommend members enter into AEO mutual recognition as part of its SAFE Framework (see page 28 of WCO SAFE Framework 2012 and section 5.5 on page 54 of WCO SAFE Framework 2007).
  • UCC Article 39 states AEO status can be granted to any economic operator meeting the criteria. UCC Article 38(7) states AEO status can be granted to operators “ outside the customs territory of the Union” where the EU recognises the third country customs legislation as equivalent.
  • The EU has agreed Mutual Recognition of AEO with a number of countries including bi-lateral agreements with Norway & Switzerland.

• Common Transit Convention The EFTA states, EU-28, Turkey, Macedonia & Serbia are signatories to this convention, which allows the movement of goods though these states with customs formalities (payment of duties and VAT) suspended until the goods either reach their destination or are exported outside the territories of the signatories, avoiding stops / checks at every frontier crossed en-route. Note that UK will remain a signatory to TIR (Transports Internationaux Routiers, International Road Transport), a United Nations Economic Commission for Europe (UNECE) initiative pre-dating the EU, covering over 50 countries (including the EU-28) which also allows transit with suspension of customs formalities. TIR cannot be used for movements within the EU, but is used for movements involving third countries and the EU
• Road Haulage Under the current EU Community Licensing scheme, truck drivers are licensed to drive throughout Europe without the need for permits at every border. The Road Haulage Association (RHA) have proposed a Land Transport Agreement to allow continued unfettered international road haulage for licenced UK and EU operators. The proposal excludes cabotage as the RHA does not believe the EU will allow UK haulage operators to compete for domestic haulage business within EU member states.
• Continued Customs Co-operation will be a crucial element of maintaining trade.
  • Jim Harra's (HMRC) evidence to the Treasury Committee highlighted the desire to “replicate the kind of information flows that we have now between EU member states”. As the report by Charlie Elphicke MP “Ready on Day One” says, “Maintaining common customs machinery is key” and suggests that UK-EU movements continue to be recorded on the New Community Transit System (NCTS) and the Excise Movement Control System (EMCS).” Conveniently, the EU has just launched a public consultation on the exchange of customs related information with third countries.
  • The “Ready on Day One” report includes a foreword by Xavier Bertrand (President of the Hauts-de-France Region), in which he speaks warmly of a new Entente Cordiale in the context of a positive trading relationship, recommends that Calais & Dover work together and emphasises that however Brexit pans out “local and regional partners of the past will remain neighbours and partners in the future”. He also suggests extending the Le Touquet Treaty to cover customs & goods in each other's territories.

There are other areas where agreements could minimise the impact of introducing customs formalities, especially for the Irish border & SME's, including :

• Expand the AEO scheme to a trusted trader scheme and extend the benefits to SMEs, combined with common technology for identification and reserved/fast-track lanes at customs borders.
• Agreement between HMRC and EU tax authorities to continue current arrangements to collect VAT and excise away form the border and reconcile in arrears. Potentially, continue to allow VAT registered companies to trade with vat registered counterparts on other side of border without need for VAT payment and subsequent refund.
• Special origin status for certified trusted traders each side of the Irish border where goods are of origin within either of the UK/RoI jurisdictions. Allow fast-track of these consignments across the border and avoid Rules of Origin paperwork.
• Special transit status for freight movements within the island of Ireland.

Staying in the Customs Union ?

There has also been much discussion of the UK remaining in the customs union in order to avoid the impact of a new customs border. But is this realistic? Peter Holmes (University of Sussex) argues that Article 28 of the Treaty of the Functioning of the European Union means the EU customs union is the same as the EU itself in terms of the definition of membership. Countries like Turkey, San Marino and Andorra have customs union agreements with the EU, but they are not in the EU's customs union.

Holmes also points out that to remove a customs border requires more than just the adoption of the EU's Common External Tariff: “Any customs union agreement with the EU would firstly have to be totally comprehensive to avoid the need for customs checks. The UK would have to follow all EU trade policies, at the WTO, in bilateral deals and in anti-dumping.” The UK would have no independent trade policy.

Clearly, this would not be a suitable long term arrangement. But, as discussed in my previous post, we might need an interim Customs Union arrangement to provide time for implementation of Technology, IT, Infrastructure and Trade Facilitation measures to mitigate the impact of customs formalities – March 2019 is not far away for such a significant logistical challenge.

This would also be dependent on EU agreement – we cannot simply shadow the EU's trade policy and demand the EU suspend customs formalities and rules of origin (as at least one commentator has suggested). Essentially the EU would be trusting the UK to maintain its customs border in line with EU policy. The EU would likely demand continued oversight via OLAF (EU's anti-fraud body) and European Court of Auditors (ECA) and may also demand we continue to send the bulk of import duty collected to Brussels. Any interim customs union arrangement should be strictly limited to the minimum time possible.

Does EFTA EEA help with customs ?

While many promote the benefits of EFTA EEA, this option does not remove the need for routine custom controls & formalities:

• EFTA's EEA Factsheet on Free Movement of Goods: “..whereas in the EU Customs Union, the EU Member States have abolished customs borders and procedures between each other, these are still in place in trade between the EEA EFTA States and the EU, as well as in trade between the three EEA EFTA States.”
• CBI's case study of the Norway option: “Not being part of the customs union, EEA EFTA exporters and foreign companies exporting to them have to go through customs procedures such as import/export declarations, including rules of origin for all goods exports and payments of VAT.”
• Swedish National Board of Trade Brexit Analysis comments on the EEA option: “Customs formalities would need to be completed though, in connection with border passage of goods and proof of origin of goods has to be presented for exemption from customs duty or reduced customs duty. “

Nor does EFTA EEA provide a comprehensive customs agreement. 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”.

The EEA agreement does include 2 protocols on customs matters, which are similar to the many EU customs co-operation agreements with 3rd countries in providing a framework for co-operation and mutual assistance :

• EFTA EEA Protocol 10 - simplified inspections and formalities for carriage of goods. Over 15 of the 24 pages of this protocol are dedicated to Norway's bi-lateral agreements on customs security measures, covering AEO recognition and Entry/Exit summary declarations. But Article 2.1 also limits the scope of these customs security measures to EU-Norway – other EFTA EEA states do not benefit from this.
• EFTA EEA Protocol 11 - mutual assistance in customs matters. Seven pages - essentially a replica of other EU third country agreements on this topic.

Access to the Common Transit Convention and the EU Community Licensing scheme would probably come courtesy of joining EFTA, but would not require rejoining EEA (Switzerland also have access to these schemes). However EFTA EEA does not provide a comprehensive customs agreement. As the Norway example shows, a UK-EU customs agreement could be added as specific protocols in the EEA agreement – requiring unanimous consent from EFTA EEA states and the EU Commission. But why choose this route when a standalone UK-EU customs agreement can be agreed via Qualified Majority voting in the EU council ? Moreover, leaving EFTA EEA would mean losing access to protocols in the EEA agreement, including those holding the UK-EU customs agreement. Which rather neatly proves the theory that those promoting the idea of EFTA EEA option never actually intend the UK to leave.

Should the UK wish to pursue a transitional customs union arrangement, there is another problem as pointed out in Peter Holmes article – Article 56/3 of the EFTA Convention requires EFTA members to harmonise their third country FTAs – which clashes with the need to align with EU third country FTAs while in a customs union. After leaving the EU, the UK can have a transitional customs union arrangement – or it can join EFTA EEA – but not both.

Conclusion

There is a wide range of agreements needed in forming a comprehensive customs agreement with the EU that will minimise the impact of customs formalities. The UK could enter into a customs union agreement with the EU (assuming the EU agree) but that would mean no independent trade policy - this might just be needed as a short-term interim agreement, but should be limited to the minimum time possible.

The EFTA EEA option does not avoid the need for a customs border with customs formalities. Nor does EFTA EEA provide a comprehensive customs agreement – and embedding a UK-EU customs agreement into the EEA agreement means that agreement would be lost when we left EFTA EEA. Furthermore, an interim customs union agreement is not compatible with EFTA membership.

The primary feature of EFTA EEA is regulatory harmonisation with the EU. EFTA EEA imports to the EU are still subject to routine customs controls and checks based on risk assessment (fraud, criminal, security etc), but EFTA EEA imports are essentially regarded as being zero-risk of regulatory non-compliance in the risk assessment calculation. Food safety regulations are also harmonised, meaning EFTA EEA imports are not subject to border inspections (although other third countries such as Switzerland, Chile, New Zealand have equivalence agreements which remove or reduce the need for border inspections for food safety).

Regulatory harmonisation is the point at which we move away from discussing the impact of leaving the Customs Union to discussing the impact of leaving the Single Market – which will be the topic of my next post.