Dr. Rebecca Harding

Yet another week, yet another blog saying that the UK is in crisis and the next week will be critical for the Brexit outcome. The political process is incapable of making choices at the moment; the economics of trade in all of this has been forgotten as politicians vie for power and influence with each other using their own pre-conceptions of what the electorate voted for to create power for themselves. In short, with barely a reference to trade at all, it is being used as a weapon in a political battle. 

It is high time for a positive message about trade. Yet within a few minutes of MPs rejecting Theresa May’s deal for a third time a commentator remarked that the Customs Union option would be unpopular with Brexiteers because it means ‘the end of free trade.’ This is nonsense because, by definition, a Customs Union is free trade between members.

But for Brexiteers, it is convenient to conflate membership of a Customs Union with limits to the UK’s freedom to set trade deals outside of Europe. It gives the impression of the UK locked into an arrangement with Europe which is both expensive and restrictive: expensive because the UK cannot reduce its import tariffs to attract goods in to the UK, and restrictive because the UK cannot negotiate free trade agreements with other countries outside of
Europe because it is bound by one external tariff. The UK, it is argued, is disproportionately affected because its largest trade partner is the US.

However compelling these arguments may seem on the surface, there is a deep-seated political perspective behind this thinking: the UK can do better outside of any customs arrangements with the EU, and the EU itself is limiting our freedoms. This is overt economic nationalism to speak directly to the disaffected, disengaged and, now, disinterested, Leave
Voters. It has very little to do with the economic reality of what a Customs Union is. 

For too long the Brexit debate has been dominated by what we can’t do because of our membership of the EU, and specifically the Customs Union, rather than what we can do. Remainers failed to find a positive case for Europe, and this has cost the subsequent debate around our future relationship with Europe dear. 

So let’s be clear on what a Customs Union is and take the politics out for a while. A Customs Union is an agreement between nations to have free trade at zero tariffs between the members and one, common external tariff to all other nations that are not within the agreement. The oldest, and most successful, Customs Union is arguably the UK itself but the EU’s Customs Union is also highly successful and stable. The reasons for creating a Customs EU’s Customs Union is also highly successful and stable. The reasons for creating a Customs
Union are to reduce transportation and supply chain costs to Member State businesses, to increase trade flows between the businesses in Member States, to widen access to markets and therefore to create economies of scale advantages for businesses within it borders. The societal or welfare benefits include more jobs, lower prices and greater choice (can anyone remember what yoghurt was like before we could get Mueller Fruit Corners in our supermarkets?). 

But there are really three principle reasons why a Customs Union matters to the UK and its position in the world at this moment in history. First, in trade terms as well as in foreign policy terms, size matters. European supply chains account for 48% of all world trade in the automotive sector, and over 55% of trade in pharmaceuticals. They account for over 50% of world trade in aerospace. Europe is the largest single trading market for the US, China, Japan and most other individual nations. As part of the EU, the UK has a seat at the negotiating table as an equal partner in free trade negotiations with the United States and has more influence over the future direction that multilateral organisations, like the WTO, take. Outside, the UK alone accounts for just 2.5% of world trade, and falling.

Second, the UK’s exports are interwoven with the very European supply chains that dominate the global trade landscape. Among our largest exports sectors are pharmaceuticals, automotives and aerospace. Include electronics and machinery and equipment, and this represents some 60% of the UK’s trade with Europe. Given the speed at which technology is changing the trade landscape globally, such supply chain integration is getting more, rather than less, complex.

Third, UK trade is strategic. 30% of exports is in goods that can be used for military or civilian purposes (dual use goods) and our 5 th largest export sector (excluding oil) is aerospace. The US is, of course, the biggest single recipient of UK aerospace exports, but EU is the biggest trade partner. Europe itself is beginning to look at its own defence procurement and to address its security policies in areas like 5G and communications. By stepping out of a Customs Union the UK at best is increasing costs of a core part of its defence procurement. At worst it is undermining its trade-based national security.

It is hard not to be political when it comes to a discussion about the EU. The EU itself is a political entity built to prevent war in Europe and to enable economic growth through trade across the region. The initial Customs Union has evolved to become a Single Market that allows for the free movement of people, capital and services as well as goods. As it has evolved it has become more complicated and as a result from a British perspective, it has become easier to pick at its faults rather than see its benefits.

Former colleagues in the EU always used to complain that the Brits had the great ideas but never used European support structures enough to understand how they worked. Now is the moment to change this habit and start making a positive case for Europe. This is something for politicians to ponder this week. It has to be done in small steps and it will take time – it is rehabilitating the UK population to understand the economic benefits of Europe rather than the costs. In the national interest, this is well worth the effort.

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