EU, Single Market and Customs Union

by George Hatjoullis

There seems to be considerable confusion about matters relating to the EU. Those not easily bored can go to the various EU websites for clarification. Most are easily bored. In this blog I will attempt a brief synopsis of some of the key concepts that will be thrown around as the UK exit is negotiated or hopefully aborted.

Membership of the EU means being bound by the Treaty of Rome and its various updates. The latest is the Treaty of Lisbon. Individual states may have negotiated opt-outs from aspects of the Treaty. The application of EU is ultimately the jurisdiction of the European Court of Justice (ECJ). This is NOT the European Court of Human Rights (ECHR) though the two are frequently conflated by the press and Brexit supporters. The European Commission is the civil service of the EU, not the law making body. However, only it can propose legislation. Power rests with the European Council (the heads of government for each member state) and the European Parliament. The exact distribution of power depends on the issue but the EP has been gaining power steadily.

Both the European Council and EP  are elected bodies so the idea that the EU is undemocratic is clearly nonsense. Ironically the idea has been promoted by UKip, who have gained many representatives to the parliament owing to its democratic nature. Westminster has been less kind to Ukip. Many decisions of the European Council require unanimity so loss of sovereignty is not quite complete. Lesser decisions are based on qualified majority voting so large countries still have great weight in the Council. Triggering article 50 means leaving this arrangement. It will happen automatically after two years unless the process is short-circuited. The clock is ticking.

The EU has constructed many institutional frameworks as it has evolved, some overlapping. The two that we will hear most about in the next few weeks are the Single Market and the Customs Union. The Single Market is exactly what it says; a single market. The member states of the EU operate as if there are no barriers when it comes to goods, services, capital, and labour. Economic activity is as if it is internal to a country. Note the members of the EU must therefore have a common external tariff. So what is the purpose of the separate Customs Union?

A customs union involves a common external tariff negotiated by a collective body representing the members. Each member cannot go off and negotiate with third parties on its own. Moreover, the Customs Union may involve more countries than the Single Market (Turkey for example). Norway is a member of the Single Market but not the Customs Union. This means Norway can have its own arrangement with Turkey even though it otherwise operates tariff free within the Single Market. This creates Country of Origin complications but is otherwise workable. Norway has no restrictions on imports from, say, France, but may impose high tariffs on imports from Turkey. It is vital that French imports of Turkish goods cannot be disguised and exported to Norway as this would create a profitable arbitrage and negate Norway’s attempt to negotiate separate customs arrangements.

It is now (I hope) possible to see why Norway comes up so often. The UK could in principle leave the EU, remain in the Single Market, and leave the Customs Union. Of course this is in practice impossible. First the Single Market requires free movement of labour. This is not optional. The Brexit support rests on restrictions on free movement. Second, the Norway arrangement basically involves Norway being a member of the EU without a seat at the Council table or in the EP. The UK may as well stay in the EU and just leave the Customs Union. This would allow it to strike its own deals with China etc provided country of destination abuses could be blocked.

The red line that is free movement will ultimately force the UK from the EU and the Single Market. There is then no point in staying in the Customs Union as this means only the EU can negotiate trade relations with China etc.The UK will then need to negotiate a free trade deal with the EU and everyone else. This is the best the UK can achieve as long as free movement remains a red line; and if free movement is not a red line why leave? This is why I regard a hard Brexit as inevitable if we leave. There is no way the UK can negotiate a free trade agreement in two years.