THE RT HON DR LIAM FOX MP {North 

 

HOUSE OF COMMONS
LONDON SWIA 0AA
020 72194198

08 April 2019

QM 

Following my appearance at the 1922 committee on Wednesday last week, I
committed to sending a letter setting out the issues around a customs union and
trade policy.

Let me begin by repeating what I said at the meeting. Trade is not an end in itself
but a means to an end. It is the way in which we spread prosperity more widely.
That prosperity underpins social cohesion which in turn underpins political stability.
That political stability is the building block of our collective security. Thus, a country
that is unable to control its own trade policy will find itself not only less able to
influence global developments but more likely to be shaped by them.

It has become clear to me in recent days that there is some confusion about what a
customs union is, and how it works. A customs union comes about when a group of
countries decide to abolish tariffs between them and to have a common external
tariff. Importantly, a customs union covers only goods, it does not cover trade in
services. The EU has full customs unions with San Marino and Andorra and a partial
customs union with Turkey covering mainly industrial goods but excluding coal, steel
and agriculture.

As there is a common external tariff among members of a customs union, countries
cannot unilaterally lower tariffs for another country, they can only act as a bloc. This
means that the UK is obliged to implement the EU's Common Customs Tariff (CTT)
which, according to EU Treaty law, is decided by the institutions of the European
Union.

Sir Graham Brady MP

 

I pointed out to the meeting that a customs union between the UK (as a third
countrymeeting of equals and is different from the customs
union in which we currently participate the latter being reserved for those
countries in the EU only. A customs union, where the UK was obliged to implement
the would allow the European Union to negotiate access to UK markets as part
of EU trade policy, irrespective of the interests or wishes of the United Kingdom i.e.
it will be able to offer access to the world?s ?fth biggest market as part of any EU
offer, without the need to balance this access by negotiating on key UK offensive
interests.

This is possible because the UK as a non-EU Member State would have no say under
EU treaty law for the formation and agreement of EU trade policy. We would be
stuck in the worst of both worlds, not only unable to set our own international trade
policy, but subject, without representation, to the policy of an entity over which MPs
would have no democratic control. This is something that Labour do not presently
seem to understand. As I said at the meeting, in such a scenario the UK would have
a new role in the global trading system - we ourselves would be traded. As the
famous saying in Brussels goes, if you are not at the table, you are on the menu.

Some have argued that, irrespective of the democratic arguments that we would in a
customs union with the EU still be able to negotiate ambitious deep and
comprehensive free trade agreements with partners around the world. However, it
is worth noting not only that we would have to apply the CCT with third countries,
but that countries who negotiate free-trade agreements (Fl'As) with the EU would
have automatic access to the UK market with the UK having no reciprocal access,
unless a new agreement was bilaterally negotiated. The key question is that if a
trading partner already had access to the UK for no cost, why would it be interested
in negotiating a further bilateral agreement?

I gave the example of Turkey as a country which has a partial customs union with
the EU. Given that those countries with which the EU has a trade agreement,
already have access to Turkey?s market for those goods covered by the customs
union, there is little incentive for any third country to negotiate a trade agreement
with Turkey. To date, Turkey?s trade agreements are largely with those countries
where EU Association Agreements already exist. Moreover, given that Turkey is
required to subscribe to the EU's Common Commercial Policy or the trade
policy this limits what, if anything, it can offer in return for preferential access to
third country markets.

Sir Graham Brady MP

 

In the recent negotiations many in Turkey were outraged that the EU was able
to negotiate access for US automobiles into the Turkish market, but Turkey was
unable to gain reciprocal access to the US market. Compare this situation with the
fact that the UK is the fifth biggest economy in the world.

Furthermore, a customs union will stymie the ability to open markets around
the world to the services sectors as an 80 per cent services economy, this is a
huge area of comparative advantage to the UK. In fact, one of the main aims of UK
trade policy is to achieve liberalisation in global services. As the current plurilateral
agreement the Trade in Services Agreement is stalled in Geneva, we are
likely to have to increase service access by bilateral agreements. As the UK service
sector is itself extremely Open, the only way in which we are able to negotiate
access to other countries services markets is by allowing increased access to our
goods markets. An inability to set our own tariff rates would make this extremely
dif?cult if not impossible, foreclosing opportunities for the world class services
exporters to gain access to new and profitable markets.

Similarly, some have claimed that joining a customs union would gain automatic
access to 87 EU agreements. Leaving aside the fact that I do not recognise the
number of trade agreements mentioned, there would be no automatic continuity for
EU trade agreements if we left the EU and join the customs union. Membership of
EU trade agreements are part of being a member of the EU, subject to the Treaties
of the Functioning of the European Union, outside of those treaties therefore
outside of the EU but in a customs union, does not give you access to these
agreements. In fact, all of these agreements would need to be negotiated again.

I have also heard colleagues and commentators suggest that Japan would be a
great prize in a customs union. However, only EU Member States have access to EU
trade agreements. So, if the UK were to join a customs union with the EU, we
would still need to negotiate a bilateral agreement to secure UK access to the
Japanese market. However, as already noted, given that the Japanese would
already have secured goods access to the UK through its agreement with the EU,
there is no guarantee that Japan would seek to negotiate such a new agreement
with the UK.

A customs union would also potentially damage Britain in international trade
disputes. For example, the EU produced countermeasures following the recent US
application of steel and aluminium tariffs. This followed consultations with
the Member States.

Sir Graham Brady MP

 

Were the UK to be a third country, outside the EU but in a customs union, it is
entirely possible that the EU could apply tariffs on products important for the UK, but
not for other EU Member States. As Britain would have to apply such tariffs as the
price of its membership of a customs union, without a say in their formulation,
British businesses and consumers could find themselves on the front line of trade
disputes while EU members could be more protected.

I mentioned that the application of the CCT could have complications beyond trade
policy itself. This Conservative government has been keen to look at ways of
bringing our trade and deveIOpment policies closer together and one of the ways in
which we can do this is to use our new found tariff freedom, when we leave the EU,
to stimulate trade with countries who currently face tariffs when they add value to
their primary produce. A combination of outward direct investment and judicious
tariff reduction would go a long way to securing our aim of helping countries to
trade their way out of poverty. If we were to remain in a custom union, we would
have to apply the EU's trade policy for developing countries, without any say. This
could have important implications for the relationship with deveIOping countries,
should the EU decide to take an action prejudicial to our interests.

Finally, it is worth saying a word about the government?s proposals contained in the
Political Declaration. Essentially, the government is seeking to maintain the benefits
of a customs union in terms of internal trade (tariffs, quotas and rules of origin)
while being outside the common external tariff. This would allow the UK to
have an independent trade policy. Such a proposal has never been implemented to
my knowledge but being outside the CCT is an absolute prerequisite to Britain being
able to bene?t from ambitious UK trade and development policies.

?5605;:

Sir Graham Brady MP
House of Commons
Westminster

London

SW1A 0AA