Leaving the European Union: Customs Unions – An Introduction

On 17 January 2017, the Prime Minister, Theresa May, made a speech at Lancaster House outlining the Government’s position on the UK’s future once it leaves the European Union. As part of these remarks, Mrs May stated that the Government would not be pursuing continued membership of the EU’s single market, or membership (in its current form) of its customs union.

Customs unions are extensions of conventional free trade agreements (FTAs), where parties to the agreement have agreed to provide each other with trade benefits such as reduced or removed tariffs. In addition to this basic premise, customs unions apply a common external tariff across its members. Therefore, goods imported into one member of a customs union should attract the same tariffs as those imported into another. Customs unions can help facilitate trade between their members by removing the need for complex ‘rules of origin’ for goods imported into the trade area from third countries. Members of the World Trade Organisation are able to establish customs unions (and free trade agreements) in accordance with article XXIV of the General Agreement on Tariffs and Trade.

Advocates of customs unions contend that there are a number of reasons as to why a country may prefer to pursue a customs union over a free trade agreement, including a desire to further facilitate trade, but also in some cases as a first step towards closer political or economic cooperation. However, customs unions can face a range of challenges. For example, it can be a politically and economically complex process to agree a common external tariff and member countries generally forfeit their ability to set their own trade policies.

The European Union is the most comprehensive functioning customs union in the global economy. This extends into the single market, which provides further harmonisation of standards to facilitate the four freedoms: freedom of movement of goods, capital, services and people. However, a number of other customs unions operate outside of the EU, examples include the Caribbean Community (CARICOM).

This briefing provides information on how customs unions operate, how they differ from free trade agreements, and how they interact with World Trade Organisation rules on most-favoured-nation status. The briefing also examines the arguments advanced for why countries may wish to join customs unions and also political and practical criticisms customs unions might face. A summary of the EU’s customs union is also presented alongside an explanation of its relationship to the ‘single market’. Finally, a list of other customs unions which operate around the world is provided, alongside a map compiled from data from the World Trade Organisation’s Regional Trade Agreements Information System. It does not consider the arguments for and against the UK remaining in the EU customs union.