WHEN discussing a “hard” or a “soft” Brexit, commentators regularly
talk of the European Union’s “customs union” and “single market”.
Currently Britain is a member of both. It is possible to be a member of
just the customs union but not the single market (look at Turkey,
Andorra or the Isle of Man). Conversely, it is possible to be a member
of just the single market but not the customs union (take Norway or
Iceland). Often the two terms are elided, which has the effect of
concealing important differences.
What are they?
A customs union
is a type of free-trade area. Two or more countries agree to abolish
restrictions on mutual trade, and to set up a common system of tariffs
and import quotas that apply to non-members. In the jargon, they have a
“common external tariff” (CET). The EU, for instance, has a common 10%
tariff on cars imported into it. The main advantage of a customs union
is understood when you consider what happens when there is no CET. If
France had zero tariffs on Japanese whisky, but Britain had a 10%
tariff, then it would be a profitable wheeze to export Japanese whisky
to France, and thence (freely) to Britain. So Britain would have to
carefully monitor whisky imports from France, and slap a tariff on any
Japanese stuff sneaking in (so-called “rules of origin” regulations).
With a CET, however, such monitoring is no longer necessary (because the
possibility of such arbitrage is eliminated). One disadvantage of a
customs union, however, is that its members are not allowed to negotiate
their own trade deals with third countries.
What of the EU’s
single market?
It is sometimes called the “internal market” and was once
called the “common market”. This is another type of enhanced free-trade
area, though for a different reason. Not only do goods move freely, but
so do services, investment and people. To achieve this much more
ambitious goal, the EU needs to get involved in harmonising regulations
across the single market. This is why there are much-maligned rules on,
for instance, the efficiency of vacuum cleaners across the EU. In the
absence of such regulations there would be a regulatory
race-to-the-bottom: countries would compete to produce the
cheapest-possible vacuum cleaner across the EU, sacrificing safety in
the process. It also explains why there is free movement of people: this
allows for the exchange of typically non-tradable goods, such as
plumbing.
With all this in mind, what should Britain do?
It is
possible to be a member of the single market without being an EU member.
The European Economic Area (EEA) agreement leaves three countries
(Norway, Iceland and Liechtenstein) in such a position. They are not
part of EU customs union and thus free to strike their own deals (but,
remember, they need to abide by complicated “rules of origin”
regulations). If Britain however decides to quit the single market,
there is no point in being part of the customs union; quitting it would
allow the British to strike their own trade deals. The best option from
an economic perspective, of course, is for Britain to quit neither the
single market or the customs union. But then that wouldn’t be Brexit,
would it?
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