Brexit, customs unions and borders

There have been some suggestions in Ireland, since June 23, to the effect that Ireland and the UK ought to be allowed to cut a special deal avoiding the need for customs borders within Ireland. In many cases these interventions seem to be ignorant of the basics of trade policy, and so a brief post on the distinction between free trade areas and customs unions might be useful at this point.

There are lots of explainers out there on the distinction: here, here, and here, beginning at p. 111 for example. Briefly, the main distinction between an FTA and a customs union is that in the latter, member states agree to a common external tariff, enforced along their common border with the rest of the world. Why would they do this, rather than retain the freedom to set their own tariffs vis-à-vis other countries? Because without a common external tariff, internal border controls will be necessary to avoid what is known as trade deflection.

Imagine that the UK and EU form a free trade area, but that the UK sets a 20% tariff on Japanese cars, while the EU sets a 10% tariff. Without border controls between the UK and EU, everyone would import Japanese cars into the UK via the EU — which would undermine the UK’s trade policy. Similarly, imagine that the UK does a trade deal with the US, and agrees to admit American beef duty free, while the EU retains a 15% tariff. Again, absent border controls between the UK and EU, everyone would import US beef into the EU via the UK, thus undermining EU trade policy.

So long as the UK and EU set different tariffs, therefore, there have to be border controls between them to ensure that Japanese cars and US beef are not being freely traded between them, alongside the UK and EU products that are entitled to be freely traded. And it is precisely because such border controls are costly that the EEC decided, all the way back in the 1950s, that it would set up a customs union rather than a mere free trade area.* The EU’s common external tariff is not a source of barriers: its whole point is to do away with barriers. That is why the provisions in the treaties regarding the customs union appear under the general heading “FREE MOVEMENT OF GOODS”. And so the fact that both Northern Ireland and the Republic were in the same customs union from 1973 onwards, and in the same Single Market from 1993 onwards, has been a great thing for Ireland.

As long as Ireland remains a member of the EU, it remains a part of its customs union. There is zero ambiguity on this point: the treaties state that

The Union shall comprise a customs union which shall cover all trade in goods and which shall involve the prohibition between Member States of customs duties on imports and exports and of all charges having equivalent effect, and the adoption of a common customs tariff in their relations with third countries.

No wiggle room here, as there is for example in some of the provisions regarding monetary union, and for good reason: the customs union has been the uncontested heart of the European project since the 1950s. As long as the North is outside the EU and its customs union, and the Republic is inside, there will have to be border controls between North and South to rule out trade diversion.

We all hope that these will be as unobtrusive as possible: if you like, that they will not be “hard”. IT can surely help. But customs controls of some sort there will have to be. As Eurointelligence says,

this is not an issue of political negotiation, but technical necessity. It is possible to soften the hardness of border by erecting customs posts for trucks alongside the motorway, before and after the border, and allow passenger cars free cross the border. But since the EU applies tariffs and taxes to goods entering the customs union, those goods have to be monitored at some point during the transit. You can think of the softest conceivable border as the one between Switzerland and Germany. Switzerland is in Schengen, but not in the customs union. Passenger cars pass relatively quickly, while there are sometime long lines of lorries on the motorway before the border. Call it what you will. But there will have to be customs controls post-Brexit.

Even if it were mysteriously possible for Ireland not to enforce the common external tariff and remain inside the EU, which it quite obviously isn’t: if we magically got the right to not check goods coming across the Border, what would be the result? Since Ireland would be de facto outside the customs union, all trade between Ireland and the EU26 would necessarily be subject to costly border and customs formalities, so as to rule out trade deflection. The basis for our prosperity, costless access to the Single Market, would be destroyed.

The return of the Border, however soft, is appalling. I understand that people wish that the British had not placed us in this position, but they have (the British, mark you, not the EU). And closing our eyes, sticking our fingers in our ears, and hoping that a fairy godmother will magic our problems away will not help.

It is logically coherent, if lunatic, to argue that Ireland should quit the EU and join the UK customs union (leaving the EU would on its own obviously not suffice to avoid a North-South border: our exit from the EU would have to be of the red, white, and blue variety). It is logically coherent to argue that Northern Ireland should remain within it, and I wish it would. That seems like something worth arguing for. But it is logically incoherent to argue that if we remain in the EU and its customs union, and the North leaves both, there can be some special deal that will avoid the need for a customs frontier on the island.

Those who want Ireland to leave the EU know that they are in a small minority, and many will not come out and argue for their position particularly strongly, for fear of being laughed out of court. The evidence that our prosperity is based on EU membership is overwhelming. But expect them, in the months and years ahead, to claim that the return of a customs frontier somehow shows that “the EU” has let Ireland down. The Brexit campaign shows that such dishonesty can pay: which is why it is so important that everyone understand that if the North leaves the EU and its customs union, and we remain inside it, there is nothing that the EU or anyone else can do to prevent the return of such a frontier.

  • There are other benefits to having a customs union: for example, the EU 27 is a far more formidable negotiator than the UK, allowing the EU to strike more favourable trade deals with third parties.

21 thoughts on “Brexit, customs unions and borders”

  1. Someone may wish to explain to the Northern Ireland electorate that:

    1) 15% of goods and services it sells outside NI are to the Republic
    2) 2.5% of all GVA in NI is direct EU expenditure (no multiplier used here)

    And that if a hard Brexit happens:

    1) will inevitably shrink due to tariff and non-tariff barriers
    2) will disappear, and Westminster will not replace much of it. The appetite of the English taxpayer for farm subsidies is very low

    Ireland has much to lose from Brexit, but Northern Ireland has much, much more.

    1. I think we mostly make too big a deal out of this. If we look at land borders between members of the single market that are outside the customs union (Norway, Switzerland) with those inside, we can see that the countries involved fulfil their obligations without having a big impact on individuals crossing borders while living their daily lives.

      I say “mostly” because there is a risk that arbitrage opportunities from a customs border with NI could result in border-centred illegalities becoming a good bit more serious than the informal post-conflict welfare system we seem to see now.

  2. This is a timely comment. However, it is early days and, as this detailed report by the French Senate points out, what exactly the UK hopes to achieve is not entirely clear. Until it is, the nature of the controls that may have to be introduced remains equally unclear. As the French senators point out, sectoral access to the single market must be ruled out. Such are the technical difficulties associated with it, the British must know that this is the case. The question then would be to what extent NI would become a backdoor entrepot for EU imports bypassing inspection in relation to rules of origin etc. under a comprehensive agreement. The likelihood of this happening in any significant way seems remote.

    The betting must be that the UK will end up with a mish-mash of arrangements, camouflaged as a victory under the guise of May’s “bespoke deal”.

    The real problems for Ireland will arise in the areas of agriculture and fisheries as it is well-nigh impossible to see these included in any likely negotiated scenario.

    http://www.senat.fr/rap/r16-425/r16-425.html

    (The British popular press are, of course, already making a big song and dance about the report. This type of populist reaction must be the biggest danger to the achievement of an outcome acceptable to all and negotiated in a reasonably civilised manner).

  3. I agree with the content of Kevin O’Rourke’s post and admire the obvious passionate intensity with which he puts forward his case. In particular, I wholeheartedly support his scathing description of those lunatics who want to take Ireland out of the EU. They are indeed a small minority, but we must remember that Irish subsidiaries of the Brexit-supporting UK press gives them a voice far in excess of their numerical strength. However, I disagree with his final point: “there is nothing that the EU or anyone else can do do prevent the return of such a frontier”. There is actually.

    The Irish government can mobilise support towards winning a referendum in N. Ireland on leaving the U. Kingdom and rejoining the Republic of Ireland (for good measure, it can additionally throw in its support for a similar referendum in Scotland). Regarding the N. Ireland referendum, this is eminently winnable. The catholic/nationalist share of the N. Ireland is rapidly approaching 50 per cent and beyond, and this support supplemented by a modest chunk of the formerly-unionist anti-Brexit business vote can push it past the winning post. The environment has never been more favourable for winning such a referendum. The Republic of Ireland is now richer than N. Ireland, is growing far more rapidly, has umpteen times as much FDI, has far more thriving agriculture and tourist industries, has had far greater population growth and far lower net emigration in recent decades, achieves better results in international student assessment tests like PISA, and, despite the absurdly-overrated NHS, now has higher life expectancy and lower mortality rates. One disadvantage that will have to be overcome is that the Dublin 4 media’s continual and relentless portrayal of the Republic of Ireland as an economic and social disaster area has had an effect on the N. Ireland electorate. This has led to a fall in the nationalist vote in the last few elections. But, this can easily be reversed when accurate information about current economic and social trends (some of which are listed above) is presented.

    1. @ JTO

      I think you yourself pointed out a possible reason for the drop in the nationalist vote in NI in recent elections: nationalists have only two leftist parties to vote for.

      I wouldn’t worry about the ‘relentless portrayal of the Republic of Ireland as an economic and social disaster area’. I was out an about in the Camden Street area of Dublin last night and everywhere was thronged, throbbing and, thrillingly, a huge international cultural mix of people all enjoying themselves. They voted with their feet to come here. Look at all the negative portrayal of the US at the moment and how little effect it has. People from all around the world will still want to travel there, emigrate there and do business there.

  4. Well argued and well put together.

    ‘The British market is gone, and thank God, gone forever’, was a reported DeValera quote from the 1930s that was recently recalled for me at a family gathering. Perhaps we are back at the same juncture.

    [I have found a second hand reference to that anecdote in the attached link from a 1933 Dail debate

    http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail1933111500029

    “His leader has gone a step forward. His leader said it was all wrong, that it was playing England’s game, that it was treachery to the Irish nation to have any solicitude for the British market because, he said, it is gone, and he thanks God it is gone.”]

    While the EU deserved a jolt, it is the decision to leave the customs unions that puts the Brexiteers beyond the Pale, literally. But I have to wonder that if the bash the Brits brigade in Brussels had handled the immediate post-Brexit vote more diplomatically, would it have changed the situation. Yet, Britain, or the UK actually, must accept the responsibility and the consequences for its own decisions.

    Everything moves along, and we must now take Brexit as a racing certainty.
    The question then arises as to what the tariff rates will be, on products between the EU and the UK.
    Why should negotiations start, for instance, on the basis of existing WTO rates, rates favourable to the EU as a whole including the UK, but rates wholly inappropriate for a hopefully collegiate EU, with the UK gone.

    Would it not be in Ireland’s interest to start the argument from the point of view that rates on all products, industrial and agriculture, should be the same, in a post Brexit EU. Whether those rate are set at 5%, 10%, 20%, or even 50%, that they be the same across all products headings. Why should tariff rates, in a disarranged union, have as their starting point tariff rates for a perfectly ordered customs union? Why should Ireland accept a situation where cars enter the UK at 10% (and vice versa), but meat will endure a 50% tariff? .
    Or why not, for instance, take all import EU tariffs on UK goods, and distribute those tariffs to each country in the EU in relation to their total trade with the UK?
    Tariffs are a result of years of manipulation in favour of larger countries, and Ireland simply cannot afford to lie back and take what is coming.

    It would, also, be a real pity to lose the opportunity provided by Brexit to impose an FTT. Surely, at some point, the master of the universe must be made to contribute to the costs of running their casinos.

    But the premise of the article is correct. Faced with a choice, as we now are, Ireland must opt for remaining in the EU. But that does not mean we become a cheerleader for rates that disadvantage Ireland disproportionately. Neither must we adopt the DeValera mantra that ‘The British market is gone, and thank God, gone forever’

  5. Good ideas, and quite some dangers down the road if something major does not give.
    .
    On a related issue, I am surprised that there is little mention in Ireland of the opportunity of joining Schengen. This is proving attractive for an island like Iceland, if not Greece.
    It seems today, that from Dublin airport, there are more flights to the Schengen area than to the British mainland, and that must certainly be more to Schengen during the summer, or what passes in Ireland for summertime. Even Reykjavík is sunnier and drier than Dubln ! https://weatherspark.com/averages/28818/7/Dublin-Leinster-Ireland
    Schengen doesn’t mean there are no immigration controls. Now I regularly have my ID checked by immigration on flights between two Schengen countries. (that is new since last year and a real pain when the queue is long, as there is no fast lane or automated fingerprint passage).
    But between the north and south, controlling ID would clearly be out of the question. Even if the UK authorities wanted controls, it would be a hopeless exercise. Even the most die-hard unionists I think would agree.
    So it is obvious to me that throwing Schengen in the works would have major implications for the very feasiblity of a hard Brexit, if the idea it also to hold together the UK, as it is now constituted. Tony Blair maybe has this threat in the back of his mind in talking about the constitutional integrity of the UK just this morning.
    At the same time, I think there must be dismay in other European capital on fears that Enda Kenny is cosying up to the British authorities on immigration control. The common line of defense by the EU has been no talks, even unofficailly, on any aspect of Brexit until Article 50 is declared.
    For the Irish authorities at some future date to apply British-imposed immigration controls against other EU residents and Schengen visa holders, when flights out of Irish airports in the south are ncreasingly into Schengen, seems fraught with risk. That however seems to be where the policy of today’s Irish administration is headed.
    Iceland is able to handle Schengen quite well, very much to its advantage. And the parallel for Ireland would be more Iceland and not Greece or Italy.
    I find it suprising that the likes of Sinn Féin and others don’t seem to see an opportunity here, yet.
    And more surprising still that the DUP could vote for Brexit, .. the image of turkeys voting for Christmas comes to mind.
    And from the British point of view, I suppose the danger as they see it, is that they come to an understanding just now with the likes of Enda Kenny, but are then wrong-footed by a fresh Irish administration at some point.
    I am sure many diplomats and some politicians have thought long and hard about all of this. Just I find it surprising there is next to nothing in the public debate .. so far. But then if you told me a year ago that I’d be writing a post on this topic, I wouldn’t have put odds at more than one in a hundred.
    Crazy times.
    fyi Ministerial statement on Schengen in 1995 here http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/zoomin?readform&chamber=dail&memberid=967&pid=NoraOwen&year=1995&month=03&day=14

    1. I think the Irish government is correct on Schengen. There is no meaningful disadvantage to Ireland being outside Schengen, as a country with no land border with the Schengen area. It gives us an ability to control our borders that many other EU countries would dearly like to have back.

      It’s not long since authoritative figures were claiming as a matter of factual certainty that Ireland would automatically be joined to Schengen upon Brexit, and I think that had the effect of killing public debate on the topic at the time. Some may be reluctant to go back to the topic and have their faces rubbed in the error.

    2. “For the Irish authorities at some future date to apply British-imposed immigration controls against other EU residents and Schengen visa holders, when flights out of Irish airports in the south are increasingly into Schengen, seems fraught with risk. ”

      But why would they do that? It’s up to the Brits to control their immigration, no?

  6. John, “One disadvantage that will have to be overcome is that the Dublin 4 media’s continual and relentless portrayal of the Republic of Ireland as an economic and social disaster area has had an effect on the N. Ireland electorate. This has led to a fall in the nationalist vote in the last few elections. But, this can easily be reversed when accurate information about current economic and social trends (some of which are listed above) is presented.”

    Methinks the causations are a tad more opaque and intertwined than you imagine. Maybe a lot of folk living in the lower ‘Three Green Fields’ would baulk at the idea of having to plough-over a fourth – which looks like its badly infected with several varieties of noxious, multi-herbicide resistant growths. Interesting times.

    The EU will have little or perhaps no empathy for our ‘Irish situation’. The Commission will negotiate an exit pack for the UK on behalf of the EU and we will just have to ‘suck-it-up’. Its a Roman option – “Slavery or the Galleys?” Nice one that.

  7. Will be interesting to look back at this post in 6 months time – I wonder what the EU will look like then (if it still exists). We might all be rushing for the exit.

  8. Ireland should be making the case for Northern Ireland staying in the customs union, even if it leaves the EU. Much more practical to have customs checks at Stranraer than Newry. And there are already a number of precedents.

  9. If Le Pen and Wilders win their respective elections, the latter being almost guaranteed of his victory, then we won’t be having this dilemma at all. Le Pen is quite adamant that she wants to replace the Euro with “a basket of currencies”, return borders and have an “independent” France. Considering the negative perception of the EU by the French, even her victory seems inevitable to me. Even the Italians want the lira back.

    So perhaps the Republic should be looking at a customs union with the UK, and a return to the Irish pound. Though the prospect horrifies me.

    1. @ VerticalFall 1) Wilders’ party may get the biggest number of seats – say about 30 – in the 150 member parliament but if so, it wouldn’t be a victory;

      2) As for France and the euro, it would be foolish to expect older savers to vote for a new currency. Even at a time of despair and economic disarray, the Greeks were not willing to support that step.

      1. I absolutely agree on the euro. People love being paid and getting benefits in the low inflation euro.

        The problem for the politicians is that without the inflation escape route economic shocks require a lot of work to navigate. The euro essentially puts all the more pressure to take on vested interests and tackle structural issues in ones economy. Work which is too much to ask some countries. Hence euro limbo.

        Of course if you’re an FDI heavy weight like Ireland you can get away with fiddling at the edges.

  10. @Ciaran

    I’m not sure joining Schengen would be terribly popular with most Irish people, although I know some purist Europhile thought leaders are pushing it – not least as a way of further isolating the UK (I suppose Ireland could take another bullet for team EU). I’m not sure the new assertiveness of populism (something that had a bit of a false start in Ireland in 2010 or so) would allow it.

    1. Agree. However, a single visa for 450m vs one for 65-70 is more sensible. We are cutting off our nose to spite our face in this regard. The difficulties non EU face, or can face, stuck here needing to get to any business in the EU are not insignificant.

      1. It simply isn’t possible to join Schengen while the British are still in the northern part of the island. It may not even be possible after they have left as some sort of ease of passage across the North Channel is likely to be part of the settlement. Much more should be done to facilitate non EU permanent residents in Ireland getting long term multi entry Schengen visas and they should have an automatic right to visit NI, if not necessarily GB.

      2. Right but isn’t the issue here the Irish in Britain. Whose got the stats on that? Priority is to retain common travel area and right of Irish to work etc. Anyone done the number crunching on that?

        1. Earlier in this discussion JtO mentions Scottish independence. This week’s Economist has an interesting piece which points out the recent very poor performance of the Scottish economy, largely due to the decline of two major industries: Oil and Financial Services. This would make the potential fiscal problems of an independent Scotland even worse, when one considers the loss of transfers from Westminster. See: http://www.economist.com/news/britain/21717089-cheap-oil-and-loss-jobs-finance-have-brought-economic-growth-almost

          As for Scotland remaining/joining the EU, what about a hard Anglo-Scottish border, given the high degree of integration between England and Scotland? How does this compare with Sotland-EU27 trade patterns. The little Englanders might of course like to be rid of the Scots, and the Barnett formula liabilities.

          Turning to Irish issues, the Guardian has a sobering piece on the total gridlock which will ensue at the English Channel ports if customs controls are introduced. This will effect Irish trade with the rest ot the EU which goes via the UK. Show the urgency of developing much better sea links (especially Ro-Ro) with the continent: See: https://www.theguardian.com/uk-news/2017/feb/20/post-brexit-customs-gridlock-could-choke-uk-trade-experts-warn

        2. Sarah,

          The DFA have the figures you’re looking for – 530,000 registered as ‘Irish’ in UK 2011 census, of whom 400,000 were reportedly born in Ireland. About 24% of the general UK population are reckoned to be of some Irish origin e.g. grandparent, parent etc.

          The problem lies not in the data; it’s political. The House of Commons passing of the Article 50 legislation without any of the proposed amendments to protect the N.I. Agreements or the ‘traditional’ CTA between Ireland the UK places Irish citizens domiciled in the UK in a quandary. Not so much different though to that confronting other EU citizens living and working in the UK, many for most of their adult lives. Several million people find themselves unwittingly stranded in a fog of insecurity about their future ‘right to remain’ in their adopted homeland. In addition they are inhumanely subjected to the indignity of being cast as political pawns by the UK government in the Brexit negotiations to come.

          It’s not as if the UK doesn’t need its EU migrants. UK universities, for instance, rely on EU citizens for about 25%+ of their academic staff. Not to mention the hundreds of thousands of EU citizens required to maintain other vital services within its economy. At the most basic level, think fresh strawberries, tomatoes and so on with supplies curtailed because there’s a steadily diminishing labour force to pick and pack them for the market? And that’s before the Brexit negotiations even get off the ground.

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