Would re-joining the EU Customs Union and Single market boost UK growth?

Labour MPs and leadership hopefuls are being dragged towards the UK rejoining the EU Customs Union and single market by the voices of the Lib Dems and Greens. These parties think much closer ties to the EU would be good for business and trade. This note looks at what would happen if the UK adopted either or both of these choices. Those in favour argue that the UK trades more with the EU than with any single country. Those who disagree point out that 59% of UK trade is non-EU, with the US as the most important single market. This non-EU trade has been growing faster than EU trade in recent years. 

When the UK left the EU Customs Union at the end of 2020 the government removed all tariffs on raw materials and components that UK manufacturers import from non-EU countries all round the world. This amounts to some £30 bn of imports. It took tariffs down to zero on 650 product lines in machinery, electronics and tools, and 20 lines of metals and metal products. The EU imposes tariffs on these items partly because they receive most of the revenue from customs dues or tariffs, but they are also protecting EU companies from more intense global price competition. 

The UK government also removed all tariffs on items the UK cannot produce or grow for itself, covering another £10bn of imports and including various food and textile product lines. In total the UK took tariffs off 2,000 product lines. 91% of the UK's imports of goods are now tariff-free thanks to these reductions and to the various free trade agreements negotiated with the EU, TPP, India and many others. As the government said at the time in 2021 "The UK General Tariff almost doubles the number of tariff lines that have zero import tariffs (compared to the EU tariff the UK used before)".

Were the UK to rejoin the Customs Union it would need to amend or rescind the free trade deals with the Transpacific Partnership, India, Australia and New Zealand because they would break EU rules. Some say these deals do not add much to UK GDP so their loss would have limited impact. By the same logic you could say a new trade deal with the EU would not add much to UK GDP, especially as the UK already has a free trade deal with no tariffs. The new trade deals the UK has negotiated since leaving, and the rolled over EU trade deals now renegotiated, have highlighted a number of opportunities particularly for services. 

The case for rejoining is based around trade in goods. The proponents hope there will be advantages in less bureaucracy if the UK adopts EU rules and customs levels. This will not always be the case. The EU, for example, has the Meursing table for tariffs on certain foods, with 13,000 varied tariffs depending on the milk and sugar content of food products. The UK has dropped use of this table and gone for a much simpler tariff structure on biscuits, confectionery and spreads with fewer rates. The government is seeking EU agreement on rules covering animal products to see if the complexity and frequency of veterinary inspections can be reduced.

56% of UK exports are services. Services are the fastest growing part of UK trade, and they are much bigger with non-EU countries than with the EU. There are no tariffs on services. The new UK trade deals struck after Brexit have chapters dealing with services, which EU trade deals either left out or changed very little. Looking ahead the UK needs greater liberalisation of services to reinforce this dominant and fastest growing part of the country's exports. 

Aligning the UK with single market rules brings some downside as well as upside. The government is keen to join the EU electricity trading and carbon emissions scheme. This will put up the UK carbon tax level to align with the higher EU one. This would push energy costs higher at a time when the government says it wants to get energy bills down and to ease the pressures on the cost of living. 

Aligning with EU rules on dairy and meat as the UK did in the EU might not produce the improvement in UK output the government wishes. During the UK's time in the Common Agricultural Policy the UK was short of milk quota, restricting the growth of value-added milk-based products in the UK. It fell into difficulties with health controls on beef where an EU ban on sales was extended beyond the time UK experts thought necessary. Part of the price of a possible deal has been the UK offer of 12 more years of high quotas of UK fish for continental boats, delaying new policies to restore the size of the former UK fishing fleet. 

The government thinks it can negotiate less bureaucracy for farm exports and for matters like music visits by UK orchestras and choirs abroad. It is looking at possible mutual recognition of professional qualifications between the continent and UK and is seeking to rejoin the Erasmus student scheme. They have not clarified whether this entails scrapping the cheaper UK Turing scheme which gives grants to UK students to study abroad but does not give grants to EU students to come to the UK as Erasmus does. Erasmus only allows students to go to EU Colleges. 

Any possible reset the UK agrees and implements is unlikely to make much difference to exports or growth. The concessions the UK are seeking will have a modest impact, and will come with UK payments to the EU, the adoption of more EU laws and an end to freedom to negotiate better deals with the rest of the world. The government seems to have ruled out joining the Customs Union and is more likely to align more rules and practices with the single market than to go for full membership. However, if the enhancement of growth is the core driver for closer ties with the EU, it is unclear how this would manifest itself and over what timeframe.

About the author 

The Rt. Hon Sir John Redwood has been a long-standing member of the EPIC Investment Partners Advisory Board. 

John is a well known commentator on governments and economies, with long experience of investment markets. Trained as an analyst at Robert Flemings, he moved to N.M. Rothschilds where he became a Manager and Director of pension and charitable funds and Head of Equity Research. He was seconded to become Head of the Downing Street Policy unit before chairing a large, quoted UK industrial business. He served as an MP and a government Minister.  

In 2007 he set up Pan Asset with a colleague, an investment management business that pioneered active/passive funds and models in the UK. Following the sale of the business to Charles Stanley, a quoted investment manager in the City, he became their Global Chief Strategist advising on non-UK markets and economies. He also ran a demonstration fund for the FT, writing articles about it and illustrating the use that can be made of ETFs in portfolios. 

He is now an adviser to EPIC, providing insights into the big investment issues of the day from the debt and spending problems of the major governments to the green and digital revolutions which have so much impact on equity markets. He is a Distinguished Fellow of All Souls College, Oxford, where he helps with their Endowment investments and gives occasional lectures on modern economics and politics.