Briefings

The European Single Market And Customs Union

The European Single Market
Written by Graham Gudgin

The creation of the Single Market and Customs Union are the EU’s greatest achievements. There is now a single market of 512 million people, much larger than the USA and including a free-trade area larger than NAFTA.

The creation of the Single Market and Customs Union are the EU’s greatest achievements. There is now a single market of 512 million people, much larger than the USA and including a free-trade area larger than NAFTA.  The advantages of a Single Market and Customs Union are to create a unified economic area large enough for firms to realise economies of scale through having unimpeded access to a large number of customers. Economies of specialisation can also be achieved with access to a large number of suppliers and complex supply chains. It is also expected that a large market will provide greater competition and hence lower prices, also encouraging firms to adopt new innovations. The absence of tariffs plus standardised regulations tends to increase the amount of trade. Economists tend to assert that growing trade stimulates faster growth in productivity, but the evidence for this among advanced economies is weak.

In practice, these advantages have been eroded by the decline in global tariffs through GATT/WTO multi-lateral agreements and by growing standardisation in world regulatory standards. Even so, the EU Single market has advantages and it is these which the EU is exploiting in its tough negotiating stance over Brexit. While the EU has internal free-trade, it should be regarded as quite protectionist towards the rest of the world, especially over food and drink products. The current Brexit trade negotiations are unique in involving two areas that already have free trade and the same regulatory framework. The UK would like to maintain this, but the EU, although professing to support free trade is threatening to impose protection on the UK.

THE CUSTOMS UNION

The European Economic Community (EEC) was formed in 1958 under the Treaty of Rome as a customs union. This meant that goods could move duty-free between member states. At the same time the EEC customs union had, and as the EU continues to have, a Common External Tariff (CET) which is administered at EU level. Individual states no longer have any direct control over international trade policy and have no administrative staff to negotiate or regulate trade. When the UK joined the EEC in 1973 its tariff levels were not initially greatly different from the EEC Common External Tariff, but it took until 1978 for the UK to fully adopt the common external tariff. Since then all UK trade has been subject to the CET.

Current members of the customs union include all EU member states plus the European micro-states (Andorra, Monaco and San Marino) and Turkey. These latter states have tariff-free access to the EU but must keep their external tariffs aligned with the EU. They are not members of the EU and hence do not share free movement of people or capital. The Channel Islands, Isle of man and British bases on Cyprus are also members of the customs union but outside the EU. Gibraltar is outside the customs union, although a member of the EU under the aegis of the UK. A number of other enclaves (within Switzerland and Morocco) are in the EU but outside the customs Union.

The EU is currently implementing its Union Customs Code (UCC).  This will streamline customs legislation and procedures, and complete the shift to fully electronic customs clearing. Larger firms can also apply for the status of compliant and trustworthy economic operators (AEOs) to reinforce swifter customs procedures. These reforms will be fully in place by 2020, and hence by the time the UK leaves the Customs Union. The UK Position paper of August 2017 offered similar procedures for the land border on the island of Ireland. These were rejected by the EU at the time but may resurface as part of the final UK-EU trade agreement.

The Common External Tariff is a system of individual import duties on around 6,000 different commodities. The EU also operates quotas and mixes of quotas and tariffs, on some commodities. The average tariff, weighted by value, is 4%. Most manufactured goods other than clothing and textiles have low tariffs of under 3%. One exception is cars and car components which have tariffs of 10 and 4.5% respectively. These were introduced to prevent Japanese car imports from displacing all European car production at the end of the 1980s. One consequence was the decision of Japanese car producers to open factories within the EU and chiefly within the UK. The really high tariffs are on food and drink products. These average 11% but are much higher for important products including wine (12%) beef (20%) sugar products (24%)and butter and cheese (40%). It is claimed by economists that trade is governed by ‘gravity’ i.e. it is most effective to trade with nearby countries, but the pattern of EU tariffs on foods is aimed at restricting competition with distant countries like Australia and Argentina. In practice the EU enforces a pattern of predominantly local trade in food and drink through high tariffs.

SINGLE MARKET

The formation of the Single Market is the key economic achievement of the EU although we should note that the EEC had existed for 34 years before the Single Market (sometimes called the Internal Market) was established under the Maastrict Treaty in 1992. Until 1992 goods trade had been on a tariff-free basis within the EU but a range of regulatory differences between EU states meant that trade in both goods and services was less free than it could have been, and access to jobs and social security in other countries was incomplete.

Technically, the Maastrict Treaty completed (rather than introduced) the Single Market. The four freedoms of: free movement within the EU in goods, services, labour and capital were guaranteed by the Treaty although it took some years to fully operationalise this aim. Full integration of services trade has been slowest, and some gaps still remain. The extent of these freedoms is overseen by the European Court of Justice and the freedoms have been clarified and extended under a series of ECJ judgments. The full set of EU law on the Freedoms was set out in the 2007 Treaty on the Functioning of the EU (TFEU). This treaty is the current form of the Treaties of Rome and Maastrict.

The TFEU bans any tariff or quantitative barriers, direct or indirect, to internal trade. Governments must take action if private groups attempt to block imports from other member states as French farmers have for instance attempted in the past. The TFEU aims to remove all intangible barriers to trade, and to harmonise regulations and standards, but has yet to completely do so for services. There are no tariffs on services, but local regulations can be impediments to trade in sectors like the law, finance medicine or air transport. There is a right of establishment, i.e. a right of any EU citizen or company to set up businesses anywhere in the EU.

Free movement of capital has been an aim since the original Treaty of Rome, but since Maastrict all restrictions are illegal (except emergency restrictions on capital outflows as recently in Greece and Cyprus). The formation of the Euro and the Euro-area of 19 EU states, has eased the flow of capital even further. This is not an unalloyed benefit since for years after the Euro was formed Greece, Spain and Portugal had access to low cost financing which eventually resulted in major recessions.

Free movement of people means freedom to live, work, study or retire in another country. Rights have been steadily extended to cover the right to vote in local and EU elections, and some rights to social security (more so in the UK were many social benefits are non-contributory),

The elimination of internal borders was introduced by the Amsterdam Treaty in 2007 which set up the Schengen area of borderless countries for both trade and personal travel. The UK has stayed outside this area, as has Ireland in order to maintain the older UK-Ireland Common Travel Area.

The EU and ECJ have no jurisdiction over taxation, and particularly not over corporation tax. This allows a number of states, and particularly Ireland, to maintain a tax haven status with low rates of tax. Some in Ireland fear that the immunity from EU jurisdiction on tax may disappear once the UK has left the EU.

IMPLICATIONS FOR THE UK

The Single Market is at the heart of the EU and leaving the EU means leaving the Single Market. Any option involving remaining within the Single market, such as EEA membership like Norway, or EFTA membership like Switzerland, means accepting the four freedoms including the free movement of persons. Since control over migration was a major reason for the Brexit vote in June 2016, the UK cannot remain in the Single Market without essentially reneging on the Referendum result. The UK has, instead opted for a ‘Canada plus’ free-trade agreement. This involves free trade in goods plus substantial regulatory alignment, but no free movement of persons. There should be no EU objection to a basic CETA-type FTA, but the it may be difficult to augment this with extra agreements on financial services.

Nor does it make much sense for the UK to remain within the Customs Union (but outside the Single Market) like Turkey. Membership of the Customs Union would facilitate cross-border trade administration but would involve the UK accepting the EU’s Common External Tariff regime, and prevent the UK from negotiating separate trade agreements with non-EU nations. Cross-border trade is already becoming lightly administered through the Union Customs Code, and most pro-Brexit supporters want the freedom to negotiate new trade agreements, for instance with the USA, Inia and China.

THE EUROPEAN SINGLE MARKET AND CUSTOMS UNION

The creation of the Single Market and Customs Union are the EU’s greatest achievements. There is now a single market of 512 million people, much larger than the USA and including a free-trade area larger than NAFTA.  The advantages of a Single Market and Customs Union are to create a unified economic area large enough for firms to realise economies of scale through having unimpeded access to a large number of customers. Economies of specialisation can also be achieved with access to a large number of suppliers and complex supply chains. It is also expected that a large market will provide greater competition and hence lower prices, also encouraging firms to adopt new innovations. The absence of tariffs plus standardised regulations tends to increase the amount of trade. Economists tend to assert that growing trade stimulates faster growth in productivity, but the evidence for this among advanced economies is weak.

In practice, these advantages have been eroded by the decline in global tariffs through GATT/WTO multi-lateral agreements and by growing standardisation in world regulatory standards. Even so, the EU Single market has advantages and it is these which the EU is exploiting in its tough negotiating stance over Brexit. While the EU has internal free-trade, it should be regarded as quite protectionist towards the rest of the world, especially over food and drink products. The current Brexit trade negotiations are unique in involving two areas that already have free trade and the same regulatory framework. The UK would like to maintain this, but the EU, although professing to support free trade is threatening to impose protection on the UK.

THE CUSTOMS UNION

The European Economic Community (EEC) was formed in 1958 under the Treaty of Rome as a customs union. This meant that goods could move duty-free between member states. At the same time the EEC customs union had, and as the EU continues to have, a Common External Tariff (CET) which is administered at EU level. Individual states no longer have any direct control over international trade policy and have no administrative staff to negotiate or regulate trade. When the UK joined the EEC in 1973 its tariff levels were not initially greatly different from the EEC Common External Tariff, but it took until 1978 for the UK to fully adopt the common external tariff. Since then all UK trade has been subject to the CET.

Current members of the customs union include all EU member states plus the European micro-states (Andorra, Monaco and San Marino) and Turkey. These latter states have tariff-free access to the EU but must keep their external tariffs aligned with the EU. They are not members of the EU and hence do not share free movement of people or capital. The Channel Islands, Isle of man and British bases on Cyprus are also members of the customs union but outside the EU. Gibraltar is outside the customs union, although a member of the EU under the aegis of the UK. A number of other enclaves (within Switzerland and Morocco) are in the EU but outside the customs Union.

The EU is currently implementing its Union Customs Code (UCC).  This will streamline customs legislation and procedures, and complete the shift to fully electronic customs clearing. Larger firms can also apply for the status of compliant and trustworthy economic operators (AEOs) to reinforce swifter customs procedures. These reforms will be fully in place by 2020, and hence by the time the UK leaves the Customs Union. The UK Position paper of August 2017 offered similar procedures for the land border on the island of Ireland. These were rejected by the EU at the time but may resurface as part of the final UK-EU trade agreement.

The Common External Tariff is a system of individual import duties on around 6,000 different commodities. The EU also operates quotas and mixes of quotas and tariffs, on some commodities. The average tariff, weighted by value, is 4%. Most manufactured goods other than clothing and textiles have low tariffs of under 3%. One exception is cars and car components which have tariffs of 10 and 4.5% respectively. These were introduced to prevent Japanese car imports from displacing all European car production at the end of the 1980s. One consequence was the decision of Japanese car producers to open factories within the EU and chiefly within the UK. The really high tariffs are on food and drink products. These average 11% but are much higher for important products including wine (12%) beef (20%) sugar products (24%)and butter and cheese (40%). It is claimed by economists that trade is governed by ‘gravity’ i.e. it is most effective to trade with nearby countries, but the pattern of EU tariffs on foods is aimed at restricting competition with distant countries like Australia and Argentina. In practice the EU enforces a pattern of predominantly local trade in food and drink through high tariffs.

SINGLE MARKET

The formation of the Single Market is the key economic achievement of the EU although we should note that the EEC had existed for 34 years before the Single Market (sometimes called the Internal Market) was established under the Maastrict Treaty in 1992. Until 1992 goods trade had been on a tariff-free basis within the EU but a range of regulatory differences between EU states meant that trade in both goods and services was less free than it could have been, and access to jobs and social security in other countries was incomplete.

Technically, the Maastrict Treaty completed (rather than introduced) the Single Market. The four freedoms of: free movement within the EU in goods, services, labour and capital were guaranteed by the Treaty although it took some years to fully operationalise this aim. Full integration of services trade has been slowest, and some gaps still remain. The extent of these freedoms is overseen by the European Court of Justice and the freedoms have been clarified and extended under a series of ECJ judgments. The full set of EU law on the Freedoms was set out in the 2007 Treaty on the Functioning of the EU (TFEU). This treaty is the current form of the Treaties of Rome and Maastrict.

The TFEU bans any tariff or quantitative barriers, direct or indirect, to internal trade. Governments must take action if private groups attempt to block imports from other member states as French farmers have for instance attempted in the past. The TFEU aims to remove all intangible barriers to trade, and to harmonise regulations and standards, but has yet to completely do so for services. There are no tariffs on services, but local regulations can be impediments to trade in sectors like the law, finance medicine or air transport. There is a right of establishment, i.e. a right of any EU citizen or company to set up businesses anywhere in the EU.

Free movement of capital has been an aim since the original Treaty of Rome, but since Maastrict all restrictions are illegal (except emergency restrictions on capital outflows as recently in Greece and Cyprus). The formation of the Euro and the Euro-area of 19 EU states, has eased the flow of capital even further. This is not an unalloyed benefit since for years after the Euro was formed Greece, Spain and Portugal had access to low cost financing which eventually resulted in major recessions.

Free movement of people means freedom to live, work, study or retire in another country. Rights have been steadily extended to cover the right to vote in local and EU elections, and some rights to social security (more so in the UK were many social benefits are non-contributory),

The elimination of internal borders was introduced by the Amsterdam Treaty in 2007 which set up the Schengen area of borderless countries for both trade and personal travel. The UK has stayed outside this area, as has Ireland in order to maintain the older UK-Ireland Common Travel Area.

The EU and ECJ have no jurisdiction over taxation, and particularly not over corporation tax. This allows a number of states, and particularly Ireland, to maintain a tax haven status with low rates of tax. Some in Ireland fear that the immunity from EU jurisdiction on tax may disappear once the UK has left the EU.

IMPLICATIONS FOR THE UK

The Single Market is at the heart of the EU and leaving the EU means leaving the Single Market. Any option involving remaining within the Single Market, such as EEA membership like Norway, or EFTA membership like Switzerland, means accepting the four freedoms including the free movement of persons. Since control over migration was a major reason for the Brexit vote in June 2016, the UK cannot remain in the Single Market without essentially reneging on the Referendum result. The UK has, instead opted for a ‘Canada plus’ free-trade agreement. This involves free trade in goods plus substantial regulatory alignment, but no free movement of persons. There should be no EU objection to a basic CETA-type FTA, but the it may be difficult to augment this with extra agreements on financial services.

Nor does it make much sense for the UK to remain within the Customs Union (but outside the Single Market) like Turkey. Membership of the Customs Union would facilitate cross-border trade administration but would involve the UK accepting the EU’s Common External Tariff regime, and prevent the UK from negotiating separate trade agreements with non-EU nations. Cross-border trade is already becoming lightly administered through the Union Customs Code, and most pro-Brexit supporters want the freedom to negotiate new trade agreements, for instance with the USA, Inia and China.

Contributed by Graham Gudgin

About the author

Graham Gudgin