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Trade Policy Insights: UK & EU Customs Union – Why in, why out?
07 February 2019
Daniela Stratulativ (daniela.stratulativ@ihsmarkit.com),
Head of Global Trade Analysis, IHS Markit Maritime &
Trade
Key Points:
If the UK leaves the EU Customs Union, it would be able to
negotiate free trade agreements on its own terms with non-EU
countries, and the EU. These agreements could take between four and
ten years. The EU has 43 free trade agreements (FTAs) in force,
with more than 50 countries, and is currently negotiating 12
regional and bilateral trade agreements.
Until new agreements are concluded, the UK will trade on WTO
terms with EU countries and non-EU partners. This translates into
higher tariffs, increased costs for intermediate outputs used in UK
production and higher prices for consumers. Rules of origin will
also translate into higher tariffs and will make UK products that
use intermediate outputs less competitive.
UK imports from non-EU countries in 2017 reached close to 129
million tonnes and over 291 bn USD. UK exports to non-EU partners
in 2017 were close to 235 bn USD and reached over 53 million
tonnes.
UK imports from the EU in 2018 reached 120 million tonnes and
364 bn USD. Exports totaled 108 million tonnes and 229 bn USD.
The Customs Union reduces trade barriers such as custom checks
and tariffs.
If the UK exits the EU Customs Union, airports and seaports
have to be prepared for additional customs checks and new
administrative procedures. The largest volumes of non-EU imports
come through London Heathrow, Manchester Airport, London Stansted,
Birmingham Airport, and East Midlands Airport. The busiest seaports
are Immingham, Milford, Southampton, Felixstowe, and Liverpool. The
UK's highest volumes of exports to non-EU countries leave through
Southampton, Felixstowe, London Gateway, Liverpool, and Hound Point
Terminal. The airports with the highest volumes of exports to the
EU are London Heathrow, London Stansted, East Midlands Airport,
Manchester Airport, and Warton Aerodrome.
EU Customs Union and trade agreements
The Customs Union reduces administrative and financial trade
barriers such as customs checks and tariffs. Goods cross borders
within the EU duty-free and common tariffs are imposed on any goods
entering the Customs Union, regardless of which EU country is the
importer.
If the UK leaves the Customs Union, it would be able to
negotiate free trade deals with non-EU countries.
The EU has 43 FTAs in force, with more than 50 countries, and
currently is negotiating 12 regional and bilateral trade
agreements.
Exiting the Customs Union means UK products will not benefit
from the lower tariffs that the EU has negotiated, since the UK
will have to trade under WTO rules. Britain's exporters would face
costly tariff increases. The UK would also have to impose tariffs,
raising consumer prices.
The UK will have to negotiate new trade agreements with each of
the countries that have FTAs with the EU. Even if the UK and the
current non-EU partners agree to sign bilateral agreements and keep
the terms as in the EU-negotiated FTAs, there is still one
significant issue that will affect UK exports: the rules of
origin.
For every product included in a trade agreement, the rules of
origin are specified: the percentage of that product that has to
come from domestic activity in the exporting country, in order for
the product to be eligible for duty-free access in the importing
country.
Currently, for each UK product, the UK inputs and the EU
partners intermediate inputs are cumulated to calculate the
percentage of UK content. If the UK does not benefit from EU FTAs
with other countries, the intermediate inputs incorporated in UK
products will not count as UK content. As a result, many UK
products will not qualify for duty-free access. This will make UK
products less competitive compared to similar products of EU
partners. It is estimated the UK imports $80 billion worth of goods
to use in production, excluding precious metals and stones (UK
Trade Policy Observatory). The main UK sectors that use
intermediate inputs are machinery and mechanical appliances,
electrical machinery, and vehicles.
The UK cannot conclude trade agreements until it has left the
EU, since it is still bound by the EU's exclusive right to
negotiate trade deals.
It could take longer than seven years to negotiate a trade deal
with the EU. The Canada - EU trade agreement (CETA) took seven
years to negotiate and was relatively simple. The CETA does not
include provisions for services and non-tariff barriers, which the
UK, as a large provider of professional services, will have to
include.
If the UK exits the EU Customs Union, what will be the impact on
importers and exporters due to tariffs and rules of origin
checks?
UK trade with non-EU countries
UK imports from non-EU countries in 2017 reached close to 129
million tonnes. The main partners are Norway with a 20% share,
United States 14%, Russia 10%, China 7%, and Canada 4%. In 2017,
the total value of non-EU imports was over 291 bn USD.
The UK's top five imports from non-EU countries by value are
precious metals, mineral fuels, machinery and mechanical
appliances, electrical machinery, and aircraft.
The largest volumes of UK imports from non-EU countries are
mineral fuels, ores, wood, plastering materials, and animal feed.
Mineral fuels, ores and animal feed imports increased in 2017
compared to the previous year at 7%, respectively 5%, and 5%, while
imports of wood and plastering materials decreased.
Mineral fuels, wood, electrical machinery, plastics, and steel
are imported in high volumes across the five seaports. In addition,
Southampton is the port of entry for vehicles; both Southampton and
Felixstowe receive high volumes of furniture, while Liverpool is
the entry for oil seeds, cereals, sugar, and confectionery.
In 2017, the total value of UK exports to non-EU countries was
close to 235 bn USD. The main partners by value are the United
States with a 25% share, China 9%, Switzerland 8%, Hong Kong and
United Arab Emirates each with 4%. UK exports from non-EU countries
in 2017 reached over 53 million tonnes.
The UK's top five exports to non-EU countries by value are
machinery and mechanical appliances, vehicles, precious metals,
pharmaceuticals, and electrical machinery.
The largest volumes of UK exports to non-EU countries are
mineral fuels, iron and steel, pulp of wood and scrap paper,
vehicles and plastics. Mineral fuels exports increased in 2017
compared to the previous year at 27%, while iron, steel and
vehicles volumes increased by 8%.
UK exports to the EU and imports from EU countries will be
subject to tariffs and rules of origin checks, according to WTO
rules. In 2018, imports reached 120 million tonnes and 364 bn USD.
Exports totaled 108 million tonnes and 229 bn USD.
The largest volumes of UK exports and imports to/from the EU are
in the energy and mining sector, chemicals, vegetables, metals and
wood. Different products are exported and imported in these
categories.
Risks, opportunities, impact on supply chains and
shipping industry can be identified for any products at 6-digit
code level within
GTA. Insights can be complemented with bill of lading
data fromPIERSand vessel movements via
AIS.
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Full description of HS codes used in the analysis:
23 Residues And Waste From The Food Industries; Prepared
Animal Feed 25 Salt; Sulfur; Earths And Stone; Plastering Materials,
Lime And Cement 26 Ores, Slag And Ash 27 Mineral Fuels, Mineral Oils And Products Of Their
Distillation; Bituminous Substances; Mineral Waxes 30 Pharmaceutical Products 39 Plastics And Articles Thereof 44 Wood And Articles Of Wood; Wood Charcoal 47 Pulp Of Wood Or Other Fibrous Cellulosic Material;
Recovered (Waste And Scrap) Paper And Paperboard 71 Natural Or Cultured Pearls, Precious Or Semiprecious
Stones, Precious Metals; Precious Metal Clad Metals, Articles
Thereof; Imitation Jewelry; Coin 72 Iron And Steel 84 Nuclear Reactors, Boilers, Machinery And Mechanical
Appliances; Parts Thereof 85 Electrical Machinery And Equipment And Parts Thereof;
Sound Recorders And Reproducers, Television Recorders And
Reproducers, Parts And Accessories 87 Vehicles, Other Than Railway Or Tramway Rolling Stock,
And Parts And Accessories Thereof 88 Aircraft, Spacecraft, And Parts Thereof