FTAs and Customs Unions: For understanding Brexit

Author: Yoichi Sekizawa, Senior Fellow, RIETI

Should the UK decide to simply exit the customs union of EU, tariffs between the UK and the member countries of the EU will be reinstated. For instance in terms of vehicles, if a finished vehicle is exported from the UK to an EU member country, a 10% tariff will be imposed, and conversely, if a finished vehicle from an EU member country is exported to the UK, a 10% tariff will be imposed unless the UK alters its tariffs. By exiting the EU, the UK will be able to change its tariff from that of the EU. The UK, however, will probably be bound by the tariff rates, which had been incorporated into the EU’s commitments to the WTO (referred to as the concession tax rates), and in such case, the UK will be able to easily lower the tariff but will have difficulty raising it.

In order for the UK to continue duty-free exports with the EU member countries, it will need to conclude an FTA, and it is generally understood that in such cases the goods to be exported from the UK will need to satisfy the rules of origin. However, the White PaperOpen a new window published by the British government is based on a different concept. Instead of setting the rules of origin, it proposes to conclude a “Facilitated Customs Arrangement” with the EU; for goods entering the UK from outside of the EU, either the EU’s or the UK’s tariff will be imposed depending on the final destination (if undecided, the higher of the two), thereby avoiding the problem of circumvention and allowing for the free flow of goods between the EU and the UK. In the case of most FTAs, tariffs had been set between the counterparties and then the rules of origin are discussed to be set to compensate for the elimination of such tariffs. However, the case of Brexit is different. There had been a free flow of goods to begin with, and now the counterparties are proposing to impose some restrictions on this flow. And thus, it is understandable that the UK proposes a scheme that is going against conventional wisdom, nevertheless, for the EU, it is probably an uncomfortable proposal, as the complexity of the scheme casts doubt on its feasibility.

Read the entire article on the RIETI website

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