Chapter 2: How the EU customs union works
The EU customs union
9.The EU has the most comprehensive customs union in the world. It has been in place since 1968 and comprises all EU Member States, Monaco (via an agreement with France), the Isle of Man and the Channel Islands.7
10.The legal basis for the EU customs union is Article 28 of the Treaty on the Functioning of the European Union.8 It states:
“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.”9
11.The Article text sets out the three key characteristics of the EU customs union:
(a)By virtue of their membership of the EU, Member States are automatically members of the EU customs union.
(b)Trade in goods between Member States is tariff-free.
(c)All Member States treat imports from third countries in the same way by applying the Common External Tariff.
12.The application of the Common External Tariff means that goods from outside the EU are charged the same import tariff, irrespective of the Member State through which they enter the EU. To ensure uniform application of customs rules, the Union Customs Code (UCC) was developed. It provides the legal foundation for dealing with goods entering from third countries; its most recent iteration has been in force since 1 May 2016.10
13.Inherent in the EU customs union and the application of the Common External Tariff is the need for a single commercial policy. Under the EU’s Common Commercial Policy, trade agreements with non-EU countries are negotiated by the European Commission on behalf of all Member States.11 While the UK remains a member of the EU’s customs union, it is bound by the Common Commercial Policy and is unable to enter into its own free trade agreements with countries outside the EU.12 Rules of origin, which are used to determine where a product was produced to levy the appropriate customs duty, do not apply to trade between EU Member States. They are considered in Chapter 3.
Administrative requirements and customs procedures for intra-EU trade
14.Goods traded between EU businesses are generally not subject to customs procedures. They are regarded as ‘goods in free circulation’ within the customs union, which means that no customs duty or import VAT is charged on them.13 Clive Broadley, Consultant, Freight Transport Association, put this succinctly: “If the goods are going to an EU Member State customer, there are no requirements, full stop. It is no different from putting your goods on a lorry here in London and sending them to Leeds.” Only goods that require risk-based and highly targeted border checks—such as firearms—are controlled.14
15.VAT-registered EU businesses that exceed a certain threshold when trading within the EU have to complete a monthly customs form—an Intrastat declaration.15 Susan Morley, Director, Morley Consulting Training Limited, explained that Intrastat declarations were “an equivalent customs entry”, which were done retrospectively.16 The information provided on the Intrastat reports is often less than satisfactory. Many businesses fail to identify the correct commodity codes and, she added, “it is known that a lot of the big players use one code”, on the grounds that nobody “checks on it anyway”.17
Figure 1: Summary of administrative requirements for intra-EU trade
Source: Written evidence from Freight Transport Association (BCA0001)
Bilateral customs unions with the EU: Turkey, Andorra and San Marino
16.With the exception of Monaco and the Crown Dependencies, there is no precedent for a non-EU country being a member of the EU’s customs union. The EU has, however, entered into three separate customs unions or partial customs unions with Turkey, and the microstates of Andorra and San Marino.18 The EU-Turkey and EU-Andorra customs unions are hybrid arrangements. The EU-Turkey customs union excludes agricultural and coal and steel products, whereas the EU-Andorra customs union’s scope is limited to industrial products and processed agricultural products.19 The customs union with San Marino is broader, but excludes coal and steel.20
17.The UK Government has repeatedly ruled out entering into a customs union with the EU on the grounds that this would tie the UK to the EU’s Common Commercial Policy and limit its ability to negotiate free trade deals with third countries.21
How is the EU’s customs union different from the Single Market?
18.The Single Market is wider in scope than the EU customs union. In addition to the free movement of goods, the Single Market also provides for the free movement of capital, services and people (the so-called ‘four freedoms’).22 Some European countries outside the EU (Iceland, Liechtenstein, Norway and Switzerland) participate in the Single Market, but are not part of the customs union. Iceland, Norway and Liechtenstein participate in the Single Market as Members of the EEA, and while they retain their ability to set their own external tariffs and negotiate free trade deals with third countries, they have to accept the EU’s four freedoms.23 The EEA Agreement does not eliminate the need for border checks between EU and non-EU EEA Member States entirely—special provisions apply for agricultural and fisheries products, for example.24 Switzerland’s position is somewhat different in that it has signed more than 100 bilateral agreements with the EU, ensuring partial membership of the Single Market, but with notable exclusions, such as financial services. It accepts the principle of freedom of movement of people.25
7 The Isle of Man and the Channel Islands are part of the EU’s customs union by virtue of Protocol No.3 to the UK’s Treaty of Accession. The Sovereign Base Areas of Akrotiri and Dhekelia on the island of Cyprus are also part of the EU’s customs union.
8 Treaty on the Functioning of the European Union (TFEU), OJ C 326 (consolidated version of 26 October 2012) Further detail is addressed by: Articles 30–32 of the Treaty (deals with the Customs Union); Article 33 TFEU (deals with Customs Cooperation); and Articles 34–37 TFEU (deals with the free movement of goods and the prohibition of quantitative restrictions on imports and exports between Member States and all measures having equivalent effect).
9 Article 28, Treaty on the Functioning of the European Union
10 The Community Customs Code was established in 1992 by Council Regulation 2913/92. This was replaced by Regulation 450/2008 which established the Modernised Customs Code. In 2016, the current iteration—the Union Customs Code—was introduced by Regulation 952/2013.
11 Article 3(1)(e), Treaty on the Functioning of the European Union confers exclusive competence on the Union to pursue the EU’s common commercial policy. European Commission, ‘What is trade policy?’, 23 February 2018: http://ec.europa.eu/trade/policy/policy-making/index_en.htm [accessed 24 August 2018]
12 Under Article 124(4) of the draft Withdrawal Agreement during the proposed transition period the UK may sign, negotiate and ratify its own international agreements provided they do not come into force before 31 December 2020.
13 Article 30, Treaty on the Functioning of the European Union. See also: European Commission, ‘Free circulation’: https://ec.europa.eu/taxation_customs/business/customs-procedures/what-is-importation/free-circulation_en [accessed 24 August 2018]
14 HM Government, ‘Guidance: Import and export licenses’, 17 October 2016: https://www.gov.uk/guidance/export-and-import-licences-for-controlled-goods-and-trading-with-certain-countries#other-import-licences-and-controls [accessed 24 August 2018]
15 ‘Intrastat’ is the system for collecting information and producing statistics on the trade in goods between EU Member States. If a firm’s trade with the EU27 exceeds £1.5 million imports, it must provide additional information on a monthly Intrastat declaration. For exports to the EU27, UK businesses are required to declare the total of their sales or acquisitions of goods from other EU Member States on their VAT return. However, if a firm’s trade with the EU exceeds £250,000 for goods exports, additional information must be provided on a monthly Intrastat declaration. See also: HM Government, ‘Declare goods you’ve moved in or out of the UK using Intrastat’: https://www.gov.uk/intrastat [accessed 24 August 2018]
18 European Commission, ‘The EU’s Customs Union’: http://trade.ec.europa.eu/tradehelp/customs-unions [accessed 24 August 2018]
19 Ibid.
20 Ibid.
21 See, for instance: HM Government, The future relationship between the United Kingdom and the European Union, Cm 9593, July 2018: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/725288/The_future_relationship_between_the_United_Kingdom_and_the_European_Union.pdf [accessed 24 August 2018]
22 European Parliament, ‘The internal market’: http://www.europarl.europa.eu/factsheets/en/section/189/the-internal-market [accessed 24 August 2018]
23 European Free Trade Association, ‘European Economic Area (EEA)/Relations with the EU’: http://www.efta.int/eea [accessed 24 August 2018]
24 European Free Trade Association, ‘Frequently asked questions on EFTA and the EEA’: http://www.efta.int/faq [accessed 11 September 2018]
25 European Commission, ‘Countries and regions: Switzerland’, 16 April 2018: http://ec.europa.eu/trade/policy/countries-and-regions/countries/switzerland/index_en.htm [accessed 24 August 2018]