Question

Compare the welfare effect of the UK leaving the EU Single market versus the Customs union

Answer 1

The UK leaving the US single market :

Micro Point 1 :

The EU is a customs union and leaving it may lead to higher import tariffs on EU exports.

Higher import prices increase costs for UK firms who then experience lower profits. Consumer welfare would suffer

Evaluation:

The assumes that the UK is unable to negotiate a wide-ranging free trade deal with the EU before Brexit is finalised and a transition period comes to an end

Micro Point 2:

Some UK firms and industries might suffer from a decline in net inward migration from EU. In sectors such as hospitality, technology and construction, EU workers have helped overcome skills shortages

Evaluation:

A fall in UK payments to the EU could fund increased investment in better technical training for UK workers.

Micro Point 3

Leaving the EU might cause delays at borders as UK firms comply with EU rules. Many products cross borders several times. Just in time delivery requires minimal border delays, costs will rise

Evaluation:

Most UK exporters already comply with EU regulations. Post Brexit, businesses will have less red tape to deal with

Macro Point 1

Leaving the EU will allow the UK to make many free trade agreements with other nations

Free trade deals with fast-growing emerging economies might see a surge in UK exports which will add to GDP growth

Evaluation:

However complex trade agreements take time. The recent EU-Canada free trade deal took seven years to agree.

Macro Point 2

Leaving the single market will allow the UK economy to limit net inward migration from EU. This will provide opportunities for UK people to find work and also lead to a slower growth of house prices and rents

Evaluation:

But the UK suffers from long run skills shortages. Parts of the economy and the NHS are hugely reliant on migration

Macro Point 3:

Leaving the single market will diminish UK trade with the EU and cut inward investment.

44% of Britain’s exports go to the EU - £220bn out of £510bn. Higher tariffs would make UK exports more expensive.

Evaluation:

This depends on the trade deal we make with the EU. Inward FDI depends on many factors including tax & regulations

Conclusions:

• Most economists believe that the UK would be better off inside the single market – free trade brings mutual gains in welfare
• Europe is our biggest trade partner – getting the best possible trade deal with the EU is hugely important
• The economy has been doing quite well since the Brexit vote (unemployment is at a 40 year low of just 4.6% of the labour force)
• But inflation is now higher in part because of the fall in the external value of sterling.
• Most of the pessimistic forecasts focus on the medium to long-term effects of being outside of the single market
• Many businesses will have to adjust their supply-chains and some will re-locate investment to mainland Europe. Others will successfully pivot and sell more goods and services to fast-growing emerging countries including China, India and sub Saharan Africa
• Overall – the consequences of Brexit for the UK remain highly uncertain

Essential contextual background:

• The EU, taken as a whole is the UK’s largest trading partner. In 2017, UK exports to the EU were £274 billion (44% of all UK exports). UK imports from the EU were £341 billion (53% of all UK imports).
• The UK had an overall trade deficit of -£67 billion with the EU in 2017. A surplus of £28 billion on trade in services was outweighed by a deficit of -£95 billion on trade in goods.

The difference between the Europe's "customs union” and “single market”:

• WHEN discussing a “hard” or a “soft” Brexit, commentators regularly talk of the European Union’s “customs union” and “single market”. Currently Britain is a member of both. It is possible to be a member of just the customs union but not the single market (look at Turkey, Andorra or the Isle of Man). Conversely, it is possible to be a member of just the single market but not the customs union (take Norway or Iceland). Often the two terms are elided, which has the effect of concealing important differences. What are they?
• A customs union is a type of free-trade area. Two or more countries agree to abolish restrictions on mutual trade, and to set up a common system of tariffs and import quotas that apply to non-members. In the jargon, they have a “common external tariff” (CET). The EU, for instance, has a common 10% tariff on cars imported into it. The main advantage of a customs union is understood when you consider what happens when there is no CET. If France had zero tariffs on Japanese whisky, but Britain had a 10% tariff, then it would be a profitable wheeze to export Japanese whisky to France, and thence (freely) to Britain. So Britain would have to carefully monitor whisky imports from France, and slap a tariff on any Japanese stuff sneaking in (so-called “rules of origin” regulations). With a CET, however, such monitoring is no longer necessary (because the possibility of such arbitrage is eliminated). One disadvantage of a customs union, however, is that its members are not allowed to negotiate their own trade deals with third countries.

Customs Unions and Single Markets:

The Economics of a Customs Union:

What is a customs union?

• A customs union comprises countries which agree to abolish tariffs and quotas between member nations to encourage free movement of goods and services. A customs union also adopt a common external tariff (CET) on imports from non-members countries.

Give examples of customs unions in the global economy

• The European Union
• Caribbean Community (CARICOM)
• Eurasian Customs Union (EACU)
• Southern African Customs Union (SACU)
• Turkey, Andorra and San Marino are each in a bilateral customs union with the EU

Exam tip:

Specific knowledge of the economics of a customs union is needed for the exam. Apart from the European Union, another example is that Kazakhstan and Belarus make up a customs union with Russia – forming for the basis for a new Eurasian customs union system

Identify ways in which a Customs Union differs from a Single Market

A single market is a deeper form of integration than a customs union.

A single market involves the free movement of goods and services, capital and labour.

In addition to a common external tariff, a single market also tries to cut back on the use of non-tariff barriers such as different rules on product safety and environmental standards replacing them with a common set of rules governing trade in goods and services within the common market.

Countries such as Norway and Switzerland are outside of the European Union, but they are members of the EU single market, paying into the EU budget to take advantage of some of the benefits of the free flow of capital, labour, goods and services.