What is the customs union and why does it matter?

07 December 2017

1. What is a customs union?

A customs union is a type of free trade agreement (FTA) which involves the removal of tariff barriers between members, together with the acceptance of a common (unified) external tariff (CET) against non-members.

Countries that export to other countries in the customs union only need to make a single payment (duty), once the goods have passed through the border. Once inside the union goods can move freely without additional tariffs

A customs union is superior to a simple FTA, in that it can prevents trade deflection. This can occur when non-members ship their goods to a low tariff FTA member (or set up a subsidiary in the low tariff country) and then re-ship to a high tariff FTA member. A unified external tariff, along with 'rules of origin' ensure that there are no such trade distortion.

Customs union are typically one of the first step towards greater economic and political integration, preceding the establishment of a common market (with common policies on product regulation and freedom of movement beyond goods) and a monetary union (single currency).

Many customs union are currently in operation across the world e.g.: the Andean Community (CAN), the Caribbean Community (CARICOM), the Economic and Monetary Community of Central Africa (CEMAC), the Gulf Cooperation Council (GCC), the Southern Common Market (MERCOSUR), the Southern African Customs Union (SACU), the West African Economic and Monetary Union (WAEMU).

Customs union are treated as a single contracting party at the WTO (GATT article XXIV) and register a single schedule of commitments.

2. The European customs union (EUCU)

Originally planned in the 1957 Treaty of Rome, the European customs union was completed in 1968 with the agreement of the 6 founding members to implement the following principles: no customs duties at internal borders between the EU Member States; common customs duties on imports from outside the EU; common rules of origin for products from outside the EU; a common definition of customs value.

A legal framework was then developed to ensure that the common tariff is applied in the same way all along the EU’s external borders, to introduce a common approach on warehousing procedures, to facilitate movements of goods in “customs transit”, and to replace the wide variety of customs documents with a single administrative document.

All of these rules were finally brought together in a single piece of legislation, the Community Customs Code, which was adopted in 1992. This directive was amended repeatedly and substantially, in particular to take account of the successive accession of new members to the EU. In 2013 it was subject to a recast under the Lisbon treaty to become the Union Customs Code (UCC).

The territory of the United Kingdom of Great Britain and Northern Ireland and of the Channel Islands and the Isle of Man is part of the customs territory of the Union.

Some territories  outside the territory of the Member States are also considered to be part of the customs territory of the Union, in virtue of conventions and treaties applicable to them: Monaco (Customs Convention with France in 1963) and Akrotiri and Dhekelia in Cyprus (UK-Cyprus Treaty of 1960).

Greenland, which left the EC in 1985, is not part of the EUCU but still applies the common external tariff (although it may charge customs in a non-discriminatory manner). The other overseas countries and territories of the European Union (OCT) - which are not part of the EU - are similarly outside the EUCU.

Seven territories that are within the EU do not participate in the customs union, including Gibraltar.

The EU has a single schedule at the WTO, although all EU Member States are also WTO members in their own right.

3. Third-countries in a customs union with the EU

Andorra, San Marino, and Turkey are the only countries that are currently in “a” customs union with the EU.

In contrast, EFTA Members (Iceland, Liechtenstein, Norway and Switzerland) do not have customs union amongst themselves or with the EU. They have established a free trade area amongst themselves (with the three members of the EEA - all but Switzerland - also enjoying access to the EU single market through a series of FTAs) but are not subject to a common external tariff. EFTA states have however concluded FTAs with third parties as a group, although they also maintain the right to enter into bilateral third-country arrangements.

Turkey

The customs union between the EU and Turkey has been in operation since 1996 and a decision of the EU-Turkey Association Council, created under the Ankara Agreement of 1963.

It covers most goods, except for agriculture for which bilateral trade concessions apply (as in a standard FTA) as well as coal and steel products, which are subject only to preferential agreements based on their originating status. It does not cover services or public procurement.

The customs union implies the alignment of Turkey on Community common customs tariff, including preferential arrangements, and the harmonisation of commercial policy measures, the approximation of customs law and mutual assistance in customs matters, and  the approximation of other laws such as intellectual property, competition, and taxation. This implies that turkey is at a major disadvantage as it must accept EU FTAs with third countries without participating in the negotiations. For example, South Korea has an FTA with the EU but not with Turkey, creating an imbalanced relationship in which South Korean products can enter Turkey through the EU.

In relation to Turkey’s application for membership of the EU in 1987, the Customs Union also foresees that Turkey is to align to the acquis communautaire in several essential internal market areas, notably with regard to industrial standards.

In December 2016, the Commission proposed to modernise the Customs Union and to further extend the bilateral trade relations to areas such as services, public procurement and sustainable development.

Andorra

An Agreement between the EC and Andorra  in the form of an exchange of letters entered into force in 1991 to establish a customs union with most favored nation status (=conditions applicable to goods imported to Andora from third countries shall not be more favorable than those applied to imports of Community goods). It covers trade in manufactured goods but not agricultural produce.

The agreement also provides for full customs checks on the EU side of the border, as Andorra has low VAT and other indirect taxes, such as those for alcohol, tobacco and petrol.

San Marino

The EU and San Marion are in a customs union for all products except coal and steel since a 1991 agreement, with no preferential arrangement based on origin.

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