Future Customs Options
The simplest option would be for the UK to remain in the Customs Union, even after ceasing to be a member of the EU. That would enable goods to continue to move between the UK and the EU without attracting tariffs. That would meet the UK Government's stated objective of an 'arrangement that facilitates the freest and most frictionless trade possible in goods between the UK and the EU'. However membership of the Customs Union would prevent the UK negotiating its own trade deals with other countries (although it would continue to have the benefit of the trade deals agreed by the EU with other countries), and the UK Government has accordingly ruled out continued membership of the Customs Union, although it may have to entertain the notion of at least temporary continued membership for the reasons indicated below. Similarly, the UK has ruled out continued membership of the Single Market, since the EU has been adamant that access to the Single Market is indivisible from the four freedoms, including free movement of people, which is at odds with the UK's stated intention to regain control of immigration.
The UK has proposed two models for the future Customs relationship: a customs partnership and a 'highly streamlined customs arrangement' known as 'maximum facilitation' or 'max fac'.
The customs partnership is described by the UK Government as 'aligning our approach to the customs border in a way that removes the need for a UK-EU customs border…[it] would involve the UK mirroring the EU's requirements for imports from the rest of the world where their final destination is the EU… By mirroring the EU's customs approach at its external border, [the UK] could ensure that all goods entering the EU via the UK have paid the correct EU duties. This would remove the need for the UK and the EU to introduce customs processes between us, so that goods moving between the UK and the EU would be treated as they are now for customs purposes. The UK would also be able to apply its own tariffs and trade policy to UK exports and imports from other countries destined for the UK market'. In essence, the UK would be collecting and remitting tariffs to the EU, in order to avoid border checks, but at an increased administrative cost and burden and with no appreciable benefit unless or until the UK begins to reap the benefits of its new trade deals. This is thought to be Mrs May's preferred option but it is fiercely opposed by pro-Brexit MPs such as the Foreign Secretary, Boris Johnson, who described it as 'crazy'. In addition there are growing fears that such an arrangement would also fall foul of the World Trade Organisation anti-discrimination laws which state that 'imported and locally produced goods should be treated equally after the foreign goods have entered the market'.
Max fac is the somewhat inelegant name applied to what the UK Government describes as a 'highly streamlined customs arrangement… it would aim to continue some of the exiting arrangements between the UK and the EU; put in place new negotiated and potentially unilateral facilitations to reduce and remove barriers to trade; and implement technology-based solutions to make it easier to comply with customs procedures'. The fact that some of these 'technology based solutions' appear not to have been invented yet has drawn criticism that max fac is another example of so-called 'magical thinking', the belief that one's own thoughts, wishes or desires can influence the external world. In fact Michel Barnier, the EU Brexit negotiator, described both of the proposals as unrealistic, and is said to have expressed the view that is not worth the EU considering either of them. Indeed it is difficult to see how max fac could be made to work in a way compatible with the desire (and legal imperative) to avoid a hard border between Northern Ireland and the Republic of Ireland, or between Northern Ireland and the rest of the UK (equally unacceptable for political reasons) since it would almost certainly require some sort of infrastructure to operate.
The UK Cabinet is said to be very aware of the need to come up with a definitive proposal on the future customs arrangement in advance of the next round of negotiations in June, but is deeply divided, with pro Remain MPs largely backing a customs partnership and pro-Brexit MPs backing max fac.
In light of this, a third option is beginning to emerge, namely max fac plus. The present draft of the EU Withdrawal Agreement already contemplates a 'backstop option' for Northern Ireland whereby it would stay in the Customs Union in the absence of other solutions to avoid a hard border, until another solution is found. Separately the UK has committed to 'maintain full alignment with those rules which …support North-South cooperation' in the absence of agreed solutions. The draft Withdrawal Agreement also contemplates a transition (or implementation, as the UK prefers to call it) period until the end of 2020, during which the UK will be able to negotiate and sign its own trade deals, whilst still being party to existing EU trade deals. If that arrangement were to extend to the Customs Union itself (and the transition period extended if necessary) the UK and EU could continue to enjoy 'frictionless trade' until such time as the technology for a max fac arrangement sufficiently sophisticated to avoid a hard border on the island of Ireland or in the Irish Sea is developed and installed. Such an arrangement has the advantage of practicality and would provide a degree of certainty to business. However HM Revenue & Customs have indicated that a new system could take five years to implement, giving rise to fears on the part of the pro-Brexit faction that de facto Brexit will never happen. In addition it is thought unlikely that the EU would agree to such an arrangement without the UK making additional financial contributions beyond the end of 2020, which again is unlikely to be acceptable to the pro-Brexit lobby. Nevertheless, many commentators believe that a compromise along max fac plus lines is the most likely outcome.
This Client Alert is not intended to constitute legal advice and should not be taken as a recommendation to take action or withhold from taking action.