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EU Customs Union

Volume 616: debated on Wednesday 2 November 2016

Motion made, and Question proposed, That this House do now adjourn.—(Andrew Griffiths.)

I am pleased to have the opportunity to have a short debate on the UK’s membership of the customs union.

My constituents voted to leave the European Union, largely because of what they see as uncontrolled immigration, but also because of the slightly bossy tendency of some of the EU institutions, which I think can be taken as a rejection of the European Court of Justice. However, they did not foresee all the consequences of the vote, partly because a number of false promises were made—most notably that there would be £350 million extra every week for the NHS, and also that no jobs would be at risk.

In the circumstances, it is reasonable of the Prime Minister to work on the assumption that part of her mandate is to end the free movement of citizens from the EU to the UK. That, in itself, does not amount to a negotiating strategy. The problem is that we are hearing wildly different things from different members of the Government. The Secretary of State for Business, Energy and Industrial Strategy has just reassured Nissan and it is going ahead with significant inward investment. I welcome that. Meanwhile, the Foreign Secretary still seems to believe that it will be easy and straightforward to do free trade deals “very rapidly indeed”.

The Government continue to say that they will not provide a running commentary on the negotiations. I know they claim that that is because they want to maintain confidentiality, but it appears from the outside as if it is because they are finding it difficult to agree among themselves on what should be done.

What I find alarming is the Government’s refusal to answer parliamentary questions. I asked the Minister a written parliamentary question about the Government’s policy on the customs union. He gave a rather opaque answer. I can live with that, but I have also put down a large number of written questions that ask factual things, such as how much we export, what the value of it is and what would be covered by the rules of origin were we to leave the customs union. On those questions, I also received the answer, “We will not give a running commentary.” That is why I felt it necessary to have a debate and explore these issues in more detail. I am alarmed by this situation, because the risk is that decisions will be taken on the basis of rhetoric not facts and on the basis of ideology not analysis.

An intelligent negotiating strategy needs to meet the public’s expectations, to be based on a hard-headed assessment of the national interest and to be deliverable. With that in mind, the Treasury Committee visited Berlin and Rome in September to find out what some of our counterparts might think. I am sorry to say that Brexit is not at the top of the in-tray for the other EU member states. They all see it in the context of their domestic political worries. Angela Merkel is looking over her shoulder at Alternative für Deutschland; Hollande is worried about Le Pen; Matteo Renzi is worried about Movimento 5 Stelle. Probably only the Irish take Brexit as seriously as we do. Over and over again we heard the same word: precedent. There should be no reward for exiting the EU, and no precedents must be set.

I conclude from that that if controlling immigration is going to be part of the British position and we are to move to a more skills-based approach for managing migration, our EU partners are going to say that we cannot remain members of the single market. However, there has not been so much attention paid to our membership of the customs union, which I am beginning to think may be more important, especially if we want manufacturing industry to thrive in this country.

It is worth recalling the history. The customs unions was established in 1968. It is what we joined in 1973, and what the public affirmed with the referendum in 1975. It is what most people call the Common Market. Unlike high levels of immigration or the ECJ, it is rather popular with the British public.

The shadow Chancellor has rather pejoratively described the Government’s approach as a “bankers’ Brexit”. I know why he has done that. We must base what we are doing on some facts. I remind the House that we export more goods—some £285 billion-worth—than we do services, the figure for which is £226 billion. That is a ratio of 56:44. This is important. At the moment, we have a common external tariff, goods move freely within the EU and the Commission has competence for external trade negotiations. The customs union is not the same thing as the single market. Norway is in the single market but outside the customs union, whereas Turkey is in the customs union and outside the single market.

It is also worth recalling that the export of goods into the European Union comprises 48% of our exports. The EU is our biggest partner. Exports to Europe bring 3.3 million jobs. The next most significant partner is America, with 17% of our exports, and way down the numbers is China, our third biggest trading partner, with just 4%, or one 10th of the significance of our European exports. So what would happen if we were to leave the customs union?

I am extremely grateful to the hon. Lady for calling this debate. She is precisely correct that this is what most of the debate in the House will be about. She said a little earlier that we joined the customs union when, effectively, we joined the European Union, as was reaffirmed in the referendum of 1975. Is that correct? If so, that sets the basis for what the Government have to argue, namely that in the referendum that we held this year we voted to leave the European Union and the directive is therefore to leave the customs union; we have to argue back from there. Will she clarify that point?

We joined the Common Market, which is the customs union, in 1973. Now we have voted to leave the European Union. People want to leave the EU, because of their concern about migration and perhaps about the ECJ. In my opinion, the move is not driven by concerns about the customs union, which in fact is very popular. That is what I am arguing.

We come from different points of view, I suspect, about the referendum—I supported our leaving the European Union—but there are very positive reasons for both sides regarding the customs union. We have to understand where we are coming from after the referendum result. The presumption from that result is that we will leave the customs union. It is therefore beholden on people who may want us to stay in the customs union to argue what strong reasons there are for staying in—and there are strong reasons.

Let me come on to give some of those strong reasons. If we were to leave, we would face tariffs ranging generally between 5% and 10% on our exports. Even more significantly, our exporters would have to comply with the rules of origin. I think this is the biggest problem. I have the last television manufacturer in Britain, Cello Electronics, in my constituency. It imports a lot of components from China, puts the televisions together and sells them into the European market. The OECD estimates that the cost of filling in all the forms and complying with the rules of origin would add 24% to the export costs of selling into the European market. That would wipe out firms such as Cello, which, as I say, is in my constituency.

In Norway, which is outside the customs union, we know that some exporters find the bureaucracy of the rules of origin so burdensome that they prefer to pay the tariffs. This is really what the Nissan problem was. Belonging to the customs union was the first thing the Japanese Government listed in their hopes for what our deal would be, but the Government cannot take a factory-by-factory approach. Let us look at some of the big industries that would be affected: the automotive industry employs 450,000 people; aerospace 110,000 people; pharmaceuticals, such as Glaxo in my constituency, 93,000 people. All those industries have the same complex integrated international supply chains and would be badly hit were we to leave the customs union.

I congratulate the hon. Lady on securing the debate and making some very strong and powerful points. Does she agree with me that if we are outside the single market there will be a load of non-tariff barriers that would definitely hit those sectors, and so membership of the single market is just as important as the customs union?

We need to explore that and think about it in a little more detail.

A leaked document from the Treasury found that were we to leave the customs union, our GDP would fall by some 4.5%. Of course, I am not asking the Minister to comment on a leaked document, but it would be very nice if he could say how many jobs a fall of 4.5% of our GDP would translate into us losing. I think it would be hundreds of thousands.

It is true that staying in the customs union limits our capacity to do new trade deals on the goods it covers with third countries such as India and Australia. Some of the hard Brexiteers, such as the Secretary of State for International Trade and President of the Board of Trade, the right hon. Member for North Somerset (Dr Fox), seem to think that this is a good thing. He made a speech in Manchester in which he hailed the “post-geography trading world”. Well I have heard of the end of history, but I have never before heard of the end of geography. I think he is being wildly over-optimistic. As the Chancellor of the Exchequer pointed out to the Treasury Committee, world growth and growth in trade are both slowing. This is not a good background in which to initiate these deals. The Government’s export target of £1 billion is bumping along at half that level and there would be a time lag. We cannot start the negotiations at least until our relationship with Europe is clear. That is obviously going to take three or four years, so we need to have transitional arrangements.

Finally, there must be a big question mark over whether we can get deals with third countries that are so much better that they more than compensate for what we would lose if we left the customs union. The UK is one tenth of the EU market of 550 million people. The Americans have already told us we would be at the back of the queue. The Swiss have found, in negotiations with the Chinese, that the Chinese get access to the Swiss market seven years before it gets access to the Chinese market. Ministers are at sixes and sevens on this, with the Treasury and the Department for Business, Energy and Industrial Strategy apparently on one side, and the Department for International Trade and the Foreign and Commonwealth Office on the other. Robert Peston has pointed out that the mere fact that the Department for International Trade exists makes it a fiduciary obligation for multinational manufacturers based in Britain to start thinking about moving investment and jobs to the rest of the European Union. I will not talk about the Irish dimension, because I have already taken interventions on it, but it does present a significant political problem.

What I am mainly saying to the Minister this evening is that millions of jobs depend on our staying in the customs union. I am sure that the Secretary of State for International Trade is delighted that his career is flourishing and that he is travelling around the world, meeting all sorts of interesting people and trying to do lots of deals, but those million manufacturing jobs matter more than his grandiloquent ideas. What we want from the Minister is some concrete evidence that decisions will be taken on a proper basis. My message is simple: a bird in the hand is worth two in the bush.

I congratulate the hon. Member for Bishop Auckland (Helen Goodman) on securing this debate. My constituents, like hers, voted to leave the European Union, so I welcome her comments about listening to that vote. It is also important that we all work together to make this process a success, so I welcome her analysis.

Last week, she posed a question along similar lines to the Prime Minister about the EU customs union and Nissan. I am delighted that since that question was posed, Nissan has announced that it will produce the Qashqai and a new model at its plant in Sunderland. The hon. Lady welcomed that, and so will I. I want to join the chorus of approval that we heard in this place for that decision. It is a vote of confidence, which shows that Britain is open for business and that we remain an outward-looking, world-leading nation. The plant in Sunderland will be expanded through new investment to be a super-plant, manufacturing more than 600,000 cars a year. Some 80% of the plant’s output is exported to more than 130 international markets. The decision is a massive win for the 7,000 direct employees and 35,000 total British employees in the plant and the supply chain.

Turning to the core subject of this debate, the issue of the customs union is an important one. As with all facets of our exit negotiations, we recognise the need for a careful—what the hon. Lady called a “hard-headed”—analysis for a smooth transition that will minimise disruption to our trading relationships and seize the opportunities presented. This is an area in which there is excellent cross-Government co-operation, and I am pleased to be joined on the Treasury Bench this evening by the Financial Secretary to the Treasury, my hon. Friend the Member for Battersea (Jane Ellison). That shows how the Department for Exiting the European Union and the Treasury are working hand in hand on these issues.

I would like to be clear from the outset that—as, I think, we are all aware—no final decision has been taken on our broader future economic relationship with the EU, which includes our approach to the customs union. As with our decision not to trigger article 50 immediately, it is right that we take the time, as the hon. Lady said, to analyse our options carefully and seek to secure the best deal for the whole of the UK.

Can the Minister help me with the question I posed to the hon. Member for Bishop Auckland (Helen Goodman)? The ballot paper said that we are either leaving the European Union or remaining in it, and we voted to leave. We joined the customs union in 1973. Is not the presumption and the starting position for the Government the fact that we will leave the customs union, so arguments have to be made why we should not do that rather than accepting that that should be regarded as the opening position?

I think it important to engage with arguments on both sides of this debate. The key thing is to secure the UK national interest, so before we take a decision, we will want to listen very carefully to the arguments for leaving the customs union and the arguments for staying in it.

I think we can all agree that the issue has numerous aspects. The hon. Lady speaks with considerable experience of complex economic issues, having been a Treasury fast-streamer serving on the Public Accounts Committee and the Treasury Committee, and a former Minister. She will appreciate that, as the Prime Minister said in her reply the other day, making a full assessment of the options of a customs union is more complex than it might seem when first described to the public.

First, it is important to understand exactly what a customs union is and is not. It is an arrangement that relates to trade in goods; it does not cover trade in services or free movement of capital or people. To facilitate trade, a customs union removes tariffs and customs controls on goods moving between its members. While services are not directly included— they are not subject to either tariffs or customs controls—they have become increasingly embedded in goods production, so a customs union could indirectly affect trade in services industries. For example, in parallel to exporting an aircraft engine, an engineering firm might also provide maintenance services; or in parallel to exporting cars, an automotive firm might provide financial services.

To function properly, a customs union must have a common external tariff, applied equally by all members of the union. That supports the free circulation of goods within the customs union, preventing trade diversion by ensuring that no one trading with the members of the union can be given preferential access to any individual members relative to the others. In the case of the European Union, in practice, we have chosen to make a reality of the common external tariff through the common commercial policy under which the European Commission negotiates on trade on the United Kingdom’s behalf, and in that way sets the common external tariff. In the case of members of the EU and the EU’s customs union, 80% of the tariffs that are collected by member states on imports from non-EU countries are paid into the EU budget, with member states retaining just the remaining 20% to cover collection costs. The UK collected £3.1 billion in tariffs on non-EU imports in the financial year 2015-16.

However, a customs union is only one of the many ways in which countries have sought to minimise the impact of customs procedures and support the free flow of goods. There are numerous examples around the world in which co-operation between customs authorities has helped to reduce the costs of customs processes at the border, short of a customs union. Even in the case of the European Union, the customs union is only part of an approach that also focuses on strengthening systems and processes on the ground. For example, the vast majority of customs declarations in the UK are submitted electronically and cleared rapidly, with only a small proportion experiencing delays—for example, when risk assessment indicates that compliance or enforcement checks are required at the border.

Norway has been involved in customs co-operation with Sweden and Finland, both of which are EU member states and are therefore in the EU customs union, as they have been since the 1960s. Norway has an agreement with the EU to mutually recognise each other’s schemes to impose less onerous checks on exporting firms with secure supply chains. It sits, as an observer, on some of the EU’s committees that discuss customs issues. Notwithstanding the issues raised by the hon. Lady, and although our Prime Minister has made it clear that we are seeking not an off-the-shelf solution but a UK solution, it is important to note the collaborative agreements that exist in other countries. Switzerland and the EU have an agreement that recognises the equivalence of security checks at their external borders, and waives the need to make pre-departure and pre-arrival declarations. If we look more widely, we see that the United States and Canada also co-operate closely on customs issues, including schemes to expedite customs procedures for firms with secure supply chains and collaborative arrangements for operations at the border.

I am listening with interest to what the Minister is saying, but according to my constituents, who do a great deal of exporting, exporting to Switzerland is a nightmare by comparison with exporting to the EU, because of all the bureaucracy. Does the Minister not agree that the UK is in a different position from Norway? Its major export is oil, and exporting oil is incredibly simple, but, as I said earlier, most of the goods that we export are manufactured goods, which have complex supply chains.

That is a fair point. I shall say something about our engagement with some of those industries and the importance of supply chains later in my speech. It is worth noting, however, that many countries also have authorised economic operator schemes, which means that exporters with supply chains that are demonstrably secure are subject to fewer and less stringent checks. The EU has such arrangements with China, Japan, Norway, Switzerland and the United States, through which both sides recognise each other’s authorised economic operators for customs purposes.

Turkey, which the hon. Lady mentioned, is one country outside the EU that has a customs union arrangement with it. That arrangement covers most but not all goods. Raw agricultural produce, for instance, is excluded. The EU and Turkey have been preparing to update the terms of their current customs union arrangements, which were always meant to be transitional, given that Turkey has applied to be a full member of the EU. I could go on, as there is a multiplicity of examples, but the point is that any decision about membership or otherwise is complex, and must take account of the full spectrum of options.

During last week’s debate, the Prime Minister also said that the way in which one dealt with the customs union did not involve a binary choice. There are different aspects to a customs union, which is precisely why it is important to look at the detail, to carry out the hard analysis that the hon. Lady called for, and to get the answer right. We have made it clear that we will pursue what works for the unique circumstances of the United Kingdom, and we continue to analyse thoroughly what it might look like in order to ensure that we make the best choice for the UK. That includes the broad-based analysis of more than 50 sectors that my Department is undertaking in relation to the impact of the UK’s leaving the EU.

As with the broader UK-EU negotiations, we recognise the need for a smooth transition that minimises disruption to our trading relationships and seizes the opportunities that are presented. The issue of a customs union has also been part of the Government’s programme of stakeholder engagement. We have been discussing this matter with numerous companies, organisations and trade bodies, including the chemicals sector, car manufacturers, and the agriculture and food and drink sector. We want to ensure that their views are reflected in our approach. The Prime Minister has been very clear that the intention of the Government is to ensure a competitive market so that people are able to prosper here in the United Kingdom and add to our economic growth.

We are also aware of the specific circumstances faced by businesses in Northern Ireland, which I know the hon. Lady could have touched on if she had not taken the interventions. We had a common travel area between the UK and the Republic of Ireland many years before either country was a member of the European Union. Nobody wants to return to the borders of the past. I underline the will and commitment of ourselves, the Irish Government and the Northern Ireland Executive to support the common travel area and to ensure that there are no hard borders. We must now work closely together to ensure that as the UK leaves the EU we find shared solutions to the challenges and maximise the opportunities for both the UK and the Republic of Ireland, which I expect will continue to be a close friend of the UK in years to come.

I am slightly nervous that the Minister might sit down before I ask him another question. He said his Department is looking at 50 sectors. My basic request tonight is that we should have more information and facts from the Department, so will he make a start by telling us which 50 sectors and how large they are, how much they export and how many people are employed in them?

In the six minutes I have left, it would be a challenge to run through each of those 50 sectors, but we will certainly disclose that information in due course. It is important to emphasise this is a whole-Government effort. Our Department is engaging with those sectors and conducting the analysis and drawing it all together, but we are also working closely with colleagues at the Treasury, the Department for Business, Energy and Industrial Strategy, the Department for Environment, Food and Rural Affairs and all the other relevant Departments to each sector of the economy, because it is important we get this right and there is a role for every part of Government in informing that process.

I am slightly confused about one point. I welcome the announcement about the common travel area between the Republic of Ireland and the UK, but will that not mean there is an open border between the EU and the British state?

I think both the Republic of Ireland in its communications with the EU and we in ours are very clear about the value we place on that common travel area, which existed long before the membership of the two countries to the EU. We have been clear in saying this is not necessarily a completely easy issue; it is an issue that will require some work, but we are determined to do that work and make sure we can make this work. I hope that answers the hon. Gentleman’s question.

We must also consider carefully the position of the Crown dependencies and the UK’s overseas territories. Just today, I have met in a joint ministerial council with the overseas territories and the chief Ministers of the Crown dependencies to hear their views. There are some interesting examples. Gibraltar, for instance, has benefited from the UK’s membership of the EU but has not been part of the customs union to date.

I welcome this debate as part of the scrutiny of the Government’s position by this House. That is an important process and the information the hon. Lady and others have brought forward can certainly be taken into account as part of our analysis. I also look forward to Monday’s debate on exiting the EU and workers’ rights. That is an important aspect of our policy, and the Secretary of State for Exiting the European Union has been very clear about our determination to protect workers’ rights. That debate will be another opportunity for the House to discuss the important issues in relation to our exit from the European Union.

In summary, the Government fully recognise the importance of the question of a customs union with the EU in the context of our future relationship. It is a complex, multi-faceted issue, and we are analysing carefully all the options available to us with the aim of securing the best outcome for the UK as a whole.

Question put and agreed to.

House adjourned.