My Lords, both the noble Lord, Lord Kerr, and my noble friend Lord Patten made extremely powerful speeches. Both of them referred to trade with the EU representing 50% of our exports. I think that the figure is actually a little lower than that, nearer 45%; I make that point not to argue over the absolute figure but the direction of travel.
One of the points that was not made in either speech is how the pattern of our trade has been changing and a much higher proportion of our trade was with the EU 10 or 15 years ago. This is because Asian markets and other countries—I agree that they are all small markets at the moment—have accumulatively been growing as a share of our trade. The question in considering the amendment is, which is better for the future trend of our trade: remaining in the customs union or the Government’s alternative—which the noble Lord, Lord Kerr, did not really put forward—of a free trade agreement with the EU? We are talking not just about the customs union, but the customs union while being outside the EU—that is, being in
the customs union but not an EU member—which is a very different matter, for reasons that I will come on to.
We have to be clear in our minds about the difference between a customs union and a free trade area. A customs union has free trade between its members but an external tariff and rules against non-members. A free trade area has reduced or zero tariffs between its members but allows individual members to have differing external tariffs and non-tariff controls on imports from non-members. The noble Lord, Lord Patten, referred to the question of rules of origin—that is, goods that come from outside the free trade area but which have to qualify to go into other countries by having a certain percentage of the content being made locally. The EU is a customs union but has free trade relations with European states outside the EU, such as Norway, Iceland and Lichtenstein. This means that, despite being inside the single market, they have control over external tariffs and the administrative costs are greatly reduced by modern customs procedures, such as electronic pre-clearance and trusted trader arrangements.
In his speech on the customs union, the noble Lord, Lord Kerr, concentrated just on what happens at the border. I would argue that a customs union is not just about tariffs; it has implications for the single market. It is related to the whole issue of the rules and definitions that make up the single market. This is made very clear on the European Commission’s website, which defines the customs union like this:
“The Customs Union is a foundation of the European Union and an essential element in the functioning of the single market. The single market can only function properly when there is a common application of common rules at its external borders … These common rules … go beyond the Customs Union as such—with its common tariff—and extend to all aspects of trade policy, such as preferential trade, health and environmental controls”,
agriculture and fisheries,
“the protection of our economic interests by non-tariff instruments and external relations policy measures”.
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A customs union has to operate a vast range of non-tariff controls on goods, such as health standards on food. Within its own market, the UK would have to operate a vast panoply of non-tariff controls on goods entering its external borders from the rest of the world. In addition, the UK would not be able to depart from these rules for goods that are domestically produced because they would circulate freely into the EU 27. Alignment or being in a customs union means that a vast swathe of regulations would have to be kept exactly the same as the EU rules. We would have to change them to match the EU rules, however damaging that might be or inappropriate we thought it was.
The noble Lord, Lord Kerr, refers to the CBI study. It would prefer to see alignment of rules in the domestic market here with the EU. No one is arguing—I am not—that there cannot be alignment, but I would argue over who makes the decision on aligning. That decision ought to remain in the control of the UK. The same would apply to tariffs, where EU tariffs can be extremely damaging to British consumers, who have to pay well above world prices for food, clothing
and footwear—things that are particularly damaging to lower-income groups. We would also have to match its trade protection and anti-dumping measures without having a say.
Another feature of the EU customs union that was not mentioned by either of the proposers is the payment of tariff revenues into a common central pot, less 20% retained by the member states. This is particularly disadvantageous to the UK because we have the highest percentage of trade outside the EU of any member state. Are we going to go on paying that?
There are some disadvantages with a free trade agreement in terms of rules of origin, but they do not seem to have bothered Switzerland, Iceland or Norway very much. The disadvantages of being inside the customs union are threefold: operating inappropriate tariffs, not having autonomy over domestic rules and goods, and not being able to conclude trade agreements. Both noble Lords who spoke said that it will take a long time to negotiate free trade agreements. That might well be right, but I still believe that it is extremely important that our trade policy should be structured with how it is likely to develop in the future.
The important point is that there is only one country that is in the position advocated by the noble Lord, Lord Kerr—Turkey, which is a member of the customs union outside the EU. Turkey is required to align itself fully under article 56(1) of the agreement between Turkey and the EU, which says:
“Where it adopts legislation in an area of direct relevance to the functioning of the Customs Union … the Community shall immediately inform Turkey thereof within the Customs Union Joint Committee to allow Turkey to adopt corresponding legislation which will ensure the proper functioning of the Customs Union”.
Turkey has absolutely no say on tariffs, the definition of products and the internal rules that apply in the internal market. That is the difference that the noble Lord, Lord Kerr, did not address—that instead of being in the customs union within the EU, being in the European Parliament, the Commission, the Council of Ministers and represented in the European Court of Justice, we would be subject simply to the rules made while having no representation at all. I know that the noble Lords, Lord Kerr and Lord Patten, would far rather we were in the EU—but that is not where we are starting from. The amendment has to address where we are, and what is possible from where we are now.
As regards trade with non-members, Turkey is obliged to harmonise its commercial policy with that of the EU, and to grant tariff-free access to goods from any country with which the EU has negotiated a free trade agreement, without having had any say or representation in the negotiations. Nor does that mean that Turkey gets tariff-free access into the result of the negotiations with the new agreements that the EU has signed; that does not follow either. Given where we are, I do not think that the model put forward by the noble Lord, Lord Kerr, is at all satisfactory. I do not think the Turks regard it as satisfactory either. As I understand it, Turks have compared Turkey’s agreement with the EU to what is called the capitulation of the Ottoman Empire. That means the provisions under which western traders entering Turkey were given exemption from prosecution, taxation, conscription and the searching
of their homes. The Turks do not regard this as an entirely satisfactory arrangement, and nor should we. It is not right for us either.