The Customs Union – an island under construction?

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 by Andreia Barbosa, PhD student at the Law School of UMinho

“No country is an island”[i]. It is an idea that is entirely valid in the context of the European Union and is particularly relevant in the area of ​​the Customs Union. Although the European Union represents only 6.9% of the world’s population, the volume of trade with the rest of the world corresponds to approximately 20% of the volume of world exports and imports[ii].

In fact, and in order to meet the characteristics that have been identified as necessary for a perfect Customs Union, there can be no frontiers among the Member States, although their territories may be separated by sea.

In particular, in the field of the European Union, the levying of customs duties between Member States no longer makes sense in view of the establishment of the internal market. Thus, the 1957 Treaty of Rome prohibited customs duties and charges having equivalent effect in trade between Member States. A Customs Union emerged, where national borders were replaced by the limits of the customs territory of the Union.

It happens that the Customs Union is not – and cannot be – an island. Commercial contact with the rest of the world is essential for the very survival of the Member States, making it reasonable that trade with third countries is sometimes facilitated, in approximate terms to those that exist internally. Free trade agreements are particularly important in this area.

Free trade agreements (FTA) are negotiated between two (or more) parties and aim to liberalize trade and fulfill social and environmental objectives. In particular, free trade agreements are concluded with the aim of influencing the terms in which the flow of goods is achieved, shaping the negotiating strategy of economic operators.

Synthetically, the immediate incentive to conclude free trade agreements is to increase exports and imports. Goods purchased and produced or processed which comply with certain agreed rules may, in principle, be imported into the European Union or to partner countries at reduced rates (preferential tariffs). Thus, in particular, the raw materials can be imported into the European Union at a lower cost and, consequently, the cost to the final consumer will also be reduced, in the interest of greater competitiveness. Overall, the agreements boost GDP (gross domestic product) growth for the parties involved, and in particular for the European Union, in periods of economic recession, can have a stabilizing effect.

There is a wide range of FTA that the European Union has already established with different partner countries and / or regions, and even new agreements (“new generation agreements”) are being negotiated. However, it should be noted that, unlike the “first generation agreements” (negotiated before 2006), “new generation agreements” do not only cover goods trade, but also cover services and investment. For this reason, the terms under which “first generation agreements” must be updated are being discussed, in order to adapt them to the current economic reality, which is increasingly complex.

In this regard, on November 9, 2017, the European Commission published the first edition of the Annual Implementation Report of the Free Trade Agreement (FTA).

The report has emerged for greater transparency in this area and has also been important in highlighting the progress that has already been made and in identifying some problems and aspects that can be improved.

According to the Report presented, the European companies have a very small share. The low adhesion may be mainly due to the following reasons:

  • Lack of knowledge about existing agreements;
  • Difficulties in understanding the rules whose compliance is necessary for products to be considered as originating;
  • Excessive paperwork to obtain the documents needed to benefit from preferential treatment.

But it is not just the FTA that suffer from unpopularity. The Union Customs Code, in conjunction with Commission Implementing Regulation (EU) 2017/2445 and Commission Delegated Regulation (EU) 2015/2446, establish a wide range of opportunities that could be exploited by economic operators and which are not, mainly due to their lack of knowledge, the wide range of conditions that have to be respected and the associated costs. These opportunities, for example by taking advantage of suspensive customs regimes, obtaining the status of authorized economic operator, reimbursement or remission of duties, mean that economic operators customs duties and promote trade.

Non-adherence to these and other mechanisms reflects the lack of customs planning that many European companies suffer and can have the consequence of pushing them towards an island state, taking with it the European Union itself, in an opposite movement that should be the trend: globalization and the blurring of borders.

Nevertheless, it should be recognized that purely free trade is, in our view, a utopia, the implementation of which seems far from being achieved. As long as barriers to trade are needed, in particular to change the terms of trade in favor of a country for the temporary protection of a “nascent industry” with growth potential, to facilitate and improve control of the international logistics chain, for the protection of national economies, the environment and public health, the collection of customs duties will continue to be relevant, even as enablers of an area of freedom, security and justice.

Although customs duties are levied by the Member States in favor of the Union, 25% of these duties are retained by the Member States as compensation for the administrative costs they incur by applying the respective tariffs, customs duties is insignificant. In fact, it is generally stated that there are very few European taxes and have a modest role in the European Union’s revenues. However, this conclusion can be perspective in two ways. Or is it considered that in a context of financial weakness, where there is a demand for increased revenues in the coffers of States, the possibility of an increase in the taxation of international trade in customs should be considered and, in that case, to be unquestionably relevant, or – and from the perspective which seems to us to be the most sensible – it is recognized that the fact that customs duties represent a small part of the revenue received by way of tax is fully justified by the need to ensure that international trade does not know obstacles. In the latter case, there is no dispute over the abolition of customs duties, which, as we have seen, are necessary – but it is simply acknowledged that, even if they are not very significant in terms of revenue, they must be maintained.

And the payment of duties does not contribute to the construction of a customs island. What can lead to the island state is the lack of awareness of the generalized economic operators themselves that they can carry out their activities globally, taking advantage, for example, of FTA’s.

[i] Cf. SAMUELSON NORDHAUS, Economia, 19th edition, New York, McGraw Hill, 2011, p. 380.

[ii] EUROSTAT data, available at https://europa.eu/european-union/about-eu/figures/economy_pt [04-01-2018].

Picture credits: Aerial View of Murchison by Island Conservation.

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