What is a Customs Union?

At its simplest, a Customs Union comprises a single external tariff, applied by all Union Members, used to charge duty on goods imported into the Union. A Customs Union removes customs duties on trade between Members on all goods that are either produced within the Union or on which import duties have been paid. Internal border controls subsequently disappear and Customs Officers are then found only at the Union’s external borders. They not only keep trade flowing, but help, for example, to protect the environment, cultural heritage, and protect jobs by combating counterfeiting and piracy.


There is a simple logic to a Customs Union and an internal market. Legally a Customs Union is a single customs territory. Therefore, traders should be able to treat it as such and, for Customs purposes, behave no differently in the larger Union than they would in their home country. The internal market seeks to harmonise a large number of disparate rules and regulations affecting the way markets work in the Union, sweeping aside national restrictions and border-based procedures. Taken to its logical conclusion, this means that the unitary nature of the customs territory should be capable of being replicated for all other processes that require administrative interventions because goods movements (or related services, like transport) involve crossing internal Union frontiers.


However, economic distortions arising from procedural differences impose differential costs on operators and thus affect their choice of location for economic activity or customs clearance.


Harmonised legislation can prescribe a series of rights, obligations and processes that have a broadly similar impact on international trade across a Customs Union. To ensure equivalent implementation of these rules, practical initiatives can be implemented such as publicity, training, simple language guidance notes, help-desks and on-line services help member countries to work towards convergence in their day-to-day application of customs legislation. To coordinate control and enforcement activities, mutual assistance arrangements allow member country administrations to exchange information and support each other’s efforts to ensure full compliance with the rules by economic operators.


However, a Customs Union by itself has no impact on other border processes that, if left unchanged, would impose compliance costs on trade that would be little different from those attributable to customs controls. Examples include the collection and control of alternative taxes such as VAT, the gathering of statistical and other information about international trade, and the implementation of rules designed to protect society from threats such as human, animal and plant diseases, from unsafe consumer products and from the consequences of undesirable or criminal activity (terrorism, organised crime, drug smuggling, etc).


In the European Union, for example, in the formative years between its inception in 1968 and the coming of the internal market in 1993, much progress was made on harmonising laws. However, practices differed substantially between Member States and, crucially, traders were unable for many purposes to treat the Union as a genuine single customs territory. The advent of the internal market forced a new look at the Customs Union and gave extra impetus to its integration. Even now, many crucial issues remain such as the replacement of separate Customs Administrations by a single European Customs body, the harmonisation of Customs penalty regimes, tax barriers between the Member States and inconvenient administrative requirements that increase the compliance burden of trading across internal frontiers.


The key benefit of a Customs Union is trade-related. By fostering closer and more intensive trade links between the countries involved, the level and nature of economic activity can improve, creating new opportunities for entrepreneurs, increased turnover for existing businesses, more employment, more tax revenue and greater chances that the economies in question will play to the strengths of those with the greatest economic advantage. But benefits can go well beyond the classic trade arguments for Customs Unions and free trade areas.


Not all countries manage to create bodies of law and practices that are simple, fair, transparent, efficient and effective in relation to their declared purposes. Trade can suffer from obscurities and inconsistencies in the way in which trade-related rules are applied, and failures of governance or administration can then open the door to more undesirable practices; corruption flourishes where rules are unclear or badly implemented. The creation of an international set of rules, accompanied by structures designed to manage their fair and impartial application, can help countries to rise above the difficulties that inhibit their border processes and burden their businesses.


Changing Customs and other border-related law offers a valuable opportunity for modernisation and reform. This can reach into areas well beyond the regimes necessary for managing international trade and affect the human resources and culture of the administrations concerned. Donors, too, may be encouraged to join in the process, seeing beneficial change as the trigger for increased funding of and participation in the reform programme.


Given the underlying motivation of forming a Customs Union – boosting trade and fostering more beneficial economic activity – there is also a real opportunity to change the ways in which public and private sectors interact. Harnessing business enthusiasm for the right sort of change can be one way in which reform can be made to endure and deliver the economic improvements that the initiatives promise. But this needs to be a partnership between government departments and businesses. Business communities often have quite uninformed or unrealistic ideas about the constraints under which administrations work or the legitimate needs and expectations of government departments charged with collecting revenue or enforcing compliance with trade-related rules. Raising the level of mutual understanding can bring benefits to both sides.



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Five Lanes Consultancy


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