Leaving the Customs Union could cause border chaos

If Britain decides to leave the Customs Union after Brexit, expect there to be chaos on the roads, says Matthew Partridge.


Expect the queues to get longer after Brexit
(Image credit: © 2017 Bloomberg Finance LP)

The extent to which the UK should remain in the European Union's Customs Union is currently a big topic for debate at the moment. It could also have important consequences for the support and logistics industry, and by implication, for firms and businesses up and down the country. We've therefore decided to speak to Andrew Meaney, a Partner at Oxera Consulting, who specialises on issues related to transport. Oxera is an extremely respected consultancy that advises firms, government and law firms on issues to do with competition and regulation.

Meaney has done a study looking at the costs of the increased border controls that will be required as a result of leaving the Customs Union. To recap, being in the Customs Union means that we have a common external tariff, which means that all external trade policies are decided at the European level. The disadvantages of this are that we're not able to do our own trade deals. However, it also means that all goods that come from the UK to the continent (and vice versa) aren't routinely checked, though ones that come from outside the EU (which account for 3% of trade) are.

However, if we leave the Customs Union, then potentially all goods will have to be checked. This is because, if additional controls aren't put in place, non-EU countries could try and take advantage of any difference in external tariffs by routing their goods through the UK (or routing them through the EU if Europe has lower tariff barriers). This in turn will lead to various costs. To gauge these costs, Meaney looks at three different scenarios. These are: increased checks, regulatory divergence, and both increased checks and regulatory divergence together.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

In the first case Meaney assumes that Britain leaves the Customs Union, but keeps the same regulations. Even if the number of checks only doubles to 6%, an extremely conservative estimate, this "could cost hauliers at least an extra £1bn a year". In reality, the £1bn figure is almost certainly an underestimate, and could be up to £15bn. This is because the number of checks is likely to be higher. It also doesn't take into account "the costs of extra border staff or increased congestion", or the loss of jobs from firms relocating overseas due to the impossibility of operating just-in-time logistics.

The next scenario is where there are a similar number of checks, but far greater uncertainty due to different regulations. In this case a certain number of goods will be rejected, because they don't meet EU (or UK) standards. In this case, haulage firms will change their model so that they only transport their loads to the border (to compensate for the risk that they will have to return with the load undelivered). This will lead to a big rise in the number of unaccompanied trailers, increase turnaround times and damage to the British road haulage industry.

Given that the deadline is approaching there is a good chance that we could end up with what Meaney, and others, have termed the "Armageddon scenario" of more checks and greater regulatory divergence. The combination of increased bureaucracy and greater uncertainty could lead to "huge costs". This would be reflected in "increased queuing", and by the possibility of the M20 "becoming a holding area for lorries". In the longer run, a dedicated lorry park would need to be built to accommodate those waiting for customs. As a point of reference, Meaney notes that the cost of the emergency measures during the 2015 border disruption totalled £1bn over just four days.

Overall, this suggests that there is a need "for a political framework so that industry can get ready". At the same time, "people need to be trained, and we need new IT systems and warehouses". It also means that we can't just "do a deal the night before we leave the EU", which strongly suggests that "we should either get going right away, or accept that there will have to be a long transition period". While countries like Switzerland or Turkey have been cited as possible models, "their arrangements evolved over a long period of time, which we don't have". In any case, "the differences in regulations mean that Turkish firms face a lot of uncertainty when exporting to the EU".

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri