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Free trade area, single market, customs union - what's the difference? Free trade area, single market, customs union - what's the difference?
(5 months later)
Theresa May is expected to set out her approach to Brexit negotiations in a speech this week. The general election means that hard Brexit may have softened.
But what stance will the prime minister take on whether the UK remains in the single market and customs union? The idea that the UK should leave the EU altogether, without retaining membership of the single market or customs union is not as certain as it seemed before the general election. But what are the options?
Downing Street says reports Mrs May will signal pulling out of both are nothing more than "speculation". Starting with the softest form of Brexit the main options are:
Here are the differences between a free trade area, a single market and a customs union.
Single marketSingle market
This usually refers to the European Union's single market and is perhaps the most ambitious type of trade co-operation. You can be in the EU's Single Market, but not the EU, this is what Norway, Iceland and Liechtenstein do.
That's because as well as eliminating tariffs, quotas or taxes on trade, it also includes the free movement of goods, services, capital and people. The European Union's single market is perhaps the most ambitious type of trade co-operation. That's because as well as eliminating tariffs, quotas or taxes on trade, it also includes the free movement of goods, services, capital and people.
That is why there has been no limit on the number of French people who can come to the UK, or the number of British people who can live in Spain - but there are limits on Turks or Ukrainians, for example.That is why there has been no limit on the number of French people who can come to the UK, or the number of British people who can live in Spain - but there are limits on Turks or Ukrainians, for example.
Also, a single market strives to remove so-called "non-tariff barriers" - different rules on packaging, safety and standards and many others are abolished and the same rules and regulations apply across the area.Also, a single market strives to remove so-called "non-tariff barriers" - different rules on packaging, safety and standards and many others are abolished and the same rules and regulations apply across the area.
There are EU-wide regulations covering a whole host of industries and products on everything from food standards and the use of chemicals to working hours and health and safety. It is an attempt to create a level playing field and a single market; this does not happen in a free trade zone.There are EU-wide regulations covering a whole host of industries and products on everything from food standards and the use of chemicals to working hours and health and safety. It is an attempt to create a level playing field and a single market; this does not happen in a free trade zone.
For goods, the single market was largely completed in 1992, but the market for services remains a work in progress a quarter of a century later. The EU has promised to introduce it many times, but several countries have dragged their feet. Even so, the City of London dominates financial services in the EU. For goods, the single market was largely completed in 1992, but the market for services remains a work in progress a quarter of a century later. The EU has promised to introduce it many times, but several countries have dragged their feet and it is much more complicated than creating a single market for say, cars or computers. Even so, the City of London dominates financial services in the EU not least because it can do business in every member country.
The EU is therefore not a free trade area - it is a single market. The EU is therefore not just a free trade area - it is a single market.
Free trade area But to stay in the single market countries have to allow the free movement of goods, services, capital and people. That last one means immigration is difficult if not impossible to control- although the UK might get a special deal to allow some limits.
A free trade area is one where there are no tariffs or taxes or quotas on goods and/or services from one country entering another. Membership of the single market also normally involves making annual payments towards the EU's budget and accepting the jurisdiction of the European Court of Justice; which would cross quite a few red lines for many Brexiteers.
The negotiations to establish them can take years and there are normally exceptions. So agriculture and fisheries might be exempted, certain industries protected and some goods may not be covered. Customs Union
Also imported goods would have to comply with the law of the country they are being sold in. So, for example, you could have a free trade agreement with the US but still a ban on the import of GM foods or different safety standards for electrical goods. Turkey is part of a customs union with the EU but not in the single market. The deal does not cover food or agriculture, services or government procurement.
There is a free trade zone in Europe and we helped to create it: EFTA, the European Free Trade Association, counts Norway, Iceland, Switzerland and Liechtenstein as members. The EU is not just a single market it is also a customs union. The countries club together and agree to apply the same tariffs to goods from outside the union.
The EU has free trade arrangements with many other countries in Europe and beyond, including Turkey and Ukraine and countries that are applying to join the EU.
Customs union
So how is a customs union different from a free trade area?
The key difference is that the countries that club together agree to apply the same tariffs to goods from outside the union.
Once goods have cleared customs in one country they can be shipped to others in the union without further tariffs being imposed.Once goods have cleared customs in one country they can be shipped to others in the union without further tariffs being imposed.
The EU is a customs union and before it was created, the European Community was one too. However that means exporters have to contend with what are called "rules of origin", to demonstrate that their goods qualify as having originated in their country and were not just imported from Japan or America for instance and then exported immediately tariff-free into the EU.
Norway is part of the EU's single market, but it is not part of the customs union. So it sets its own tariffs on goods imported from outside the single market. But Norwegian goods (with exceptions for farm produce and fish) are imported tariff-free into the EU. That could be complicated for many companies that import components from around the world to put into finished products made in the UK.
That means that Norwegian exporters have to contend with what are called "rules of origin", to demonstrate that their goods qualify as having originated in Norway and are therefore eligible for tariff-free entry to EU countries. Also services are a huge part of the British economy, 78%, and are not totally covered by a customs union because they tend to face "non tariff" barriers.
Other options Still the UK could opt to leave the single market but stay in the customs union, but that does mean it couldn't negotiate free trade deals with other countries, the EU does that.
Three members of EFTA are also pretty much part of the single market - Liechtenstein, Iceland and Norway have negotiated access to the single market (excluding agriculture and fish). They have to implement EU single market rules and regulations in their own countries, with little say on what they are and they pay into EU coffers. It might also mean paying money to the EU and accepting ECJ judgements when they relate to trade and it is unlikely to cover farm produce or fish since the UK would not be in the Common Agricultural Policy or Common Fisheries Policy.
Switzerland has negotiated a series of bilateral deals that give it access to the single market for most industries, although it also has to apply EU rules and pay the EU money. This deal is under threat of renegotiation after a slim majority voted in favour of imposing limits on immigration in a 2014 referendum. The EU insists on free access for EU citizens to EFTA countries. A customs union does however have one big advantage, it means the Ireland/Northern Ireland border would remain open and easy to cross.
So, for companies, the trade deal the UK ends up with could matter very much. Free trade area
If, for instance, a business is based in Britain because it has complete access to the single market with subsidiaries and component plants across the EU, a free trade deal might not give it the same complete freedom to move money, people and products around the EU. If we left both the single market and the customs union we could negotiate a free trade deal with the EU. A free trade area is one where there are no tariffs or taxes or quotas on goods and/or services from one country entering another.
Other companies might prefer a free trade area, where they do not have to implement EU regulations and laws, saving them money in red tape and administration, although they might have trouble selling in the EU if they fail to agree to its rules. The negotiations to establish them can take years and there are normally exceptions.
So agriculture and fisheries might be exempted, certain industries protected and some goods may not be covered.
Services like banking and education also pose a problem in many free trade deals, as the barrier to trading services are not normally tariffs, but so called non-tariff barriers like different rules, standards and qualifications. So the negotiations can be very long and complicated and the result can still leave many barriers to trade.
There is a free trade zone in Europe and we helped to create it: EFTA, the European Free Trade Association. It counts Norway, Iceland, Switzerland and Liechtenstein as members, but they now have a very close relationship with the EU; all but Switzerland are part of the single market.
The EU also has free trade arrangements with many other countries around the world; so it is not against negotiating one with the UK in principle, but compared with staying in the single market or the customs union this would be the "hardest" form of Brexit. It would also almost certainly mean border controls including between Ireland and Northern Ireland.