Customs unions and FTAs: Debate with respect to EU neighbours

07-11-2017

The EU neighbourhood is undergoing deep transformations and this raises debate on how best to establish trade relations with neighbouring partners, like Turkey and the Eastern Partnership countries (such as Ukraine, Moldova and Georgia). Moreover, Brexit will entail the reorganisation of EU-UK relations, which will shake up cross-border trade flows. The EU can negotiate two basic types of trade agreement granting preferential market access to partners’ goods: free trade agreements (FTAs) and customs unions (CUs). CUs represent a higher level of integration, as the parties decide to harmonise their external trade barriers with the rest of the world. As FTAs do not maintain a single external border, they may result in trade deflection, whereby third countries can 'free ride' on FTA concessions by entering via the least restrictive border. For this reason, FTAs need to discriminate between goods originating in an FTA member and goods from third countries, through the introduction of costly preferential rules of origin (PRoO). Notwithstanding the cost of PRoO, FTAs have been the main type of trade agreements used, while the smaller number of CUs is due to the higher negotiation costs involved. CUs have therefore mainly been considered as a first step towards deeper regional integration. This is why there are ongoing political debates on customs unions in three different contexts: the assessment of the EU-Turkey CU, a CU as a further step in EU-Ukraine trade relations and the issue of the UK's exit from the EU CU as a result of Brexit. This briefing may be read in conjunction with one by Krisztina Binder, Reinvigorating EU-Turkey bilateral trade: Upgrading the customs union (PE 599.319), EPRS, March 2017.

The EU neighbourhood is undergoing deep transformations and this raises debate on how best to establish trade relations with neighbouring partners, like Turkey and the Eastern Partnership countries (such as Ukraine, Moldova and Georgia). Moreover, Brexit will entail the reorganisation of EU-UK relations, which will shake up cross-border trade flows. The EU can negotiate two basic types of trade agreement granting preferential market access to partners’ goods: free trade agreements (FTAs) and customs unions (CUs). CUs represent a higher level of integration, as the parties decide to harmonise their external trade barriers with the rest of the world. As FTAs do not maintain a single external border, they may result in trade deflection, whereby third countries can 'free ride' on FTA concessions by entering via the least restrictive border. For this reason, FTAs need to discriminate between goods originating in an FTA member and goods from third countries, through the introduction of costly preferential rules of origin (PRoO). Notwithstanding the cost of PRoO, FTAs have been the main type of trade agreements used, while the smaller number of CUs is due to the higher negotiation costs involved. CUs have therefore mainly been considered as a first step towards deeper regional integration. This is why there are ongoing political debates on customs unions in three different contexts: the assessment of the EU-Turkey CU, a CU as a further step in EU-Ukraine trade relations and the issue of the UK's exit from the EU CU as a result of Brexit. This briefing may be read in conjunction with one by Krisztina Binder, Reinvigorating EU-Turkey bilateral trade: Upgrading the customs union (PE 599.319), EPRS, March 2017.