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How can I not try to rise up to this challenge? So: are the argument in the ex-cabinet ministers letter to the PM correct? A thread on customs unions. OMG. Another one.
Here’s the letter that we are talking anbout
The first thing to discuss is: what IS a customs union. Legally, a customs union is defined in Art. XXIV GATT (yes. THAT Art. XXIV). Here’s the text 
So there’s two elements: 1) elimination of internal duties and other restrictive regulations of commerce with respect to substantially all the trade and 2) substantially the same duties and regulation of commerce with third states.
That’s the legal definition. In reality, of course, states don’t sit down and say “let’s do the bare minimum”. They build on it, include other things (level playing field, anyone?), refine it (or mess it up).
Now that complicates the debate. Because some criticism is not targeted at CUs in general, but specific examples - usually the EU-Turkey CU, our prime model for discussion. @SamuelMarcLowe complains about this rather regularly in increasing dispair.
@SamuelMarcLowe OK. So we have our CU definition. This brings us to the mother of all issues (discussed in the letter): can a state in a CU conclude FTAs with third states? To what extent does a CU limit a state’s choices?
@SamuelMarcLowe The definition of a CU does not have a position, but a limit here: The external duties have to be substantially the same. So a CU can allow countries to negotiate their own FTAs, but where the external tariff drifts apart you have a problem.
Namely you could then import a product either into the country that does not have an FTA and pay the tariff. Or import through the country that does and the product enters tariff-free (and you could then try to move it on, circumventing the tariff).
How to deal with that? In practice you could either centralise negotiating FTAs (that’s what the EU does for member states, once we referred to that as being in THE customs union). Or you try to negotiate parallel FTAs. See Art. 16 of the Turkey-EU CU
Now the parallel negotiations can cause problems, particularly where partners refuse to extend the same treatment. This is from the 2014 evaluation of the EU-Turkey CU. ec.europa.eu/neighbourhood-…
So there’s a pickle: partners don’t want to extend the same benefits, also because they feel they benefit from the EU-Turkey CU through “trade deflection”, Turkey could prevent deflection, but this would mean origin checks - and thus risk one of the main benefits of the CU.
Why does Turkey live with this? Several reasons: 1) the benefits of the CU largely outweigh the costs of this issue and 2) the risks are rather limited where the FTA and the tariff diversion happen with countries where there’s not so much trade. AND 3) there’s reform.
Meaning the EU and Turkey can (and do) work towards ameliorating the situation - the text I cited speaks about formalized structures for parallel track negotiations. (@pinarart anything to add? Feel free to correct me if I went wrong anywhere)
@pinarart So as to the letter? There’s light and there’s shadow. The largest shadow is that it utterly fails to acknowledge the economic benefits of a CU (the reason why Turkey is in one and puts up with the downsides).
@pinarart As to the downsides: while you are not traded (too strong), you do lose an important part of your independent trade policy. We can haggle about how important. The letter is too categorical and overstates a bit, IMHO (@SamuelMarcLowe also has views here).
@pinarart @SamuelMarcLowe Also note that @pinarart immediately spotted that while my first definition of a CU mentioned the requirement of external regulation of commerce, I dropped it the second time around - this was largely because that was my segway to disucussing tariffs and trade deflection. BAD.
@pinarart @SamuelMarcLowe Furthermore @Ambetkar3 is right to recall that the Turkey-EU CU is subject to much criticism for not encompassing all goods.
