Thread by @AnnaJerzewska

How to combine a customs union and bilateral trade deals?

A question widely discussed a few years back in the context of Brexit but one that's much bigger than that.

A couple of thoughts on that based on @_AnabelG's superb blog for @PIIE.

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piie.com/blogs/trade-an…

In principle CU members are not meant to sign their own FTAs but as @_AnabelG points out few of the existing CUs are perfect.

Many CUs are partial and some are a hybrid between a CU and an FTA – e.g. include rules of origin.

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As a reminder: CU members have a common external tariff applied to all 3rd parties.

As a result, they can eliminate tariffs and other quantitative restrictions amongst themselves. Customs formalities and checks are still in place.

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While we have examples of CUs with rules of origin, in principle a movement certificate is enough for goods to move within a CU – once a product is in a CU (gains CU status) it can be imported without further tariffs.

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The main problem is – if you have an unrestricted, tariff-free flow of goods within a CU how do you prevent FTA partner's goods from entering the markets of other CU members?

Using the FTA to enter the markets of other CU members and avoiding the common tariff.

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How to prevent this without introducing new barriers and checks between CU member states?

If you have an imperfect CU that already has RoOs it's easier. But the more “perfect” the CU, the more difficult it would be.

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As such signing FTAs with third parties seems not compatible with facilitating trade between CU members.

The more there is that you need to control, the more controls you have to have.

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And yet, as Anabel points out, there are advantages to such solutions.

FTAs focus on so much more than just customs, they can be leveraged for the benefit of other members and can provide an incentive for further regional integration.

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Third-party cumulation would definitely help to make this possible. Especially now that the UK has opened the doors to using it across the board (WTO compatibility status still pending).

But that would require the FTA partner to agree.

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Anabel's two first suggestions - greater transparency and reducing CET - would certainly help to mitigate the impact.

But some sort of practical customs mechanism to prevent transhipment would still need to be introduced.

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Various ways to do it depending on the availability of resources and how much additional burden the traders would be willing to absorb.

This would be worth exploring further.

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I reckon these questions are only going to become more important as various types of economic blocks continue to interact.

They will also probably become relevant again in the never-ending Brexit discussion sooner or later.

Worth exploring practical solutions.

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