Leaving the customs union could prompt our ‘screwdriver operations’ manufacturing sector to fall apart

Business Green

Published: 21st August 2017

Full article (paywall): https://www.businessgreen.com/bg/opinion/3015923/leaving-the-customs-union-could-prompt-our-screwdriver-operations-manufacturing-sector-to-fall-apart

Article in full below:

The government has in recent days set out proposals for a future customs relationship with the EU. Like most of the government’s Brexit proposals to date, it confirms that leading cabinet Brexiteers are living in some fantasy island, detached from reality. Though this cake-and-eat-it approach, which proposes the continuation of existing customs arrangements with the EU without barriers to trade, probably has more to do with attempting to paper over the growing confusion and deep divisions within the Tory Party than being a realistic proposition. We must ask why the EU27 would agree to grant a country that is not a member of the club the benefits of membership without restriction. 

We should also ask, of course, why the customs union is so important anyway? The answer is, that being outside this tariff and duty-free trade area would have a devastating impact on our manufacturing industry.

Following the devastation of many local economies, the government lured foreign investors to use the UK as an assembly base (so-called ‘screwdriver operations’) for onward sale into the EU single market. This means that our manufacturers are highly dependent on a customs union which imposes common external tariffs on goods from countries outside the EU but agrees not to impose them on the trade of goods within the block.

Car manufacturers are an example of an industry heavily reliant on tariff-free trade across the EU. Leaving the customs union is set to disrupt their ‘just in time’ supply chain by requiring time-consuming checks and paperwork as components pass across currently open borders.

But leaving the customs union would impact equally on green businesses, such as Siemens, the German engineering conglomerate who are manufacturing wind turbines in Hull. For such manufacturing businesses, leaving the customs union could ultimately be more damaging than leaving the single market.

The justification for exiting the customs union is to leave us free to strike bilateral deals under WTO rules, but these would also be vulnerable to the structure of our manufacturing industry. In order to be a part of free trade agreements, a WTO ‘rule of origin’ is commonly applied whereby around 60 per cent of components must originate from the UK otherwise a higher rate of export tax would be applied; manufacturers like Honda currently use just 25 per cent of components originating from the UK.

Of course, some believe that reducing our dependency on exports and making the UK more self-sufficient is the only chance there is of making Brexit successful and truly greening our economy. Indeed, a report I commissioned earlier this year, looking at an alternative trading model post-Brexit, concluded that only greater self-reliance and strengthened local economies could build stronger communities, create new jobs and reduce our environmental impact.

As a Green, I of course welcome any such critique of globalisation, which has been the dominant – and in so many ways damaging – economic ideology for both the EU and UK in recent decades. However, the reality is that our ‘screwdriver operation’ economy will take time to fix. For manufacturers to find new suppliers in the UK within the 18 months now left before the UK plans to exit the EU looks like an almost impossible task; especially since the UK currently has neither the design expertise nor the skilled workforce to produce components currently imported from other European countries. We just have to acknowledge that a failure to recognise the current importance of the customs union will leave our manufacturing industry screwed.