A new UK-EU ‘customs union’ will do nothing to boost growth

The Liberal Democrats have long argued in favour of some new form of ‘customs union’ between the UK and the EU. But it now appears that key figures in the Labour administration are swinging behind the idea as well, including the prime minister’s chief economic adviser, Minouche Shafik, Treasury minister Torsten Bell and, most recently, deputy prime minister David Lammy.

Prime minister Keir Starmer has himself signalled that he sees closer UK-EU ties as one of the few levers left to reboot economic growth. And politically, this might be a final lifeline for his government. The polls suggest that public opinion now favours closer ties with the EU – though voters are much less keen when made aware of the conditions that would be attached.

In a nutshell, a ‘customs union’ is an agreement to remove tariffs on (most or all) goods traded between member countries. To make this work, all members must apply a common external tariff to (most) goods imported from outside the union.

It is not possible for a non-EU nation state, such as the UK, to join the EU Customs Union. But it is possible for another country to enter some more limited form of customs union with the EU, as Turkey has done, and as then prime minister, Theresa May, initially proposed as part of her government’s Withdrawal Agreement.

However, there are four compelling reasons to resist the attempts to revive this idea now. First, there would not be much to gain in terms of lower tariffs. Most UK-EU goods trade is already tariff-free and quota-free under the terms of the existing agreement, the Trade and Cooperation Agreement, as long as it meets the appropriate ‘rules of origin’ – criteria determining the national source of a particular product. This essentially replicates one of the main potential benefits of joining a customs union. Admittedly, EU tariffs are still charged on some imports from the UK where these rules are not met (which applies to a few higher-value products with parts from third countries), or where it is too costly to prove compliance with them (some lower-value shipments). But any remaining tariff benefit from a new customs union would then need to be offset against the UK’s obligation to apply the EU’s higher tariffs on goods that we import from the rest of the world.

Second, there is not much to gain in terms of non-tariff barriers either. Crucially, there would still need to be checks at the UK-EU border, especially if the UK remained outside the EU Single Market and Schengen – the border-free area in Europe, allowing free movement. These other checks could only be reduced by accepting a raft of other European regulations, with no say on how these are determined.

Third, the ability to do independent trade deals with other countries would be severely limited. The UK might still be able to negotiate a few agreements covering some aspects of trade in services – but not trade in goods. At the very least, the UK would have to renegotiate all the new trade deals it has done since Brexit. It will have to cancel some altogether, making the UK look like a very unreliable partner. For example, UK goods exporters currently face lower US tariffs, on average, than those from competitors selling the same products. This benefit is partly thanks to Brexit, and it would be lost.

Fourth, a new UK-EU customs union would clearly be intended as a step towards rejoining the EU in full, by the back door if necessary. This would be a slippery slope. Remember how much bandwidth was taken up in negotiating the exit in the first place? The resulting uncertainty disrupted trade and undermined investment, but these drags are already fading. Do we really want to rerun that process now, just in reverse?

Some supporters of a new UK-EU customs union argue that the EU would be willing to offer relatively favourable terms. But this is a triumph of hope over experience. The recent negotiations over a limited UK-EU reset have stalled in several areas precisely because the EU wants to extract every possible concession. What might be good political optics now will not look so clever once the public realise all the costs involved.

For now, though, there appears to be a growing misinformation campaign to trumpet the benefits of a ‘customs union’ – often based on flaky economic studies. A prime example is a February 2025 report by the consultancy firm, Frontier Economics, paid for by the pro-EU lobby group Best for Britain and now being cited by the Lib Dems. This claims that a UK-EU reset could boost UK GDP by as much as 2.2 per cent.

As usual, this claim falls apart at the slightest scrutiny. The report modelled something that is simply not on the table – regulatory alignment based on ‘mutual recognition’, with the most favourable results assuming that this applies to both goods and services (so well beyond a basic ‘customs union’).

In reality, the UK-EU reset is likely to be limited and based on ‘rule taking’, severely restricting the UK’s scope to reap any Brexit benefits from independent regulatory or trade policies. Even then, Frontier’s modelling suggested that the boost to trade from ‘deep alignment’ in both goods and services would (only) increase UK GDP by 0.3 to 0.4 per cent over one year.

So where did the ‘up to 2.2 per cent’ come from? It turns out that this was a ‘long-run’ estimate which simply extrapolates the one-year figures (themselves iffy) using some heroic assumptions about the links between trade intensity and productivity.

Specifically, the report assumed that a one percentage point increase in trade openness would increase GDP by as much as 0.5 to 0.7 per cent. But this would be an implausibly large boost for an economy like the UK, which is already relatively advanced and open. In short, there is nothing here to justify the hype from the Lib Dems, or their fellow travellers in the Labour government and beyond.

Unfortunately, the siren calls for a new UK-EU customs union are growing louder. It is essential that saner voices are not drowned out.

Julian Jessop is an independent economist. He tweets at: @julianhjessop.