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This week, Parliament passed the Brexit Bill, clearing the way for the UK to trigger Article 50 to leave the EU. Brexit Secretary, David Davis, announced last month that Brexit would involve leaving the EU Customs Union and this was reiterated by Chancellor, Phillip Hammond, this week.

But, what is the Customs Union? And, what does it mean for UK SMEs?

What is it?

The EU Customs Union has three main roles: enabling free trade between EU states; ensuring that all EU states charge equal import duties to countries outside the union; and ensuring that EU countries do not impose tariffs on goods travelling between countries in the EU.

The Customs Union promotes a similar aim to the single market, but they should not be confused. The single market provides for the free movement of goods, services, capital and people. But, in practice, it is possible to be outside the Customs union but still have access to the single market, like Norway. On the other hand, it is also possible to have customs union agreements with the EU and be outside the single market, like Turkey, Andorra and San Marino.

What does it mean for SMEs?

If the UK does leave the customs union as Davis and Hammond have suggested, the biggest impact for SMEs is likely to be increased tariffs. EU officials have made clear that the UK will not be given an easy ride. The cost of doing business will therefore rise and it is likely that such costs will eventually be passed on to SMEs and subsequently their customers.

Although it is possible to enjoy tariff-free access without being part of the customs union, the UK would have to accept free movement and make contributions to the EU budget. In which case, the UK will eventually lose all of its democratic influence in the EU, when the Brexit result comes into fruition, but still be required to make large annual contributions. Nevertheless, Theresa May has seemingly ruled out that possibility, at least for the moment.

What is the impact of leaving the Customs Union?

If the UK is unable to negotiate a more favourable deal, it would have to trade on standard tariffs under the World Trade Organisation rules. According to The Independent, this could cost Britain’s exporters up to £4.5 billion per year.

There is a counter argument, however. Secretary of State for International Trade, Liam Fox, argues that UK businesses could benefit from leaving the customs union, as the country would be free to negotiate its own trade deals with non EU countries. In turn, this could make up for any loss of trade with the EU or even improve upon what we had before.

Whatever the case, the Customs Union is an important part of the Brexit negotiation process and a part which many SMEs across the country will be watching closely.

Edward Winterton is Commercial Director at Bibby Financial Services.