Understanding Customs Unions and Free Trade Agreements

Both Customs Unions and Free Trade Agreements (FTAs) aim to facilitate trade, but their structure and the rules governing them are quite different. A Customs Union, such as the one that the European Union (EU) has with certain countries, involves a common external tariff and common external trade policy among member states. On the other hand, the EFTA and the EU have a more complex relationship, characterized by individual trade deals and a more nuanced approach to handling free trade without uniform tariffs or common external policies.

Challenges in EFTA's Trade with the EU

Since EFTA members are not part of the Customs Union, their goods are subject to border checks with the EU, which can lead to significant costs and delays. Even if goods can enter the EU free of duty, the tariffs and customs procedures can still add to the expenses and logistical complications. This means that while EFTA members can enjoy free trade with the EU, the process is not as seamless as it could be.

Rules of Origin: Preventing Back Door Imports

Rules of Origin, which are agreements on the origin of goods, play a crucial role in preventing the entry of goods into the EU without the appropriate duty payments. These rules ensure that only products that meet specific criteria can benefit from preferential tariffs. For instance, if a Norwegian manufacturer wants to sell a finished good to the EU, they must have assembled a significant portion of the components from countries that are part of the trade agreement. Failure to meet these criteria can lead to the imposition of higher tariffs.

The Single Market and Internal Borders

In the EU's Single Market, goods can pass over internal borders without inspection or delay. This is due to the EU's Customs Union, which ensures that all member states apply the same tariffs on goods arriving from third countries. The absence of such a system in EFTA's relationship with the EU means that the process is more cumbersome and less efficient.

The Complexity of Rules of Origin

The Rules of Origin can be extremely complex, often making it challenging for even EFTA members to comply. The UK and the EU are currently negotiating their own Rules of Origin, which will determine the specific criteria goods must meet to benefit from preferential tariffs. The EU prefers to use standard agreements, such as the PEM cumulation and the PEM Convention, while the UK government prefers more bespoke rules, which may take longer to negotiate.

The EEA's Level Playing Field

The European Economic Area (EEA) is built on the principle of a level playing field. This is reinforced by extensive trade agreements with the EU, ensuring that all members have a fair and balanced approach to trade. The Rules of Origin are a key component of this, preventing any back-door imports that could exploit existing agreements.

The Role of Certificates of Origin

Certificates of Origin are a critical tool in enforcing Rules of Origin. They provide evidence that a product has been manufactured in a specific member state and qualifies for preferential tariffs under the agreed-upon trade deal. Without these certificates, goods in the free trade process may be subject to tariffs, ensuring that the intended tariffs are not circumvented.