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Free trade area, single market, customs union - what's the difference?

Container being scanned Image copyright EPA

Theresa May is expected to set out her approach to Brexit negotiations in a speech this week.

But what stance will the prime minister take on whether the UK remains in the single market and customs union?

Downing Street says reports Mrs May will signal pulling out of both are nothing more than "speculation".

Here are the differences between a free trade area, a single market and a customs union.

Single market

This usually refers to the European Union's single market and is perhaps the most ambitious type of trade co-operation.

That's because as well as eliminating tariffs, quotas or taxes on trade, it also includes the free movement of goods, services, capital and people.

That is why there has been no limit on the number of French people who can come to the UK, or the number of British people who can live in Spain - but there are limits on Turks or Ukrainians, for example.

Also, a single market strives to remove so-called "non-tariff barriers" - different rules on packaging, safety and standards and many others are abolished and the same rules and regulations apply across the area.

There are EU-wide regulations covering a whole host of industries and products on everything from food standards and the use of chemicals to working hours and health and safety. It is an attempt to create a level playing field and a single market; this does not happen in a free trade zone.

For goods, the single market was largely completed in 1992, but the market for services remains a work in progress a quarter of a century later. The EU has promised to introduce it many times, but several countries have dragged their feet. Even so, the City of London dominates financial services in the EU.

The EU is therefore not a free trade area - it is a single market.

Image copyright Christopher Furlong
Image caption Some industries, such as fisheries for example, could be exempted from a free trade area depending on negotiations

Free trade area

A free trade area is one where there are no tariffs or taxes or quotas on goods and/or services from one country entering another.

The negotiations to establish them can take years and there are normally exceptions. So agriculture and fisheries might be exempted, certain industries protected and some goods may not be covered.

Also imported goods would have to comply with the law of the country they are being sold in. So, for example, you could have a free trade agreement with the US but still a ban on the import of GM foods or different safety standards for electrical goods.

There is a free trade zone in Europe and we helped to create it: EFTA, the European Free Trade Association, counts Norway, Iceland, Switzerland and Liechtenstein as members.

The EU has free trade arrangements with many other countries in Europe and beyond, including Turkey and Ukraine and countries that are applying to join the EU.

Image copyright Matt Cardy
Image caption Iceland, alongside Liechtenstein and Norway, has negotiated access to the single market

Customs union

So how is a customs union different from a free trade area?

The key difference is that the countries that club together agree to apply the same tariffs to goods from outside the union.

Once goods have cleared customs in one country they can be shipped to others in the union without further tariffs being imposed.

The EU is a customs union and before it was created, the European Community was one too.

Norway is part of the EU's single market, but it is not part of the customs union. So it sets its own tariffs on goods imported from outside the single market. But Norwegian goods (with exceptions for farm produce and fish) are imported tariff-free into the EU.

That means that Norwegian exporters have to contend with what are called "rules of origin", to demonstrate that their goods qualify as having originated in Norway and are therefore eligible for tariff-free entry to EU countries.

Other options

Three members of EFTA are also pretty much part of the single market - Liechtenstein, Iceland and Norway have negotiated access to the single market (excluding agriculture and fish). They have to implement EU single market rules and regulations in their own countries, with little say on what they are and they pay into EU coffers.

Switzerland has negotiated a series of bilateral deals that give it access to the single market for most industries, although it also has to apply EU rules and pay the EU money. This deal is under threat of renegotiation after a slim majority voted in favour of imposing limits on immigration in a 2014 referendum. The EU insists on free access for EU citizens to EFTA countries.

So, for companies, the trade deal the UK ends up with could matter very much.

If, for instance, a business is based in Britain because it has complete access to the single market with subsidiaries and component plants across the EU, a free trade deal might not give it the same complete freedom to move money, people and products around the EU.

Other companies might prefer a free trade area, where they do not have to implement EU regulations and laws, saving them money in red tape and administration, although they might have trouble selling in the EU if they fail to agree to its rules.

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