Henry Newman is Director of Open Europe.
Earlier this week, the Government was heavily defeated in the Lords on an amendment which tries to push the UK towards forming a post-Brexit customs union with the EU. The amendment may be reversed but, with a hung Parliament deeply divided on this issue, the possibility of a customs union is not going away. It’s the subject of a Commons backbench debate next Thursday. And an amendment to the Trade Bill threatens to tie the Government’s hands even more starkly than the Lord’s amendment. The Government may be forced ultimately to concede this point. Yet doing so would hardly resolve the issue – and would raise profound questions around the long-term sustainability of any deal arranged with the EU.
Let’s imagine that the Prime Minister is forced to seek a customs union. Such an arrangement would mean the UK allowing the EU to sell access to our markets without our control. It would have no incentive to do anything to protect our interests in its trade policy, putting our exporters at potential competitive disadvantage.
This new customs union would mean that the UK could not alter any tariffs covered by the agreement. There would be limited ability for the UK to sign new free trade agreements or to deepen existing ones. We would lose the ability to offer potential partners lower tariffs on goods, in return for the better services access that suits the UK economy. Liam Fox would largely be out of a job.
The entire argument around the Customs Union is rather odd. Even those European states closest to the EU, such as Switzerland and Norway, do not have a customs union with it. When I quizzed an EFTA-state foreign minister about why that country wasn’t in such a customs union, I was met with incomprehension. So when the EU’s Brexit lead, Michel Barnier, talks of the British decision to leave the Customs Union he’s being disingenuous. Only the city-state of Monaco and some British territories are outside the EU and in the EU’s Customs Union. Leaving the EU means leaving the Customs Union.
A very few states – of which Turkey is the only large example – have a partial customs union with the EU. But that arrangement is rather unsatisfactory, and was dismissed as unsuitable for the UK by Labour’s Brexit lead, Keir Starmer, only yesterday. Labour want the UK to have a customs union, but of the mythical sort where the UK retains a “say” over EU trade agreements. A serious say just isn’t on offer to non-members: even members don’t always get a veto. Labour’s position is clever politics but bad policy. Cake having and eating anyone?
There’s also quite a lot of confusion here. Angry tweeters complain that the Commonwealth or Anglosphere cannot ‘replace’ European trade. However, while leaving the Customs Union will come with costs, trade with the EU will not cease. Others insist that a customs union is the ‘only’ way to solve the Irish border problem. But the queues of lorries at the Turkish-EU frontier shows that such a union wouldn’t resolve the need for checks. Of course the UK and EU should agree to smooth any customs checks on trade. In our Nothing to Declare paper, Open Europe set out a host of ways both sides can do just that. But if you look around the world at close countries which trade intensively together, such as Australia and New Zealand, or Canada and the USA, they’re not in a customs union.
Despite all this, the chances of the Prime Minister’s hand being forced are increasing. Ironically, as acceptance slowly grows that the UK is leaving the EU, the ‘fight’ is shifting from whether we leave towards how we leave. Various parliamentarians, pundits and campaigners are determined to soften Brexit. Of course, there are some sound economic arguments for remaining in a customs union but it’s also a political aim – a customs union, however unfavourable to the UK, is symbolic of a softer Brexit.
We often hear how the referendum question didn’t address membership of the Customs Union. At one level that’s true. Yet, during the campaign, both sides endlessly debated the benefits of free trade deals outside the EU. That whole argument was premised on leaving the Customs Union. And Vote Leave emphatically rejected a Turkish arrangement post-Brexit.
It’s not just some parliamentarians, however, who are keen to keep a customs union on the table. The EU side is as well. Barnier has recently shifted the goalposts – making it clear that the UK could re-think its redlines on a Customs Union at any point, even after Article 50 and during the transition. In so doing, the Commission waded straight in to a domestic political issue.
Why does the EU want the UK to stay in a customs union? At one level it’s about minimising disruption for trade. But there’s also a deeper – rarely articulated – desire to limit the options for Britain outside the EU. As one EU diplomat put it to me, the big concern for Brussels is the UK making a serious success of Brexit. Binding the UK close will make that harder.
If the UK does end up in a customs union, I can’t see it lasting long. And this is the danger for both sides with any UK-EU deal that isn’t seen as fair or that isn’t politically sustainable. Can we really imagine post-Brexit, ministers and MPs rejecting the offer of Justin Trudeau to deepen a trade deal with Canada, of the American administration to create a trade deal, perhaps with strong provisions on services, with the world’s biggest economy, or to sign new arrangements with Australia and New Zealand? I can’t see it.
A position where the Government was forced to stay in a customs union would therefore mean a high degree of uncertainty around the future UK-EU relationship. It might well happen that the Government loses a vote on an amendment in the Commons. My guess is that the Prime Minister would survive such a defeat. But, as of April next year, the UK will be a third country – outside the EU. The negotiations will be ongoing, but I think the political arguments will begin to shift away from how close we can keep things the same as if we were members, towards what comes next. What would stop the Conservatives fighting a future election with a clear manifesto commitment to leave the Customs Union?