It still remains wholly unclear what the future trading relationship between the United Kingdom and the EU will look like following Brexit, and how long it will be until a final framework is in place. The “common sense solution” favored by us – namely for the UK to remain part of the customs union – has become an increasingly unlikely scenario in recent weeks. And not just because Prime Minister May has doggedly stuck to her line that Brexit means the UK having to turn its back on both the EU domestic market and customs union. At the beginning of March, EU Council President Donald Tusk observed in a resigned manner that the outcome of the Brexit negotiations would probably “only” be a free trade agreement. However, the Prime Minister’s unwavering “no” stance toward customs union has now been well and truly rebuffed from her own side of the English Channel: The House of Lords has insisted that the government explicitly include the option of customs union in its Brexit negotiations. Numerous members of the House of Commons are likewise very keen on this proposal, and could inflict another voting setback on Theresa May. Only a few months ago, the leading opposition party (Labour) adopted a stance in favor of the “customs union” model. All in all, it appears that this particular issue is increasingly becoming a sticking point in the Brexit process.
The United Kingdom would benefit in many ways from a decision to remain in the customs union. Apart from anything else, London could still achieve the majority of goals that ultimately drove the UK to vote “out” in the first place: No further payments would have to be made to Brussels, and immigration policy could be set in a wholly autonomous way. In addition, the domination enjoyed by the European Court of Justice over UK legal matters would be significantly pared back. As a further benefit, the trade of goods between the UK and other EU countries would remain free of customs duties and border controls. Moreover, no hard border between Northern Ireland (part of the UK) and the Irish Republic would arise.
But from the British standpoint, this model has one significant drawback: As a member of the customs union, the UK would not be allowed to conclude any free trade agreements with third-party countries independently of the EU. For many “Brexiteers” this constraint really sticks in the craw, as they believe freedom to conclude stand-alone agreements with other countries is what gives Brexit its potential to become a success story. From an economic perspective, however, such an argument doesn’t really stack up, as the UK currently processes some two thirds of all its trade in goods through the single European market, or under free trade agreements already in place. In other words, London would be accepting the idea of almost two thirds of British trade being done on less favorable terms just to increase the amount of control it has over trading relationships. This looks like a position predestined to deliver a negative outcome, and one that is now probably making many a British parliamentarian nervous.
Now, it could be pointed out that a free trade agreement along the lines of the CETA Agreement (the free trade agreement between Canada and the EU), which has been held out as a prospect by Donald Tusk, would combine two advantages: On the one hand, customs duties in the trade of goods with the EU would effectively be eliminated, while on the other the United Kingdom would nonetheless have the opportunity to conclude agreements with third-party countries. But this argument is only partly valid. For one thing, while custom duties themselves would not apply, customs formalities and border controls would not be eliminated. For companies, this would mean bureaucracy and costs, and therefore a persistent and unwelcome obstacle to trade. Furthermore, at a political level the thorny Irish border question would remain unresolved. But another aspect on top of the above is the “time” factor. If the UK were to remain in the customs union, the parameters that would apply to future trading relationships from the point of departure from the EU would essentially be set in stone over the coming year. The private sector would then be able to use the entire transition phase – just under two years – to adapt to this new framework. By contrast, if London and Brussels were “only” to agree on free trade discussions, these would not be able to start until the spring of next year under EU rules – and would in any case have an uncertain outcome. The risk of these negotiations failing (or not being concluded in a timely way) would remain, which means the uncertainty would remain considerable for a long time.
“This is a negotiation and neither of us can have exactly what we want,” said Theresa May herself not that long ago about the Brexit discussions with Brussels. Over the next few months, it will become apparent just how prepared the British Prime Minister is to sacrifice some of her own “red lines” in order to arrive at a workable compromise. This will be a tightrope act from the domestic political perspective in particular, as while the private sector and a majority of the political establishment in London want the greatest possible proximity to the EU even after Britain’s departure, any compromise – such as remaining in the customs union, even during the transitional phase – is a step too far for the Brexit hardliners. The divisions in the UK on the subject of Brexit truly run deep.