Businesses would be wise to start thinking about a Brexit plan B – along with plans C, D and E. Any confidence that the deal done in December to allow the talks to proceed was a harbinger of a soft Brexit will have been seriously damaged by what has happened in the past week or so. Pushed by the Brexiteers, Theresa May has insisted that the UK will not be in a customs union with the EU in future. This brings her government's promises about the Irish Border back into focus – not to mention the nature of the UK's future trading relationship with the EU.
The European Union has called the British prime minister's bluff by insisting that the United Kingdom outline what it wants from the talks about a future relationship as soon as possible and that it live up to the commitments it made before Christmas. In response the UK has reiterated this week that it plans to have no customs union with the EU in the long term. The EU's chief negotiator, Michel Barnier, warned in response that "without a customs union and outside the single market, barriers to trade in goods and services are unavoidable".
The customs union allows goods to circulate freely within the EU and imposes common tariffs on goods entering the union from outside. Together with alignment of rules via the single market, it allows goods to circulate freely. The single market also allows free trade in services, vital to the UK because of its financial sector.
The UK wants to withdraw from the customs union to allow it to negotiate new trade deals with third countries like the United States and China – in other words it wants to negotiate lower tariffs with these countries than those the EU operates, in return for greater access for UK businesses to their markets.
In papers published last year it suggested a customs “partnership” with the EU or a “streamlined customs arrangement” were its preferred options. UK government officials quoted by Bloomberg on Wednesday suggested that much “ technical” work remained to be done before the UK cabinet could decide its preferred option. The truth is that the partnership option as outlined looked unworkable and the streamlined arrangements were just fancy ways to make a Border with the EU a bit less intrusive.
To suggest that you should exchange free access to markets on your doorstep for the hope of freer trade with markets farther away is a central part of the economic madness put forward by the Brexit lobby. Economic evidence, in the form of what is known as the gravity model of trade, shows that trade flows are greatest between bigger economies that are closer together. This might also be seen as common sense. The UK will never find a better trading partner than the big, rich one on its doorstep known as the European Union.
Even for services, the dominant factor in UK exports, recent research by the Centre for Economic Policy Research in London shows that the gravity model also holds, albeit a bit less strongly than in goods. The UK’s biggest single trade partner for goods is the US – because of financial-services flows – but the EU as a whole is still bigger.
So this will mean a problem for the talks on the Irish Border and a row about what the December deal “really” meant. Ireland will try to get this tied down as far as possible in the formal withdrawal agreement that is now being negotiated. Note, meanwhile, that, in the background, countries like France are insisting that there can be no fudge in terms of controlling goods entering the EU single market and customs union. Unless the UK reneges on its promise to the DUP not to control goods movements across the Irish Sea, it is hard to see how this circle can be squared.
It creates a difficult issue for business planning, given the wide gap between the possible outcomes, which range from the UK changing course, perhaps after a general election, to the chaos of a no-deal Brexit where the UK crashes out next March without any agreement.
Time is short. Businesses trading with the UK that have not done so already should familiarise themselves with the rules of trade with countries outside the EU – and the tariffs and customs procedures involved. Companies moving goods through the UK to the Continent face particularly tricky issues, as it is unclear what delays and bureaucracy may await.
This is what the UK leaving a customs union with the EU will mean. The remorseless logic of the argument is inescapable. If the UK is serious about leaving the EU trading bloc, it is very hard to see how a deal can be done that still meets the Border pledges made in December, never mind the fantasy economic goals being outlined in London. Something, somewhere, is going to give.
