BrexitCentral: A permanent UK-EU customs union would create worse problems that those it would supposedly solve

The most likely effect of Jeremy Corbyn’s announcement that Labour will support some form of second referendum is to increase the probability that the UK leave the EU without a formal trade deal.

That so many Labour MPs have pledged to stick by their election pledge to honour the 2016 referendum means that a second referendum remains highly unlikely. And a good thing too given the serious damage it would do both to democracy and, due to the division and business uncertainty it would bring to the UK economy.

Corbyn’s U-turn will, however, cement the impression in the vital Leave-voting heartlands that Labour is a party of Remain. Just as importantly, it will stiffen the EU’s impression that they have no need to make a serious move on Theresa May’s demand that the unacceptable Northern Irish backstop be re-written. Why give any ground when so many of our parliamentarians and the official Opposition are stating openly that are prepared effectively to cancel Brexit on 29th March rather than allow the UK to leave without a trade deal?

It should go without saying that if the EU know we will not leave without a deal, then they have no incentive to change the backstop. And with no change to the backstop, the Withdrawal Agreement as it stands looks dead in the water.

Attention now is likely to switch to whether Theresa May will reverse her long-standing promise to leave the Customs Union with the aim of tempting enough Labour MPs to back a Withdrawal Agreement.

For some months, the Labour front bench has taken to endless repetition of the “permanent customs union” mantra as if this is some sort of magic key to unlocking the Brexit stalemate. In fact, nothing could be further from the truth. The real puzzle is why journalists (as well as Labour backbenchers) do not subject this flagship policy to more scrutiny. As as soon as you do, it becomes clear a permanent customs union does not solve the problems it is aimed at and creates even worse ones of its own.

The fundamental arguments against the EU’s Customs Union are well established: it works as a protectionist mechanism to protect large EU companies from overseas competition. Although many tariffs are low, this is not the case for significant sectors such as food, clothing, footwear and cars. As a result, prices for hard-pressed consumers are higher than they should be, companies have little incentive to invest in improving productivity (which in turn limits wage increases), whilst poorer countries can find they are effectively frozen out of EU markets limiting their ability to develop.

On those grounds alone, it’s odd that Labour MPs think this is going to be a vote-winning strategy, but that is only the start of it.

Being in the Customs Union after we have left the EU would leave us in the same situation as Turkey – having to accept whatever tariffs the EU decide on whilst having no say in trade negotiations. But, even worse, when the EU strikes a future new trade deal with another country, say India or Argentina, we would be bound to accept zero tariffs on imports from that country, but with no obligation on them to drop tariffs on UK exports.

It is sometimes suggested that the UK could keep a say in future trade policy, possibly through the EU and UK forming a new customs association going outside EU boundaries. If you believe that the EU would ever countenance such a proposal, perhaps I can introduce you to a friend of mine who has a splendid bridge for sale. No doubt, the EU would be happy to pledge to ‘consult’ with the UK on future trade deals and tariffs but we can safely rule any significant role in decision-taking and safely rule in the European Court of Justice having the final say on our trade laws.

Have John McDonnell and Jeremy Corbyn forgotten TTIP – the proposed US-EU trade which they hated by so much? By strong-arming the UK into a ‘permanent’ customs union with the EU, they would forfeit any power for a future Labour government to stop such proposals in the future.

Defenders of the customs union idea suggest that it will keep frictionless trade and solve the Northern Ireland border, but even that is not so. Getting rid of tariffs does not in itself solve the problem of border checks because nil tariff customs declarations must still be filed and sanitary/phytosanitary and other regulatory checks are required. Only by remaining within the Single Market at least for goods can checks on trade be avoided.

The catch is that the EU will not allow the UK to have partial membership of the Single Market for goods as they believe this will distort trade. Staying in the Single Market would mean accepting freedom of movement and continued payment to the EU, effectively staying in the EU in all but name – giving away our money and losing even more control over our laws. It’s hardly the slogan that will endear Leave-voters to either of the main parties.

In reality, being outside the Customs Union and the Single Market need not involve significant delays at the border. The vast majority of checks and tariff payments are already made electronically or away from the border. Actual border checks tend to focus on smuggling and other illegal activity and are highly targeted and intelligence-led.

As soon as you look beyond the headline, it becomes clear that committing to a permanent customs union is a policy without any serious merit, unless of course you want to nullify Brexit completely. So what should MPs who want to respect the referendum result but are worried about the impact of No Deal on their local industries be looking to achieve?

Well, in the first place, they should remember the advantages that a clean break on 29th March will bring. First, it would end the uncertainty for business far sooner than would any version of Theresa May’s Withdrawal Agreement under which our future trading relationship with the EU would remain unresolved for many years.

Further, the Government would regain the ability and the cash to help affected industries through the transition. On current trade patterns, even if full tariffs were charged, UK firms exporting to the EU would be the liable for about £5 billion whilst EU firms would find their exports to the UK liable to about £13 billion of tariffs. This is money which the Government can use to provide agricultural assistance, more targeted regional policy, R&D credits and even some transitional payments – measures that are all legal under WTO rules but only become possible once we have left the EU.

The UK would not only be free to agree FTAs with non-EU countries, we also would have the option of immediately reducing or even abolishing tariffs on imports, starting with goods for which there is little UK production. This would help both consumers and firms importing intermediate goods as part of their manufacturing process. Despite the relentless coverage given to firms who say they may leave the UK, a clean break on 29th March would actually encourage firms to set up or increase manufacturing capacity in the UK, thereby ensuring good access to the strategically important UK market. Indeed, this process is already happening, although it is rarely reported. Look, for example, at Medstrom announcing a new manufacturing facility in the East Midlands because of Brexit, whilst Nissan have started the process of trying to source more parts from the UK.

Finally, it is likely – once out of the EU and freed of the time pressures of Article 50 – that we would find it easier to negotiate a Free Trade Agreement with the EU. Then, the leverage would be on our side of the table.

There is a strong case to be made that, far from hitting the economy, leaving without a formal trade deal on 29th March will actually provide a net boost to UK business.

Perhaps most importantly, MPs need to realise that, in practice, ‘No Deal’ has already been taken off the table due to the large number of side deals that have already been agreed with the EU and other countries. These cover areas such as citizens’ rights, cross-border transport within the EU, mutual recognition on standards with the US, a number of financial services and continued free trade with important partners such as Switzerland.

Putting pressure on the Government to prepare properly and fully for 29th March should be the main focus for MPs of all parties.

A key step in that process should be to rule out once-and-for-all damaging policies such as another referendum, delaying Brexit or a permanent customs union. A clean break on 29th March is nothing to be afraid of; but only when the EU understands that the UK will be taking back control of its laws and trade policy, come what may, will there be a real prospect of achieving a Withdrawal Agreement that is acceptable to both sides.

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