The Telegraph: Staying in customs union is not an option

With the UK’s Brexit negotiations at boiling point, I’d like to make two observations. Amid the political manoeuvring and rhetorical conflict, the underlying reality of the various options assumed to be available is often lost.

My first point is that staying inside the EU’s protectionist customs union indefinitely – the Prime Minister’s latest proposal – has serious economic downsides.

As a customs union member, the UK must charge rather high tariffs, at rates set by Brussels, on various exports from outside the EU. So British shoppers will keep paying more for imports from around the world, particularly food, clothing and shoes – given that prices include tariffs designed to protect uncompetitive producers in other EU states.

Under customs-union rules, 80pc of these tariff revenues go to Brussels – billions of pounds each year. And because the UK trades more with non-EU countries than other large EU members do, we pay an unfairly high share of the combined tariff revenues.

The customs union protects many large EU-based corporations from global competition – which is why large business lobby groups like it. But it’s bad for consumers. And the EU’s tariff burden is disproportionately shouldered by the UK – particularly our poorer households, given the high income share they spend on the subsistence goods the customs union is deliberately designed to restrict.

The customs union also stops Britain striking trade deals with non-EU countries – that is, over four fifths of the world economy. This is a big disadvantage, given our cultural and historic links with a wide variety of nations. With the global centre of economic gravity shifting inexorably east, it’s vital for our future prosperity that Britain engages more with the world’s most populous markets.

Yes, outside the customs union we’re no longer part of the EU’s trade deals – often presented as a huge sacrifice. Over the 60 years since the EU was founded, though, Brussels has failed to agree and ratify a free-trade agreement with any of the world’s top economies. The EU has no deals with the US, China or India. Only about half of the 50-odd deals often referred to are operational – and they cover just 10pc of the global economy, being mostly with tiny countries.

Despite its large, taxpayer-funded permanent trade secretariat, the EU is bad at trade agreements as the numerous member states often have conflicting objectives. And its deals have favoured French agricultural and German manufacturing exports, not UK services.

Nations acting along – such as Switzerland, Singapore and South Korea – have secured trade deals covering a much bigger share of the global economy than has the EU. In 2013, Switzerland struck a deal with China after 18 months of negotiations – Britain can do the same. Far from being “at the back of the queue”, we are well placed to make historic deals with the US, India, Indonesia and a host of others – but only if we’re outside the customs union.

And the sizeable nations that have signed EU trade agreements – including Mexico, South Africa and South Korea – have also indicated they want UK-equivalent deals, providing an opportunity for Britain to modify existing agreements to our advantage.

Will leaving the customs union really wreck EU-wide supply chains? UK manufacturers import countless “just in time” components from the US and elsewhere every day. And most EU-sourced components are likely to remain “zero-rated” for tariff purposes (even if goods attract a tariff on the final sale). Manufacturing supply chains also operate effectively across the US-Canada border, where there is no customs union.

I’d also say this protectionist customs union is neocolonial and even immoral – given the EU’s high tariff wall, particularly on processed agricultural goods, severely hinders the development of many of the world’s poorest countries.

When the UK joined the EEC in the early Seventies, the bloc accounted for around a third of global GDP. Once we’ve left, it will be just 15pc – despite the EU now comprising many more member states. It makes no sense for a diverse, competitive economy like Britain to be in a construct that harms our consumers and discriminates against 85pc of the world economy, while leaving us unable to cut bespoke deals with the fastest-growing markets.

Over the last two years, Theresa May has repeatedly stated that staying in the customs union would “betray the Brexit referendum result”. Just a few weeks ago, in Salzburg, she said ongoing membership “would mean we’d still have to abide by all the EU rules … but couldn’t do the trade deals we want with other countries”.

Yet now the Prime Minister is trying to secure a deal that keeps Britain inside the customs union indefinitely. One reason is that her closest advisers are far too heavily influenced by corporate vested interests. Another is that she “wants to maintain the integrity of the United Kingdom” – and Downing Street has been duped into thinking leaving the customs union means imposing a “hard Irish border”.

As someone whose family hails from part of the Irish Republic very close to Northern Ireland, I know the importance of peace on the island of Ireland. Yet the idea that the Irish border is an obstacle to leaving the customs union, and striking a UK-EU free trade agreement, is nonsense.

The Irish land border already copes with differing currencies, excise duties and other tax rates. There is no need for physical border infrastructure or checks that could inflame sectarian sensitivities.

The issue only flared up after June 2017 when the Tories became dependent on the DUP, after a disappointing election, and when a new Taoiseach emerged in the Republic. Since then, Brussels and Dublin, keen to gain negotiating leverage over Britain, have taken a maximalist, ultra-legalistic approach.

The reality is – and this is the second of my two points – that with good will and common sense, a combination of derogations, trusted-trader schemes and existing technology can “solve” the Irish border. Even Michel Barnier acknowledged this, as part of his recent “de-dramatisation” of this issue. And just last week, Brussels confirmed a UK-EU free-trade agreement is still on the table.

For the sake of the British economy and her own Premiership – to say nothing of democracy – it’s an offer May must now grab.

To read the piece in full, click here.

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