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February 23, 2018

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Towards a customs union

We are slowly but surely heading to a mini-climax in the Brexit drama, as the Labour Party is preparing to organise a commons majority in favour of a customs union agreement.  

Theresa May, meanwhile, and her most senior cabinet ministers met at her official country residence in Chequers, and agreed on Canada-Plus-Plus-Plus, as the FT reports this morning. The number of three pluses is no coincidence. They resemble three baskets - as Laura Kuenssberg painfully explains: one where the UK wants to join EU agencies like in aviation, where it would accepts EU rules in full; one where it accepts the goals, but not the means; and one where it wants to retain the freedom of setting goals and means, but aims for regulatory convergence.

The UK press fails to mention that none of this nonsense is going to be acceptable to the EU. The main purpose is domestic politics. It keeps the Tory rebellion under wraps for now. There will be a dangerous moment later in the year, when the UK parliament votes on the withdrawal agreement. If this is rejected, the UK could be headed for a cliff-edge Brexit. It is our view that the probability of this event is underestimated.

The consensus emerging in the Labour Party of a tailor-made customs union is no less delusional. Behind this idea lies the hope that it will be a very different customs union from the one the EU has with Turkey. This view is correct only in the sense that the EU is likely to impose much tougher constraints on the UK given the size of its economy.

We are in the political equivalent of a Bermuda triangle where the Tories want Canada-Plus-Plus-Plus, Labour wants a tailor-made customs union, and the EU cannot and will not accept either. The question is how will this dynamics play out. 

The Guardian has a report this morning that a parliamentary majority is forming in favour of an amendment to be brought by pro-Remain Tory rebel Anna Soubry for a customs union agreement. Such a majority would be a devastating defeat for May. The vote on this amendment has been postponed until after Easter. The implications of a defeat would be serious, because it would force the government to change the negotiating mandate for Brexit - or at least to raise the issue of a customs union with the EU.

Jeremy Corbyn will give a speech on Monday in which he will flesh out his latest ideas. Over the last two weeks, he rejected the customs union and later called for one. So it will be intriguing to see whether he will become any more coherent.

A customs union agreement would have the support of several Tory MPs, include the rebels who inflicted a minor procedural defeat on May earlier in the year. The Guardian writes that Corbyn may impose a three-line whip on his MPs in favour of supporting Soubry's amendment. Her original amendment was for the UK to remain in the customs union. This has now been changed to a customs union. It is naturally impossible to stay in the customs union, as the customs union is integral to the EU. So what we are talking about is Brexit followed by a customs-union agreement, along the lines of what Turkey has with the EU. Labour's delusion is to assume that such an agreement would be softer than the Turkish one, while we think it would be much harder because the UK is a much larger economy.

The Article 50 withdrawal agreement, on which the UK Parliament will vote presumably in October, will not include a trade deal but it will include a reference to the future trading relationship, without fleshing it out in detail. It is possible that the agreement will only mention the future relationship in the loosest of terms. This would postpone the inevitable conflict until after the Art 50 agreement is reached. It is possible that the compromise is for the Art 50 agreement to mention a customs union agreement as one of several possibilities to be explored. 

The EU's position on all of this is pretty straightforward, and has not changed much. The EU accepts different Brexit options, but the number is strictly limited:

  1. A Canada-style trade agreement is possible - with only one of the pluses, relating to a small number of areas of mutual interest, which includes aviation. However, because of the commitment made to Ireland at the December summit, the EU will insist on a soft border between the north and the south, which means a customs union agreement between the EU and the UK in respect of Northern Ireland only. This would require an external customs border in the Irish Sea. This is obviously not the position of the UK government. Because of May's dependence on the Northern Irish unionist DUP, the Canada-Plus solution (single plus) would require a new election in the UK or a cross-party agreement in favour of this option. We think this is unlikely.
  2. The second option is a customs union agreement. It is the most realistic in our view - especially now that Corbyn is inching in this direction. It can be restricted to material goods only. It would preclude, or severely limit, any third-country trade agreements on goods. It would also include full compliance with EU single market rules, and undertakings on anti-dumping as well as tax policy. It would allow the UK to strike agreements on services with both the EU and third countries.
  3. finally there are always the corner options: a WTO trade arrangement or full membership of the EEA.

Our other stories

We also have stories on the ECB not objecting to restrictions imposed on Latvia's central banker Ilmars Rimsevics; on the politics behind the Novartis case; on the postponement of a decision on diesel cars in Germany; on the IMF's advocacy of eurozone fiscal union; on the Le Pens recapturing media attention; and on an alternative view of Germany's current account surplus.

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