Sunday, March 31, 2019
A customs union beckons - and it won't stop trade deals
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

Another week on in the Brexit process and I am worried. I may have used up all my best adjectives too soon. This thing could get even madder. And, in a few weeks’ time, the short rein of Theresa May as prime minister will soon be over; the only former Bank of England official, as far as I know, to have made it to the top job. She lost heavily again on Friday.

For all her faults, there was always an element of “cling on to nurse for fear of something worse” about Theresa May. Who knows who the 100,000 members of the Tory party, one of the least representative electorates in the world, could inflict on us? And then there’s Jeremy Corbyn waiting in the wings.

But let me be positive. Last week saw the House of Commons seize control of the order paper for a series of indicative votes on the way forward. They have been criticised for failing to agree on any option but that rather misses the point. They do point to a way forward if MPs are prepared to remove their party blinkers.

So, for example, a perfectly sensible proposal from George Eustice, the Tory Eurosceptic former agriculture minister who resigned in protest over May’s withdrawal agreement, was the pure “Norway option” of Britain rejoining the European Free Trade Association (EFTA) and thus staying in the single market and European Economic Area (EEA). It was heavily defeated by 377 votes to 65. Only a minority of Tory MPs and a tiny handful of Labour MPs supported it. It suffered from its authorship.

EFTA countries have profited from their relationship with the EU, whether by being in the single market, as with Norway, Iceland and Liechenstein, or by mirroring it closely, as with Switzerland’s large range of bilateral deals with the EU. All have a higher proportion of trade with the EU than Britain does.

On the other hand, the “Norway-plus” Common Market 2.0 proposal, combining EFTA-EEA with a comprehensive customs arrangement, attracted a lot of Labour support but very lukewarm Tory backing. Combine the two and Norway – staying in the single market - favoured by me since immediately after the referendum, could yet still be a runner. I fear, however, that like Monty Python’s Norwegian blue it is now a dead parrot.

The two indicative votes which came closest last week, and around which a consensus could build this week, were for a permanent customs union with the EU, as proposed by Kenneth Clarke, the former chancellor, which lost by just 272 votes to 264, and a second or “confirmatory” referendum, defeated by 295 to 264.

Let me say at the outset that anything with Clarke’s name attached to it deserves to be taken very seriously. As chancellor from 1993 to 1997, not only was he a delight to deal with but he presided over a strong recovery in the economy that in normal circumstances would have seen the Tories romp home in the 1997 election.

But then, as now, the party was riven with disagreements over Europe – maybe it would have been better if it had split irrevocably back then – and also tarnished by the biggest government humiliation since the current one; Britain’s involuntary and embarrassing exit from the European exchange rate mechanism in September 1992.

Does staying in a permanent customs union with the EU make sense? Let me explain. The central point is that within a customs union there are no internal tariff barriers. Exports from Britain to the EU would not attract tariffs, and neither would export to the UK from the EU. Within the customs union there is tariff-free trade.

There is not, of course, tariff-free trade from outside the customs union; a common external tariff would apply to imports from the rest of the world, as it does now. Being in a customs union would settle the problem of so-called rules of origin. Anything originating within the customs union would satisfy the requirement for tariff-free trade within it.

It would, as Clarke said in the Commons, “keep the minimum needed for frictionless trade and an open border in Ireland. We would also need some understanding or moves on regulatory convergence, but that does not need to be dealt with at this stage.”

Is not the fundamental flaw of a customs union that it restricts Britain’s ability to negotiate independent trade deals with other countries? No. As the trade expert Sam Lowe of the Centre for European Reform says he is now tired of pointing out, being in a customs union with the EU does not require Britain to sign up to the EU’s common commercial policy, under which it negotiates trade deals with other countries. The common external tariff would constrain Britain’s freedom of manoeuvre, preventing this country from offering tariff concessions, but would not prevent trade deals from being negotiated, particularly concerning services, which are the dominant part of Britain’s economy.

Are there other disadvantages? A customs union is, in the jargon, trade diversionary. It favours inefficient domestic producers at the expense of more efficient ones overseas. That applies particularly to agriculture. But an increasing proportion even of agricultural imports are tariff-free.

A customs union does not tick every box, as Clarke told the Commons. He also favoured the “Common Market 2.0” option of staying in the single market as well. The main drawback for this, and for any of the other indicative vote ideas that might rise above the pack this week is the current state of British politics.

May made no commitment to being bound by these votes and her successor would probably not be bound at all. No future Tory leader or prime minister would submit to the will of the Commons on a customs union or the single market if that was not already their position.

That is why, constructive though these votes may have been in purpose, they may turn out to be a waste of time. Not only that but their outcome will still be seen as second best by the many MPs, and voters, who would rather we just stayed in the EU. Their second-best solution should be to maintain as close a post-Brexit economic relationship with the EU as possible but for many of the most ardent Remainers it is a second referendum or nothing. I would warn them that, while polls point to a modest Remain lead in the polls, most voters have learned very little from the chaos and humiliation of the past three years.

Onto the next chapter and, I presume, a further extension of Britain’s “limbo” period; neither in noir out. At some stage the fun must stop.