British voters last year settled the question of whether or not to leave the European Union by choosing Brexit. But that’s not the only stay-or-go question. The government is split over how close a partnership with the rest of Europe to maintain on trade. Prime Minister Theresa May said on Jan. 17 that she wants to pull the U.K. out of the single market, the economic backbone of the world’s largest free-trade area. Even so, some officials hope to keep the U.K. in Europe’s customs union, which lets its exporters trade tariff-free with the bloc. Others want Britain to leave so it can land free-trade pacts with countries elsewhere.
1. What does the customs union do?
It requires that its members impose no tariffs on goods traded among each other, and sets a common duty on goods of non-members. It also limits checks and other bureaucracies at borders between members. The customs union has leverage when it negotiates deals with the rest of the world because it speaks for a bloc of 500 million people.
2. How is the customs union different from the single market?
The single market encompasses services as well as goods and is focused on non-tariff barriers along with ensuring common standards and regulations. Countries participate in different ways. Turkey and Andorra, for instance, are outside the EU single market but inside the customs union although not for all goods. Norway is a member of the single market but not the EU, so it can line up its own trade arrangements. May’s move to pull the U.K. out of the single market would give her the ability to slow immigration from the EU and stop sending money to the bloc’s budget.
3. What would breaking from the customs union entail?
Unless and until the U.K. negotiates a new trade deal with the EU, its exports would run into the union’s common external tariff, which now averages about 5 percent across all goods, including 10 percent for cars and 29 percent for chocolate. Exporters would also be subject to checks at borders with the EU, which they aren’t now. There would be geographic implications as well. The line separating the Republic of Ireland and Northern Ireland, the only hard border between the U.K. and EU, might need to be toughened up. Some worry that could undermine the Irish peace deal.
4. What are the different sides of the argument?
Foreign Secretary Boris Johnson said that the U.K. can leave the bloc and still enjoy easy trade, a view rejected as foolhardy by some European officials. The question of remaining in the customs union has divided May’s government, with Johnson, Brexit Secretary David Davis and Trade Secretary Liam Fox agitating to leave after Brexit and Chancellor of the Exchequer Philip Hammond counseling caution.
5. What’s the case for leaving?
So long as the U.K. is a member of the customs union it can’t sign trade accords with other countries such as China, which may be unwilling even to begin negotiations now, since the U.K. can’t yet seal a deal. This leaves Britain’s Trade Secretary "unable to do his job," Andrew Tyrie, a Conservative lawmaker, wrote in a September report. Leaving the customs union would allow the U.K. to pursue its own deals with 85 percent of the world. The Policy Exchange think tank says staying in the bloc also makes the imports of consumer goods, particularly food, more expensive. Embracing free trade could increase the U.K.’s long-term gross domestic product by 4 percent, Patrick Minford of Cardiff Business School, a former adviser to Prime Minister Margaret Thatcher and one of the few economists to campaign for Brexit, has argued.
6. What’s the case for staying?
The Treasury warned before the June 23 Brexit vote that leaving the customs union would mean the imposition of “significant” administrative costs, such as border checks and certification of where goods come from. Raoul Ruparel, who now advises Davis, estimated in a report for the Open Europe consultancy that quitting the union would lower GDP by 1 percent to 1.2 percent by 2030.
7. Is there a middle way?
May seems to think so. In her speech on Jan. 17, she said she wants to strike deals with other countries, but still wants tariff-free, friction-less trade with Europe. “Whether that means we must reach a completely new customs agreement, become an associate member of the customs union in some way, or remain a signatory to some elements of it, I hold no preconceived position,” she said. “I have an open mind on how we do it. It is not the means that matter, but the ends.”
8. What are the chances of a U.K.-EU trade deal?
The EU may be skeptical of May’s suggestion as its leaders have repeatedly said the British can’t “cherry pick” the benefits of EU membership and avoid the costs. Canada got a deal with the EU, although it took seven years and, for now, doesn’t fully cover services. While the odds are that the U.K. and EU would eventually find it in their interest to establish a pact, it’s likely to take longer than the two years the British have to negotiate Brexit.
The Reference Shelf
- Q&As on why Brexit is still a work in progress six months later, what makes a "hard Brexit," the possible exodus of banks from London and the focus on passporting rights.
- A QuickTake explainer of Brexit’s basics.
- Conservative MP Andrew Tyrie’s report.
- Europe is getting tired of Brexit "chaos."
- Turkey is no model for Britain’s post-Brexit trade policy, Stephen Booth argues.
- Sign up for Bloomberg’s Brexit Bulletin newsletter.
- Follow @Brexit on Twitter for full coverage of Britain’s exit from the EU.