Britain Wants an Interim Customs Union With EU to Smooth Brexit Path

  • Proposal set out as part of series of Brexit position papers
  • Next round of talks scheduled in Brussels starting Aug. 28

The U.K. Government will look to maintain a period of tariff-free trade with the European Union after Brexit as part of its plans for future relations with the EU. Bloomberg's Svenja O'Donnell reports on 'Bloomberg Surveillance.' (Source: Bloomberg)

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The U.K. government said it wants to maintain tariff-free, bureaucracy-light trade with the European Union for a period of up to two years after Brexit, a proposal cheered by British businesses but which is likely to raise eyebrows on the continent.

Ahead of the publication Tuesday of the first of a series of new papers aimed at fleshing out its ambitions for future relations with the EU, Britain said it will seek to negotiate a “close association” with the bloc’s customs union after it leaves in March 2019.

Industry lobby groups expressed relief. They have repeatedly warned against the potential for a “cliff edge” of duties, border controls and regulatory uncertainty on commerce with the U.K.’s biggest market the day after Brexit.

The road map, though, will likely run into opposition from the EU, given the U.K.’s suggestion it be allowed to line up trade accords with other countries during the interim period, something remaining fully inside the customs union would prevent. The EU has repeatedly warned the U.K. against cherry picking the advantages of membership and said that it won’t be able to enjoy frictionless trade outside its ranks.

A European Commission spokesman said the bloc welcomed the U.K.’s detailing of its position as a “positive step” and predicted it would allow the talks to progress. But he added that the EU would only turn to future relations once “we have made sufficient progress on the terms of the orderly withdrawal” and that any agreement “can only be finalized once the U.K. has become a third country.”

Read more about Britain’s options for a trade deal with the EU

“We’ve got to have some sort of a transition arrangement for a year or two,” Brexit Secretary David Davis told BBC Television on Tuesday. The interim agreement “would be as close as we can to the current arrangements” while giving Britain the freedom to line up new trade deals, he said on BBC Radio 4.  

While the bloc’s 27 other governments have said they are open to a post-Brexit implementation phase, they first want to resolve matters such as citizens’ rights and a financial settlements. That’s unlikely before October at the earliest. Divorce talks are set to resume in Brussels on Aug. 28 and the EU’s lead negotiator, Michel Barnier, has complained of a lack of progress in the first two rounds.

Davis would not be drawn on the cost to Britain of its proposed customs arrangements, and said the divorce bill’s amount was still under discussion.

“We are putting up some proposals, we’re not saying here’s the price list to go with these proposals,” Davis told the BBC. “At this stage were not going to commit, there won’t be a number by October.”

Mujtaba Rahman, an analyst at the Eurasia Group, said much will depend on how much Prime Minister Theresa May’s government is willing to pay to leave the bloc. “A lot still hinges on money,” he said. “This will determine whether the U.K. can unlock discussions on the future -- and these options -- in October.”

The U.K. is showing more of its hand after a summer in which members of May’s cabinet forged a consensus around supporting a transitional period following Brexit, although differences remain over how long it should run. Tuesday’s blueprint will be seen as a victory for Chancellor of the Exchequer Philip Hammond, who has advocated as smooth a departure as possible from the EU.

The Brexit department said the interim period it imagines would enable both sides of the Channel to establish future customs arrangements to ease border crossings. The U.K.’s public-spending watchdog warned last month of a “horror show” if new systems were not in place by the time of Brexit.

Non-Tariff Barriers

Failure to maintain something akin to the status quo could prove costly for the British. The current arrangement saves U.K. exporters from paying tariffs on goods sold to the EU. Countries outside the region and lacking a free-trade accord with it pay about 10 percent on shipments of cars alone.

Potentially more expensive are non-tariff barriers. Customs checks at a U.K.-EU border such as proving the origin of goods could cost 1 billion pounds ($1.3 billion) a year and snarl traffic in both directions, according to a July report by Oxera, an economic consultancy.

The customs office calculates that in two years’ time there will be 255 million declarations per year based on current levels of trade with the EU, up from 55 million now. Carmakers worry such bureaucracies would hurt their ability to ship vehicles and source inputs in a timely fashion, while retailers risk watching goods perish at borders.

“Business wants to see as frictionless a customs system as possible,” Confederation of British Industry Deputy Director-General Josh Hardie said in a statement. “All efforts should be made to deliver a single-step transition, so that businesses don’t have to adapt twice.”

TheCityUK, which represents the finance sector, said the government must conduct “urgent” talks to support services, which make up a larger share of the U.K. economy.

Open Britain, a group that lobbies for close ties with the EU, accused May’s government of “having our cake and eating it.” Keir Starmer, the opposition Labour Party’s Brexit spokesman, called the proposals “fantastical and contradictory."

‘Not Possible’

Barnier warned in July that it was “not possible” for Britain to enjoy as easy trade with the EU as it does now, pointing to the need to comply with tax returns and test animal products among other obstacles.

A customs union-like relationship would help clear up the matter of how to police the border between Northern Ireland and the Republic of Ireland. Irish Prime Minister Leo Varadkar said earlier this month that a new customs union should be designed to avoid the need for controls on the 310-mile (500-kilometer) frontier which forms the EU’s only land link with the U.K.

The Irish issue will be detailed more fully by the British on Wednesday when they publish another paper that will express a commitment to keeping a “seamless and frictionless” border on the island.

The U.K. said ultimately it would like as few as hurdles as possible to trading with the EU. One model it proposed would use technology and agreements to ease the transfer of goods. Another would allow each side to enforce the other’s customs rules, negating the need for a border.

“I make no apologies for being ambitious,” Davis told BBC Radio 4.

— With assistance by Viktoria Dendrinou

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