Commentary

Bouncing into a Customs Union Would Be a Betrayal of Brexit

News over the weekend that Theresa May might be considering a customs union with the EU post-Brexit was baffling to life-long Eurosceptics.

For years before the referendum, would-be Brexiteers painted two economic pictures of life outside the EU.

The first was a Thatcherite Britain — one seeking to reverse swathes of EU regulation and immigration law, cut tariffs, and pursue global free trade.

The second was merely “political independence”, leaving the EU’s governance structures, but remaining within the Single Market.

The customs union has become a political, rather than economic, fault line - and one skillfully exploited by the EU and unreconciled Remainers.

Yes, these two visions contradicted sharply, but neither considered it desirable to remain within a formal customs union.

The costs in terms of lost control were too high. Customs union membership prevents not just independent free trade agreements, but other commercial partnerships, independent tariff setting, and regaining our WTO seat, which is why there was such outrage at the prospect that such a model might still be up for consideration.

Since the latest rumours surfaced, Number 10 has come out and reiterated its commitment to leaving the customs union. But the question remains: why is this issue even being debated?

For all the hand-waving by vested interests, it’s certainly not for economic reasons. Look at Switzerland, a country outside the customs union that manages to trade with relatively little friction with the EU.

It complies with almost the entire EU regulatory framework for goods, and Swiss experts estimate that the border friction cost is approximately 0.1 per cent of the value of goods traded.

Applied to British goods traded with the EU — worth 12 per cent of UK GDP — this implies total frictional border costs amounting to 0.01 per cent of GDP.

As the economist George Yarrow mused on Twitter, “Compare the Sweden-Finland or Sweden-Denmark border with the Sweden-Norway border. Sure there are some extra barriers at the latter, but the question is: how significant are they?”

The Swiss evidence tells us “not very”. Remaining locked in an institutional arrangement where Britain cannot sign independent free trade agreements as global trade gravity shifts eastwards is certainly not a price worth paying.

No, the customs union has become a political, rather than economic, fault line — and one skilfully exploited by the EU and unreconciled Remainers.

Desperate for talks to move beyond transition and towards a trade deal, the UK government tried to fudge the question of the Irish border. To prevent a physical border, it agreed that, in the absence of other solutions, the backstop would be for the UK to remain, in essence, within a customs union.

It didn’t take Nostradamus to predict that, although Britain saw this as a last resort, the EU would reject Britain’s proposals and insist the backstop was honoured. This was, after all, Brussels’ desired outcome.

For the Remainers, too, insistence that we remain in the customs union is a first step in their strategy to later say: “Brexit is not worth it — even the purported benefits of new free trade deals cannot be realised”.

As if to almost admit this self-reinforcing partnership, an EU source told a British newspaper this weekend: “We won’t move forward with the negotiations until we have a clear idea as to whether there is British parliamentary support for leaving the customs union. We don’t think there is — that sentiment is changing.”

The Prime Minister must be aware that the public can see through this. This may be the reason for her emphatic denials on Sunday — she knows giving way on this would result in her own political defenestration and a pro-Brexit revolt within her party.

This is a totemic issue — Brexiteers cannot accept chopping away such an important repatriated freedom. Many would prefer no deal in the short term to this, and would vote accordingly.

With the Article 50 clock ticking, now is not the time to be playing with customs union fire.

Ryan Bourne holds the R Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute.