A post-Brexit customs union with the EU would be the worst of all worlds

Of all the Brexit outcomes advocated by MPs, few have been more persistent – and persistently wrong – than the idea that we ought to remain in the/a customs union with the EU after we leave.

Support for a customs union was official Labour Party policy for a while, but I am yet to hear a single MP of any party provide a persuasive argument as to why continued membership of a customs union post-Brexit is in the best interests of our country. Yes, a customs union delivers a small reduction in trade friction and tariff cost, but for that minor reduction we would be required to surrender near-complete trade sovereignty. This has serious ramifications which go much further than an inability to strike new free trade deals.

Let us remind ourselves of what a customs union like the EU is. A free trade area abolishes tariffs between the states that are signatories to that agreement. A customs union also does this, but in addition it establishes a common external tariff – a tariff border wall, if you will – around those states that are members. It is therefore a protectionist bloc, and one that requires individual states to surrender their independent trade policy.

So, inside a customs union, we would be unable to pursue a bold independent trade policy, unable to operate a sovereign trade defence system to protect domestic industries, and we would be handing control over access to our domestic market to an outside organisation of which we are no longer a member. If (when) the EU were engaged in trade discussions with a third party, it would be able to offer up access to the UK’s market without any guarantee of reciprocal market access, as is the case with Turkey.

Just think about that for a moment. The world’s fifth largest economy, a proud democratic nation, having no independent trade policy, no control or say over its trade policy, and with its domestic market being used as a bargaining chip for the benefit of a trade bloc that we have just decided to leave.

So why would any rational person think that would be in the UK’s best long-term interests?

The answer lies in the influence of large, established, multinational companies, which want continued close alignment with the EU, in which they enjoy market dominance inside a protectionist trade bloc where the rules shelter them.

But from the perspective of a smaller business, one that is British-owned, perhaps niche or specialised, the view is very different. The key to understanding the true damage that would be wrought by a customs union lies not in the issue of tariffs, but in regulations, which are the silent, huge elephant in the room in the customs union debate.

Tariffs, whilst unwelcome, are a known, quantifiable cost that can be monetised. They can be planned for and, to an extent, avoided or their affect ameliorated.

Regulations cannot have a value placed on them in monetary terms in the same way, but their effect is vast in financial terms – and dwarfs the impact of tariffs. You cannot plan for a regulatory change that you cannot influence, particularly if it is designed to harm your productivity or even your market access.

Influencing the formulation of regulations must take place through a broad church of small and large companies, otherwise they are made in a way that favours the large, established market players and freezes out the market entrants and stifles competition.

If you are a large, established company, then the chances are that you will be either European-owned, or have a European footprint – and therefore seen through the eyes of the EU Commission as a European company for the purposes of the formulation of regulations. Essentially you will have a voice or a seat at the table.

If, on the other hand, you are a small company, perhaps a market entrant, university spin-out or specialist concentrating on a niche or emerging market, you almost certainly will be British-owned, with only a domestic footprint.

You will obviously not have a voice or a say in the formulation of regulations in an organisation of which you are not a member, unless you are able to do so through the medium of free-trade agreement negotiations, which is the way it works for the rest of the world’s trade.

So, let’s say you are a smaller, entrant company, dealing with an emerging technology like autonomous driving. If you are part of a customs union but without being a member of it, you are shackled to a customs policy that is not being operated for your benefit – and which could inhibit your growth opportunities. This is further exacerbated as other opportunities may be limited, due to the restrictions on striking trade deals with other countries.

Given that 80% of the world’s growth is set to take place outside the EU over the next 20 years, you really do need to be able to negotiate greater access to those growth markets.

And this is critical, given that for some industries, the potential of a trade deal with the United States vastly outweighs the impact of the relatively low tariffs across most sectors that the EU’s Common External Tariff imposes. Whilst EU tariffs will be, for many industries, survivable, the impact of the sort of tariffs President Trump has discussed and – in the case of Steel/Aluminium and Scotch Whisky – imposed, are absolutely not. For those industries, a Free Trade Agreement with the USA is not a ‘nice thing to have’, but essential.

So, a preference for a customs union boils down to the kind of industry you are, and whether you have a preference for risk avoidance in the short-term, over seizing opportunities in the medium to long term.

If you are going to be a member of the European Union’s Customs Union (which deals with tariffs) then you really ought to be a member of the Single Market (which deals with regulations,) as well. Fine – but this is essentially European Union membership.

If you are not a member of the EU, then you want to be in a position where you can regulate your own market and set your own tariffs (by maintaining control of your own trade policy) because those two things together give you the ability to influence regulations in the rest of the world through free-trade negotiations.

What EU Customs Union membership alone does is sacrifice your ability to influence EU Single Market regulations, without – because you do not have an independent trade policy – any ability to influence anyone else’s!

A post-Brexit customs union with the EU is therefore absolutely the worst of all worlds and can only rationally be defended as a back-door way to continued, or renewed, EU membership. In which case, fine – that is a perfectly respectable opinion – but its enthusiasts must at least have the courage to make that argument, rather than engineering a customs union situation where Brexit can be argued to be a failure.

So, what’s the solution? It’s straightforward. It is not, emphatically not, a customs union. It is a deep and meaningful Free Trade Agreement, giving us the ability to set our own rules and to influence others’ – which requires our having control of our own trade policy. This is absolutely essential, not just, as it is often portrayed, ‘a nice to have’.

And it just so happens that that free-trade solution is what is promised by the Withdrawal Agreement and Political Declaration on the future relationship, negotiated by the Prime Minister.

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* This article was originally published here