EU Council President Donald Tusk arrives to attend the EU summit in Brussels, Belgium, December 14, 2017. REUTERS/Yves Herman
Donald Tusk, the president of the European Council, was right to call Theresa May's 'basket' proposal 'pure illusion' © Reuters

Last week I compared a proposal for reform of the eurozone to the toxic instruments that brought us the global financial crisis. The British government’s ideas about the future trading relationship with the EU also feel surprisingly similar to the deadly innovations of structured finance.

One option under discussion is Canada-plus-plus-plus. Each of the pluses stands for an adjunct to a plain vanilla free trade agreement. The UK approach proposes three categories or, in Theresa May’s words, “baskets”. The government wants to remain aligned with the EU’s single market in some areas such as aviation, a semi-detached member in others, and an unattached but voluntarily compliant member in a third category. This is not just having your cake and eating it. It is like having three cakes and eating them all at the same time. Donald Tusk, the president of the European Council, was right to call the proposal “pure illusion”.

It is a common mistake in the UK to think that the spectrum of choices is continuous. Even if you include the possibility of a Brexit revocation and a no deal Brexit, I can count the total number of options on the fingers of one hand. Of the remaining three, membership of the European Economic Area, the so-called Norway option, has already been rejected by the UK.

This leaves us with two intermediate scenarios, both of which are possible: a Canada trade deal without pluses and the customs union for trade only in goods.

The Canada option faces one huge complication. At the December summit, the EU and the UK agreed that there should be no hard customs border between the Republic and Northern Ireland. I am sure that the European Council will honour their commitment to the Republic of Ireland.

This leaves a customs union agreement. The UK cannot stay in the European customs union simply because it is only available to member states. But the UK could have a bilateral customs union agreement with the EU, perhaps one that is similar to the deal the EU has with Turkey.

Jeremy Corbyn, the opposition Labour party leader, may endorse a customs union agreement in a speech on Monday. Anna Soubry, a Tory MP, has tabled an amendment to the trade bill calling on the government to seek a customs union after Brexit. I have been told by a Labour MP who supports the customs union that they would need approximately 20 Tory party rebels to win the vote. This could be a big game changer on the way to Brexit.

The EU would accept the idea of a customs union in principle because it would help continental companies, too. But contrary to what some customs union proponents in the UK think, the EU would impose tough rules on Britain because its economy is much bigger than Turkey and geographically closer to the EU’s economic centre. The French in particular are paranoid about a UK that seeks a competitive advantage post-Brexit through lower taxes and laxer labour standards.

The EU will demand a degree of political convergence as a price for a customs union. It would, I presume, not require the UK to accept freedom of movement. This alone may make the customs union attractive from the UK’s perspective. But it would be a mistake to think of a customs union agreement as non-intrusive.

The EU could, for example, insist on a relatively open immigration regime in the UK, something that might resemble free movement in practice. There is no economic reason to link the free movement of traded goods and of people. But politics could intrude. A customs union would have to be ratified by all 27 member states, including states that have little to gain from the smooth flow of goods, but a lot to lose from UK immigration controls. The EU as a whole would object to any immigration regime that directly or indirectly discriminates against some member states.

Personally, I am struggling to understand why one would want a customs union when one can have the Norway-option. The EEA would have allowed for much wider market access, albeit at the cost of accepting freedom of movement. As net immigration from the EU is falling rapidly, the whole freedom of movement issue will lose its importance.

Be that as it may, a customs union agreement would still constitute a decent second-best option because it would minimise disruption in trade flows, and solve the Northern Ireland problem.

The Canada deal would be much less intrusive, but it is politically harder to do. It would not solve the Northern Ireland border issue. A Brexit revocation is possible in theory, but it requires that a few low-probability events happen in the right sequence at the right time.

My expectation is that the UK and the EU will ultimately end up in a customs union.

munchau@eurointelligence.com

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