Theresa May is under growing pressure from Liam Fox, the trade secretary, to pull out of the EU customs union, a move required to facilitate post-Brexit bilateral trade deals but which would impose costs on exporters and could strain Anglo-Irish relations.
The issue is looming as a battleground in discussions over whether the UK will pursue a “hard” or “soft” Brexit. It will have to be resolved before London triggers Article 50, the starting gun for withdrawal negotiations with the EU.
The prime minister is expected to decide before the end of the year whether Britain should leave the customs union as part of her negotiating strategy.
Dr Fox wants maximum freedom to negotiate new trade deals around the world and is determined that Britain should break out of the EU framework, which he believes has stifled such agreements. “We have nothing to fear from forging our own free-trade environment and breaking out on our own,” he said on Tuesday in Chicago during a trade tour of the US.
The customs union is an area that allows the free movement of goods with no tariffs, but imposes the same administrative and tariff barriers at its external borders. Under the customs union, the EU negotiates trade deals and sets the same external tariff for all members.
Quitting the customs union would not preclude Britain remaining in the European single market. But the UK’s hands would be tied in trade deals because Britain would need to keep the same external tariffs as the customs union, leaving no room to negotiate on tariffs and other administrative issues.
One government insider confirmed that Dr Fox wanted to leave the customs union, saying: “It’s widely accepted that, to be able to negotiate free trade deals, we would have to be outside the customs union.” Dr Fox said this week that final decisions have yet to be taken. His department declined to comment.
Mrs May and Philip Hammond, the chancellor, need to be convinced that the advantages of pursuing an independent policy offset the downsides of leaving the customs union.
The Treasury has prepared an options paper for the cabinet setting out the pros and cons, with Mr Hammond said by aides to be “neutral on the issue at this stage”.
The Treasury warned before the EU referendum that leaving the customs union, which covers all EU member states plus Turkey, would add “significant” administrative costs to trade, laborious form-filling and delays at border posts.
It also warned that goods crossing the Northern Ireland border into the Republic could face “various forms of customs control and their liability to duty determined according to complex rules or origin”.
Enda Kenny, Irish prime minister, on a visit to London on Tuesday urged Mrs May not to recreate a “hard border” between north and south. “We are in agreement that we don’t wish to see any return to the borders of the past on the island of Ireland,” he said.
Turkey is the only leading country which is not in the EU but is a member of the customs union. It has to implement third-country trade deals struck by Brussels. It then has to negotiate separately its own preferential access to the third country.
The Treasury’s April report on Brexit options said that leaving the customs union would require all exports to the EU to be declared to customs authorities on a form with more than 50 boxes, supported by 78 pages of guidance.
Exporters would have to specify whether components of goods were made within the European Economic Area, a particular problem for aerospace and automotive companies with long supply chains. “UK-based firms would likely incur both time delays and costs,” the Treasury said.
“This would reduce the competitiveness of UK-based firms and potentially jeopardise their role in the production process.”
The Treasury’s view has not changed in the past three months, but Mr Hammond is open to persuasion that the ability to pursue new trade deals outside the EU framework can offset the likely costs to the British economy.
Mrs May is seeking a specifically British approach to relations with the EU after Brexit. She is also considering the linked question of how much access to the EU’s internal single market she is prepared to trade in order to control migration flows.
On Tuesday, Dr Fox announced the setting up of three new trade offices in the US — in Minneapolis, Raleigh and San Diego — as part of “an ambitious vision for an open and outward looking UK economy”.
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