Remaining in the Customs Union is the very worst mistake the UK could make

shutterstock_436039639-1000x606 A complicated EU negotiation just got more complicated

THIS week’s newspapers reported that the Prime Minister wants to “stick to the plan” to leave the Single Market. And yet the chancellor is said to be pushing hard to maintain participation in the Customs Union.

The HM Treasury line is deeply worrying. Retaining the common external tariff would remove any tariff threat from trading with the EU, but it would also be a very big mistake.

Outside the Customs Union, the UK could trade at world prices and, as Economists for Free Trade has shown, the gain from this to consumers would be roughly seven times the cost to producers.

But if gains of this magnitude are to be realised, we need to do two things.

First, we must leave the Customs Union. Second, we need to introduce unilateral free trade – zero tariffs on imports. The Treasury seems to stubbornly refuse this logic, as if it has a new secret model, which runs completely counter to economic history and conventional economic thinking.

Leaving the Customs Union provides a competitive spur on UK companies, and this will drive up performance and incomes in the long term. It’s not rocket science, but the Treasury seems to want to push it to the far side of the solar system and ignore it. So let’s be clear. Maintaining membership of the Customs Union is the absolute last thing we should be doing right now.

Having sorted out the Customs Union, what about the Single Market? In the wake of the General Election result, speculation is rife that a new softer Brexit will emerge. But this is a lot easier said than done. Maintaining free movement, budget payments and ECJ supremacy doesn’t sound a lot like Brexit to me.

Still, if freedom of movement becomes less of a priority thanks to the post-election politics, I can envisage a scenario whereby the UK participates in the European Economic Area (EEA) – at least for a transitional period. This would fend off business concerns regarding labour supply, maintain free access to the EU and permit the UK to negotiate trade deals independently.

But – and it’s a huge but – the maintenance of free movement would be upfront and central. Is that deliverable politically? The answer is possibly yes in the House of Commons, but boy would there be a fight.

The simple truth is that if moves to soften Brexit take us down the EEA road, maximising the benefit of leaving the Customs Union becomes more, not less, important. That potentially ratchets unilateral free trade up the political agenda.

Two further considerations apply. The Norwegian model is accepted by the rest of the EU because it is basically a small single commodity oil economy. In contrast, the UK is a large heterogeneous economy, which would gain a competitive edge if it was outside the Customs Union and inside the Single Market. Would the EU accept that? I don’t know.

Finally, the thorny issue of the DUP comes into play. The DUP wants to maintain freedom of movement and a soft border with the Republic of Ireland. It also wants the UK to have the freedom to negotiate trade deals, and for the UK to negotiate a comprehensive free trade agreement with the EU. A complicated EU negotiation just got more complicated.

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