In or out of the Customs Union? A Brexit prediction

If you take the Government at its word, then the UK will leave both the single market and the customs union as a direct result of leaving the EU in March 2019. But is this what will really happen?

Reasons why it might include the fact that, although a transitional period has been discussed in principle, Theresa May is under pressure from a group of 60 Conservative MPs (mostly from the European Research Group) who are demanding that the UK has the right to negotiate trade deals immediately after March 2019.

There’s also the fact that our trading partners are preparing for change. The Dutch Ministry of Finance has announced that it is adding up to another 930 staff members to the 5,000 that already work in customs and duties, emphasising that it couldn’t wait any longer because these new officers have to be educated and trained. The UK is one of the Netherlands’ largest trading partners and the extra staff will mostly be checking and controlling exports to and from the UK in the event that the UK comes out of the customs union.

The prospect of increased checks and controls if the UK does leave the customs union, is a concern for small and medium-size businesses, which employ around 70% of all workers in the UK. It worries larger businesses too, including many in the financial services sector. Like the Dutch Ministry of Finance, businesses realise they have to make decisions on where they think the UK will end up, both in March 2019 and after any transitional period ends. The financial services sector has made assumptions that regulatory cross-border passporting will end for UK-based firms, requiring those seeking ongoing EU trade to set up a vehicle in another Member State. The EU negotiators know that this is a key business issue for the UK. They are also aware that as long as there is no progress between the two sides, financial sector businesses will implement their Brexit planning because they can’t afford not to. This makes the Government’s lack of progress in this area all the more alarming.

So, where is the UK going to end up?

My best guess is that we will find ourselves members of the, or a customs union, with further limited access to the single market. Crashing out of the customs union would be a disaster for many SMEs, and would also place intense pressure on the Good Friday Agreement.

How will we get there?

The Conservative so-called ‘hard’ Brexiteers will not be prepared to see this once-in-a-lifetime referendum victory whittled away to the extent that it doesn’t ultimately mean very much. In the final analysis, if they believe Theresa May is backing away from a hard Brexit, they will try and bring her down. (It’s no coincidence that there are 60 signatories to the letter demanding the freedom to negotiate trade deals in the transition period – enough to force a leadership contest). In the event of such a contest and provided he makes the last two, Jacob Rees-Mogg is the current bookmakers’ clear favourite to be the next leader of the Conservative party. Let’s assume this expectation is fulfilled and he calls an election – let’s call it the “Save Brexit from Betrayal” election. I predict the Conservatives would lose this election, because voters won’t just be basing their choice on Brexit (which, incidentally, will also mean no come back for the Lib Dems if they choose to fight under a ’Second Referendum’ banner.)

So that means the installation of a Labour government. Labour leader Jeremy Corbyn has previously made it clear that the result of the referendum must be respected, indicating that the UK could not remain within the single market if it left the EU. However, he’s also said that nothing should be ruled out while negotiations are continuing. Most recently Corbyn has stated that he wants the UK to be part of the customs union and also negotiate access to the single market.

So there you have it. By March 2019, we will have a new Labour Government with a commitment to remain in the customs union and negotiate access to the single market. But nothing in politics is ever certain, of course. Which is why all businesses need to make their own assumptions and plan accordingly.