Brexit: How a 'temporary customs union' might work

The government is at last offering some clarity over its Brexit plans, and the Cabinet hostilities that have raged all summer appear to have ceased.

When senior Brexiters and Remainers agreed last month on the need for a transitional arrangement when the UK leaves the EU in March 2019, they kicked off a further round of squabbling about what the temporary rules ought to cover and how long they should remain in force.

This week, the government seeks to settle some of those disputes, providing more detail of its negotiating goals for the proposed interim deal. The first in a series of papers, published today, focuses on the EU customs union.

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What is the customs union?

It's an agreement that includes all EU member states and a number of related territories that enables goods to travel freely between countries.

"Countries in the customs union don't impose tariffs – taxes on imports – on each other's goods," says the BBC.

"Every country inside the union levies the same tariffs on imports from abroad. So, for example, a ten per cent tariff is imposed on some cars imported from outside the customs union, while 7.5 per cent is imposed on roasted coffee."

The customs union is separate from the single market, which is a broader agreement across the EU and several other states to enable free movement of people, money, goods and services.

In addition to the main customs union there are several individual customs union agreements in place between the EU and certain third party countries like Turkey for certain classes of goods.

What's the UK proposing?

In an article for the Sunday Telegraph at the weekend, once-warring Cabinet ministers Philip Hammond and Liam Fox declared a truce by jointly announcing that Britain would definitely leave the single market and customs union in March 2019.

It was a move designed to "cheer Brexit supporters" after months of infighting and was broadly seen as a major concession by Chancellor Hammond.

Today's paper signals that "Hammond has the upper hand", claims The Times, as it sets out plans for the "present customs arrangements to stay in place for an 'interim period' that could last for up to three years".

In black and white, the UK government wants to ensure businesses "only have to change their processes once", says the BBC, when the UK moves to a new relationship with the EU after the "transitional period".

During that period, the government still wants a new arrangement, but one that continues a "close association with the customs union" or even enters a new "temporary customs union".

So the UK will be outside the main customs union – enabling the government to say it has delivered on a clean break in March 2019 – but businesses will have very little disruption to their operations for several years to come.

"It should look and feel the same for business," one Whitehall official told the Financial Times. "This is all about giving business what they asked for," another told The Times.

What are the benefits?

Businesses would have the certainty of knowing they can trade with the EU for many years without disruption, enabling them to continue to invest now.

That's why the Confederation of British Industry, among other business groups, welcomed it.

Longer term, the paper sets out plans for the "freest and most frictionless possible trade" with the rest of Europe.

Options to achieve this include a new "customs partnership " that "would align UK and EU customs approaches to dispense with any customs border", says the FT, or effectively a "virtual border" using vehicle recognition software and "trusted trader schemes".

These are both complex and may take years to realise, but the prize would be streamlining the estimated five-fold increase in customs declarations at UK borders to 255 million a year, says Bloomberg.

The scale of demand could put a strain on UK customs operations, leave goods stranded at borders and jeopardise valuable trade – in addition to an estimated cost of £1bn a year to check the country of origin of goods entering the country.

What about the hurdles?

First and foremost: the EU.

As the UK is indicating that it will leave the main customs union and strike a more bespoke deal, it will need the consent of a majority of the remaining 27 EU member states.

The EU's chief negotiator Michel Barnier says no progress can be made on trade matters until the two sides are closer to resolving the Brexit "divorce bill", rights of EU and UK citizens, as well as the border issue between Northern Ireland and the Irish Republic.

He has indicated that trade talks won't start before the autumn, which leaves a race against time to reassure businesses who need to make decisions on where to invest in the medium term.

Then there's the political cost.

First, it's unclear whether the UK will be able to sign third-party trade deals during the transition. Its paper says the UK wants the right to sign deals that would kick in once the period expires, but The Times' Whitehall source conceded "we need to talk to the EU about that".

There will almost certainly be requirements for the UK to continue to pay "pretty serious money" into the EU budget and to accept some "compromise on sovereignty" in the form of a "role for the European courts" during the interim, adds the paper.

All of which is anathema to some Brexiters and is therefore likely to face heavy resistance, especially from within the Conservative ranks.