Brexit: Customs Union Bad for International Trade?

Brexit: Customs Union Bad for International Trade?
Brexit: Customs Union Bad for International Trade?

Liam Fox, the international trade secretary, has said that he is opposed to the UK remaining in a customs union with the EU. For Fox, a customs union is the “worst of both worlds” and would deter the UK from setting its own policies.

His views were expressed in a four-page letter to the 1922 committee of backbench Tory MPs, at a moment when the Prime Minister is in negotiations with Labour to deliver a new deal that will possibly involve a customs union membership post Brexit.

Addressing his letter to Sir Graham Brady, the chair of the Conservative backbench 1922 Committee, Fox wrote: “We would be stuck in the worst of both worlds, not only unable to set our own international trade policy, but subject, without representation, to the policy of an entity over which MPs would have no democratic control. As I said at the [1922] meeting, in such a scenario the UK would have a new role in the global trading system – we ourselves would be traded. As the famous saying in Brussels goes, if you are not at the table, you are on the menu.”

Fox concluded that being outside of the customs union was an “absolute prerequisite to Britain being able to benefit from ambitious UK trade and development policies.”

Michel Barnier: Customs union for article 50 extension

Michel Barnier, the EU’s chief Brexit negotiator, has put pressure on Theresa May to keep the UK in a customs union, in return for a long article 50 extension. He clarified that the UK needed to respect the European council and its internal market, and that any extension should serve a purpose. He said: “There is one point that needs to be stated quite clearly; that these ambitions, with regard to future relations, which could for example consist of adding to a free trade agreement … for example a customs union – we are willing to improve and amend the political declaration rapidly, within a few hours or days. But the request we await and expect from the UK as a result of this cross-party dialogue is one that needs to respect the principles underlying the approach of the European council and the European parliament, and respect what we are and what we will continue to be.”

No deal Brexit

The possibility of a no-deal Brexit has not been totally removed from the horizon, as the EU27 would still have to agree to eliminate the possibility, despite parliament voting through a bill to prevent it.

The International Monetary Fund is now warning the UK, that with an already weak economy, a no-deal Brexit would push the country into a two-year recession. In its World Economic Outlook completed in March, the IMF underlined that its projections were punctuated by uncertainty, as it was not clear whether a Brexit deal could be achieved. It foresaw UK growth of 1.2% in 2019, but with a Brexit deal in place.

A no-deal scenario, where there are trade barriers, customs delays, limitations to financial services firms and the loss of preferential access to non-EU countries enabled by EU trade deals would disrupt the economy and have a negative impact in 2019-20.

British exporters and importers would possibly lose the benefits of the EU’s international trade deals, having to deal instead with the World Trade Organization (WTO) rules.

The prices of certain imports could increase, while a possible drop in the value of the pound could trigger inflation.

While a no-deal Brexit would free the UK to agree trade deals with countries other than the EU member states, as Liam Fox points out, the advantages of something like this would arguably take a long time to see. On the contrary, to some, an argument like this simply sounds too tentative. What rings true, however, as more assessments about the economy come out, is that, in the long term, a no-deal Brexit will stall investment in the UK, affect jobs, and push firms out of Britain.

A no-deal Brexit would possibly drive the pound down while increasing, at the same time, interest in UK exports which will become cheaper for importers. If Brexit uncertainty and the unpredictable fluctuations of the pound will have a significant impact on your business, get in touch with Universal Partners FX.

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