The first coherent Brexit plan that Britain has produced... the EU will never agree to it

On Thursday The Times obtained a draft of Theresa May’s plan for Brexit. Sam Lowe, of the Centre for European Reform, analyses the prime minister’s preferred way forward.

What does she want

Essentially Mrs May is going for Jersey (single market for goods, customs union). With some caveats.

The single market for goods bit is pretty clear (although questions remain as to the expected governance mechanism) with eventually the new customs partnership kicking in, which is essentially a customs union with the opportunity for businesses to claim a rebate if the UK has a lower external tariff on a given product in the future. However, until the new customs partnership (NCP) is functional, Mrs May envisions that the backstop proposal — a customs union — would apply.

Free movement will end; nothing has been said about whether it will be replaced by a preferential migration scheme. This comes at the expense of services. Offering nothing on freedom of movement makes it much easier for the EU to say no, in my opinion.

My feeling is that, even if this does get through the cabinet, the EU will struggle to agree to such a proposal, for a few reasons.

EU reaction

On the point of the withdrawal, this note suggests that the UK will follow up its customs backstop proposal with an additional offer to remain aligned in goods, in the event that the future relationship fails to provide for no physical infrastructure and associated checks on the Irish border.

As this is now also the ambition for the end state, it entirely blurs the lines between backstop and future relationship and will be seen by the EU as an attempt to smuggle in an advantageous (to the UK) future relationship via the Northern Irish backstop.

While the EU is willing to discuss a backstop option for Northern Ireland as part of the withdrawal, it will not countenance pre-empting the future EU-UK negotiations by locking in a fallback option that goes far beyond what could probably ever be negotiated and, importantly, needs to be able to come into effect under any eventuality, including the EU and UK failing to reach agreement on the future relationship after withdrawal.

While Britain may point to paragraph 49 of the December joint report as evidence of an agreed all-UK approach, the EU will point to paragraph 46 which says that the principles and commitments in the joint report “will not pre-determine the outcome of wider discussions on the future relationship between the European Union and the United Kingdom and are, as necessary, specific to the unique circumstances on the island of Ireland.” The EU interpretation will probably hold.

Customs Partnership

While the EU is certainly willing to discuss the option of a customs union as part of the future relationship, it is incredibly skeptical about the NCP proposal. There are numerous opportunities for fraud baked in, and questions remain over things such as revenue allocation, quota management, and the application of trade defence measurers. Also, something I don’t feel has been fully grasped by the UK is that the predominant reason tariffs exist is not revenue collection; it is to protect domestic industry from foreign competition.

The EU will have concerns based on the following scenario: a British distributor imports car parts. It pays the EU tariff, but, because it is selling to a UK manufacturer it claims back the difference (in this scenario, the UK has a lower tariff). The price paid by the British manufacturer reflects the savings made by the UK importer it bought from. This allows it to sell its cars more cheaply than its EU-27-based competitors across the single market, effectively undercutting them.

However, I wonder if the EU will let this one hang for a bit. Essentially the UK is acknowledging that it wants a customs union, at least in the medium term, and the EU can shoot down the NCP proposals in the negotiation once we have left.

Single market for goods

The question then is if Jersey can be negotiated specifically as a landing point for the future relationship. In January, we concluded that big question marks hung over whether the EU would require a financial contribution, and whether single market for goods would require the UK accepting freedom movement of people. Perhaps underappreciated in our analysis was the EU’s commitment to the indivisibility of goods and services.

In the face of the Trumpian threat to the established international legal order, the idea that a country on its way out of the EU would be granted a deal that openly challenged the bloc’s understanding of rights and obligations (which has developed over decades of internal compromise) now seems more foreign than ever.

While it is certainly true that the EU has granted the Swiss a similar relationship (single market for goods, minus customs and VAT union), it does not want to make the same mistake (as the EU sees it) again. Also, the Swiss relationship is a product of its time, and one that developed in parallel to the solidifying of the single market as it is understood today (and requires free movement of people).

The European Commission is also keen to draw attention to the increasing interdependence of services and goods, where a significant proportion of the value of a manufactured product might be derived from its services inputs, making the carving out of goods increasingly problematic.

A British deregulated services sector outside of the single rulebook of the internal market could therefore endow Britain’s manufacturers, trading on equivalent terms across the single market, with a competitive advantage over their EU-based competitors, or so it is argued. However, the UK could argue that this would be addressed by commitment to level playing field provisions.

Tactics

Where once there was appetite, now it seems unlikely that the EU would negotiate a deal with the UK that explicitly granted it full single market membership on goods. This is especially true if Britain is unwilling to accept free movement of people as it exists. If the UK were willing to accept free movement, it then begs the question of why it doesn’t seek to remain in the single market for services as well?

Ultimately, cries of hypocrisy will not get the UK anywhere. The political reasoning for insisting on the indivisibility of the four freedoms is, at this time, the most potent force of all. Allowing the UK such a relationship could cause problems for the EU vis-à-vis its external relationships with Switzerland and the EEA countries; and it could also empower Eurosceptic sentiment in manufacturing-heavy parts of the EU, such as France and Germany. If the EU doesn’t want to grant the UK a special deal, it won’t.

Sam Lowe is a senior research fellow at the Centre for European Reform.