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May's choice - admit we're out of EU customs union or Fox is redundant

Theresa May faces a tough choice. Credit: PA

If you run into Theresa May, could you please put the following to her.

When she decided to create an expensive new department for international trade, and put Liam Fox in charge, did she know she would be seen as announcing that the UK would be leaving the EU's customs union?

You may have heard her say that all our options are open in respect of our future trading relationship with the EU.

But the facts tell a contrary story (I choose my words carefully).

Once Fox was mandated to prepare the ground for future bilateral trade deals with the likes of China, the US and Australia, it became almost inconceivable that the UK could remain in the customs union.

This is a point of inescapable logic.

And I am slightly surprised it has not exploded into a big political controversy (though that probably has something to do with the way Labour MPs are engaged in bashing each other rather than holding the government to account).

Liam Fox is Minister for International Trade. Credit: Reuters

Here is why we cannot stay in the customs union, and have an international trade minister.

First of all it is a rule that members of the customs union are prohibited from negotiating free trade deals with countries in the rest of the world (there is relatively trivial flexibility for Turkey, which is a non-EU member of the customs union, but not the degree of flexibility that would be any use to us).

But that prohibition would not matter perhaps if it was irrational - because we could have some expectation of negotiating a way around it.

However EU governments would be nuts - economically suicidal in fact - for them to give customs union members free rein to negotiate their own bilateral deals with third-party countries.

Because that would give those non-EU countries an invaluable backdoor route into the EU's gloriously lucrative market.

Just imagine if the UK as a customs union member did a free trade deal with China. That would allow China to swamp the EU with tariff-free goods, without formal permission from the EU via an EU-China trade deal.

The EU would no longer have any power to negotiate its own trading relationship with China.

Britain could not negotiate a free trade deal with the EU like Canada. Credit: Reuters

So it's overwhelmingly clear that the EU cannot let Liam Fox do his trade-negotiating thing and also allow the UK to stay in the customs union.

But, you will ask, does this matter? Can't we just do a free trade deal with the EU like the one Canada has negotiated (see what I wrote about this over the summer).

Well, the point about being in the customs union is it makes it easier and cheaper for British-based manufacturers to trade with the rest of the EU than any trade deal would deliver.

In the customs union, they can sell their cars, and missiles and electronic chips to other EU countries without incurring tariffs and without having to prove that the content of those goods is largely made in Britain.

Think for a second about why it is incredibly helpful to British makers that they don't have to prove country of origin, as part of the customs union.

Well, in a typical motor car or aircraft wing or chocolate or pharmaceutical there are loads and loads of ingredients and components that are manufactured outside the UK.

Or to put it another way, a great deal of British manufacturing - and a great deal of manufacturing everywhere - is actually the assembly of parts, kit and compounds actually made all over the world.

So the great advantage for a Ford, or a BAE or a Jaguar LandRover of the UK being in the customs union is they can sell to the rest of the EU without having to prove the item is truly British, rather than a foreign wolf in British clothes.

Companies like Jaguar Landrover benefit from being inside the customs union. Credit: Reuters

But, you may say, when Canada's trade deal with the EU is implemented (and goodness knows when that will be) won't that be as beneficial for Canadian companies as being in the customs union?

Absolutely not.

Because when selling to the EU, Canadian companies will have to prove that their goods really are Canadian, and are not - for instance - Chinese thingummies masquerading as Canadian goods.

And that will be expensive and inconvenient for Canada.

So for British makers being in the customs union is quite a big deal.

And they are deeply concerned that the appointment of Fox means we'll be out of the customs union.

Perhaps Boris Johnson should be the one to confess we're out of the customs union. Credit: Reuters

As it happens he broadly acknowledged they were right to be worried when he told a recent meeting of companies hosted at the CBI (which I wrote about here) that the bothersome facts about our trade relationship with the EU did rather get in the way of us getting an optimal trading relationship.

So the mere fact that Fox is international trade minister - and is as we speak recruiting a team of highly paid trade negotiators - makes it a fiduciary obligation for Japanese, American, Indian and other multinational manufacturers based in Britain to start thinking about moving investment and jobs to the rest of the EU.

Ouch.

But if May hears their concerns and sticks to the line that we may be able to stay in the customs union, she would have to concede that Fox is redundant, and she is wasting a ton of public money in creating his department.

So the choice for her is painful: admit either that Fox is as much use as a fish on a bicycle or own up that we're out of the customs union.

(Or perhaps ask Boris Johnson to fess up on this, since one of his great lines during the Brexit campaign is we could have wonderfully lucrative new trade deals all over the world while staying in the customs union).