May Risks Brexit Backers' Wrath With Customs Extension Plan

(Bloomberg) -- Prime Minister Theresa May is preparing the ground to keep the U.K. inside the European Union’s core trade rules for years after Brexit, a move that risks a rebellion from euroskeptics who could force her out.

May’s inner Cabinet has agreed a plan to keep the U.K. aligned with the EU’s tariff rules for longer as a last resort measure designed to solve the intractable problem of the Irish border, according to people familiar with the matter. Ministers discussed the idea on Tuesday and are likely to propose it formally to European negotiators in Brussels in the coming weeks.

May Risks Brexit Backers' Wrath With Customs Extension Plan

The plan faces major hurdles ahead. In the U.K., it will be unacceptable to Brexit campaigners in May’s Conservative Party, some of whom are privately threatening to mount a leadership challenge if she fails to deliver a clean break. European officials have also expressed skepticism about the proposal.

Applying the EU’s tariff across the whole of the U.K. would be a major concession from May, potentially limiting her scope for striking free trade deals in goods with countries outside the bloc. The freedom for the U.K. to set its own tariffs on imports is a key demand from the Brexit campaign.

But Brexit negotiations are deadlocked on the question of the Irish border. Even pro-Brexit ministers now see that a compromise on this might be necessary.

The Famous Backstop

The EU is demanding an insurance clause to make sure no border emerges on the island of Ireland. The EU’s own “backstop” proposal is unacceptable to May as it would sever Northern Ireland from the rest of the U.K. She reiterated that point in a meeting in Sofia on Thursday with European Council President Donald Tusk and EU Commission President Jean-Claude Juncker, her spokeswoman, Alison Donnelly, told reporters in London.

“The prime minister said that the U.K. would shortly put forward its own backstop proposal in relation to customs,” Donnelly said. Ask to elaborate if the proposal would go beyond customs to include regulatory matters, she said "it’s in relation to customs."

The EU side has made clear that customs alone won’t be enough to prevent a hard border, and having the same rules on either side will have to be part of any backstop.

May reiterated Thursday that the U.K. will “be leaving the customs union” and will negotiate “future customs arrangements” instead.

But briefing reporters in London, May’s spokeswoman repeatedly declined to say if the country would still be bound by the EU’s common tariff rules. “The backstop is a fallback and we do not want or expect it to happen,” she said. “Negotiations are continuing on what a workable backstop looks like.”

Don’t Call it Customs Union

The language on this is riddled with subtleties. The government line is that the U.K. will “leave” the EU’s customs union and single market in March 2019 -- on Brexit day -- even though it has agreed to a transition that will keep it inside those two frameworks through 2020. Any solution May comes up with to solve her Brexit dilemma is unlikely to be called a customs union, to give her full deniability, even though it may look like one.

“There’s semantics in this: she says we can’t stay in THE Customs Union,” Tory lawmaker and rebel Kenneth Clarke told Bloomberg Radio, dismissing the parsing of words over the customs issue as “political rubbish.”

The EU is highly unlikely to accept the latest proposal as an alternative to its own plan for a backstop for Ireland, according to a person familiar with the bloc’s negotiating position. Irish Prime Minister Leo Varadkar said on Thursday that the U.K. hasn’t come up with any plausible alternatives.

EU officials have signaled they could be prepared to extend the whole transition period for longer if needed but reject a piecemeal approach. A wholesale extension of the transition -- including abiding by all EU single market rules and free movement -- would be harder for May to sell to the members of her Cabinet who are keenest on getting Brexit done.

EU officials are also clear that there’s not much scope for changing the terms of their proposed backstop. The wording can change slightly to make it more palatable to the U.K. but the concept has to remain broadly the same. And the EU says the backstop must only apply to Northern Ireland -- it doesn’t want the U.K. staying in the customs union by the backdoor as a result of the last-resort clause being triggered.

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