Theresa May, U.K. prime minister, drinks a glass of water during a news conference at number 10 Downing Street following air strikes in Syria, in London, U.K. (Photographer: Will Oliver/Pool via Bloomberg)  

May Defeated in Lords on Brexit, Signaling More Challenges Ahead

(Bloomberg) -- The U.K.’s upper house voted against a key part of Prime Minister Theresa May’s Brexit policy, inflicting a defeat on the government that could eventually push it toward keeping closer ties with the European Union.

The defeat by a margin of more than 100 votes was on an amendment pressing May to seek a post-Brexit customs union with the EU. Staying in a customs union is a key demand of business as it would facilitate trade. It would also ease negotiations in Brussels, which haven’t made much progress on what trade ties will look like after the split.

May Defeated in Lords on Brexit, Signaling More Challenges Ahead

While the government doesn’t interpret the amendment as binding, the heavy defeat may signal more challenges ahead.

For starters, there is the scale of the defeat. It could embolden members of her Conservative Party in the elected House of Commons who want to soften Brexit. Once it has cleared the Lords, the bill returns to the lower chamber, where there’s also probably a majority for a customs union.

The prime minister “must now listen to the growing chorus of voices who are urging her to drop her red line on a customs union and rethink her approach,” the opposition Labour Party’s Brexit spokesman, Keir Starmer, said in a statement after the vote.

The pound edged lower. While businesses overwhelmingly want the U.K. to stay in the customs union to avoid new barriers to trade, pound investors are wary of the increased uncertainty that rebellions against the government might bring.

Pro-EU Tories are feeling bold. Lawmaker Anna Soubry, a former Conservative business minister who has put her name to amendments to other bills in the lower chamber pushing for a customs union, retweeted a Twitter post saying “Lords batter the govt.”

She earlier co-authored an article in London’s Evening Standard newspaper with former Tory Chairman Chris Patten, one of the sponsors of the Lords amendment, which described staying in a customs union as “the best way to support our trade both within Europe and beyond.”

“There are times in one’s political career when what is alleged to be party loyalty comes way behind trying to stand up for the national interest,” Patten said during the debate that preceded the vote. “In doing that I think I will be repeating what I would have been able to say with the full support of my party for most of the time I’ve been a member of it.”

May was later defeated on a second amendment that binds the government to bring in added protections for workers rights, environmental protections and consumer standards that stem from EU law currently in place.

May’s Bind

May has rejected staying in the customs union as it would prevent Britain pursuing an independent trade policy, which for the most enthusiastic Brexit supporters in her party is a crucial benefit of leaving the bloc. If she reneges on that, she risks a leadership challenge.

“We have set out our two potential options for a future customs relationship with the EU,” Brexit Minister Martin Callanan told the upper chamber before the vote. The amendment “would send a signal that the government won’t seek to negotiate them and instead will pursue an outcome that the government has ruled out.”

After the vote, the Department for Exiting the European Union said it was “disappointed” by the result, but that the government doesn’t feel bound to change its policy.

Further Defeats Possible

The cross-party amendment passed by 348 votes to 225. As well as Patten, it was sponsored by Labour’s Brexit spokeswoman in the Lords, Dianne Hayter, Liberal Democrat Sarah Ludford, and John Kerr, an independent who helped draft the Article 50 clause that governs the Brexit process.

After Wednesday’s sittings, the bill has five more sessions in the Lords through May 8 before returning to the Commons. Labour sees a chance of beating May on eight issues, including the government’s desire to set Brexit day in stone on March 29, 2019.

©2018 Bloomberg L.P.