Brexit: U.K. Is Still Fighting, Two Years Later

(Bloomberg) -- It's been nearly two years since the U.K. voted to leave the European Union. But the intervening period has done nothing to resolve the question of what that should mean.

Consider the latest Brexit-related fracas, which has seen members of Prime Minister Theresa May's cabinet publicly squabbling about Britain's future trade relationship with Europe. For many Brexit supporters, the debate has become a test of whether the U.K. is really leaving, or just pretending to.

This isn't a polite disagreement: "Bonkers," "cretinous" and "crazy" are adjectives recently used by three leading figures in May's own Conservative Party, two of them cabinet ministers, to characterize her preferred option for resolving the dispute. There are thinly veiled threats of a coup against her if she doesn't change course.

One of the central promises made by the Leave camp in the 2016 referendum campaign was that the U.K. should be free to strike its own trade agreements with the U.S., Canada and India. That wouldn't be allowed if the U.K. decided to stay in a customs union with the EU, which imposes a common set of import tariffs for outside countries.

So from the pro-Brexit standpoint, if Britain doesn't leave the EU customs union, Brexit becomes pointless. By any standard, if it leaves entirely, trade becomes more costly and difficult.

The threats to May come from hardline Brexiters — those who want the cleanest break from EU laws and regulations — such as Foreign Secretary Boris Johnson and Environment Secretary Michael Gove. Their preferred approach would use technology to reduce customs controls with the EU and relies on measures such as a "trusted trader" scheme to keep trade flowing. They call it maximum facilitation, or max fac. Critics say the details are too fuzzy, the prospect of "frictionless trade" too optimistic, and that it would take years to put such a system in place.

Less ferocious Brexiters in the Conservative camp, including Chancellor of the Exchequer Philip Hammond, proposed a "new customs partnership," whereby the U.K. would collect EU tariffs for goods destined for the continent, and vice versa. How that's done is fiendishly complex. Hardline Brexiters, who see the Hammond side's proposals as a Trojan horse, warn that it would require the jurisdiction of the hated European Court of Justice and too much regulatory harmonization.

All this furious arguing has been over plans that the EU has already ruled out anyway. From the EU perspective, you are either in or out of the customs union. If you are out, those pesky border checks return.

May's allies will meet on Tuesday, reportedly to agree on a third option that tries to address each side's concerns. If they all come out looking satisfied, then the Fudge Phase of Brexit hasn't quite ended yet.

Fudges have been useful for May so far — they have kept a veneer of Conservative Party solidarity and the impression that progress is being made. But time is running out before the U.K. officially leaves the bloc in March 2019. By October, the parties are supposed to agree on a range of issues, including the customs arrangement, the terms of a transition period and the broad outlines of a new U.K.-EU trade relationship.

Perhaps most importantly, without agreement on the customs relationship there will be a politically contentious physical border dividing the Republic of Ireland, an EU member, from Northern Ireland, part of the U.K. The border issue was fudged with a promise that it would remain open, if necessary by keeping Northern Ireland in "regulatory alignment" with the EU, something that is anathema to most British politicians as it effectively creates a physical border within the U.K. itself.

That's the thorny thing about Brexit; all these issues are linked. As EU negotiator Michel Barnier never tires of repeating, "Nothing is agreed until everything is agreed."

Barnier has optimistically noted that the U.K. can change its mind about any of this, even up to the end of the transition, which would run through 2020. But Britain would have to make up its mind in order to change it. Paralyzing divisions will persist until the Brexiters' fear of never-ending EU membership, which grips half the government and country, is fully dispelled.

That can't happen until the U.K. is out of Europe. Britain may have to have a messy, drawn-out, expensive break before it will be able to have a productive conversation about the kind of relationship with Europe it wants.

If May's government doesn't come up with a workable option, then either Parliament will force its hand (Britain's legislative bodies skew toward remaining in the customs union) or else the EU will do so by holding other parts of the deal hostage. Expect more fudge, maybe in the form of an extended transition limbo. Nobody is ready yet to say that the U.K. is either in or out.

To contact the author of this story: Therese Raphael at traphael4@bloomberg.net.

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