Brexit – a new customs union?

A new, far-reaching customs union between the UK and the EU may well be both sides’ best hope for creating a sustainable relationship that avoids disruption.

The UK has long pressed for a new, deep partnership with the EU, with a bespoke, bilateral free trade agreement likely to be the end result. This, I suggest, will come despite the current difficult outlook. Overall, we have seen the UK and EU begin to work out their difficulties in the negotiations so far.

While there has been much talk that the EU ‘doesn’t do bespoke deals’, it does in fact have several in existence, all of which differ slightly. The Swiss option allows for multiple bilateral deals between the two, while Switzerland itself can pursue its own trade policy.

Second, there is the Ukraine option. It gives almost full access to the single market, with access for goods and services, especially financial. While this is designed as a prerequisite for membership, it could be adapted to serve the UK and the EU as the former becomes a partner to, rather than a member of, the EU.

Finally, we have the Canada option. The Comprehensive Economic and Trade Agreement (CETA), only gives limited access for services, but gives free trade for agricultural and industrial goods. Canada and the EU have mutual recognition of regulations for market access to services, and has its own trade policy.

Given the possibilities outlined above, and the potential for a new agreement that takes elements from all three, it should be possible for the two sides to come to a deal, although we can expect stiff haggling along the way.

Such a deal should be positive for sterling in the long run, since it would avoid trade disruption. We can expect a deal to emerge in due course, but hints along the way will likely see the pound gain. EUR/GBP has been relatively rangebound of late, but with rallies being sold around the £0.90 level we may see a break lower in due course.

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.