Image: Minis in the 'Body in white' stage of manufacture pass on the production line at the BMW Mini car production plant in Oxford

Faisal Islam, Political Editor

The trade-off over trade looms large over the big Brexit decision.

Protecting the frictionless bulk of our existing trade with our biggest partners and neighbours in Europe, or prioritising an absolute ability to sign free trade deals with the rest of the world.

Perhaps you thought the decision to leave the EU's customs union had been made? Well yes, but no.

The semantic reality is that the UK will leave the EU, and therefore will leave the customs union that it represents.


This is Government policy.

But, it turns out, such statements might not mean a great deal more than Brexit meaning Brexit.

Because, from within the Cabinet Brexit subcommittee, the idea of essentially remaining part of the same customs union is now seriously being pondered again.

Formally, this will be a separate and entirely new customs union between the UK and the EU27. Functionally, it means exactly what people meant a year ago when it was first suggested the UK would stay in such an arrangement.

Indeed, there is a "proxy war" underway within the Cabinet, say some involved, with some Leave-supporting Cabinet ministers activating Tory Brexit MPs to attack a customs union.

:: Brexiteers could rebel over Brexit legislation for first time

Conservative split over customs union future

Meanwhile, business groups are being encouraged to explain the implications for business of there being no customs union.

The Confederation of British Industry (CBI) is pushing hard to remain in a customs union "for now".

As ever with Brexit, look at what is actually being done rather than what is being said.

And what is being done is the Government is legislating for super fast-track powers to enable ministers to immediately join a customs union with "a country or a territory"; i.e. the EU.

The powers are within section 31 of the Treasury's Taxation (Cross Border Trade) Bill, currently in committee stage in the House of Commons.

Indeed, the legislation very clearly gives these powers - to apply a common external tariff around the EU27 and the UK - which functionally does the same thing as applying one around the EU28.

It is certainly not what one would have expected in legislation after Theresa May, in her Lancaster House speech in January last year, announced: "I do not want us to be bound by the common external tariff."

I asked Jacob Rees-Mogg, the head of the European Research Group caucus of Brexiteer Tory MPs, if the new legislation presented a rolling back of the Prime Minister's Lancaster House commitments.

"Lancaster House is Government policy, I fully support the Lancaster House speech," he said.

"It gets the advantages of Brexit and is clear.

"I'm as confused as you are as to why anyone in the Treasury would want to undermine the Prime Minister.

"If Treasury civil servants are undermining the Prime Minister, that is a constitutional issue of considerable importance."

He added: "We'll have to see what happens at the committee and report stage [of the bill]. It easily could be amended.

"The [Brexit] bills have to work in unity - you can't have one bill undermining the bill you passed the week before, that would not make any sense."

Image: Theresa May delivers her Lancaster House speech

Ministers argue the fast-track powers are being reserved for a possible negotiation option and are aimed at the Brexit transition period alone.

But that is not identified in the actual legislation.

As such, the bill could become the first Brexit legislation to be subject to amendment from Leave-supporting Tory MPs, either next week in committee stage, or later at its report stage in the House of Commons.

The substantive issue of a customs union really matters to exporters.

In particular, to those companies operating pan-European integrated supply chains; firms purchasing thousands of parts from all across Europe for the production of car or aeroplane components, or those manufacturing pharmaceuticals.

Such manufacturers have communicated very clearly to the top of Government that they need to know, right now, if they will be required to change their systems to apply "rules of origin".

In a free trade agreement, even a comprehensive one, goods being exported from Britain will have to comply with a significant "rules of origin" threshold before being classed as UK content - e.g. 55% for cars.

This is to prevent, for example, an Asian manufacturer from setting up shop in the UK and rebranding their exports as British with only cosmetic UK production.

These are the "rules of origin"; but they are not required within a customs union.

Indeed, a Government deadly serious about leaving the customs union would right now be warning our biggest manufacturers they will have to comply with the subsequent reams of "rules of origin" paperwork.

It was precisely for this reason that Brexit Secretary David Davis wrote five years ago that he was in favour of staying in a customs union - to avoid "rules of origin" requirements.

Mr Davis was confronted with his own past writing on the subject by Labour MP Emma Reynolds during a meeting of the Brexit select committee this week.

Image: Jacob Rees-Mogg says he doesn't want to stay in the EU by the back door

This issue is the focus of how, for example, US President Donald Trump is attempting to bring back manufacturing to America.

As a vital part of trade negotiations, "rules of origin" are a potentially potent barrier to trade.

Government engagement with manufacturers on these types of issues has not been wholly successful.

Some report having to explain "rules of origin" to Cabinet ministers who should really have understood them.

At one meeting attended by a Cabinet minister, manufacturers machine-gunned one of the innovative options for post-Brexit customs arrangements floated in a Government white paper.

"It was killed in five minutes," said the representative of one of the world's biggest manufacturers.

They are still wondering what changes to their systems will be required once the UK leaves the EU.

Image: The M20 is used as a lorry park during Operation Stack

On the ground preparations for new customs arrangements are also rather sparse too.

Motorways leading to and from the port of Dover, where the bulk of cross-Channel traffic moves through, have already been plagued by bouts of near-standstill traffic, and the chaos of Kent Police's Operation Stack.

The Government has looked for permanent solutions to the problems, such as constructing a £250m lorry park in Kent.

But, late last year, the Government withdrew its plans amid legal problems and will not even apply for planning for a new permanent solution until 2019.

An interim plan is due at some point "early this year" and could include physically separating off one lane of the M20 to serve as an effective lorry park.

Local Police and Crime Commissioner, Matthew Scott, told Sky News action on creating new lorry parks - and strengthening the hard shoulder of Kent's motorways - was required "now".

Image: Brexit may pose logistical challenges for some ports

In other cross-Channel ports the planning required for extra space that increased customs checks would entail has not happened.

In many cases, for example in Portsmouth, such space simply does not exist by the harbour.

In theory, inland checking facilities could be created. But, again, there is little sign of such facilities being planned for, or purchased, or let alone actually constructed.

There seems zero chance of having infrastructure in place by 2019 to deal with the customs checks that would be required in the event of a "no deal" Brexit.

The same concern at the prospect of post-Brexit queues at ports also applies across the Channel.

Although, Rotterdam, Zeebrugge and French ports have recently announced recruitment of dozens more customs officers.

So, what exactly is going on?

The issue of customs arrangements have until now been seen mainly through the lens of the restriction on Britain's ability to forge new free trade policies.

Certainly, applying a common external tariff would restrict the UK's negotiating potential with non-EU countries.

It is not quite right, however, to say it would make free trade deals impossible.

Turkey, which is part of the EU's customs union for goods trade, has done deals with Malaysia and Georgia.

The country has also built up its car industry and forms an intrinsic part of the pan-European integrated automotive supply chain.

By contrast, Norway, Switzerland and other nations outside the customs union do not.

Image: Minis in the 'Body in white' stage of manufacture pass on the production line at the BMW Mini car production plant in Oxford

The issue of car manufacturing is creating problems even in negotiations over a Brexit transition deal.

How does a post-Brexit UK access Turkish markets?

Ford, for example, makes all its engines in the UK but manufactures some of its cars and vans in Turkey.

The bigger point is Turkey, as part of the customs union, has to open up its market to free trade deals done by the EU without its say - for example, to the bloc's agreements with South Korea or Japan - but cannot guarantee reciprocity with those third countries.

In the long-term, this type of relationship would be a non-starter for the UK, as International Trade Secretary Liam Fox told me in a recent interview.

Even very pro-EU members of the Cabinet are wary of the "serious flaws" of the "Turkey model".

Image: Theresa May in Brussels

However, something else is clearly going on in Government right now.

It is true to say the queue of new free trade deals that could credibly be signed this Parliament is limited.

The Government may try to fast-track a deal with Australia and New Zealand covering three or four chapters of trade, rather than the normal 30, but the big prizes will take longer.

Many of the biggest fish are waiting not just for the UK to leave the EU, or for their own deals with the EU, but for the UK to settle what its post-Brexit trading arrangements will be with Europe.

The former trade minister Lord Price told Sky News that new deals were, in fact, fifth priority at the Department for International Trade; behind regularising the UK's World Trade Organisation presence and rolling over the free trade deals the UK currently enjoys as a member of the EU.

So, if the great upside of leaving the customs union fully is the signing of new free trade deals - but they will be sparse, and highly unlikely to be implemented in a manner to fully outweigh the likely extra friction in the relationship with the EU - it appears clear why some in Government see a role for a customs union for a couple of years.

Mr Rees-Mogg, however, believes such a scenario would fundamentally undermine the UK's ability to pursue a more radical policy of unilaterally slashing tariffs on food, footwear and clothing, which would deliver an immediate Brexit dividend of cheaper essential goods; bankable politically by the Conservative Party.

He and his allies smell a rat within Government, a "back door into the customs union" which will "negate Brexit".

The evidence suggests the Government has admitted new free trade deals will be limited initially; has not put in place the infrastructure necessary to stay out of a customs union; is not talking about "rules of origin" at all; and is taking through the House of Commons legislation that would give ministers fast-track powers to create a new customs union across the same area as the one the UK is leaving.

Labour are also moving fast towards a pro-customs union policy.

The decisions on the cost-benefit analysis of leaving the customs union cannot be put off any longer: the proxy war has begun, as Tory Brexiteers prepare to amend legislation to limit the length of any "interim" customs union.

The real battle, when it starts, could be rather bloody indeed.