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The Government has announced this morning that it wants to negotiate a temporary customs union with the rest of the EU.

This temporary arrangement could last for up to two years after Britain leaves the EU in March 2019 and is intended to smooth the transition to a final deal on trade and border arrangements.

The news has come as a relief to business which feared a 'cliff edge' if the UK left the EU without any new arrangements in place. In effect it would give negotiators a breathing space to put together the new system that under which Britain trades with its European neighbours.

But what is the customs union and why is it so important?

Customs union

The customs union is the arrangement under which goods can be traded within the EU without tariffs, while goods imported from outside the EU face tariff barriers that are common to all member states.

It's different to the single market in that only covers trade in goods, not movement of people, capital or services. It dates back to 1958 and is what Britain signed up to when we joined the then EEC back in 1973.

It also differs in that it only covers tariffs, not non-tariff barriers such as standards and regulations, which businesses say are just as important as tariffs in determining where they export to.

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New trade deals

The Government also says it hopes to start negotiating new trade deals with non-EU nations while the temporary arrangements are in place. This could cause problems, because under the EU treaty members are not allowed to negotiate trade deals with third parties - only the EU can do that.

But the Government argues that the prohibition relates to signatories of the EU treaty, and once Britain has left the EU it is no longer bound by its provisions, even if it is still within the customs union for a limited time.

The Government will argue that it should be able to start talking with other states during the temporary arrangements so long as nothing is signed or implemented until the period is over. In practice the length of time it takes to negotiate trade deals means any new deals are unlikely to be finalised before Britain leaves the customs union.

New trading arrangements with the EU

The purpose behind our temporary membership of the customs union after Brexit would be to allow extra time to negotiate our new trading arrangement with our former EU partners. This means deciding what tariffs if any will apply on goods imported from and exported to the EU, as well as discussing how passing through customs can be made as quick and easy as possible.

There's also the thorny question of non-tariff barriers - those differences in standards and regulations that the single market is designed to remove. The EU will be concerned at the impact of diverging standards and regulations in Britain and will probably seek to block them at least during the temporary customs union phase, and reduce their impact afterwards.

The timescale

Many people think it will be impossible to conclude a deal with the EU before the March 2019 deadline for Britain's departure - especially as the EU is insisting that the details of Britain's departure are thrashed out before its future relationship with the union is discussed.

This is why the Government has raised the idea of temporary membership of the customs union in the two or three years immediately after 2019. In the absence of a new trade deal - which most people agree could take years to negotiate - this would at least avoid the 'cliff edge' that economists and business people fear as British companies suddenly find themselves outside the tariff wall of the Customs Union.

Single market

(Image: Andrew Matthews/PA Wire)

The single market is the cornerstone of what the EU is all about. Under its rules people, goods, capital and services are allowed to move as freely as possible between the 28 member states.

Margaret Thatcher signed Britain up to the single market when she put her name to the Single European Act back in 1986. The idea was to boost economic growth by removing the remaining barriers to trade that still existed within the European Economic Community (EEC) that Britain joined in 1973.

The single market is Britain's biggest trading partner, accounting for 45% of UK exports and 50% of imports. Membership of the single market allows British companies to trade across the 28 member states without restrictions, and Britons to live and work anywhere in the EU.

Remainers would like the UK to remain part of the single market, but this could only happen if we accepted freedom of movement and the all the regulations that come with membership.

So soft Brexiteers prefer to talk about access to the single market under a special arrangement such as that enjoyed by Norway or Switzerland Both can trade freely with the EU, without tariffs, but have to accept freedom of movement and make some level of contribution to the EU budget.

Freedom of movement

Most commentators felt that concern over immigration was at the heart of the Leave vote in June 2016 - and Theresa May made regaining control of it the cornerstone of her position on Brexit.

Ending freedom of movement means leaving the single market, and the Conservatives pledged to reduce net migration to tens of thousands per year in their 2017 election manifesto.

Divorce settlement

What the EU wants to discuss first is arrangements for its citizens who live in the UK, and settling Britain's outstanding debts, which could amount to tens of billions of pounds.

Some hard Brexiteers say Britain shouldn't pay a penny, but most politicians accept that the UK should honour any financial commitments it has already entered into, even if this means paying a contribution into the EU budget after we have left.

If Britain continues to stay in the customs union, even if only for a short period, it may also have to pay a contribution to the EU. Brexit Secretary David Davis refused to be drawn on whether Britain would pay, saying it was something that would have to be part of the negotiations.

What business says

(Image: Daniel Leal-Olivas/PA Wire)

Business groups have welcomed today's announcement. Janet Jones, FSB Wales Policy chair, said: "Today's commitment from the Government would give small businesses in Wales the time they need to prepare for new customs arrangements, which is very welcome. But it is essential that this interim deal is negotiated as soon as possible with the EU Commission, to give businesses the certainty to keep investing in the UK.

"We also welcome the aspiration that negotiation on Free Trade Agreements globally will be able to begin once we have left the EU. Whilst 63% of our small businesses across the UK would prioritise an FTA with the EU, 49% would prioritise an FTA with the US and 28% with China.

"Beyond the interim period it is essential that new customs arrangements achieve the most frictionless trade with small businesses as possible. Our UK-wide research shows that non-tariff barriers are just as important as tariff barriers in determining where small businesses export to.

"Many Welsh businesses trade within the EU Single Market and so engagement with small businesses is essential to develop a new customs relationship with the EU that enhances trade and successfully capitalises upon the opportunities offered by digital technology."

Josh Hardie, CBI deputy director-general, said: “Companies will welcome the progress Government has made today in publishing these papers. Over the past year, businesses have been providing policymakers with the evidence, ideas and solutions to make a success of Brexit.

“So it’s encouraging to see that these papers propose a time-limited interim period and a customs system that is as barrier-free as possible.

“We at the CBI have always been clear that new ideas on crucial issues like this should be brought to the table quickly. But the clock is ticking and what matters now is giving companies the confidence to continue investing as quickly as possible.”

“Business wants to see as frictionless a customs system as possible, with a strong emphasis on digital systems that make it easier to trade.

“But to secure frictionless trade, negotiations on regulation, tariff and non-tariff barriers will have to take place. All efforts should be made to deliver a single-step transition, so that businesses don’t have to adapt twice.”