A new CER modelling exercise shows that Brexit has substantially reduced the UK’s trade with the EU, both in goods and services. We find that a customs union with the EU would do little to recover those losses.
A decade after the British public voted to leave the EU in the 2016 referendum, the debate about Britain’s relationship with the bloc is shifting gears.
After many years of keeping quiet about the costs of Brexit, British politicians on the centre-left have become more vocal. Prime Minister Keir Starmer has said that Brexit did “deep damage to our economy” and that his Labour government will be “defined by rebuilding our relationship with Europe”. Chancellor Rachel Reeves has described better trading relations with the EU as “the biggest prize” for reviving economic growth and argued that Britain should align with EU rules when doing so brings economic benefits.
A renewed focus on the UK’s relationship with the EU will be an important part of the British political debate in the years ahead. Wes Streeting, the former health secretary who resigned to challenge Keir Starmer for the Labour leadership, said that he wanted Britain to rejoin the EU “one day” – a view shared by Andy Burnham, the main other challenger, who said, “I hope it happens in my lifetime”. Zack Polanski, the Green Party leader, has called for a referendum on rejoining in the future and a customs union “as soon as possible”. The Liberal Democrats have also emphasised their position, which is the same as the Greens: a customs union first, rejoin later.
Discussions about what a much closer relationship with the EU would look like – be it a customs union, rejoining the single market in goods, or the single market in full – are happening behind closed doors. What is missing from these discussions, however, is a clearer understanding of the economic gains that each option might bring, and the political costs that each would entail. Without it, British politicians risk repeating one of the central mistakes of the Brexit era: pursuing options that are either unavailable on the terms they envisage, or those that appear within reach but are unlikely to contribute meaningfully to economic growth.
A customs union appeals to some British politicians because the EU may not insist on the free movement of people as a condition. It would require the UK to apply the EU’s common external tariff to imports from outside the bloc, eliminating the costly ‘rules of origin’ requirements that currently apply when UK-EU goods trade contains too much third-country content. And depending on the form of a customs agreement, it would likely constrain the UK’s ability to set its own trade policy with non-EU countries, including China and the US. A decade on from 2016, the ability to protect one’s market from coercive pressures is becoming more important, and UK-EU customs union negotiations would be particularly thorny on Westminster’s powers to deviate from the EU’s decisions on trade defence.
Anything beyond a customs union – participation in the EU’s single market for goods, or the single market in full – would allow goods, people, or services to move with fewer border checks, but would involve political trade-offs. These options would require accepting free movement of people, aligning with EU rules without a vote on them, and making substantial financial contributions to the EU budget. These are unavoidable political choices: any British politician wishing to move substantially closer to the EU will need to confront them.
Clear evidence about the economic gains associated with different options can help inform these choices. With that in mind, we analysed the impact of Brexit on goods and services trade, using a new ‘structural gravity’ model. Our aim was two-fold: first, to quantify the trade losses from leaving the EU, and second, to estimate how much of those losses stem from leaving the single market, as opposed to the customs union. Separating the two effects is difficult because the single market and the customs union operate in tandem within the EU. However, we developed a new method that allows us to produce a reasonable estimate of each. The full method is explained in detail in the technical annex.