By Andrew MacAskill
LONDON (Reuters) - Prime Minister Theresa May's plan for Britain to leave the EU customs union when it quits the bloc - and not join a similar arrangement - has become a flashpoint in the Brexit process, setting up a possible parliamentary defeat that could force her government into a damaging policy U-turn.
The European Union's customs union is a legal arrangement in which all member states participate. Some other countries have also joined under varying conditions, including Turkey and Norway, but May has ruled this out for Britain.
Members of a customs union apply the same tariff to imports from outside the union, and apply no tariffs to goods from other members of the union.
Economic supply chains across Europe rely heavily on this. For example, car components criss-cross borders many times for processing before a vehicle is finally assembled. The union also limits checks and other time-consuming and costly bureaucracy at borders between members.
Yet there are drawbacks to membership. One of the biggest is nations cannot strike their own free-trade deals in goods with other countries.
May's Brexit cabinet sub-committee meets on Wednesday to discuss the government's position on a looser future customs arrangement with the EU.
WHY IS THE ISSUE SO DIVISIVE?
The issue lies at the heart of the Brexit debate, setting those who argue that pragmatism and business interests should shape government policy against those who prioritise sovereignty and the idea of Britain as a pioneering, trading nation.
The first group say staying in a customs union will smooth commerce with the world's largest trading bloc. It will also avoid the return of a "hard" border between British-ruled Northern Ireland and the Irish Republic. There are fears that reintroducing checks on what will be Britain's only land border with the EU could reignite sectarian violence.
Brexit supporters say Britain must quit the customs union to pursue independent trade deals with other countries, which they argue is a big advantage of leaving the EU. They say Britain cannot truly leave the EU without leaving the customs union.
WHAT HAS THE GOVERNMENT PROPOSED SO FAR?
The government has proposed two ways of overcoming the difficulties of leaving the customs union and avoiding the need for border checks: a streamlined customs arrangement or a customs partnership.
The first would involve using technology to lower customs barriers. Measures could include pre-approved "authorised economic operators" who are given faster clearance, and pre-arrival notifications linked to customs declarations and vehicle registrations so trucks do not have to stop at borders.
The second proposal would align Britain's approach to customs with the EU's, removing the need for a customs border. Britain would continue to act as if it were in a customs union when dealing with imports from elsewhere. If they are bound for EU markets, British authorities would collect the tariffs and pass them to the EU.
WHAT DOES THE EU SAY?
The EU has rejected both proposals. EU officials have dismissed a "digital border" as unrealistic. One EU diplomat told Reuters last month it is an "elves and fairies" solution.
They have also said plans for a customs partnership are too complicated and are unlikely to work.
The EU is already demanding Britain pay it 2.7 billion euros it has failed to collect due to fraud on Chinese imports. EU officials say that London has lost their trust on customs collection and its refusal to be bound by EU law after Brexit makes them unwilling to consider the proposal.
Unless a better solution is found, the EU has prepared an emergency mechanism under which it would go on regulating trade with Northern Ireland after Brexit. This is anathema to London and Northern Ireland unionists, who see it as weakening the British province's links to the rest of the United Kingdom.
WHAT HAS THE OPPOSITION LABOUR PARTY PROPOSED?
Labour has proposed Britain being in a new kind of permanent customs union with the EU. London would have a say in any future EU trade deals and be able to "negotiate agreement of new trade deals in our national interest".
WHAT ROLE DOES BRITAIN'S PARLIAMENT HAVE IN THIS DEBATE?
The lower House of Commons is expected to vote soon on whether Britain should leave the customs union and there are concerns that the government may be defeated by pro-European rebels in May's Conservative Party.
So far 10 Conservative lawmakers have backed an amendment to proposed trade legislation that seeks to bind the government into being in a customs union with the EU. A similar amendment is also expected on a customs bill.
Conservative and Labour sources say other lawmakers are willing to back the amendment but give no numbers.
The votes could be tight: with the support of a Northern Irish unionist party, May has a working majority of 13 seats, although some pro-Brexit Labour lawmakers are expected to vote with the government.
A second flashpoint is the EU withdrawal bill - the legislation that will formally end British membership. The upper House of Lords last month challenged the government's plans to leave the customs union.
WHEN WILL THE VOTES IN PARLIAMENT HAPPEN?
Sometime in May, the House of Commons will consider the amendment to the EU Withdrawal Bill passed by the House of Lords. However, the amendment requires ministers to report what efforts have been made to secure a customs union only by the end of October, and does not explicitly say Britain must reach a deal on such a union. Some government officials say the vague wording means it is unlikely to change policy.
Votes on the proposed trade and customs legislation will be more dangerous for the government but a timetable has yet to be made public. Some Conservative and Labour lawmakers say they could happen as soon as this month, or delayed until the autumn.
(Additional reporting by Elizabeth Piper, William James, Alastair Macdonald; Editing by Guy Faulconbridge and David Stamp)
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