UPDATE 1-Maintaining EU customs union a "sellout" for Britain, trade minister says


* Trade minister says opposition plan would stifle dealmaking

* Government says this would waste one of the key prizes of Brexit

* Former trade official mocks government position (Adds details)

LONDON, Feb 26 (Reuters) - Britain's trade minister Liam Fox will warn on Tuesday that staying in a customs union with the European Union after Brexit would leave the country in a worse position than now, calling the prospect "a sellout of Britain's national interests."

The extent of any British post-Brexit involvement in a customs union - which binds members into a trade bloc with common external tariffs - has emerged as one of the key issues of contention between Britain's two main political parties.

The opposition Labour party tried to outflank the government by arguing on Monday that Britain should stay in a customs union with the EU, potentially setting up a major test of Prime Minister Theresa May's fragile parliamentary authority.

Fox, a long-standing eurosceptic, will say in a speech that the ability to strike new trade deals around the world is one of the key prizes of Brexit, and that if Britain stays in a customs union with the EU it will have to accept EU rules without any say in making them.

"We would be in a worse position than we are today. It would be a complete sell-out of Britain's national interests," Fox will say, according to excerpts from his office.

"A customs union would remove the bulk of incentives for other countries to enter into comprehensive free trade agreements with the UK if we were unable to alter the rules in whole sectors of our economy, as Turkey has now discovered."

But the former most senior government official in Fox's department compared leaving the EU's single market and customs union to being like swapping a three-course meal for a packet of crisps.

Martin Donnelly, the former permanent secretary at the Department for International Trade, said Britain risked being shut out entirely from its biggest market.

"You're giving up a three-course meal, the depth and intensity of our trade relationship across the European Union and partners now, for the promise of a packet of crisps in the future, if we manage to do trade deals in the future outside the EU," he told BBC radio.


Fox will also say that Britain should focus on opportunities outside the EU. He will say that 57 percent of Britain's exports of goods and services now go outside of the EU, compared with 44 percent in 2005.

"We cannot allow the practices and patterns of the past to constrain the opportunities of the future," Fox will say. "Our approach should not be premised on simply identifying how much of our current relationship we want to keep, but what we need to prosper in a rapidly changing global environment."

Labour's announcement on Monday places May's government on a collision course with a number of her own members of parliament, who are planning to back an amendment to a trade bill calling for the government to pursue a customs union, and will now have the backing of the opposition party.

Eight Conservative rebels are backing an amendment and, if they win more support from colleagues, the government could be defeated in parliament on one of its key Brexit policies.

Foreign minister Boris Johnson was also criticised by opposition politicians after he dismissed concerns that leaving the customs union after Brexit could lead to a hard border on the island of Ireland.

He compared the problems of moving goods between Northern Ireland and the Republic of Ireland if Britain leaves the customs union to crossing London boroughs.

"There is nothing funny about his glib comparison," Owen Smith, the shadow Northern Ireland secretary said on Twitter. "Preserving an open border, without infrastructure, is a matter of the utmost importance - for peace and prosperity in Ireland. (Editing by Stephen Addison)