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Brexit: What is the customs union and why does it matter?

David Davis, U.K. exiting the European Union (EU) secretary, left, and Michel Barnier, chief negotiator for the European Union (EU).
Dario Pignatelli | Bloomberg | Getty Images
David Davis, U.K. exiting the European Union (EU) secretary, left, and Michel Barnier, chief negotiator for the European Union (EU).

The latest Brexit battleground is over whether the U.K. should stay as a member of the European Union (EU) customs union.

A vote in parliament over the arrangement's future takes place Thursday and, should it go against the U.K. government, the pressure will rise on the performance of Prime Minister Theresa May.

CNBC takes a look at what the customs union is and what could happen next.

What is the customs union?

A customs union is an agreement that allows partaking countries to set common external tariffs, allowing goods to travel freely between those countries.

The customs union which covers Europe was created in 1958 as part of the European Economic Community (EEC), which then evolved into the EU. All members of the EU are also members of the customs union.

The arrangement allows manufacturers to move goods and parts around the continent — which currently includes Britain and Northern Ireland — without cost or delay.

Conversely, goods that travel from outside such an agreement are generally subject to additional levies and checks that cost both time and money.

The customs union sets what is known as a common external tariff, so that any goods coming into the EU are charged the same amount, no matter which country they arrive in.

This means that once that tariff is paid, no further proof on where in the world the goods came from is necessary.

So it is different from the single market?

Yes. The single market is a deeper form of co-operation between member states that allows the free movement of goods, services, money and people in the bloc.

There is an understanding that exiting the single market will happen when the U.K. leaves the EU in March 2019. This is because to remain would mean that the U.K. would not be able to restrict the movement of people at its border. This is seen as a major reason why people voted for Brexit.

Why is it suddenly an important issue?

The customs union has become the latest battleground between those that want to leave Europe decisively and those who would prefer a "soft Brexit," where many of the current arrangements are retained.

"Hard Brexit" supporters, such as Foreign Secretary Boris Johnson and International Trade Secretary Dr. Liam Fox, make the argument that if the U.K. were to remain in the customs union, it would stop Britain from arranging its own trade deals.

Those that want it kept it in place argue that it offers the best possible deal for Britain and no amount of future deals with other countries could make up for its absence.

Traffic passes a Brexit Border poster on the Dublin road Co Armagh border, between Newry in Northern Ireland and Dundalk in the Irish Republic, on December 1, 2017, The European Union will not accept Britain's Brexit offer if Ireland is not satisfied with proposals for future border arrangements, EU President Donald Tusk said in Dublin on December 1, 2017.
PAUL FAITH | AFP | Getty Images
Traffic passes a Brexit Border poster on the Dublin road Co Armagh border, between Newry in Northern Ireland and Dundalk in the Irish Republic, on December 1, 2017, The European Union will not accept Britain's Brexit offer if Ireland is not satisfied with proposals for future border arrangements, EU President Donald Tusk said in Dublin on December 1, 2017.

A major sticking point is that Brussels has insisted that there is no return to a hard physical border between the Republic of Ireland, as a remaining EU member, and Northern Ireland, which would exit the EU as part of the United Kingdom.

That is hugely emotive for the people of Ireland who endured a civil war and heavy U.K. military presence for decades until a breakthrough peace agreement in 1998.

The issue will come to a head Thursday as a cross-party group of U.K. lawmakers has successfully scheduled a debate and vote in the House of Commons.

Is there a solution?

The person who is expected to solve this conundrum is Theresa May. So far, the prime minister has put forward two options.

One would involve staying in the customs union until technology can better track the origin of goods, allowing Britain to evaluate and pass on tariffs that were ultimately destined for the EU. Where the goods were found to be staying in Britain, a lower tariff could be set. Critics have derided that scheme as unwieldy and unlikely to work, no matter what tracking technology comes to market.

The second scheme is called "maximum facilitation" and accepts the need for borders, even in Northern Ireland. This would involve "trusted trader" schemes, fewer border checks and would also be reliant on improved technology.

Negotiators in Brussels have rejected both possibilities as unworkable and neither option has strong domestic support.

Could May lose her job?

Britain's Prime Minister Theresa May arrives at a European Union leaders summit in Brussels, Belgium, March 22, 2018.
Francois Lenoir | Reuters
Britain's Prime Minister Theresa May arrives at a European Union leaders summit in Brussels, Belgium, March 22, 2018.

"We are leaving the customs union, we will have an independent trade policy and we will strike trade deals around the world," May's spokesman said this week.

That sounds pretty clear-cut, but the U.K. parliament will have its say and could make May's authority difficult to maintain.

Britain's upper house, the House of Lords, decisively voted to retain a customs union this week and the House of Commons will debate and conduct a non-binding vote on Thursday.

May and her supporters could face an embarrassing defeat in parliament if members of her own Conservative Party ally with others to press for a continuation of the customs union.

Right-wing Brexiteers want May to make the debate a "back me or sack me" issue in order to persuade her own MPs from voting against her. The vote is non-binding and May has made no pledge to resign over it, but the pressure will be ratcheted up should she lose.

If that happens but May stays on as leader, the war of words currently ongoing within the Conservative Party could explode into resignations and leadership challenges.