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When the UK and EU reached an agreement on Phase I of the negotiations in December, it appeared to signal progress towards a Brexit deal. Previous UK red lines on sovereignty, immigration and money seemed to have softened as the Prime Minister acknowledged the need for a status quo transition, agreed the basis of a financial settlement and made commitments to avoiding a hard border in Ireland – through continuing close regulatory alignment with the EU if necessary. That reflected the political necessity for her to be able to deliver a deal at the end of the first stage of negotiations with Brussels.

However, recent weeks have seen a hardening of the UK rhetoric that appears to step back from the December agreement, which has in turn injected renewed uncertainty into the process. With the focus now back on parliament and the need to keep the Government in power, Theresa May is keener to assuage the sensitivities of her pro-Brexit backbenchers and the Northern Ireland Democratic Unionist Party and worry about Brussels later. So her blurred red lines on Ireland and customs in December are now being drawn in a more vivid colour again.

The UK Government’s problem is that revisiting positions that the EU27 thought had been resolved are causing tension and irritation. The EU is agreeing its negotiating mandate next month and as Michel Barnier signalled in his press conference today – warning that the transition deal is not guaranteed – it  is likely to take a harder line in the light of what they see as British recidivism, which will inflame Brexiteer and Unionist emotions.

Central to this is the question of what future customs arrangement the UK should pursue with the EU. Theresa May has stressed repeatedly in recent days that Brexit means leaving the Customs Union. Her International Trade minister, Greg Hands, this week refused to say whether the UK wants continued membership of the Customs Union even during the transition period.

Inside Government the Treasury has been pushing a position that the UK should seek ‘a’ customs union that covers goods, leaving the ability to negotiate global trade deals on services. However this has not secured collective support and there has been a concerted effort in recent weeks by prominent Eurosceptic Tories, including the Brexit minister Steve Baker MP, to attack the role of Treasury officials. The Brexiteers believe – not unreasonably – that it will be even more difficult to secure trade deals with third countries post-Brexit if the UK has nothing to offer on manufactured goods.

In practical terms, there are no easy solutions if the UK wants to be outside the Union. Reports from the Brexit cabinet sub-committee meeting this week suggest that the Government has fallen back on its ‘blue skies’ idea, floated in August, of a ‘customs partnership’ in which the UK sets its own external tariffs but collects the EU’s tariffs where goods move onward into Europe and sends any difference to Brussels.

The restatement of this proposal, which was slammed by Remainers, Leavers and the European Commission alike as ‘fantasy’ when it was first advanced, is likely to antagonise the EU27 which already feels the UK has slid back on the Phase I deal done in December.

The same dynamic is working with the immigration debate. Many in the Conservative party and in Brussels had been expecting a UK offer to EU27 on mutual labour market access but this has been ruled out by Number 10 on the grounds that third countries would insist on a deal on immigration as well in return for a wider trade deal.

Trust between the two negotiating sides is low. A leaked EU paper this week proposed that Brussels could restrict UK access to the single market without recourse to arbitration, if Britain was seen to renege on the terms of any transition deal.  Labour’s position is just as unclear as that of the Government. A report that Jeremy Corbyn agreed in a meeting with Michel Barnier that under Labour, the UK would remain in the customs union has been denied by a party spokesperson. Labour’s confused position reflects deep divisions within the party between the euro-sceptic far left around Corbyn and the shadow chancellor John McDonnell and the overwhelmingly pro-EU party both in and outside of parliament. Brexit spokesperson Keir Starmer has been attempting to edge the party into a pro-customs union positioning but there is as yet little sign that he has convinced the party leadership of this position.

The effect of this political stalemate in the UK is to hand the initiative to the EU, who look set to dictate the terms of transition and future trade, potentially presenting a ‘take it or leave it’ deal that could cause serious political strain in Westminster and Whitehall.

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