Philip Hammond has indicated the Government intends to bow down to Brussels over its proposed terms for the post-Brexit transition.
In what eurosceptics are likely to see as a capitulation to EU, the Chancellor signalled the UK would not haggle over the transition deal, which he said will “effectively replicate the current status quo”.
EU leaders have insisted the UK must agree on its relationship with the bloc during the 2019 to 2021 adjustment period before discussions on trade can begin.
Mr Hammond’s comments come just hours after prominent Brexiteer Jacob Rees-Mogg warned the UK would be “very unwise” to agree to transition terms proposed by Brussels, which he said would see Britain become “a colony of the EU” for at least two years.
Speaking in Beijing at the end of a three-day trade mission, the Chancellor sought to reassure businesses there would be no “cliff-edge” Brexit.
When asked about what he had told Chinese business leaders about the transition phase, he said: "We won't technically or legally be in the customs union or in the single market, but we're committed as a result of the agreement we've made this week to creating an environment which will effectively replicate the current status quo so that business can carry on trading with their commercial partners as they do now.”
Mr Hammond went on to say following the transition, the UK would negotiate “bespoke arrangements” with the EU and not necessarily replicate the Canada model or a Norwegian-style deal.
He said: "We have a level of trade and commercial integration with the EU 27 which is unlike the situation of any trade partner that the EU has ever done a trade deal with before.
"And therefore it is likely that we will want to negotiate specific arrangements, bespoke arrangements.”
But while bespoke trade deals will be welcomed from Brexiteers, the prospect of kowtowing to Brussels over the transition terms has already caused anger among eurosceptic MPs.
Outspoken Tory backbencher Jacob Rees-Mogg said last night accepting the rulings of the European Court of Justice for two years, while the UK has no say in EU decisions, would effectively make Britain a “vassal state” of the bloc.
Speaking on Newsnight, he said: “We cannot be a colony of the EU for two years from 2019 to 2021, accepting new laws that are made without any say so of the British people or Parliament or Government.
“That is not leaving the EU, that is being a vassal state of the EU and I would be very surprised if that is Government policy.
“I am always applauding Mrs May, I think she is an excellent Prime Minister, giving clear leadership over Brexit.”
But he warned “the British Government would be very unwise to accept” the EU’s intention that “in the transition period we will be bound by the single market, the European Court and the acquis”.
EU chiefs yesterday signed off on phase one of the Brexit negotiations, which sets out draft terms for key divorce issues.
Phase two will begin in the New Year, and at first will only focus on the transition deal.
Jean-Claude Juncker, President of the European Commission, said trade talks would not begin until March, after transition terms has been agreed.