‘It is true that leaving the EU will allow the UK to pursue a nimbler and more nationally focused international trade policy. Global Britain is a laudable goal. But it is ironic that we start by withdrawing from the world’s most sophisticated regime for free trade in by far our largest market. It’s a bold case of “reculer pour mieux sauter” [i.e. ‘to draw back to leap better’]…
The journey can only start from where we stand today. In 2015, 44% of total UK exports of goods and services went to the EU, and 53% of total UK imports came from the EU. The EU is the biggest market for all major sectors of the UK economy. The 50 countries with which the EU currently has FTAs accounted in 2015 for 13% of our trade. That rises to 25% if you include countries with which the EU is currently negotiating. This means that almost 60% of our trade will be directly affected when we leave the EU. In the same year, 20% of total UK exports of goods and services went to the US, and 11% of our imports came from the US, amounting to around 16% of our total trade. 8% of UK exports went to all the BRICS countries – Brazil, Russia, India, China, South Africa combined. 11% of our imports came from the BRICS. The Commonwealth accounted for 9.5% of our exports and 8% of our imports. Of that Australia received 1.6% of our exports and provided 0.8% of our imports. New Zealand accounted for 0.2% of both exports and imports. The EU provides 54% of our direct inward investment: France over 8%; Germany over 6%; The Netherlands over 17%. Almost 32% of FDI into the UK comes from America. The BRICS, excluding of course Hong Kong, account for 1.6% of our inward FDI. Of our outward FDI almost 43% goes to the EU, 23% to the US and 5% to the BRICS… [These] figures… tell a clear story. Whatever our longer-term goal, the EU and the US together constitute over 60% of our export market and will remain at the heart of our trading relationships. Certainly, the ratios may change over time, not least as a consequence of Brexit. Trade with the EU has fallen from 55% of our total in 1999 to 44% today. But significant structural change will not happen rapidly , and there will be a floor. There is strong evidence that trade flows are influenced by geographical proximity. Switzerland has about one third of the population of Canada, but imports twice as much from the UK. It is our third largest trade partner outside the EU, after the US and China. Over 70% of UK agricultural exports go to the EU, where it is easier and cheaper to get them fresh to market. By any calculation, the trade strategy for Global Britain has to start with Europe and America…
To be more than an optimistic slogan, Global Britain needs to rest on a clear, evidence based strategy. And once we have the strategy, we will need a consistent plan to deliver it…
[Our] strategy should not be opportunistic or reactive, but based in principles. Brexit makes it even more important for the UK to have an international trade system with rules ensuring non-discrimination, fair competition and enforcement. Alone, we will be less equipped to cope in a trade environment driven by the bilateral and power based instincts of the new US administration and China, or indeed the sheer trading weight of the future EU. That is why we should remain a strong supporter of the WTO, and resist any temptation to short-circuit rules to score quick successes…
The Government has decided to prioritise other goals over our economic relations with the EU. This is fine, provided either people are prepared to pay the price in more expensive goods, less inward investment and lower growth, or we can quite rapidly find compensating alternative markets. There is also a risk, if the Article 50 exit negotiation does not go smoothly, that our future trade relationship will be negotiated not from the starting point of the status quo–integrated membership of a common market and regulatory space – but from outside, almost like any other third country. We should do our utmost to minimise this risk by avoiding gratuitous political friction and prioritising a smooth transition to new arrangements.’ The Tacitus Lecture 2017 – ‘The World is Our Oyster? Britain’s Future Trade Relationships’ delivered by Sir Simon Fraser.
If you stopped a member of the public on the street and asked ‘what is the economic rationale and function of the European single market?’, what is the likelihood they would preface their remarks by explaining:
- differing national technical and licensing regimes create major obstacles to a unified market, restricting market entry on a grand scale;
- differing product standards and certification procedures hamper the Europe-wide acceptance of numerous items ranging from cars to pharmaceuticals, and cereals;
- the basic rule on the elimination of non-tariff barriers to trade is enshrined in Article 34 of the Treaty of the Functioning of the European Union (‘TFEU’) which provides,
‘Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States’;
- ‘measures having equivalent effect’ has been defined by the European Court of Justice as meaning,
‘All trading rules enacted by Member States which are capable of hindering, directly or indirectly, actually or potentially, intra-community trade are to be considered as measures having an effect equivalent to quantitative restrictions’ (Fourcroy v Dassonville ).
Therefore Articles 34 and 35 (which contains a similar prohibition for the export of goods) apply to any conceivable, discriminatory and non-discriminatory, direct and indirect hindrances to trade within the internal market; and
- Article 26 of the TFEU propounds the existential policy that,
‘The Union shall adopt measures with the aim of … ensuring the functioning of the internal market, in accordance with the relevant provisions of the Treaties… The internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties.’
Efficiency depends upon integration. ‘Thus an essential thrust of the move towards completion of the internal market by 1992 was the harmonisation of regulatory regimes with respect to financial services, securities, insurance, company law, and telecommunications, as well as community-wide standards with respect to product safety, and technical specifications’. (The Regulation of International Trade by Trebilock, Howse, and Eliason).
Integration determines economic power. ‘The EU’s role and possibly effectiveness in international economic negotiations will be greater the larger the EU’s economic power. Equally important is the ability or willingness on the part of the EU to offer or deny access to its market. In the exercise of such market power it is the EU as a whole that counts and therefore the ability of the EU rather than the member states to determine access. If one takes market size as a measure of economic power then clearly the more integrated the EU market the greater the potential economic power of the EU.’ (European Union Economic Diplomacy by Stephen Woolcock).
Reduction of relative market power is an existential threat. It also proves the fallacy that Britain will be economically better off ‘out’ rather than ‘in’ because we can then negotiate FTA’s on our own terms. As we will be proceeding from a position of weakness against states that belong to trading blocs who in relation to the UK have vastly superior market power to dictate terms in their own favour, it is they (including the EU) who will be in the driving seat and not us. This is a stark negotiating reality that the British public does not yet appear to have grasped or even woken up to. Furthermore, because terms pivot upon residual integration post-Brexit, no state is likely to conclude and implement terms of a FTA with the UK until the EU and UK have agreed and implemented terms of a FTA to govern their future trading relationship, which typically can take up to seven years from commencement of FTA negotiations (which have not yet started), see the Brexit page of the Diplomatic Law Guide which refers to research by the Peterson Institute: http://newsite.diplomaticlawguide.com/brexit-2#roadmap
‘Relative market power is important because all economic diplomacy is shaped to a greater or lesser degree, and more or less formally, by reciprocity or the view that there should be a broad balance of benefits (or costs) resulting from any negotiation. The issue is generally how such a balance is defined and over what period. In some areas such as trade policy, reciprocity has been and remains, for better or for worse, one of the underlying principles of the GATT/WTO system of multinational trade negotiations. Relative market size is even more important in bilateral (or other preferential) trade negotiations that have become the dominant feature of international trade negotiations since the late 1990’s. In 2009 the EU constituted the largest single market in the world with a GDP in purchasing power parity of $14.5 trillion, just slightly larger than the US at $14trn and equivalent to China, India, Brazil and South Africa put together ($14.9trn) (European Union Economic Diplomacy by Stephen Woolcock).
When the British public voted for Brexit I wonder what percentage could have explained if you had stopped them on the street and asked them, what the Single Market and Customs Union actually are, and the existential significance of the relationship between relative market size and integration?
For a definition of ‘customs union’ please visit the ‘Bilateral and Regional Trade Agreements’ page of the Diplomatic Law Guide: http://newsite.diplomaticlawguide.com/bilateral-and-regional-trade-agreements#structuring
In his article published in the Independent 3 August 2017, ‘This is what the single market and customs union actually are – and here’s what will happen to Brexit if we leave them’, Richard Corbett wrote,
‘The debate about continued British membership of the single European market is often confused, because the shorthand term “membership”, just like the term “access to”, can mean different things.
There is not actually an entity called the “single market” that you can apply to join. The EU has created an “internal market” as one of its policies, and it has associated countries from outside the EU with it, to various degrees, as the EU treaties allow it to do. The EEA countries (Norway, Iceland and Liechtenstein) are the most closely involved though not quite fully participating, as fish and agriculture are excluded. Switzerland is involved through different arrangements. So are others, to a lesser degree, such as Moldova.
The shorthand term “members of the single market” is inaccurate, but is usually used to refer to the EEA countries and Switzerland. Those countries have red-tape-free access to the single market for most of their products, on the condition that they follow its rules.
After all, that is what the single market is about: ensuring that there are common standards on consumer protection, workers’ rights, the environment and fair competition means that products do not need to be checked at borders and can circulate without hindrance. This is particularly important for supply chains that criss-cross borders, such as in the manufacture of automobiles and aircrafts, or in agriculture. It is also vital in transport, where, notably, the right of airlines to fly across Europe is conditional on them complying with EU safety standards and being tested by the European Air Safety Agency. Britain’s financial sector, which provides one third of government tax revenue, is similarly dependent on its right to passport insurance and banking services across the single market in accordance with its rules.
In other words, “membership” of the single market is vital for our economy, jobs and public finance.
But here’s the rub: leaving the EU, assuming we go ahead with it, means Britain will have no direct say on those rules anymore. We would probably have some influence – the EEA countries are consulted on draft single market legislation – but we would no longer have representation where the final decisions are taken: the EU Council of Ministers and the European Parliament.
This loss of influence is the political price of leaving the EU. We do not need to compound that by the economic damage of distancing ourselves from the single market.
Some argue that we must leave the single market in order to make our own, separate rules, otherwise we will be a rule-taker, not a sovereign state. But the supposed gain in sovereignty would not be so great as to justify the huge economic cost. EU legislation in its entirety amounts to some 13 per cent of our laws according to the House of Commons library, and single market rules are a proportion of that. Within even that smaller proportion, we would have little option but to keep most of it anyway.
First, some of it is where the EU has set standards that have since become world standards, as frequently happens. Second, sectors such as chemicals, aviation, pharmaceuticals and agriculture will still be dependent on EU rules that apply to their supply chains. Thirdly, some EU rules are the simple application in the single market of world level agreements in the WTO, UN agencies and so on. Fourthly, most rules are not controversial and there would be no particular gain from changing them. All in all, the extra “sovereignty” to do our own thing would, in practice, be limited, and not worth the economic damage of leaving the single market.
Others argue that staying in the single market does not respect the result of the referendum. Yet, it was Leave campaigners themselves who promised that we could leave the EU without economic damage because we’d stay in the single market:
“I’d vote to stay in the single market. I’m in favour of the single market,” said Boris Johnson.
“Only a madman would actually leave the [single] market,” said Owen Paterson.
“Increasingly, the Norway model looks best for the UK,” said Arron Banks.
“Absolutely no one is talking about threatening our place in the single market,” said Daniel Hannan.
A similar argument applies to the customs union – the arrangement whereby EU countries don’t impose any tariffs on trade between themselves, but set a common external tariff to the outside world. Leaving the customs union would probably mean tariffs and certainly mean border checks on our exports to, and imports from, the EU, which, let us not forget, is our biggest trading partner by some margin.
The price to pay here is that staying in the customs union means we can’t negotiate a different set of tariffs with third countries. But the new shiny trade agreements offered by Liam Fox are anyway turning out to be illusory. It won’t be easy to get better deals than we have secured via the EU with countries around the world. These have been negotiated with the clout of the whole of Europe – the world’s largest market – behind us. Negotiating new agreements, as Britain alone, and in a hurry, would not be to our advantage. If we gain anything at all compared to now, it is unlikely to balance the loss of diminished access to the European market.
Few people voted for Brexit-at-any-cost; indeed they were told it would save money that could go to the NHS. If it turns out to be a costly exercise, damaging the economy, they will be entitled to feel let down. A soft Brexit, staying in the single market and the customs union, will attenuate that cost and is arguably the only kind of Brexit that would come close to what several Leave campaign leaders pledged. But many would go further and say that even these costs, and the loss of British influence over decisions that will affect us anyway, are too high a price to pay for Brexit.And if this government doesn’t fall within the next 18 months and muddles its way through to an unclear, half-baked, or clearly damaging deal, then the clamour for a rethink of Brexit will grow. As Manuel Cortes said from a trade union perspective: “If a bad deal is on the table, the prospect of staying in must be an option.”
And as David Davis himself said: “If a democracy cannot change its mind it ceases to be a democracy.”
This still has a long way to go. But the fact that, well over a year after the referendum, there is still no clarity in what alternative to full membership we might go for means that no option should be closed.’