Sunday, November 15, 2015
Leave the EU and you lose the single market
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

The battle over Britain’s membership of the European Union is now officially joined. It could be all over by next summer, though it could drag on for the next two years.

I presume that if, as is likely, David Cameron decides that the EU has not turned a deaf ear to his fairly modest renegotiation demands, Downing Street will choose a referendum timing which offers the best prospect of a yes vote. That probably means waiting until the refugee crisis has subsided.

Anyway, there is a long way to go, and a lot of areas to cover, between now and even an early referendum. But let me focus on just one today: the issue of trade and access to the single market.

Last week I quoted projections from PWC which demonstrated that, though the share of exports of Britain’s goods and services going to the rest of the EU is in decline – from 55% in 1999 to 45% last year and a projected 37% in 2030 – it will remain, assuming continued EU membership, the key trading partner.

The EU is important even if you adjust for the so-called Rotterdam effect; exports destined for the rest of the world which are shipped via Rotterdam in the Netherlands, and imports from the rest of the world which come in the same way. Exclude all exports to the Netherlands from the numbers and it would still be the case that more than 40% of Britain’s overseas sales are to the rest of the EU.

The EU is even more important when it comes to imports: 53% of the total last year, up from a recent low of 50% in 2011. Britain had an overall trade deficit with the rest of the EU of £62bn last year, compared with a non-EU trade surplus of £28bn.

It is this that has led some in the “leave” camp to conclude either that we would be better off without EU trade – because we have been in long-term deficit with the rest of Europe – or that if there is a vote to leave, Brussels will be desperate to quickly put in place a deal to allow EU exporters to continue to access the British market.

The first can be easily dismissed. Though the far left and extreme right have periodically argued for blanket controls on imports, basic economics tells us that countries gain from trade even when running a deficit.

The serious issue is whether Britain and the EU would rush to negotiate a market access deal even after an exit vote. The answer, provided a few days ago by Lord Mandelson in a speech to the EEF, the engineering employers federation, was a firm no.

The Mandelson speech, delivered at the Royal Society, was interesting. Though the EEF is as broadly pro-EU as the CBI, the event did not attract a silly Vote Leave stunt. There were no students dressed as business people holding up placards.

And, while there is inevitably a strong “he would say that wouldn’t he” element about the former EU commissioner’s remarks, they struck a chord. Whatever else he learned in Brussels as trade commissioner, he quickly discovered that negotiating new trade and market access deals is a thankless task. Such negotiations typically drag on for years, if not decades. Mandelson’s verdict was that, even in the event of a deal, it would not give Britain’s exporters anything like the access to the single market they enjoy now.

These days any such deal would not be mainly about tariffs; industrial tariffs between advanced economics are very low. They are about common product, regulatory and safety standards. For Britain, they are also about completing the single market in services, in many of which we excel; which is proving challenging to negotiate while we remain in the EU, and would be impossible if we were no longer members.

In a recent paper, Brexit: The impact on the UK and the EU, Global Counsel, the strategy advisory firm chaired by Mandelson, looked at the options for Britain outside the EU. The paper, written by Gregor Irwin, former chief economist at the Foreign Office, examined a Norwegian-style European Economic Area (EEA) agreement; a Turkish-style customs union; a free trade area; Swiss-style bilateral trade accords for different sectors, and a so-called most favoured nation approach giving Britain preferential access to the EU but on less advantageous terms than now.

Of these, only the Norwegian option would give Britain full access to the single market, but at the cost of continuing to pay into the EU budget and losing any influence over the regulations and directives British business would be required to adopt to gain access to that market. A free trade agreement would mean that British exports would escape the EU’s common external tariff but not much else. Full access to the single market would be lost.

As for it being in the EU’s interest to quickly negotiate a comprehensive deal to preserve its trade surplus with Britain, that is not how it works, as became clear at the EEF event. For some countries and for some industries, such as the German car manufacturers, it would clearly be of benefit to do so. Getting approval from the remaining 27 member parliaments of the EU, and from the European parliament itself, would be tough in an environment in which there would be little goodwill towards Britain.

Some voters will say that some loss of access to the single market is a price worth paying for, say, regaining control of over our borders (though non-EU net migration is larger than migration from the rest of the EU). Some businesses, particularly those that do not trade elsewhere within the single market, will agree with them. After all, we sell to plenty of countries with whom we do not share a single market, though largely under trade deals negotiated by the EU.

The single market issue is not, on its own, decisive, but it is important. And it is just one of many areas in which, as things stand, a vote to leave the EU would be a step into the unknown.