Sunday, June 05, 2016
Leaving the single market risks a world of pain
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.

Judging by the many ideas I have had for post-referendum subjects – keep them coming – I sense that June 23 cannot come too soon for most. Are we nearly there yet? Yes.

Soon there will be no more of the Brexit camp’s bogus £350m figure, or its fantasy pledges of spending £100m a week more on the NHS or cutting Vat on fuel, which are an insult to voters’ intelligence.

Next week I shall pull all this together and the following week I shall clear up some important loose ends, but today’s piece is a reminder of how far we have come.

When, seven months ago – before we even had a date for the referendum – I wrote that if we left the EU we would lose the single market, the reaction from many Outers was that we would do nothing of the sort. The rest of Europe would be so keen to trade with us that they would allow us to leave while staying in the single market.

Time has moved on. Vote Leave’s position is clear on one thing; that a post-Brexit Britain will not be in the single market. What it will be in is not clear. The small group known as Economists for Brexit has suggested no trade deals at all and the unilateral removal of all trade barriers by Britain. I shall come back to that.

It is important in this debate to know what the single market is. It is not just a trade deal. It is one of the most important ways in which Britain has influenced the EU. When Margaret Thatcher took up the idea of the single market in the mid-1980s, and set Britain’s European commissioner Lord Cockfield the task of pushing it through, it was against the protectionist instincts of some other EU countries.

The single market is still a work in progress but it has come a long way. By setting the same regulatory standards, state-aid regulations and other rules across the 28 members, it guards against unfair competition. Those same standards mean that firms do not have to go through the rigmarole of complying with different sets of rules, including product and safety standards, to sell in different European countries.

The single market has created an integrated European economy, taking advantage of the economies of scale of a 508m population grouping of countries. Supply chains operate across borders. Within a business, some components will be made in one country to be combined with others made in another. Dismantling these supply chains, or putting tariff and other barriers up within them, would be both time-consuming, costly and a recipe for inefficiency.

Most importantly, as far as Britain is concerned, progress is being on a single market in services. When EU leaders such as Donald Tusk talk of deepening the single market, it is an agenda we should enthusiastically embrace. British exports of services to the EU have almost doubled in a decade and trebled in 15 years. The passporting regime, as the Bank and England and others have noted is important for Britain’s financial services sector. In its absence, some activity and employment would be relocated to inside the single market.

Much of the debate on the single market is stuck in the world of 40 years ago. When the Brexit camp say a way would be found for Germany to sell its cars or the French to sell their cheese in Britain, they are reflecting that world. Perhaps the strangest recent comment – in a crowded field - was from Steve Hilton, David Cameron’s former “blue sky” thinker, who said: “The US is not a member of the EU, but the last time I checked, General Motors had no problem selling cars there.”

GM, of course, exports very few cars from America to the EU, but is part of the integrated single market, with local manufacture at Vauxhall in Britain, Opel in Germany, and extensive operations in Spain, Hungary, Poland and Austria.

As for a deal to sell German cars in Britain, maybe. But most of the 80% of British cars built for export are sold elsewhere, including elsewhere in the EU, and a deal to maintain access could be difficult. No wonder Britain’s Society of Motor Manufacturers and Traders reports that 77% of its members favour continued EU membership and only 9% want to leave.

The single market, named by 79% of inward investors in Britain as a key driver of location decisions in the latest EY attractiveness survey, clearly matters for both trade and investment.

It is also a dynamic process. When the rules evolve – and in the case of Brexit without any British influence on those changes – firms selling into the EU would have no choice but to abide by them. Without Britain at the table to push for further liberalisation, and with new barriers erected, our strongly-growing services to Europe would languish.

What about the fact that fewer than half of our exports now go to the rest of the EU? This tells me two things. One is that EU membership is not preventing us exploiting other markets. The other is that it is an inevitable consequence of the rise of China and other emerging economies. As the share of the older industrial economies in the global economy has declined, so their share of UK exports has fallen.

But the EU remains crucial. We sell almost as much to the 450m people in the rest of the EU, as to the 6.5bn or so people in the rest of the world. Making it more difficult to do that does not look like an obviously sensible strategy.

What about the idea, associated with Professor Patrick Minford of Economists for Brexit, of no trade deals at all, and a unilateral removal, by Britain, of all trade barriers? I know Minford well, but I think he is onto a loser with this one. He himself has said it would probably mean the elimination of manufacturing industry in Britain.

An assessment of his proposal by the Centre for Economic Performance at the London School of Economics, using up-to-date trade models and empirical evidence, says the negative impact on living standards in Britain would be similar to the so-called WTO (World Trade Organisation) option. The WTO option is, in any case, quite problematical, as its director-general has pointed out. Whatever future Britain had outside the EU, it would involve extensive and painful negotiation to get there, generating significant uncertainty.

But, as I say, one thing is clear. If we were to vote to leave on June 23, it would be a vote to leave the single market. Some will not mind that. Many, including many in business, will be deeply worried.