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31 August 2016

Brexit negotiations: What happens if we don’t get access to the single market?

Nearly half of British exports go to the EU. 

By Julia Rampen

The Finsbury Park branch of Lidl, in north London, is crammed with shoppers buying cheap French cheese, Spanish wine and German sausages. Four miles south, the City of London’s bankers meet with clients from across the continent. The chandeliers glittering above their heads may be powered by French energy company EDF, or Germany’s E.ON. Underpinning all of this is access to the European Union’s single market, which could soon disappear. 

The single market is based on the principle of free trade – specifically, removing barriers like tariffs and allowing the free movement of goods, capital, services and labour across borders.

The vote for Brexit has been mostly read as a protest against the last category. But immigration aside, the majority of British politicians would agree that access to the rest of the common market should be preserved as far as possible. This view is common among economists too.  A report by the National Institute of Economic and Social Research in May 2016 predicted four varying economic outcomes. The main difference between the scenarios was the trade deal Britain had with the EU.

This reflects the wider liberal economic consensus of the nineties and early noughties. Back in the 1970s, Eurosceptics tended to be on the left and motivated by suspicion of free trade (in the first European referendum of 1975, a young left-wing activist named Jeremy Corbyn voted No). But others observed that European economies seemed to be thriving while British growth remained sluggish. Two-thirds of the public voted to become permanent members of the EU’s forerunner, the European Economic Community. 

For younger voters, it can be hard to imagine an economy outside the single market. That is not least because there isn’t one opposite model. Instead, depending on what governments do, the consequences can be felt in multiple ways. 

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Freed of free trade, governments can protect domestic companies. In 2009, the left-wing President Cristina Fernández de Kirchner in Argentina revived a high import tax on electronics. This created the tech boom town among the penguins and sea lions of Tierra del Fuego.  In Britain, campaigners to save the steel industry have argued for some minor protectionist policies to shield it from a slump in demand. 

But protectionism tends to keep prices high. Argentina’s tax made iPhones and tablets an unattainable luxury for most Argentinian consumers. Frivolous, perhaps, until you consider how many tech entrepreneurs were once kids mucking around with a computer.

In Britain, the 19th century Corn Laws whacked tariffs on imported grain, which benefited farmers, but forced hungry factory workers to pay more for their grain. After widespread protest and a famine in Ireland, the laws were repealed. 

Making up the rules also works both ways. Nearly half of British exports go to the EU. In a gloomy scenario, the EU could decide to impose tariffs that made it hard for British companies to compete on the continent.

Even without trade wars, Britain’s companies could be shut out for regulatory reasons, just like the US has banned French cheeses on health and safety grounds. Up till now, the EU and Britain have shared roughly the same quality controls. But if practices diverge, this could change. Except with Britain, the biggest risk isn’t to the cheddar industry, but to the financial services sector, which could find itself facing unfamiliar regulations and lose the right to operate from a London base outside the UK.

For those who oppose free trade of any sort, Brexit brings a chance to rethink the economy. But most Brexit negotiators are signed-up economic liberals. David Davis, the Brexit minister, said in July that “the first order of business” is to agree more free trade deals, not just with the EU but the rest of the world. 

Can Davis really persuade other countries to sign up? Britain’s most successful stint as a sole free trader was in the 19th century, when it could flood the rest of the world with the kind of cheap goods China does today. This time, it is the rest of the world setting the agenda.