The European single market and trade are crucial to the discussion about Brexit, so we were delighted to welcome Lord Mandelson recently to address our regular meeting of Labour MPs on exiting the European Union. Apart from decades working in British politics, he was the European Commissioner for Trade for 4 years, when Labour was in power.
The single market is the largest of its kind in the world, with half a billion customers, and we do almost half our trade with it. Peter started our discussion by explaining that the single market is much more than a free trade area. He described it as a vast factory floor. Across this floor, businesses can move goods and product parts, tariff and barrier free. Meanwhile, across this same floor, are integrated supply and advanced manufacturing assembly chains. A car manufactured in Sunderland, for example, is assembled with parts from other European member states. This sort of internal market across national borders doesn’t exist in other parts of the world. It is at the heart of the EU’s economic importance for the UK.
A full 80 per cent of the EU’s work is in the areas of internal trade within the single market, and external trade with the rest of the world through the EU’s common trade policy and EU-wide competition policy. Deepening the single market has allowed the UK and other member states to dramatically boost trade, productivity and competitiveness. The opportunities it offers are the main driver of foreign direct investment into Britain.
The UK currently enjoys tariff-free, customs-free trade. Within the EU, British goods cannot suffer trade discrimination. A single set of regulations, and their enforcement by the Commission and European Court of Justice, is central to the success of the single market. If the British economy is to succeed, continued membership or full participation in the single market is key. This is not just for trade in goods, but for services, which now comprise 80 per cent of the UK economy.
The government has suggested negotiating access to the single market on a sector-by-sector basis. As we discussed at the meeting, the EU might not be prepared to negotiate on this basis at all. Even if it did, it would be very difficult to organise or deliver in practice. There would most likely be regulatory divergence and enforcing any compliance would be a practical nightmare. The Swiss have negotiated over many years for a bilateral agreement in goods, but not in most services. Continuous negotiations with the EU would be needed to achieve regulatory equivalence, as its rules and regulations change over time.
Another question the government has yet to decide is whether the UK will remain in the EU’s customs union, which covers goods but not services. The Prime Minister has repeatedly argued this is not a binary choice. The government has intimated that it might seek a sector-by-sector solution. However, such an approach is likely to fall foul of World Trade Organisation rules. In addition, given the depth and complex nature of supply chains, it would be difficult to define exactly what would be considered part of a certain industrial sector. For example, it is unclear whether an audio company supplying sound systems to a car manufacturer would be categorised as the automotive industry.
Theoretically, the UK could negotiate access to the single market, while leaving the customs union, either through EEA membership like Norway or bilateral deals like Switzerland. The main benefit would be the ability to strike trade deals with other countries, independently of the EU, if not in the customs union. However, the costs of being outside the customs union are significant. It would mean additional bureaucracy in exporting goods and likely customs delays at the UK-EU border. Rules of origin would also apply which would make doing business in the UK costlier. Because it means that if a product has been produced in more than one country, it is considered to have origin in the country where the last substantial transformation took place. And if that last transformation was in a country outside of the customs union and the product was set to be exported into it, then it could face both tariff and non-tariff barriers.
Turkey’s arrangement represents another option – remaining in the customs union but being outside the single market. This would mean businesses could trade within the union without tariff and non-tariff barriers. However, this would only cover trade in goods, so a separate set of complex trade agreements would have to be negotiated to cover trade in services. This would also severely restrict our ability to strike trade deals with non-EU countries, as we would retain common external tariffs decided by the EU.
All of these options carry economic risks. During the referendum campaign, the Tory government claimed that if we voted to leave the EU, the damage to our economy would be immediate. That was never going to happen. Leaving the EU and retaining little access to the single market would damage our economy in a slow, incremental manner, over the next five to ten years.
Finally, at this stage the tone and body language of the negotiations are as important as the substance. The negotiations should be approached in a constructive manner. Any trade deal will require unanimity amongst the EU 27 member states, ratification by the European parliament, as well as national and regional parliaments. The rhetoric and tone from the Tories, at Conservative party conference and in the last few months, has destroyed much of goodwill that other member states still had for Britain. The Tories are still in propagandist mode, rather than negotiating mode. It is important for us to keep all our options open and prioritise the economy in the negotiations. But there is a real risk that Theresa May will deliver a hard Brexit which will damage growth, jobs and living standards.