Access to the Single Market
Economics is not a science, however it is logical. For example, if we leave the EU and French politicians (who have said they would want to punish us) successfully lobby for Britain to be expelled from the Single Market (SM) and make us face WTO rules, average tariff barriers of around 3% would apply – both ways. Some economists predicted that sterling would fall about 12%, comparable with its (brief) fall when we left the ERM; they were right about that but about little else.
Because it doesn’t work well for us we have a negative trade gap of around £10B per month with the SM. Our trade with the rest of the world is both larger and growing more rapidly than with the SM, plus the balance is in our favour. In an ideal world trade deals would not be needed, they exist to overcome trade barriers; the UK is the largest exporter of services after the USA but the SM hardly deals with services, which leaves us at a disadvantage.
Negotiations with the EU will be decided by qualified majority voting and endorsed (or not) by the European Parliament, so France has no veto. The Germans may be unhappy with the French position because they won’t want to see a WTO (9.8%) tariff on their cars – the UK is the largest market in the world for German cars. However, large German manufacturers in general gain considerably from the SM, especially by exporting their restrictive regulations through their powerful Brussels lobbying, so they may be more willing to sacrifice some part of their UK market share than the smaller companies.
But markets aren’t simple. Fear, uncertainty and doubt have powerful short-term effects so markets behave unpredictably and irrationally at first. In the longer term things become clearer and markets start to behave rationally.
What will be the effect on our economy when all factors have been taken into account? We don’t know because we can’t account for all the factors. Put both above scenarios into the experts’ models – what predictions would they give? Might the French and Germans agree a third, compromise solution? If circumstances could be repeated in this complex environment economists could become like scientists instead of astrologers.
We’re not claiming that everything is simple if we leave the Single Market, simply that some institutional experts may have been selective in their choice of scenarios or been selectively and sensationally reported.
Our economic argument is simple but that doesn’t mean it’s clear what will happen. The destructive incompetence of the EU is obvious to anyone who cares to look. By introducing the euro EU leaders have taken huge risks with the continent’s economy in pursuit of a non-economic goal and, in spite of the damage to so many citizens, will not deviate from it. This is the mark of ideologues, not idealists.
WTO rules – OK?
The Government is hoping to negotiate a free trade arrangement with the EU when we leave, but what if it can’t get agreement from all 27 nations plus the EU Parliament (or Wallonia)? In the worst case we would be reduced to World Trade Organisation (WTO) terms, but how bad is that?
For cars the WTO tariff on imports is 10% but with sterling’s fall against the Euro (if it stays at around 15%) vehicles made here become 25% cheaper than those imported from the EU whilst our exports would undercut their prices in their own markets by 5%. Of course we import some auto components but we would now be free to cut tariffs where necessary and reduce company taxes for our manufacturers. Imagine the effect all this would have on consumers. Britain built 1.6 million cars last year, exporting nearly 80% of them around the world, but our trade deficit with the EU was £14bn.
For food and drink the WTO tariff averages 20% and our 2015 trade deficit with the EU was £16.5bn. After leaving we could return to trading with our Commonwealth partners and other countries at world prices rather than the inflated ones under the protectionist Common Agricultural Policy.
For financial services we have a £16bn trade surplus with the EU but these services are much less price sensitive than manufactured or agricultural products. Will we be able to continue selling our services if we are outside the Single Market? Our regulations would not just be equivalent, but identical to theirs on exit so we should have passporting rights just like other third-party countries, the USA or Switzerland for instance. If the EU changes its regulations (over which we would no longer have a say) we would again be in the same position as the USA and others who might choose not to follow these changes. Banks, insurance companies and other firms would need to open EU offices with at least administrative staff if not the top professionals. Some jobs would be lost but our lower corporate tax rates would still attract foreign institutions.
Some rebalancing of Britain’s economy away from finance towards manufacturing, in employment at least, might well be the result of a failed trade negotiation with a hostile EU. Of course we cannot be sure of the net outcome because in the meantime the Euro might have slumped given its continuing crises, in which case we all would suffer. But we would be safer with our newly restored freedom to seek trade deals in the big world, becoming less dependant on a market that has long been declining in global importance.