The Government’s decision
Open Britain has always believed that the UK must seek to negotiate the trading arrangement with the EU which minimises the economic cost of our leaving. All evidence shows this means remaining a member of the Single Market and the Customs Union.
This is, however, not the path the Government has chosen. Ministers have taken a political decision to take the hardest of hard lines on immigration and the European Court of Justice and as a result are sacrificing the UK’s membership of the world’s largest free trade area. By letting immigration policy dictate economic policy, the Government are running the risk of damaging our economy for generations to come and of leaving people poorer.
We will continue to hold them to account for the decisions they have taken and continue to make the case that an alternative path exists, which the Government jettisoned without even pursuing.
Holding the Government to account
It is perfectly possible to be outside of the European Union but within the Single Market. Norway has voted against joining the EU, but is a member of the European Economic Area, which is within the Single Market.
The debate around whether the UK should be a member of the Single Market after leaving the EU has been characterised by misleading claims.
During the referendum campaign the country was told, for example, that we could leave the Single Market and Customs Union while retaining all their barrier-free benefits. David Davis said it would be possible to “ensure that trade with Britain continues uninterrupted” and that “trade will almost certainly continue with the EU on similar to current circumstances.” Michael Gove said “it should be win-win for us and it will be if we vote to leave and we can maintain free trade.” Vote Leave said “the idea that our trade will suffer … is silly.”
This delusion has continued to define the Government. David Davis said in the House of Commons in January 2017 that the trade deal with Europe the Government will negotiate will deliver the “exact same benefits” as our current trading relationship. Liam Fox has said that it's in everybody's interests that, as we move forward, that we have “at least as free a trading environment as we have today.”
Open Britain will hold the Government to account for these promises because there is, in fact, no way of fully benefitting from the Single Market without fully participating within it.
Why the Single Market and Customs Union matter
The Customs Union removes customs duties and quotas on all goods traded within the EU. The Single Market removes non-tariff regulatory barriers by harmonising rules and standards of products and having the principle of mutual recognition of laws so that these are accepted across the bloc.
The Single Market also provides a guaranteed right to deliver services within the EU without national impediments. These arrangements offer the best deal for Britain for services and manufacturing alike, in particular by allowing British-based companies to be part of integrated European supply chains and therefore incentivising overseas businesses to invest in the UK as a launch pad for export to the Continent.
Independent analyses of the economic consequences of Britain leaving the EU have shown that remaining within the Single Market – or the European Economic Area – is the least damaging arrangement.
But the Single Market is about much more than just freeing up trade and investment. It sets common standards in labour market rights, health and safety regulations and consumer and environmental protections, ensuring there are no competitive advantages in adopting lower standards in a race to the bottom. Its importance is underlined by the commitments in the 2015 Conservative, Labour and Liberal Democrat manifestos to the UK remaining within it.
Leaving would erect trade barriers between the UK and EU since there is no EU Free Trade Agreement (FTA) that exists which offers the same degree of access as being in the Single Market and European leaders have made clear that this will remain the case with regard to the EU.
Leaving the Customs Union means that the UK will now face increased bureaucracy at the border when trading with the EU and will almost certainly see some tariffs imposed on some goods. Even under a comprehensive FTA, total tariff elimination cannot be guaranteed. The Government has said it will seek a customs co-operation agreement which will minimise the impact, but will not avoid, for example, costly Rules of Origin regulations, which mean countries outside of the Customs Union exporting in to the EU have to demonstrate the country of origin of goods.
The reason given for leaving the Customs Union is trade autonomy and the ability to sign bilateral trade agreements. Leave campaigners promised that we would be able to secure all the equivalent international agreements to those previously negotiated by the EU and new agreements as soon as we left the bloc. This is another fantasy. Open Britain has pressed Ministers to provide evidence of their timetable for signing new deals and for evidence that the benefits of new deals will outweigh the costs of leaving the Customs Union, which they have failed to provide.
The Government have made a voluntary political choice to seek a worse option for our economy, one that will put growth and jobs at risk. We know that an FTA will not be a pain-free alternative; we just cannot be sure where the pain will be inflicted and at what cost.
The Government has said they are intending to reach a ‘bespoke’ agreement, not an ‘off-the-shelf’ arrangement. Open Britain agree that the UK should seek a trade arrangement specific to an economy of our size and composition. However, this increases the complexity and in turn the length of negotiations, in particular if Ministers were to opt for sector-by-sector agreements, as has been suggested.
Given the UK’s new arrangement with the EU will be unprecedentedly complex and will require ratification in each of the 27 Member States, a new UK-EU arrangement will almost certainly mean trade negotiations extending beyond the two-year Article 50 timeframe. To avoid a period between the completion of the Article 50 process and the ratification of a new UK-EU arrangement (where a new UK-EU regulatory framework would not be agreed and UK-based service providers would be unable to operate in the EU) there should be a transition period to allow firms to trade as at present while enabling them to adapt and, therefore, minimise disruption.
The purpose of a transition phase is to ensure an arrangement is in place at the end of Article 50 negotiations so trade talks can proceed without having to default onto WTO arrangements, and so that companies have a period of stability to adapt their operations to new trading arrangements if changes are made that impact on them. The Prime Minister could not be more wrong when she says “no deal for Britain is better than a bad deal for Britain”: no deal is the worst possible deal.
The danger of a cliff edge
Leaving the EU without any preferential trade arrangement in place would mean defaulting onto World Trade Organisation rules, complete with high tariff barriers and no deal at all for our services sector. This would be a disaster for Britain. The UK would be subject to the EU’s common external tariff; would face new regulatory barriers; would no longer benefit from the Single Market’s ongoing reduction in non-tariff barriers; and would be excluded from the EU’s trade deals with over 50 other countries.
Studies have shown that defaulting on to the WTO would be most damaging outcome for the UK economy. The Treasury estimated that this would reduce GDP by 7.5% over 15 years and would reduce tax receipts by £45 billion per year. The National Institute for Economic and Social Research has shown that under the WTO model real growth would be “projected to fall by 4.6 per cent to 6.3 per cent.”
The Institute for Fiscal Studies have shown that, “maintaining membership of the Single Market as part of the EEA could be worth potentially 4% on GDP” and leaving the Single Market could weaken public finances by up to £39 billion by 2020.
It is essential that the UK rules out moving on to the WTO with no deal in place at all.
Making our economy work for everyone
While membership of the EU’s Single Market brought increased prosperity to the UK, one of the defining lessons from the referendum must be that prosperity has been unequally shared. Low employment rates, lower wage growth and lower perceptions of future opportunities have all been shown to be important indicators of whether people favoured leaving the EU.
Many of those who rejected economic warnings in the referendum campaign did so because they felt ignored by the political mainstream, faced by an economy that was failing to spread opportunity. Inequalities in growth and living standards have been laid bare but, in our view, people didn’t reject the global economy – their vote was a call to share more equally in it.
After June 23rd, an argument for a global economy must acknowledge the limits of free trade alone to deliver higher living standards for all. An open economy must be coupled with a national strategy for fundamental economic change to deliver more equitable gains through regional regeneration, investment in infrastructure and far wider educational opportunities.
As a domestic agenda this would include, for example, efforts to rebalance the economy; regional regeneration and investment; greater industrial activism; increased support for entrepreneurialism; increased investment in infrastructure; more widespread skills training; and wider educational opportunities.