30 January 2018

Labour Campaign for the Single Market/Open Britain: Busting the Lexit Myths

The report, published with Open Britain, considers the arguments - myths about state aid, renationalisations and trade deals - that are often advanced by those within the Labour Party about why staying in the Single Market is not the answer.

New trade deals cannot replace our lost trade with the EU 

The EU is, by some distance, the UK’s largest trading partner. In 2016, it was the destination for some 43% of UK exports in goods and services.57 This is the case for good reason. The Customs Union allows for trade in goods that is unencumbered by customs duties or rules of origin checks, while the Single Market ensures common product standards, health and safety regulations and consumer and environmental protections, and the right to deliver services across the continent.

It is also a simple matter of geography. No matter which countries you look at, the evidence is remarkably consistent: bilateral trade between two countries is proportional to size, measured by GDP, and inversely proportional to the geographic distance between them.58 This is known as the gravity equation. The countries of Europe are on our doorstep, and so it is of little surprise that we do the majority of our trade with them. By contrast, many of the countries often talked up as targets for future free trade agreements are on the other side of the world. For example, although they are important markets, Australia accounts for just 1.7% of UK exports, India 1.7%, Indonesia 0.2% and New Zealand 0.2%.

It is too often overlooked that the EU is also a major trading power in its own right, with preferential trade agreements in place with more than 65 countries around the world, and negotiations ongoing with many more. That means the EU has deals in place with more countries than the US (20), China (23) and Australia (19) combined. At present, nearly two thirds of UK exports go to countries in the EU, the EEA or countries with whom the EU has an agreement in place. If Britain leaves the Customs Union, each of these countries will have an interest securing better terms. So, while it is possible that many of these deals can be renegotiated as we leave the EU, this is by no means guaranteed. And we of course stand to lose out as the EU concludes negotiations with other major economic powers in the coming years.

Many of those who advocate a hard Brexit argue that new trade deals will compensate for the economic cost of leaving the Single Market and Customs Union. Yet there is no evidence for this. The Treasury is widely reported to have analysis showing that new trade deals cannot make up for lost trade with Europe, though it has so far refused to publish it. One of the most comprehensive studies, by Monique Ebell at NIESR, has estimated that the increase in total UK trade from free trade agreements with Australia, Brazil, Canada, China, India, Indonesia, New Zealand and the US would be less than 5%.59 By contrast, she estimates that leaving the Single Market will be associated with a long-term reduction in total UK trade of between 22% and 30%. Given that some 3-4 million jobs in the UK are linked to our trade with Europe, the burden of proof is on those who advocate a hard Brexit to disprove this.

The fact is, EU members negotiate tariffs and trade agreements with third countries collectively, and are able to use the clout of being the world’s largest market to secure better terms than could be delivered by any individual member state. Going it alone, with a small and inexperienced negotiating team, and with the economic imperative of needing to secure numerous trade agreements at speed, Britain’s position will be weak. New deals will take many years to negotiate, and will involve major trade-offs for minimal reward.

The EU is not ‘tariff-heavy’ across the board the world’s poorest countries

It is often claimed that the EU has high tariffs on imports from the world’s poorest countries, and that remaining in the Customs Union would mean Britain continuing to enforce these protectionist policies. A narrative has emerged in some quarters that the EU acts as a ‘protectionist racket’ towards the developing world, strangling many countries growth and development prospects.

There is little evidence to support these claims. The European Union offers developing countries lower tariffs on their exports into the EU through its ‘Generalised System of Preferences’. In particular, the EU’s Everything But Arms scheme grants full duty-free and quota-free access to the EU Single Market for all products except arms and armaments, to all countries that are listed as a Least Developed Country (LDC) by the United Nations. There are currently 47 such countries on the list of LDCs, and the list is updated every three years. Far from imposing large tariffs against the world’s poorest countries, the EU has in fact done the opposite.

There are issues related to market access for certain areas of agriculture between the EU and many developing countries who do not qualify as LDCs – issues that are shared with other developed countries. However, the EU is known for being the most generous of the major developed economies in this regard.

It is not credible to think we can sign more progressive trade agreements

Another argument that is often made for leaving the Customs Union centres around the view that EU-negotiated trade deals are intrinsically bad for workers and the environment, and that they are anti-democratic. This has stemmed out of opposition to the now stalled Transatlantic Trade and Investment Partnership (TTIP), and more recently to the EU-Canada Comprehensive Economic and Trade Agreement (CETA), which entered into force provisionally in September. Unshackled from the EU’s trade policy, so this argument goes, Britain will be free to strike more progressive deals than the EU does.

But this argument is flawed as well. TTIP stalled because of concerns across Europe about the impact of regulatory convergence – concerns that are understandably shared by many Brits – and because the US was demanding provisions unacceptable to European citizens like the acceptance of genetically modified foods, chlorinated chicken, and access to procurement of protected sectors like healthcare. It is hard to see it being revived for as long as Donald Trump, with his brand of ‘America First’ protectionism, occupies the White House.

The CETA agreement, meanwhile, in many ways demonstrates the European Commission’s responsiveness to public concerns with TTIP. It guarantees existing labour, health and environmental standards, and protects public services, including the NHS, from privatisation. And the proposed, and much-maligned, Investor-State-Dispute-Settlement (ISDS) that was proposed for TTIP was replaced for CETA with an open and transparent tribunal system with well-qualified public judges, ironically in part due to the impact of public pressure. CETA is not however a model for the UK. In particular, it has very little coverage for services – which constitute 80% of the UK economy – and it took seven years to negotiate!

To even begin to attempt to compensate for the costs of leaving the EU, a UK government would have to seek substantially greater access to major economies such as the US, China and the Gulf states that the EU does not currently have preferential trade relationships with. But there are very good reasons why the EU has so far failed to reach agreement with any of these countries; it is not for lack of effort but rather lack of common ground with the counterparties on mutually beneficial terms for all European countries, including the UK. Negotiating independently, and from a position of weakness (due to the relative size difference between the economy of the UK alone and of the EU with the UK), the UK will be confronted by terms that are simply unacceptable to the people of this country, as Liam Fox is in the process of discovering. In fact, we will find that we must give greater concessions in order to get the terms of trade we really need. In trade policy there are no ‘mates rates' deals because of relative ‘like mindedness’ - it is a negotiation where each side seeks maximum advantage and the best deal possible.

At a minimum, US negotiators will demand the UK lowers its environmental and food standards and accepts products like hormone-treated beef, GM crops and chlorinated chicken; these demands are, after all, exactly those that the US has made of Europe and the US Commerce Secretary has already said publicly the US will demand these of the UK in order to get a deal. US healthcare companies will again lobby for the right to bid for NHS contracts. The Labour Party has rightly rejected these demands in the past, and there is little reason to believe the US position will soften in the future.

China, meanwhile, will want Britain to support its trade demands, such as Beijing’s current request of being granted “market economy status” in the World Trade Organisation, in return for greater market access. But it is unlikely to drop its restrictions on imported services, which is where the UK could have a comparative advantage. According to the European Chamber of Commerce, restrictions on major service sectors in China – such as finance, education, culture and healthcare – are one of the toughest issues that 30 31 EU businesses face. This is unlikely to be any different for an independent UK - and given the greater disparity in market size, the UK will in fact be under greater pressure to agree Chinese demands, and get less in return, than if the agreement was negotiated by the much larger EU.

Trade agreements with other major economies, such as India, Australia, Brazil or Saudi Arabia would pose their own challenges. International trade negotiations are tough, and in many cases the terms on offer would be a hard sell to a British public that is rightly resistant to any attempt to deviate from the high European standards we currently enjoy.

A future UK government risks leaving the Customs Union and the Single Market only to find it doesn’t support any of the trade deals on offer, or that it cannot secure support for them in Parliament. A better approach would be to remain in the Customs Union, retain access to the EU’s trade deals around the world, and seek to better leverage our large economic size relative to most European countries to get better deals via the EU than we could get alone. 

Full report

© Open Britain