As the time before the EU referendum ticks away, the Remain and Leave camps are still fleshing out their positions, sometimes in quite revealing ways. At the weekend, Michael Gove said that if the UK voted to leave the EU, it would have neither the wish nor the need to remain in the EU’s Single Market. This is a deeply troubling idea.
This position on the Single Market had been alluded to before by the handful of economists who have expressed their support for Brexit. Now it is out in the open, so to speak, and Boris Johnson has been quick to concur. In this line of thinking, the UK would seek free trade access to the Single Market area but would not want to adhere to EU law, regulations and product standards, which are part and parcel of the arrangement. The most important of these laws for the Leave campaign are those that govern free movement—namely, immigration. However, this kind of an arrangement is nothing short of fantasy.
First, if there are exit negotiations—which would undoubtedly be drawn out and acrimonious—there is no reason to expect EU countries to give the UK any special favours. Many EU politicians have already said as much. Member states will be seriously put out by the signalling effects of Brexit on their own anti-EU parties, and the prospect of rewarding the UK in this context is as distant as the Milky Way.
Moreover, the notion that outside the EU’s Single Market, the UK would be able to negotiate numerous bilateral free trade agreements and forge a path towards economic greatness beggars belief. The Leave camp concede that a post-Brexit UK would be in a group that includes the Balkan nations, while missing the point that these countries crave EU membership. President Barack Obama has already stated that the UK would be “back of the queue” for a trade deal; Hillary Clinton has warned against Brexit too.
Outside the Single Market, the UK would have to compete with the EU’s biggest trade partners. The biggest of these is the United States, with a trade share of 17 per cent. Next is China (15 per cent), Switzerland (7 per cent) and Russia (6 per cent, nearly all of which is in natural gas and resources).
Leave campaigners often argue that the UK could emulate the US and China’s successful trading relationships with the EU. But could we? Granted, the UK is still strong on manufactured exports. But it lacks the US economy’s capacity when it comes to machinery and transport equipment (aside from cars), and high technology products, both of which are major EU imports. The UK bears no more resemblance to China, the world’s biggest export nation, with its sophisticated supply chains. And the UK’s financial services sector would be compromised if, as seems likely, the ECB were to require Euro-denominated financial transactions to go through banks domiciled in the EU.
Aside from the giants of the US and China, the UK’s most rewarding trade relationships are with countries that are close by. It is true that the flow of growth has been to outside the EU in recent years, reflecting Europe’s difficult economic conditions, and UK exporters catching up with China and the BRICS economies. Yet this trend is not pre-ordained and it will not last forever, especially as China and other emerging markets have lapsed into a growth hiatus.
Before long, China’s banking system will have to come to terms with its excessive credit boom, the cost of which could be several years of low growth. And generally, world trade is in a funk, partly because of China, partly because of weaker commodity trade volumes, and partly for structural reasons concerning the composition and nature of advanced manufacturing. Under these circumstances, it is folly to imagine that the world would be a comfortable place for the UK to navigate outside the Single Market.
Back in 2011, before the idea of an EU referendum was seriously entertained, the Department for Business, Innovation and Skills issued a report called “The Economic Consequences for the UK and the EU of completing the Single Market.” Its conclusion was that UK-EU trade would be compromised and appreciably below its potential were it not for the elimination of trade and non-tariff barriers. It tried to quantify the costs of regulation and compliance, acknowledging that these did create sub-optimal situations (for example, some companies and market participants were able to extract “rents,” or rewards for market power and control). But these phenomena were outweighed by the spur to innovation and productivity, lower price outcomes, and benefits to foreign direct investment and service industries in the UK. Plus ça change, as they say, as the world at the moment bears out these conclusions many times over.