It is in the UK’s long term interests to be outside the Single Market, but to secure a free trade deal with the EU, argues John Mills.
Should the UK try to stay in the Single Market as part of our Brexit negotiations? On balance, the City might favour this course of action and it appears that Philip Hammond, the Chancellor of the Exchequer, is following their lead. Pursuing this course of action successfully, however, would come at a heavy cost.
Being in the Single Market, as we are at present, brings us tariff free access to the whole of the EU, but the membership fee is not low. Our total net contribution to the EU budget and institutions came to £11.4 billion last year. Crucially, for a lot of people, Single Market rules imply no restrictions on EU internal migration and thus none of the control over our borders, which was an important factor in the June 2016 referendum. Being in the Single Market also implies acceptance of huge numbers of regulations and directives, judiciable by the European Court of Justice, which a large majority of businesses in the UK would very much like to see reduced.
It is therefore very difficult to see how the main policy objectives for which there was a referendum majority, can be achieved as long as we retain our Single Market membership. Maybe we could achieve deep derogations, but these would very probably be both time-limited and hedged with conditions. A much better bet, therefore, would appear to be for the UK to be outside the Single Market but with a free trade deal with the EU. This would give us both tariff free access to the EU market without all the downsides of Single Market membership.
Would this be feasible? It could be. We would be asking for no more than is already in place with countries such as Peru, Mexico and Israel, all of whom have free trade deals with the EU at least on goods if not fully on services. As the UK is much the biggest export market for other EU countries, surely it would make sense for the EU to offer us no worse terms than these other countries, especially as they sell far more to us than we sell to them.
How long would it take? When Norway decided not to join the EU in 1972, it took less than eight months for the Norwegians to negotiate a free trade deal with the EU. We need to aim for the same fast progress, to get the necessary arrangements in place within the two-year period allowed for in Article 50 of the Lisbon Treaty.
What if the talks stall and by the end of the two years no free trade deal is in place? We would then have to fall back on World Trade Organisation (WTO) terms, still trading with the EU but over tariff barriers averaging about three per cent. This should not be an insuperable obstacle, especially if sterling is at a competitive level. Being outside the Single Market does not mean that we cannot sell to EU markets in just the same way as, for example, China and the USA do all the time, facing the same WTO tariff barriers as we would.
So what is there to lose by this approach? There would be some costs. The City might find it more difficult than it otherwise would do to provide the EU with financial services. Negotiations might be more difficult and therefore slower than if we stayed in the Single Market. But we now have the opportunity to shape our relationship with the EU not on the basis of short term expediency but of long term stability. This means maximum co-operation on everything where common action makes sense, but on an inter-governmental footing rather than with the UK being part of the EU’s major political project. The way to do this is not with the UK staying in the Single market but coming out of it – and going for the free trade deal which is in everyone’s interest.