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17 July 2017

The disadvantages of Single Market membership remain as clear as ever

by Michael Burrage

Originally published by Brexit Central.

Many of the arguments in favour of the UK remaining a member of the Customs Union or Single Market, by way of EFTA or the EEA, have been resuscitated in the light of the election. They all rest on the assumption that membership has been of great benefit to the UK economy. Unfortunately, this assumption remains untested and unproven – even after 23 years of membership.

Mrs May’s four immediate predecessors enthusiastically endorsed membership of the Single Market but none of them ever asked HM Treasury or any other government department to identify and measure its benefits. On the contrary, they rejected repeated requests for a thorough cost/benefit analysis of membership by Lord Pearson and others. Their endorsements were therefore no more than expressions of their opinions, or their hopes.

The CBI and other industry and trade associations came out in favour of a so-called ‘soft Brexit’ after the referendum and since the election have done so again. None of them, however, has presented convincing evidence to show that the Single Market has given their members a significant advantage over their non-member competitors. No doubt their members find it more convenient than trading under WTO rules, and no doubt they prefer, unlike their non-member competitors who pay all their own trade costs, to have their trade costs subsidised by UK taxpayers’ annual EU contribution. They have, however, never demonstrated or measured any benefit of the Single Market for the wider UK economy or its taxpayers.

In 2005, an internal Treasury report, which later emerged because of a Freedom of Information request, unexpectedly found that the Single Market had only a marginal impact on UK trade. However, eleven years later, in a report evidently intended to persuade referendum voters to back Remain, the Treasury found that it had, after all, had a truly a remarkable impact on UK trade. Despite the intervening financial crisis which depressed world trade considerably, it claimed that the Single Market had boosted UK trade with the EU ‘by three quarters’, increasing goods trade by 115 per cent, and services by 24 per cent. It then went on to a make its celebrated – or rather notorious – predictions about the severe loss to UK GDP growth that would result if the voters should decide to leave the EU and the UK thereafter traded with it under WTO rules

As many commentators have observed, this report fell far short of normally-accepted methodological, and ethical, standards of economic research, and is therefore of no help in trying to assess the merits of remaining in the Single Market. The impartial historical databases of various global agencies such as the OECD, the World Bank, the IMF (DOTS), UNCTAD, and UNComtrade, the WTO (RTAIS), and the ITC are more trustworthy and reliable guides to whatever the benefits of the Single Market might have been for the UK economy, and to whatever the disadvantages of non-membership might be in the future. Their data leads to startlingly different impression from that conveyed by HM Treasury (in 2016), and also from that of many media commentators, including some of those supporting Leave.

UK goods exports to the 11 fellow founding members of the Single Market have grown over the years 1993-2015 at a compound annual growth rate (CAGR) of just 1.0 per cent. This compares unfavourably with the mean growth rate of the goods exports of Canada, Japan, Singapore and the US and 10 other non-member countries trading with the same 11 founding members under WTO rules, who had a CAGR of 1.93 per cent, which is almost twice as high. It also compares unfavourably with UK goods exports to the 111 countries with which it trades under WTO rules. These have grown over the same 23 years nearly three times faster, at a CAGR of 2.88 per cent.

The records of services exports are no more encouraging, since they show that a single EU Market in services barely exists. The European Commission’s preferred index of Market integration is the difference between intra- and extra-EU services exports as a percentage of EU GDP. In 2015 intra-EU exports were 6.90 per cent of EU GDP and extra-EU exports 5.90 per cent, a difference of 1.10 per cent. This is slightly less than it was in 2007, so by this index the Single Market in services has been declining rather than growing.

A comparison of the services exports to the EU of 27 non-member countries scattered around the world with those of 27 EU member countries to each other over the years 2004-2012 – the only years for which there is exactly comparable data – found that non-members’ services exports to the EU, though little more than half the total value, had grown 0.5 per cent per annum faster than those of members. As with the export of goods therefore, it is not easy to discern the disadvantage from which non-members suffer.

One of the main hopes for membership of the EEC in 1973 was that it would help to improve UK productivity, but there is no evidence that membership of the Single Market has contributed to this long-standing policy goal. Overall, the mean productivity growth of EU countries since 1993 has been slower than that of non-EU OECD member countries. UK productivity has grown more slowly than that of most non-EU OECD members, as well as most other EU members. The World Bank measure of GDP per person employed in 2014 shows the UK in exactly the same lowly position relative to other EU members as it was in 1993. After examining comparative productivity data, Wolfgang Münchau decided that the Single Market was ‘a giant economic non-event’.

The UK is also thought to have benefited from the 60-odd trade agreements that the European Commission has negotiated on behalf of the UK and other member countries. These agreements have, however, been overwhelmingly with small and micro-economies, have neglected the Commonwealth, and until recently, have often not included services. In 2016, they covered just 6.1 percent of the world markets for UK goods outside Europe, and 1.8 per cent of world markets for UK services.

Moreover, they do not appear to have helped UK exporters. In ten of the fourteen cases where the pre- and post-agreement exports can be tracked over sufficient years, they have been followed by a decline in the rate of growth of UK exports to the partner country. This is in sharp contrast to the increased growth in the post-agreement exports of Switzerland, Korea and Singapore to most of their new partner countries.
The legal, constitutional and democratic arguments against the so-called ‘soft’ Brexit options of membership of the EEA or the Customs Union have been comprehensively analysed by Martin Howe. In their differing ways, they entail severe restrictions on the political and economic freedom of action of future UK governments, and subjection to the decisions and will of a neighbouring power that is incompatible with the status of a sovereign state.

The idea that UK negotiators should accept any of these restrictions, or try to cleverly modify or tweak them, in the belief that the UK might then continue to enjoy the economic benefits of the Single Market is to be woefully misled by the Single Market’s image and rhetoric, to exaggerate its benefits, and to ignore the evidence, available to anyone with access to the internet, about the UK’s economic performance within it over the past 23 years.

The economic case for leaving completely, without clinging to membership via the EEA or Customs Union, is scarcely less compelling than the political and legal one described by Martin Howe, it being difficult to identify the economic benefits of membership and the disadvantages of non-membership. It’s much easier the other way around: the disadvantages of membership and the benefits for many non-members are both easy to see.

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