22 February 2017

Does the Single Market really boost exports?

By Ken Worthy

The Government has committed to leaving the Single Market, but a rearguard action continues from Remain. Siren voices in the City, not without support in the Cabinet, are calling for a “transitional period” – a reasonable-sounding compromise which somehow always involves staying for a while in the European Economic Area, still subject to EU rules and its Court’s jurisdiction.

One of the main claims made by Remainers is that the loss of preferential access to this market will be an economic blow to Britain. But does the Single Market really help its members to export?

Last year, Civitas produced a very interesting report arguing that the single market has actually benefited non-members of the EU more than members.

The report, Myth and Paradox of the Single Market by Michael Burrage, analysed OECD data on international trade flows. It showed that many non-member countries have done much better exporting to the single market than member countries have.

Between 1973 to 2012, nine non-members (China, Russia, Brazil, India, Turkey, Korea, Australia, Mexico and South Africa) increased their EU exports at rates varying from 11 per cent a year (China) to 5 per cent (South Africa). In the same period, Britain’s rate of export growth to the EU was 2.9 per cent, and average growth in exports to other members across the EU was 2.7 per cent. Only four of these non-members have FTAs with the EU; the others trade under WTO rules.

Now, obviously, there are mitigating factors. The economies of many of these countries were growing rapidly, so it is understandable that their exports would rise too. But that was hardly the case for all of them.

The situation is similar when it comes to considering the EU’s role in trade negotiations. We in Britain are often told that membership of the customs union gives us greater clout and better terms than we would get if we were negotiating on our own.

Yet the Civitas report also showed that many small independent countries have been far more successful than the EU in negotiating trade deals. Chile, for example, has free trade agreements (FTAs) with countries whose GDP is worth $58 trillion. For Korea it’s $40.8 trillion, Switzerland $39.8 trillion, and Singapore $39 trillion.

Each of these countries has an FTA with the EU (GDP $16.7 trillion). Chile and Singapore have further FTAs with the USA, China, India and Japan. Korea has FTAs with the USA and India; Switzerland with China and Japan. Of these, 90 per cent include services – the key area of concern for Britain, given the make-up of its economy.

But what of the the EU? It has FTAs with countries whose combined GDP is a mere $6.7 trillion. They do not include the USA, Japan or any BRICs country.

In other words, what the EU seems to have done – at great expense to itself – is to create a huge market which is immensely useful to other countries in expanding their exports, but not nearly as useful to its own members.

Why have non-members done so much better than EU countries in taking advantage of the Single Market? The answer lies partly in the nature of the EU as a group of 28 nations, each with its own interests, concerns and ways of doing things. It is naturally less nimble than countries acting on their own, with a clearer focus on their own priorities.

But there is more to it than that. The founding principle of the EU was idealism – to end war in Europe by bringing together historic enemies.

The means were economic, but the aim was political. Economic growth was never a central objective. The EU’s much-vaunted “social welfare model” was not pro-business. It looked rather to protect workers and customers from it. The euro, too, is a political rather than an economic project, designed to drive political union.

Sadly, that early idealism has hardened into arrogance. The Single Market itself has given predominance to bureaucracy – a grinding process of regulation for its own sake, bringing more and more business sectors within its scope almost irrespective of cost or benefit.

As a result, the EU has held back the economic dynamism of its member states. It has monopolised the right to make trade deals, and failed miserably to make a success of them. After 30 years, its first FTA was with Andorra.

It is telling, in particular, that the FTAs negotiated by Europe do not just focus on expanding trade. They have three “pillars” – economic growth, social development and environmental protection. These originated in early EU policies to help neighbouring Mediterranean countries develop, which saw its trade deals cover issues such as the impact on women’s rights, poverty and climate change.

These wider issues are still important to the EU, and still blunt its negotiating edge. The deal with Canada almost foundered over an EU attempt to dictate human rights to Canada, of all countries – and the EU will not do a deal with China because of its record on the same subject.

Britain is already an open, dynamic economy, and has committed itself to helping business and expanding its trade with the whole world. On the Single Market, we of course need access to it – but we will continue trading with Europe, deal or no deal, transitional period or none.

As for our wider trade policy, it would be a supreme irony if we did better at exporting to the EU from outside the Single Market than we did from inside. Based on the evidence, however, it would hardly be very surprising.

Ken Worthy is a former management consultant who provided advice to UK government departments