27 April 2017

The Single Market promised much, but delivered little

By Michael Burrage

In the months since the Brexit vote, an enormous amount of time and effort has been spent debating whether or not Britain should attempt to remain in the Single Market.

Yet this debate has been notable for its lack of much in the way of actual evidence. In fact, throughout its history the Single Market has been driven forward by predictions and promises of future benefits – with little time spent trying to discover whether any of these have materialised.

To remedy this, I searched through seven of the world’s most authoritative international databases on trade, employment, foreign direct investment and productivity. The results are presented in my new Civitas report, It’s Quite OK to Walk Away.

As the title suggests, the evidence from these databases strongly supports Theresa May’s decision to withdraw from the Single Market – irrespective of the freedom of movement issue.

Take goods exports, one of the main predicted benefits of EEC/EU membership when it was first touted.

On the face of it, the UK certainly seems to have benefited from joining the common market in 1973. Although exports of its goods to other members did not grow as fast as they had done before joining, they nonetheless grew between 1972 and 1992 at a compound annual real growth rate of 6 per cent, which was higher than the mean rate of the 12 countries that were members at that date.

So if John Major had decided to hold a referendum in 1993, he would have been able to make a strong economic case for remaining in the EU, at least when looking back to 1973. And those who voted to stay in the common market in 1975 might have cause to feel vindicated.

But take a look at the Single Market rather than common market years, and a different picture emerges. Between 1993 and 2015, UK goods exports to the 11 other founder members of the single market grew at a rate of just 1 per cent a year, which was slower than all of the other members except Greece.

Not only that, it was slower than the 14 non-members exporting to the EU under WTO rules, including Bangladesh, Brazil, Nigeria, Canada and the US, whose exports to the EU grew at a rate of 1.93 per cent. Their superior growth cannot be attributed to the fact that they include a number of developing countries (though not China) since the exports of the two developed countries provide perhaps the closest match with the UK, the US and Canada, both exceeded the WTO 14 mean. US exports grew at 2.39 per cent annually or well over twice as fast as the UK’s 1.0 per cent, and Canada’s at 1.98 per cent, nearly twice as fast.

One should note that UK goods exports to the other founder members of the Single Market was also slower than the growth in the UK’s goods exports, largely under WTO rules, to the rest of the world, which grew at a rate of 2.88 per cent during that same period.

If we look back over the entire 43 years and include both the (good) common market years and the (poor) Single Market years, the compound annual growth rate of the exports from 1973 to 2015 is 2.65 per cent. That of the 14 countries trading under WTO rules is 2.63 per cent, meaning that the total real growth of UK goods exports was 200 per cent vs 198 per cent for the WTO 14.

The observable difference therefore, after all the sound and fury, and all the economic and political costs over 43 years, is that the rate of growth of UK goods exports has been 0.02 per cent higher, and the amount of real growth just 2 per cent more, than the 14 countries exporting to the EU under WTO rules, and bearing none of its costs.

If you look at services – which are obviously a major part of Britain’s economy – a similar picture emerges. Although the export data is more time-limited and uneven, it is clear both that many non-members’ exports to the EU have grown at a faster rate than those of members, and UK exports to the rest of the world have grown at a much faster rate than those to fellow members of the Single Market.

This contrast throws doubt not just on the benefits of the Single Market in services but its very existence. It is difficult to see why the UK would want to pay to remain in a market that barely exists, or be concerned about leaving it.

The strange thing is that none of these figures appeared in the referendum or post-referendum debates about the Single Market, though they are very relevant to both. And more importantly, perhaps, none appeared during the years before, because no one wanted to monitor and measure this great project – as if empirical validation was unnecessary.

The Treasury conducted one study, in 2005, but declined to publish its (disappointing) results, and otherwise failed to follow the guidelines for evidence-based public policy decisions in its own Green and Magenta books. Specific requests since 2000 from Lord Pearson of UKIP for a cost/benefit  analysis of membership were also ignored. The Treasury did, however, rush to produce a careless, incompetent and incredible set of predictions shortly before the referendum about what UK GDP would be in 2030,

It was a similar story elsewhere. No political parties collected evidence on their own account, even those now desperately committed to remaining in the Single Market. Trade associations, even those strongly supporting Remain, did nothing to identify its benefits for their sectors by comparison with their non-member competitors.

Perhaps they all thought that Europe was monitoring and measuring the performance of theSingle Market, as well as enforcing its regulations. But in fact, Brussels only began to consider how it might do so in June 2014.

Virtually everyone, it seems, was happy that this great project should roll on without being subject to any retrospective scrutiny and analysis. And we all have paid a price, especially UK voters and negotiators – since if data had been regularly collected and analysed, some of the counter-intuitive and paradoxical results might by now have been understood and explained.

Continued free trade will, of course, be the UK’s preferred option as the Brexit negotiations get under way. However, the lesson of these statistics is that if the EU cannot accept free trade with its largest market, the UK need not be reluctant to walk away and trade with it under WTO rules, as it already does with most of the rest of the world.

Michael Burrage is a director of Cimigo and author of the Civitas report: 'It's quite ok to walk away'