Articles, Briefing Notes & Speeches

The Trade Policy Research Centre is concerned with realistic solutions to the UK's trading relationships with other entities, especially the European Union.

Now it's time to think outside the box

The Fresh Start Project's research programme has given us an impressively comprehensive analysis of the EU's impact on the UK in a wide range of key policy areas. Now, better than ever before, we have a clear understanding of the scope the British government has within the Treaties for achieving useful reforms and recovering powers from Brussels.

Unfortunately that scope seems rather limited. No doubt the fast unfolding Eurozone crisis will give us new negotiating opportunities if we are prepared to use them. But sadly we do need to recognise that "No one in Brussels is considering downwards negotiation" at present, as a senior EU diplomat put it to me at the WTO Ministerial Conference in Geneva last December. We also need to realise how far our European friends are from beginning to understand what Europe needs to do to "Work Together for Growth".

Last January I attended a "High-level Conference" on this very theme at the Charlemagne Building in Brussels with the subtext "Making the most of the internal market and external trade". They really do live in another world there. Not only did no one see fit to mention the damage the Eurozone crisis was doing to European and indeed world economic growth prospects. But also we heard the EU's Director-General for Enterprise and Industry, Heinz Zourek, talking about how the EU prides itself on the Single Market's high levels of protection in areas such as social policy, the environment, and health and safety, compared to other countries around the world.

This is rather like voluntarily saddling your horse with top weight in the Grand National. For the UK that might be alright in a European Grand National where every other horse was similarly burdened. But in the intensely competitive markets of the World Grand National, where non–European horses are free to carry much lower weights, European horses are bound to be disadvantaged.

There has been much analysis of the possible alternatives to full EU membership represented by the existing preferential trading arrangements that Norway, Switzerland and Turkey have with the EU. As is rightly recognized, there are quite a number of problems with both the Norwegian and the Swiss options. Arguably, the biggest is the rules of origin issue. Loss of free movement of goods would surely be unacceptable to important UK industrial sectors such as car manufacturing, chemicals and food processing, all of which are now largely foreign owned.

The Turkish customs union model was fine as a stepping stone to EU membership. However it is not working well as a continuing trading arrangement between two sovereign countries which look likely to stay separate for the foreseeable future.

The WTO clean break option would be attractive in many ways. It is not generally known that 84 per cent of world merchandise trade is conducted on non-preferential terms. But if the UK left the EU without any new preferential trade agreement UK exporters would immediately face tariffs on their exports to the EU. For major exporting industries such as car manufacturing, chemicals and food processing, in particular, such tariffs would be unacceptably high.

The think tank Open Europe's conclusion that all these options would come with major drawbacks is no surprise to the Trade Policy Research Centre. Nor is their observation that the level of discussion on this subject is woefully inadequate. I can quite see why so many believe that, on a purely trade basis, the EU remains a more beneficial arrangement for Britain than any of the alternatives normally put forward.

The proposal put forward by Open Europe that the UK should seek to achieve a new model for EU cooperation, based on remaining a full member of the Single Market in goods and services and of the EU's customs union, with a 'pick and mix' approach in other areas of EU policy, must be the right way to go. And of course the UK should try to negotiate for reasonable reforms within the framework of the existing EU treaties.

But we do need to recognise the real possibility that our European friends will prove inflexible, however much the Eurozone crisis must be undermining their self-confidence. Therefore we would surely need to strengthen our negotiating hand by holding in reserve a fallback plan that would involve the UK ceasing to be a full political member of the EU. A prime aim of such a plan would be to cause the minimum possible disruption to existing trading arrangements.

For this purpose we need to think outside the box. I believe the most promising approach would be to negotiate a new, essentially inter-governmental trade agreement with the EU, based on a continuing customs union and structured to preserve free movement of goods and full rights of commercial presence in the EU for UK services businesses, with other chapters covering intellectual property, investment, public procurement and competition.

That would enable us to "Stay in Europe for Trade", in accordance with what most people who voted Yes in the 1975 referendum thought they were voting for. On that basis we would surely hold the moral high ground in the event our European friends were not immediately cooperative.

Of course there can be disadvantages entering into an asymmetric customs union agreement with a larger partner. Yet such disadvantages could hardly be worse than our present position. In fact, with good legal advice, the UK ought to be able to secure a better customs union deal with the EU on an inter-governmental basis than its present supranational one.

I see no reason why we should not seek to negotiate continuing influence over EU trade policy, keeping our votes on the Council of Ministers for trade matters and retaining our access to the trade side of the Commission. Our European friends might not agree immediately. But money talks, and as a price for agreement we could obviously offer to leave some of our present £12 billion a year contribution to the EU budget on the table.

If we ceased to be a full political member of the EU, it should suit every one for the UK to continue to be party to the EU's existing free trade agreements with countries like Switzerland, Norway, Mexico, South Africa and Korea. And we should recognise that continuing to work with the EU for freer and fairer trade would give us much stronger negotiating clout in the world than we could ever have on our own.

That would apply not only at the WTO level, where I see a good case for trying to resurrect the Doha round in a simpler form, but also in negotiating new free trade agreements with third countries. And we should recognise that in recent years EU agricultural tariffs have more than halved, from an average level of 22.9 per cent in 2004 to just 11.0 per cent on the latest WTO figures1, largely as a result of rising food prices.

In addition there are several other areas where it would be in our interests to work closely alongside the EU: to counter China's often flagrant abuse of intellectual property rights, for example, or in solidarity with the EU against the USA in the unending Airbus-Boeing subsidy dispute. And being tied to EU tariffs for imports from the rest of the world should not prevent us negotiating quite a lot of flexibility to do our own deals with other countries in areas such as rights of commercial presence for services businesses, mutual recognition of professional qualifications, and investment agreements.

So how could we make this a credible policy option to present to the politicians and to Whitehall?

First, we would need top quality legal advice, which would not come cheap.

Second, we would have to seek to bring the UK business establishment round to our way of thinking. Not only bodies like the CBI and the Institute of Directors. But also opinion formers like the Financial Times and The Economist.

In addition we would need to bring along with us the main business sectors involved in trade with the EU. Not only manufacturing. But also the City, which ought to be possible to convince that we would be much better off determining for ourselves the optimal balance between prudential regulation and supervision on the one hand and free market activity on the other. Of course we should pursue regulatory cooperation in financial services with countries like the USA and the EU. But in this crucial area for our economy we do not need to be dictated to.

Third, we would want to get the world at large to acknowledge the UK was considering a sensible option. That would include the World Trade Organization itself, the main Commonwealth countries such as Australia, Canada, India and Singapore and all the world's other leading trading nations such as the USA, Brazil, China and Japan. And of course we would need to win as wide recognition as possible with the media all round Europe that our thinking was reasonable.

I would question the value of any extensive cost-benefit analyses at this stage. With limited resources the first thing is surely establish that the fallback plan we are proposing is a credible and realistic policy option. Trade policy is an intensely complex subject, and there is a huge amount of education to be done at all levels.

For all the European Union's present difficulties the UK must surely continue to strive to do her utmost to help develop a viable future for the European Union. As the late Victorian Prime Minister Lord Salisbury put it "We are part of the community of Europe, and we must do our duty as such."2. But, if all else fails, it would not necessarily be an unpopular option for the UK to stay in Europe for trade whilst ceasing to be a full political member of the European Union.

Ronald Stewart-Brown is Director of the Trade Policy Research Centre.

Note (1): Most EU agricultural tariffs are set in euros per tonne and therefore automatically decline in percentage terms as food prices rise. If and when the Doha round is completed all EU agricultural tariffs will move on to an economically more rational "ad valorem" basis (i.e. they will be set at specified percentages of import prices, like most manufactured goods).

Note (2): Speech by Lord Salisbury at Caernarvon in 1889.

This blog is adapted from a speech given to the European Reform All Party Parliamentary Group meeting on trade policy on 22nd May 2012.