Speech by Ronald Stewart-Brown at the Evening Reception on 23 November 2011 to mark the opening of the Trade Policy Research Centre's Westminster Office.
May I echo David Ord’s welcome to all of you, especially the many here tonight who have helped us so generously over the years leading to the establishment of our new Westminster office?
Europe used to be a perennially boring subject. If someone said we’ve got to be in Europe for trade that was generally the end of the conversation as no one had anything entertaining or knowledgeable to say in response.
But now it’s all changing. The Eurozone is in potentially terminal crisis. And year after year we find Brussels taking control of areas of our government no one conceived of when we joined the old Common Market 40 years ago.
I think most of us here want Europe to work. The idea of Britain trying to run away and leave Europe to its fate is alien to anyone with a sense of history. But now, following the Prime Minister’s visit to Berlin last Friday, it is crystal clear that Conservative ideas for Europe’s future and the role of the UK within it are not welcome to the present generation of continental leaders.
So what can we do about it? Well, there may perhaps be scope for repatriating some powers from Brussels as a quid pro quo for agreeing a new treaty to save the Eurozone.
Parliament remains sovereign, so we do have power to defy the European Commission and the European Court of Justice and unilaterally bring back powers over social and employment policy, for example, to Westminster. But that’s never going to make for long-term harmony with our European friends.
Surely we need to think more radically. Ultimately we need to be able to be like the businessman who walks away from a deal he doesn’t like. We need to be able to threaten credibly that if all else fails we would be willing to leave the European Union altogether.
Could we leave the European Union but "Stay in Europe for Trade"? Our answer is an emphatic Yes! But not in the way most people think, as I shall come on to explain.
So what is unique about the TPRC?
First, our research programme has focussed particularly on the World Trade Organization and what is known as the multilateral trading system, the basic principle of which is non-discrimination. The WTO system remains the bedrock of world trade, and no less than 84 per cent of world trade is conducted on non-discriminatory WTO terms.
It’s easy to get distracted by free trade agreements when talking about possible alternative UK trading relationships with the EU. But the truth is they are only the thin icing on the rich cake of the WTO multilateral trading system.
Secondly, we have gone out and interviewed over 120 business leaders and others involved in UK-EU trade covering a wide range of different sectors. This exercise has given us a whole range of new insights simply not available to those who rely on printed reports and internet research.
One of our most important conclusions is that neither of the most widely canvassed ways for the UK to leave the EU would actually be attractive options.
- Some say we could just leave the EU without any new trade agreement and rely on the WTO Agreements to protect us. But they have no answer when you point out the immediate consequence that UK-based car manufacturers would then automatically face the same 10 per cent tariff on their exports to the EU as car manufacturers based in the USA or Japan. Other important UK manufacturing sectors such as chemicals would immediately face EU tariffs in excess of 5 per cent. Forget it!
- Others say we could negotiate a new free trade agreement with the EU like Switzerland or Norway. But free trade agreements are not as simple as they sound. Typically they only provide for duty-free trade in products manufactured or partly manufactured in the area covered by the agreement. The EU would not want cheap heavy trucks from China imported duty-free via Norway to avoid the 22 per cent tariff rate with which it protects heavy truck manufacturers such as Mercedes and Renault. Under an EU-UK free trade agreement all product being shipped between the UK and the EU would have to be tested for compliance with what are known as “rules of origin”. And EU rules of origin are highly complex. Imagine how manufacturers in Yorkshire and Lancashire would react if they were told that in future goods could only be trucked across the Pennines duty-free if they complied with the relevant rules of origin! We’d face exactly the same problem if we tries to persuade British and continental manufacturers to accept that in future merchandise could only be shipped across the Channel duty-free if it complied with the applicable rule of origin.
There is a basic confusion here. The free movement of goods which the Single Market provides for, without let or hindrance, is far superior to rules of origin based duty-free trade under a free trade agreement. We argue that if we left the EU it would be vital to retain free movement of goods, in the best interests of both ourselves and our European trading partners.
That would mean agreeing to stay in customs union with the EU and retaining EU tariff rates on most of our imports from the rest of the world. But we would be doing this as an independent country, on an inter-governmental basis in place of the present supranational one.
Having to retain EU tariff rates wouldn’t be so bad. Average EU tariffs on manufactured goods are only 2.4 per cent. The car manufacturing sector would be loath to give up its current 10 per cent tariff protection. We would continue to be stuck with relatively high EU tariffs for some food imports. But that would be a small sacrifice in the context.
With our net EU budget contribution climbing ever higher, we would surely have the whip hand in negotiation. Logistically, it would be relatively easy to switch to an inter-governmental customs union agreement. Morally, we would have the great strength of being able to say we wanted to “Stay in Europe for Trade”, which was what people voted for in 1975.
I believe we would be able to negotiate at least as good access to other EU services markets as we have at present. And we would no longer need to contribute towards the vastly over-generous and wasteful levels of agricultural subsidy which most other EU member states benefit from under the Common Agricultural Policy.
A huge benefit would be that we could take back from Brussels control of supervision and regulation of the City. Then there would be no possibility of a new Financial Transactions Tax being forced on us. And the London art market’s competitiveness relative to New York and Zurich need no longer be threatened by the droit de suite tax.
Also I do see attractions in working alongside the EU for future international trade liberalisation. The fact is that in the three completed GATT trade rounds since 1964 the EU has brought its average industrial tariff down from over 10 per cent to just 2½ per cent. It is not the EU’s fault the Doha round has stalled. The EU’s recent free trade agreement with South Korea is genuinely trade liberalising. And the EU’s longstanding free trade agreements with countries like Switzerland, Norway and Mexico would be well worth the UK continuing to participate in.
There would be a small downside in no longer being able to participate directly in the EU’s Single Market rule making process. But in reality the value of our influence is a lot less than some people like to claim. And there are very few exclusively indigenous UK exporting industries which could be vulnerable to deliberately discriminatory regulation.
The TPRC’s next job is to incorporate all these ideas into a detailed green paper which we will make available to selected interested parties for comment. Our aim will be to use that paper to build a broad business and media consensus behind our thinking, which will develop to take account of all constructive representations by informed third parties.
In particular we will need to get business opinion formers like the CBI, the Institute of Directors, the FT, The Economist and even Whitehall on side or, at the very least, not overtly opposed. Once we have achieved that, we will seek to persuade one of the prominent local think tanks to publish a definitive paper on our proposals.
Let me emphasise our strong preference is for the EU to further liberalise its markets, particularly services, and to make it possible for member states like ours to bring back powers from Brussels. What I have been outlining this evening is a fallback plan for negotiation under which, if all else fails, the UK could leave the European Union but Stay in Europe for Trade.
No one should underestimate the size of the challenge!