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.

Speech to the 1922 Committee's Subcommittee on Foreign Affairs, Defence and International Development 06.05.14

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Good afternoon, and many thanks to your Chairman for inviting me to address you today.

It’s over 40 years ago that we finally succeeded in joining what we then called the Common Market. I think few at Westminster then really understood the long-term implications of that momentous decision.

Even in the late 1990s, when it first started to look probable we would avoid joining the euro, it was reasonable to ask how easy our position would be as a non-Eurozone member of the EU. Now, following two recent European Court of Justice rulings on short selling and the financial transactions tax, our situation is looking extremely uncomfortable. Both rulings look blatantly discriminatory against the UK with its world class financial services industry. I think that is beginning to concentrate quite a few people’s minds.

Certainly, George Osborne’s mind seemed to be concentrated when he told Open Europe’s great pan-European conference on EU Reform in January that “proper legal protection for the rights of non-euro members is absolutely necessary – to preserve the single market and make it possible for Britain to remain in the EU”. I wonder how he thinks we can hope to get such protection now.

I first got interested in the world of trade policy 15 years ago when I started to research alternative trading relationships the UK might ultimately negotiate with the EU if we couldn’t establish an acceptable basis for continuing membership. That interest led me to the first of many visits to the World Trade Organization in Geneva. I’ve also attended its Ministerial Conferences in Seattle, Cancun and Hong Kong as well as three of them in Geneva.

The WTO and the rules-based multilateral trading system are the very bedrock of global trade. It all started in 1947 when just 23 countries signed the original GATT (or General Agreement on Tariffs and Trade). Since then, average developed country industrial tariffs have come down from the 20-30 per cent range to under 4 per cent now and the membership has risen to 159 countries. Trade, in the sense of aggregate exports and imports of goods and services, has increased to well over 50 per cent of most developed countries’ GDPs.

This must be one of the most amazing achievements of international cooperation in all history. It has underlain the astonishing growth in prosperity the world has seen over the last two thirds of a century.

I have been following closely the WTO’s efforts through the Doha round to make world trade even freer and fairer. If it eventually succeeds, and I am hopeful, it will achieve dramatic further reductions in the higher ranges of tariff rates and trade-distorting agricultural subsidies. For example EU tariffs for cars will come down from 10 per cent to 4½ per cent whilst average EU duties on food, beverages and tobacco will come down by well over half from their current level of over 20 per cent.

Besides this, free trade agreements are really just icing on the cake, and quite thin icing in most cases. Those of you who have had time to read the Trade Policy Research Centre’s recent UK Trade Statistics Discussion Paper will know that most free trade agreements achieve much less than the term literally suggests. Farm lobbies fight to keep high levels of protection in place through getting key tariff lines excluded from agreements and retaining non-tariff barriers. Protectionism in trade in services is notoriously difficult to tackle through free trade agreements.

Rules of origin, in particular, are a serious impediment to duty-free trade in free trade agreements.  They are essentially protectionist devices designed to ensure that duty-free trade only applies to goods which have been made or partly made in the free-trade areas they create. They are technical in language, complex and often difficult for even experts to understand.

Incidentally, the much vaunted Transatlantic Trade and Investment Partnership now looks to have little prospect of success. Only last June Kenneth Clarke was claiming the so-called TTIP as a prime justification for the UK staying in the EU. But now the chances of getting any deal through both Congress and the European Parliament are looking increasingly slim. Endless technical problems and regulatory issues have been emerging.  Agricultural interests on both sides of the Atlantic are digging in their heels. And, predictably, the incompatibility of EU and US-style rules of origin is proving a major problem.

I used to think that if we ultimately decided to leave the EU we should negotiate a free trade agreement with the EU like Switzerland or Norway. But I have changed my mind. The “Let’s be like Switzerland or Norway” default thinking mode of much of the UK’s Euro-sceptic movement looks seriously unrealistic when you look in any detail at how those countries’ relationships with the EU are working in practise.

Switzerland’s referendum vote in February against continuing free movement of persons has been a seismic shock for both the Swiss Federal Council and the European Commission. But arguably the trickiest problem is that Switzerland’s twenty or so different bilateral trade agreements with the EU contain no effective dispute resolution mechanism. Also, Switzerland is surrounded by the EU, which makes it particularly vulnerable to border issues.

For Norway, as is well known, the workings of the European Economic Area Agreement have gradually been depriving it of legislative control of more and more areas of its national life.

At the Trade Policy Research Centre we now don’t think any free trade agreement we could negotiate with the EU would fit the bill for us.

Of course we must do all we can to negotiate an acceptable basis for continuing EU membership, including radical reform, and we must be seen to be doing so. I would prefer little more than just a trade-related basis for continuing membership. But it may become clear quite quickly, perhaps within the space of a few months, that our European friends are not going to play ball. So we absolutely must have an alternative in reserve.

For that purpose we are advocating what we call “Staying in Europe for trade” through negotiating a new inter-governmental customs union agreement with the EU with full UK voting participation in customs union policy decisions. For those unfamiliar with the important technical distinction between customs unions and free-trade areas I have got some one-pagers here together with spare copies of our statistics paper.

Let me summarise why we argue our “Staying in Europe for trade” approach is the best one:

*       First, it would enable a seamless change from the present basis of UK- EU trade, with

         continuing free movement of goods, no rules of origin tests and no changes in customs

         paperwork and other border procedures.


*       Second, it would give the UK the moral high ground of being able to offer EU exporters

         continuing unimpaired access to UK markets for all their goods and services exports.

         How could they reasonably object when they know that most British voters have no

         vocation for political union?


*       Third, it would keep the UK in customs union with the EU as a liberal ally for Germany

          and the rest of the so-called “Northern liberal bloc” of member states on the Council of

          Ministers.  Without the UK their voting strength would fall from 40 per cent to 31 per

          cent, well below the 35 per cent blocking minority threshold which will start to apply in

          six months’ time, whilst the voting strength of the “Club Med” protectionist countries

          led by France, Italy and Spain would rise from 38 per cent to 43 per cent.


*        Fourth, by retaining the Common External Tariff and free movement of goods it would

          address the prime concerns about the UK leaving the EU of the higher tariff sectors

          such as cars, food & beverages and chemicals in both the UK and the rest of the EU.


          These sectors account for nearly 40 percent of UK-EU merchandise trade. In my view,

          they are just too powerful to take on at the same time as the many EU politicians who

          would be desperate for us not to leave. The rest of the EU is running a £32 billion trade 

      surplus with the UK in cars, food & beverages and chemicals alone, which would

       ensure the UK an extremely strong negotiating position.


*        Fifth, it would permit the relatively easy “novation” of existing EU free trade

          agreements with third countries such as Switzerland, Norway, South Korea and

          Singapore to enable the UK to remain party to at least their chapters on trade in goods.

          If the UK ceased to be in customs union with the EU it would have to negotiate new

          free trade agreements with these countries and then ratify them, which could take

          many months. 


          Leaving aside the now questionable prospects for the TTIP, there is now no realistic

          near-term prospect of the EU completing any new free trade agreement with any

          significant third country other than the one it has signed last year with Canada.


  *     Sixth, it would enable the UK to assure the court of world opinion, led by the

         USA, China, India and Japan as well as the WTO itself, that the UK leaving the EU

         in this manner:  

-      would not in any way disrupt world trade, and 

-      would enable the UK to continue to work with the EU for the multilateral

        liberalisation of world trade through the Doha round. 

                *       Seventh, it would permit the UK to pursue trade disputes with third countries
                         either in its own right or in alliance with the EU.

*       Eighth and lastly, it would enable the UK to negotiate in its own right with third

          countries in areas which are currently EU competences, such as:


-       investment agreements

-       agreements on aspects of trade in services such as commercial rights of presence,

      movement of persons and mutual recognition of professional qualifications, and

-       protocols on regulatory cooperation

Well, you might say, wouldn’t it be much better to break free entirely of the EU’s Common
Commercial Policy? There can be no doubt the current arrangement leads to higher prices for the
consumer in protected sectors such as cars and food. But we would argue that would be a case of letting
the unrealistic best be the enemy of the achievable good.

The reality is that being in customs union with the EU is actually rather a good place to be:-

*          UK goods exports to the rest of the world have been growing at 9 per cent per annum

             over the five year period from 2007 to 2012, as compared to only 3 per cent to the rest of the EU, whilst;

            UK service exports to the rest of the world have been growing at 7 per cent per annum over the same period,

            as compared to just 4 per cent to the rest of the EU.

On our calculations, if present trends continue, the proportion of UK exports of goods and services

going to the rest of the EU will be down to just 37 per cent by 2017, the hoped for referendum year.

That’s after adjusting for the famous Rotterdam-Antwerp effect, which results in UK exports

ultimately destined for the rest of the world being registered in the official UK trade statistics as

exports to the Netherlands and Belgium.


The proportion of UK exports going to the rest of the EU looks set to continue to decline to just a third

by the end of the decade. The trade arguments for continuing EU membership are getting weaker by

the year.


Admittedly, there would be downsides in leaving the EU, even though they would be manageable

ones. So let’s do all we can to negotiate an acceptable basis for continuing EU membership.

But if we can’t, I believe our “Staying in Europe for Trade” approach is by far the best alternative,

especially as it would enable the UK, with all its unique set of global connections, to continue to

to strive in its own name for freer and fairer trade, both within Europe and throughout the rest of the



Thank you.