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

"Staying in Europe for Trade": CapX, 13 November 2014

This article was first published 13 November 2014 on CapX—a new global pro-market news service, making the case for popular capitalism

Ronald Stewart-Brown argues that if we are thinking of withdrawal we should not let the unattainable best be the enemy of the attainable good. Therefore we should be prepared to negotiate to stay in Europe for trade through a new inter-governmental customs union agreement with the EU.

Blind faith in the EU is not a strategy, the Prime Minister told assembled business leaders at the CBI annual conference last Monday. Implicitly Sir Mike Rake, the president of the CBI, was saying the same thing when he insisted that it was vital that the UK remained part of a reformed EU. What does he propose if Britain proves unable to steer the EU’s byzantine decision making process towards agreeing and then ratifying the reforms he wants to see? He must answer that question.

Britain must use every negotiating ploy at its disposal, that’s for sure. Sir Mike’s long business experience will tell him no businessmen ever gets the deal he wants without holding an alternative in reserve. He will also know that unilateral withdrawal from the EU is a non-starter. WTO rules would require the EU to charge the same 10 per cent tariffs on car exports from the UK to the EU as it does on those from Japan and the USA. The same principle would apply to all other goods on which the EU imposes tariffs.

Fear, uncertainty and doubt are frequently cited as the prime reasons why the UK’s political and business establishment is unwilling to consider the UK leaving the EU. But actually this is perfectly understandable given the profound ignorance of most people in the UK, even at the highest levels, of the world of trade policy.

In the old days before the UK joined the EU, trade policy was recognised as the most important dimension of foreign policy apart from defence. Three Liberal cabinet ministers and eight junior ones resigned from Ramsay MacDonald’s national coalition government on principle in 1932 over the Imperial Preference system created by the Ottawa Agreements, which they rightly saw as a protectionist ganging up of the British Empire against the rest of the world.

Which of the Conservative cabinet members who reportedly want the UK to leave the EU would have the courage to do that now? Their problem, and the Prime Minister’s as well, is that they have no alternative policy at their disposal. Nor are they easily going to have one developed for them in Whitehall. As a result of our EU membership it is the Directorate-General for Trade in Brussels which controls the commanding heights of European trade policy decision making. And, to be fair, it is not doing a bad job of it.

The TTIP (Transatlantic Trade and Investment Partnership) negotiations may now have little chance of successful conclusion, let alone being ratified by the US Congress or the European Parliament. But no one should blame the EU for the current stalling of the Doha round. Over the longer term it has played a central part in the reduction of developed country industrial tariffs from the 20-30 per cent range that prevailed after the 1939-45 War to less than 4 per cent today. And at least its customs union voting structure safeguards Europe and indeed the rest of the world from the demands for trade protection we must expect to see increasingly from populist movements like Marine Le Pen’s Front National in France.

The sad fact is that Whitehall is poorly equipped to negotiate with Brussels on the terms of our withdrawal from the EU. Its expertise in trade policy is essentially passive and divided between no fewer than four government departments: the Foreign Office, the Treasury, BIS and DFID. It is doubtful whether any of them really have the mind-set or knowledge, let alone the capability, needed to negotiate seriously with the EU. So let’s keep it simple if we can!

You might think some of the great pillars of the UK’s Eurosceptic establishment would have thought this through. But Open Europe have got no further than analysing four existing alternative models for trading with the EU, which they term the “Norwegian option”, the “Swiss option”, the “Turkish option” and “WTO clean break” option. Dismissing each of these for sensible reasons, they conclude the UK has no alternative but to stay in the EU and fight for reform.

Lord Dartmouth, the UKIP’s trade spokesmen, told his party conference in September that UKIP proposes that the UK negotiate its own tailor-made trade agreement with the EU, one that suits (sic!) our economy. What that should be in his view he did not divulge.

Many would make the case for negotiating a free trade agreement with the EU. But with the EU’s average industrial tariff now down to 2.3 per cent it wouldn’t matter greatly whether we were in a customs union or free-trade area relationship with the EU.

Realistically, that’s an entirely secondary question to that of how we should go about managing the extremely challenging and complex political and diplomatic process of leaving the EU if that’s what we ultimately decide to do. Answering that question is the prime reason why the Trade Policy Research Centre argues that we should negotiate to “Stay in Europe for Trade” through a new inter-governmental customs union agreement with the EU with full UK voting participation in customs union policy decisions and internal market harmonised trade regulation.

There would of course be a good economic argument for breaking free entirely of the European customs union if that were the sole consideration. Being in customs union with the EU surely does lead to higher prices for the UK consumer in protected sectors such as cars and food. But that would be a case of letting the unattainable best become the enemy of the attainable good. Let me make my case.

First, it’s simply not true to say, as many think, that EU trade policy is holding the UK back. Over the last five years goods exports from the UK to the rest of the world have increased by 35 per cent* whilst service exports from the UK to the rest of the world have increased by 30 per cent. By contrast UK goods exports to the rest of the EU only increased by 9 per cent* whilst UK service exports to the rest of the EU increased by only 5 per cent*. It’s not EU trade policy that has held them back. It’s the uncompetitive and anti-entrepreneurial nature of the EU’s internal market policy in areas such as employment and energy.

On present trends, the proportion of total UK exports of goods and services that go to the rest of the EU will be down to just 37.5 per cent* by 2017, the hoped for referendum year. (That’s after allowing for an estimated 10 per cent of UK goods exports registered as going to the EU because their initial destination is Rotterdam or Antwerp whose ultimate destinations are outside the EU.) The trade case for continuing UK membership of the EU is withering away by the year.

Second, staying in customs union with the EU would enable a seamless transition from our present basis of trade with it. Free movement of goods, which we and our EU trading partners get within the customs union, is fundamental. Under an EU-UK free trade agreement, by contrast, all UK goods exports to the EU would be subject to EU tariffs unless they were certified as complying with the applicable EU rules of origin. These are always tedious and many of them are a nightmare, particularly in food, chemicals, textiles and clothing.

Third, it would give the UK the priceless moral high ground of offering EU exporters continuing unimpaired access to UK goods and services markets. How could our European friends reasonably object when they know we don’t want political union. For President Hollande to do so would be ridiculously “chien dans une crèche”, or “dog in a manger” for any non-Francophiles amongst us!

Fourth, it would keep the UK in customs union with the EU as a liberal ally for Germany on the Council of Ministers. Without us the voting strength of the so called “Northern liberal bloc” of countries would fall well below the new 35 per cent blocking minority threshold. By contrast, 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, giving them a dominant position on the Council of Ministers. In these uncertain and potentially dangerous times there must be a serious risk of Europe going protectionist. Who knows how the Eurozone crisis is going to develop? We need to keep the European customs union together to prevent a return to the 1930s.

Fifth, by retaining the Common External Tariff and free movement of goods it would address the prime business concerns of the higher tariff sectors such as cars, food and chemicals. These sectors account for nearly 40 per cent of UK-EU merchandise trade, and they are mainly foreign owned. Arguably, they are just too powerful to take on at the same time as the many European politicians who would be desperate for us not to leave, not to mention home-grown organisations like the CBI and TheCityUK.

Sixth, it would permit the relatively easy adaption of existing EU free trade agreements with countries like 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 all these countries simultaneously and then get them ratified, which could take several years. And linking them with a new UK free trade agreement with the EU would certainly be very complex.

Seventh, it would enable the UK to negotiate its own new agreements with other countries in areas such as trade in services and investment which are currently EU competences.

Eighth, it would permit the UK to pursue trade disputes with other countries either in its own right or in alliance with the EU or the USA or any other country.

Ninth and lastly, it would allow the UK to assure the court of world opinion, led by the USA, China, Japan, India and the WTO itself that the UK leaving the EU in this manner would not in any way disrupt world trade. Rather, it would enable the UK to continue to work with the EU for liberalisation of trade, both internationally and within Europe.

* Certain figures in this article have been changed from those contained in the original version published by CapX on 13th November 2014 reflecting unexpected significant differences between trade statistics taken from the HM Revenue & Customs UK Trade Information website, on which the original version was based, and trade statistics taken from The Pink Book 2014 on the UK Balance of Payments, published on 31st October 2014.

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

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