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A term often bandied about during the referendum debate and afterwards, is the EU Single Market. What is this, why is it important and why will it be detrimental for the UK if we leave it? To answer these questions, let's look at trading between countries and the ways in which the UK traded before it joined what is now the EU and what options it has if we go ahead with the decision to leave the EU.

Summary

  • Leaving the EU will leave the UK extremely vulnerable in world trade circles.
  • We would be required to impose tariffs on imports and likewise our exports would face tariffs. Both would become more expensive and we would have little choice but to pay the higher prices for imports whereas our exports would become less price-competitive and we would most likely sell less abroad as a result.
  • International trade rules mean we can't just cut tariffs for the EU on product sectors: we would have to cut tariffs for the rest of the world as well.
  • Tariffs are effectively just taxes and are fairly easy to negotiate away between countries. Modern trade deals are more about harmonising technical standards than tariffs.
  • Tariffs are only part of the story because membership of the EU single market is about harmonising standards and working practices; these so-called "non-tariff barriers" would also hurt our export prices and make imports more expensive if UK standards diverged from EU single market standards. This is because manufacturers would be required to develop custom versions of their products for the comparitively small UK market and the costs of this development work would be passed on to UK consumers, or manufacturers might chose not to sel their products in the UK at all because the cos of engineering a UK version of their prodct is deemed not to be worth it.
  • But if we want access to the single market then we need to accept the rules; rules which encompass much of the EU laws that the Leave side claimed we wouldn't have to comply with. It would also mean paying into the EU budget and accepting the rulings of the European Court of Justice, which Theresa May has ruled out. It's worth noting that practically any trade deal with the EU would be regulated by the European Court of Justice.

Trading between countries in the modern era: GATT and the WTO

When talking about trade deals between countries it is tempting to think in terms of ship of raw materials coming in one way and finished manufactured products leaving in the other direction. It's also worth remembering that the history of the UK as "a great trading nation" is largely from the time we had an Empire and we could use the people of that Empire as cheap labour. Obviously this is no longer the case and it would be politically unacceptable these days anyway. In any case, the UK's past trading practices are irrelevant because of the formation of the World Trade Organisation (WTO) in 1995. The WTO was formed by consensus between a number of national governments including the UK (as part of the EU, which actually conducted the negotiations on behalf of its member states; this arrangement being better for the UK because the EU has far more negotiating power as a collective than each of its member states considered in isolation). Ever since the conclusion of the Second World War the aim had been to establish an "International Trade Organisation" (ITO) along the lines of other global bodies dedicated to international economic cooperation such as the International Monetary Organisation. For various reasons, the ITO never actually came into being. For many years international trade was regulated, in the absence of any better solution, by the 1947 General Agreement on Tariffs and Trade (GATT) which was only ever a provisional agreement and which by the early 1980s was struggling to keep up to date with developments in global trading relationships, particularly the start of "globalisation". Prolonged international negotiations resulted in the formation of the WTO on 1st January 1995 which set a formal framework to global trade for the first time. A basic rule of thumb now is that, in the absence of any dedicated trade deal between countries, trade these days must be conducted along WTO rules. Because the EU single market counts as a dedicated trade deal from a WTO standpoint, if we leave the single market we would be subject to tariffs and quotas on our imported and exported goods to and from the remainder of the EU.

Trading outside the EU single market part one: Tariffs, quotas and customs formalities

The UK Government has stated that it intends to remove the UK from the EU single market. This means that, unless we can negotiate a new trade deal with the EU, we would "fall back" to WTO rules. It's important as well to realise that both the UK and EU would have no choice in this matter: the WTO's default tariff regime is known as "Most Favoured Nation" (MFN) which is a slightly misleading title because it actually requires the reverse of that, in that any countries trading on MFN rules is legally required to treat all other countires that it doesn't have trade deals with, in exactly the same way. So unless the UK and EU could negotiate a new trade deal they both have to adopt MFN tariffs. A new trade deal would not be a simple matter because in order to be recognised as valid by the WTO, a trade deal must take in "substantially all" trade between the countires in question. Not only does this mean both the UK and the EU would be required to impose tariffs on imports and exports between the two bodies but that the thorny issue of tariff quotas also comes into play. For example, the first 100,000 tonnes of chicken imported might attract a low tariff but anything above that attracts a higher tariff. The complications come because that 100,000 tonnes of chicken is currently for the EU as a whole, including the UK - if we leave then we would need to calculate the UK's approximate share of this and devise our tariff quotas accoredingly. Repeat this for all market sectors and products imported for an idea of the scale of the problem.

 

Trading outside the EU single market part two: Non-tariff barriers

 

Trading outside the EU single market part three: potential alternatives to the single market for the UK

 

Trading outside the EU single market part four: trading services

 

 

 

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