The EU single market: How it works and the benefits it offers

Brexit vote has thrown up big questions about future trading

Britain’s vote to leave the EU has thrown the country’s trading relationship with Europe into doubt. That in turn opens up big questions about the future of the UK economy, which sends almost half of its exports to the bloc.

Here the Financial Times considers how the market works and what leaving it might mean.

The status quo: rights and regulations

Access to the single market requires acceptance of all four EU freedoms — of movement of goods, capital, services, and people.

The single market is predicated on the belief that these four freedoms drive prosperity.

The EU is a customs union. Its members impose common tariffs on imports from non-EU countries and can trade freely with each other.

Members automatically benefit from trade deals that the EU strikes with other countries but cannot set their own tariffs.

To create a fair internal market, the EU is committed to a common regulatory framework to prevent one company — or country — from gaining competitive advantage by getting rid of regulations.

Countries must promise to implement common rules and to recognise each other’s standards.

This means that companies everywhere in the bloc can then sell their products and services throughout the EU.

These policies are designed to both reduce trade costs and open up markets.

Quantifying the impact of the single market

A Treasury paper found that trade in goods was 73 per cent higher between EU member states than would have been the case in a free trade area (where no tariffs but other barriers remain), while trade in services was 16 per cent higher.

An analysis by the OECD of membership of the European Economic Area, found trade in goods was 60 per cent higher than if trading partners simply relied on World Trade Organisation rules.

Trading with the EU post Brexit

In theory, the UK should be able to relatively easily negotiate a free-trade deal with the EU for goods, because it already complies with current regulations and there are no tariffs in force at present.

But Neil Williams, chief UK economist at Hermes, said that any deal would probably still take several years to agree “just to end up close to square one”.

For the service sector, which accounts for about 80 per cent of the UK economy, the negotiations will be much harder. Most existing trade deals exclude services and the deals with the EU that do include services also require free movement of people and common regulations.

Even assuming some sort of free-trade deal is done, other non-tariff barriers could be expected to add costs for business.

Complying with rules of origin

These are an important component to preferential trade deals. They are designed to prevent products from countries not covered by the deal from entering the trading bloc.

If only some of the UK’s exports are covered by the free-trade deal, companies will have to check individual goods to see whether they are compliant. This is “particularly cumbersome for small and medium enterprises”, Rebecca Driver, director of Analytically Driven, said.

Multiple regulatory regimes

Over time, EU rules will diverge from UK rules. UK companies wishing to export to the EU will need to comply with both sets of rules.

Border inspections

On a practical level, without full membership of the single market and mutual recognition of standards, companies will face border inspections.

In the era of just-in-time delivery and integrated supply chains where even a day’s hold-up can cause problems, this is likely to be of more importance than it was historically.

All these factors collectively add up to an increase in barriers to trade with Europe that the victorious Leave campaign hopes would be offset by other benefits of leaving.

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