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 British economy, with almost half of all exports going to the bloc.
With so much at stake, the UK’s prospective prime ministers have set out the goal of maximising access to the EU’s single market, while also underlining their intention to see Brexit through.
“It must be a priority to allow British companies to trade with the single market in goods and services — but also to regain more control of the numbers of people who come here from Europe,” said Theresa May, an early favourite for the premiership, as she set out her candidacy for leadership of the Conservative party.
But how does the single market work and what evidence is there of its benefits? The Financial Times looks at this key economic issue, likely to be at the centre of debate as Britain’s place in the region, and the world, is thrashed out in coming months.
The status quo: rights and regulations
In their response to the British vote to leave, the leaders of the EU’s other 27 member states made clear the scale of the dilemma facing the UK if it seeks to deliver both retained access to the single market and the Leave campaign’s promises on immigration.
“Access to the single market requires acceptance of all four freedoms,” they said in a joint statement on Wednesday with the presidents of the European Commission and the European Parliament.
That was a reference to the free movement of goods, people, services and capital. At its core the single market is predicated on the belief that these four freedoms will drive prosperity.
The EU is a customs union. Its members impose a common tariff on imports from non-member countries and can trade freely with each other.
All members automatically benefit from any trade deals that the EU strikes with other countries but cannot set their own tariff levels.
To create a fair internal market, the EU is committed to a common regulatory framework to prevent one company — or country — from gaining a competitive advantage by working to looser regulations.
This has two elements. First, countries pledge to agree and implement common, harmonised rules. Second, on this understanding, they pledge to mutually recognise each other’s standards.
Companies that comply with domestic regulations can then sell their products and services throughout the EU.
Fundamentally, these interlocking policies are designed to both reduce trade costs and open up more 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, while trade in services was 16 per cent greater. This is because while there are no tariffs in a free-trade agreement other barriers remain.
A similar type of analysis by the OECD looking at membership of the European Economic Area, which includes full single market access, said trade in goods was 60 per cent higher than if trading partners simply relied on World Trade Organisation rules.
Gaining access to the trading zone
In theory, the UK should be able to relatively easily negotiate a free trade deal with the EU for goods, as it already complies with current regulations and there are no tariffs in force at present.
But exactly how quickly that can be done would depend on the political appetite in the rest of Europe.
Neil Williams, chief UK economist at Hermes, says that even a “soft exit” deal “would probably need several years just to end up close to ‘square one’”.
For the service sector, which accounts for about 80 per cent of the UK’s economy, the negotiations will be much harder. Most existing trade deals explicitly 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 in preferential trade deals. They are designed to prevent products from countries not covered by the deal from entering the trading bloc by the back door.
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, says.
Multiple regulatory regimes
Over time the EU is likely to change its regulations. If Britain withdraws from the drive for common regulations, Britain’s regulations will diverge from those of the EU. If that happens, UK companies wishing to export to the EU will need to comply with both UK domestic legislation and EU rules — for example, around issues such as product safety.
On a practical level, without full membership of the single market and mutual recognition of standards, companies might 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.