The Single Market Is No Big Deal

AS the dust clears on PM Theresa May’s new cabinet, we are finally starting to see what the UK’s Brexit strategy will look like.

Yesterday David Davis was appointed Minister for Brexit (or Secretary of State for Exiting the European Union, as he will be called by no one, ever). Three days ago Davis wrote an article at Conservative Home setting out his favoured strategy. I would assume May read this before offering him the job. While the official strategy will need to be approved by the Cabinet, there is good chance it will look a good deal like this.

This is good for Leave voters. Here are some extracts. On freedom of movement:

Once the European nations realise that we are not going to budge on control of our borders, they will want to talk, in their own interest.

On access to the single market:

The ideal outcome, (and in my view the most likely, after a lot of wrangling) is continued tariff-free access.  … We should work out what we do in the improbable event of the EU taking a dog in the manger attitude to Single Market tariff free access, and insist on WTO rules and levies, including 10 per cent levies on car exports. … In that eventuality, people seem to forget that the British government will be in receipt of over £2 billion of levies on EU cars alone. There is nothing to stop us supporting our indigenous car industry to make it more competitive if we so chose.

On new trade deals:

Be under no doubt: we can do deals with our trading partners, and we can do them quickly.  … the new trade agreements will come into force at the point of exit from the EU, but they will be fully negotiated and therefore understood in detail well before then.  That means that foreign direct investment by companies keen to take advantage of these deals will grow in the next two years.

On regulation and employment rights:

At the moment all businesses in the UK must comply with EU regulation, even if they export nothing to the EU.  … To be clear, I am not talking here about employment regulation.  … The great British industrial working classes voted overwhelmingly for Brexit.  I am not at all attracted by the idea of rewarding them by cutting their rights.

This approach is pretty close to the one I advocated here. The essential point is that we must have the courage to say that freedom of movement and compliance with EU regulations are not on the table. They end when we leave. We are not going to be Norway. When that is accepted, we are approaching the EU as a external, friendly nation with which they do a heck of a lot of trade. Do they want a trade deal or not? Davis recognises the strength of our position: we could afford to walk away and trade under WTO rules.

The are a couple of common misunderstandings I would like to address. First, ending “freedom of movement” is not about ending movement, but about ending the system under which entering the UK to work is a legal right of every EU citizen, and therefore any attempt to deny it can be challenged, with the European Court having the final say. This is what has required us to allow suspected terrorists to enter, and prevented us deporting convicted criminals. As an independent state again, the decision of our Home Secretary and courts will be final.

We may in practice choose to allow many EU citizens to work here, but it will be at our discretion. The Australian points-based system that many Brexiteers have talked about is aimed at permanent immigrants. For EU citizens wishing to work here short term we will need a system of work permits with quotas, similar or identical to the one we now operate for non-EU workers. We will expect to be subject to something similar in the other direction. But there is no reason we can’t agree (either with the EU as a whole or in bilateral agreements with individual countries) that some categories of worker have an unlimited quota. In that case the issue of a work permit should be quick and easy.

The widespread concern about migration that came to the fore during the referendum campaign concerned the effect of mass unskilled migration on wages, housing and public services. Therefore we need quotas for unskilled workers. There is no reason why the comparatively small number of brain surgeons, bankers and software engineers who are used to plying their trade across european borders should be greatly inconvenienced.

Second, some people doubt the strength of our negotiating position on tariffs. To explain this I will look at the situation with car imports and exports in more detail. The UK (2014 figures) exports $46bn of cars every year, and imports $47bn. To see the trade balance with individual countries and regions, see this vey useful website:
http://atlas.media.mit.edu/en/visualize/tree_map/hs92/export/gbr/show/8703/2014/
http://atlas.media.mit.edu/en/visualize/tree_map/hs92/import/gbr/show/8703/2014/

You will see we export $22.3bn to Europe (including EFTA countries), but import $42.3bn. What would happen if these trades in both directions were subject to a 10% tariff? (The current EU external tariff on cars). That means we receive $4.2bn and have to pay only $2.2bn, a neat profit of $2bn, or £1.5bn at current exchange rates.

Of course it is not that simple. Because of the extra cost we expect the quantity of sales in both directions to drop. But the pound has recently dropped about 10%, so in fact our cars would be about the same price as before in the european show room. Nevertheless, lets assume that sales both ways drop 20% (it doesn’t matter what figure you use). Then our car manufacturers have lost $4.4bn of sales. Europe has lost $8.4bn, but even so, won’t British workers lose their jobs?

Hold on a minute! Our consumers are also short of $8.4bn worth of cars they used to buy from Europe. Where will they get them from? We may import them from elsewhere in the world. But if we replace French and German cars with Japanese, the nearest place Japanese cars are manufactured is … Derby (Toyota), Swindon (Honda) and Sunderland (Nissan). So the most likely outcome is that UK car production actually increases to meet the domestic demand.

That looks like a win-win. We gain from the tariffs and increase our car production, employment and profits, also increasing inward investment from companies manufacturing in the UK. You may think this is too good to be true. If tariffs are so great why does anyone want to eliminate them in the first place? But of course not everyone does. The reason governments are always tempted towards protectionism is precisely because, where you have a trade deficit, you gain in the short term by imposing a tariff in exactly the way I have shown. Where you have a trade surplus the opposite is true.

Don’t however fall into the fallacy that only exports are beneficial and imports are somehow bad. Actually UK consumers benefit from buying German and French cars and reducing that trade is not in our long term interests. But in the short term, if the EU wants a trade war, they really have nothing to threaten us with. It is not just that it will hurt them more than it will hurt us. It will hurt them and positively help our economy. Brer fox, please don’t throw me into that briar patch!

We don’t need to be a member of the Single Market. Indeed we don’t want to be, since that includes freedom of movement and compliance with EU laws and regulations. What we want is a trade deal, with tariff-free access or as close to it as possible. But if the EU wants to impose some tariffs for political reasons, that is fine too. We will match them, and within a few years common sense will prevail and bring them back down as close to zero as makes no difference.

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