We should relish the opportunities of life outside the EU’s Single Market and Customs Union
By Gerard Lyons
5 February, 2018
The Lancaster House Speech of January 2017 was probably the high point of Mrs May’s premiership. It sent a clear, strong message. The Conservative election manifesto was even clearer: we would be outside both the Single Market and Customs Union. For this they received 13.64 million votes, their highest poll since 1992.
Admittedly, the Conservatives did not secure a majority, but not because of Brexit, as Labour’s manifesto was EU-sceptic too. As time has progressed, the Government’s position on Brexit has appeared fickle. While we are leaving the EU, it is still not clear how. The challenge is that under the Article 50 process, the EU calls the shots. In such a situation it is important we are clear about what we want and about our strategy. This should be to be outside the Single Market and Customs Union, while seeking a comprehensive trade agreement with the EU.
While we do not want a ‘No deal’ [Oh, but we do!], sensible risk management suggests we should have contingency plans for this, outlining areas where work is needed. From the EU’s perspective, they could adopt a sensible approach to future negotiations – given the economics – and reach a deal that works for both them and us. Or, for whatever reason, they could offer us a bad deal, although that makes no economic sense. While we – just as in any negotiation – can try to influence the other side and reach a favourable outcome, what should be our approach?
It would seem that there are three plausible outcomes: a deal we are prepared to accept; a bad deal, but one that we still end up accepting; or no deal. No deal is, in my view, not the same as walking away. No deal is where we cannot reach an agreement on trade and realise this but accept that, for safety and other reasons, we need to have a future working relationship on areas such as landing rights and co-operation on terrorism and defence.
Part of the challenge in the UK is that ever since we became members of the European Economic Community in 1973, we have tended to see our relationship with the EU largely through an economic and financial lens. We have usually opted to ignore the political underpinning of the project and that other countries have seen it through a political lens. In recent months, President Macron has highlighted a reality we need to face up to: either the EU fragments into different layers with a core and periphery, or it marches on towards greater political union. The latter, of course, is what is widely seen as necessary to cement the euro area and to stop it from splintering.
Why, then, you might ask, has not more of the debate here in the UK focused on the problems ahead for the EU? Its current cyclical recovery, which I expected, is largely driven by the European Central Bank’s cheap money policy – one that is not welcomed in Germany and that does not disguise the euro’s deep-rooted flaws. The reality is that Remainers want us to be closely aligned to an EU whose future direction of travel would point to us either being in a periphery where we would have little say, or being aligned to a tight-knit political union. Why would we want either?
The main argument for leaving the EU is to restore sovereignty. This was highlighted by Labour politicians such as Hugh Gaitskell in 1962 and Peter Shore and Tony Benn ahead of the 1975 referendum, and by many cross-party politicians in recent years. But it was not the only reason people voted to leave in 2016. Controlling immigration, distancing ourselves from the problems of the euro area and positioning ourselves better in the global economy were others. These helped underpin the Lancaster House Speech and our official rhetoric towards Brexit since.
There is no doubt in my mind that there are many things we should have done when we were in the EU but did not do. But now we are coming out we have to address these – such as industrial or regional policy and boosting investment. Yet, at the same time, there is no doubt that leaving the EU will give us more room for manoeuvre in addressing these and other issues. Anyone who doubts this should read the series of detailed competency reports produced by the pro-EU Coalition Government of Cameron and Clegg.
There are many aspects of the Government’s approach since the Referendum that I wish had been different. But we are where we are, so the question is where to from here? We still need to project a positive global vision – something we have failed to do sufficiently – even though many firms and people since the Referendum still see the UK as an attractive place in which to invest. And we need to follow this up with actions to boost investment, innovation and infrastructure spending as well as creating the right incentives, including lighter but sensible regulations and lower taxes.
We should still leave the Single Market. Being outside allows us to regain sovereignty. MPs should treat this with enthusiasm; they would genuinely become law-makers. Business people in small firms would be truly able to lobby their MPs to influence policy, currently the preserve of large firms with deep pockets in Brussels. In fact only 8 per cent of firms sell directly into the Single Market, representing one-eighth of the economy as they include big companies. Yet, all firms have to abide by EU regulations, no matter how costly.
Being outside the Single Market could, according to some, also boost our tax revenues as firms currently exploiting the EU’s right of establishment to base themselves in low-tax regimes like Ireland would be forced to establish here. It is hard to quantify this effect.
Finally, of course, the only way to run a sensible immigration policy is outside the Single Market. As Cambridge’s Professor Robert Rowthorn has pointed out, large-scale immigration has added to pressure on public services and housing, while also suppressing wages. It has also discouraged firms from investing enough in their staff and occupational training too.
Outside the Single Market makes sense, but so too does leaving the Customs Union. Yet it appears this is where a ‘compromise’ may be sought. It is not clear how remaining in any sort of customs union with the EU would impact our future freedom in regulation. It would certainly not help it, but would depend upon what is agreed. We need to retain our regulatory freedom as much as we can for future free trade deals, especially in the services sector that dominates our economy.
The Lancaster House Speech was vague on the Customs Union, in contrast to the clarity of the Conservative manifesto.
Currently, our demands in EU-negotiated trade deals are as one of 28, with services not always high on the agenda. Moreover, several countries smaller than the UK, with far less commercial and diplomatic influence, have signed a range of Free Trade Agreements dwarfing those struck by the EU in terms of their size and scope.
The trouble is, not enough UK firms export. This is a challenge and an opportunity. Given the importance of services, we need to be at the forefront of pushing non-tariff barriers lower across the globe. The benefits of being outside the Customs Union are both the ability to conduct trade deals across the globe and to cut tariffs if we so choose. The latter has not received as much attention as it should in the recent debate.
It is important the bespoke free trade deal we seek with the EU does not tie our hands and limit our future room for manoeuvre on domestic and global policy. Future success depends not only on having a good relationship with the EU but on positioning ourselves with the rest of the growing world economy and on our domestic economic policy.
Dr Gerard Lyons is an economist and Chief Economic Strategist at Netwealth Investments, having previously served as Chief Economic Adviser to Boris Johnson while he was Mayor of London. He was Co-Founder of Economists for Brexit and is co-author of Clean Brexit (Biteback Publishing).