John Redwood, Conservative MP for Wokingham recently made an appearance on BBCs Newsnight proclaiming that the USA and China already have access to the European single market. Factually this is correct. But it is also misleading. Like a barman saying “Tonight you can have all the beer you want”. He just leaves out the part you have to pay for it. China and the US do have access to the European single market but pay tariffs and have trade barriers. Futhermore he proclaimed that there is no issue leaving the EU at the drop of a hat to set up a new trade deal. What do the facts and statistics say?
The American electric car company Tesla Motors is doing well in Norway. Really well. Not only is this due to more environmentally orientated mindset of Norwegians but also due to the fact there is 0% import duty on cars into Norway. It is allowed to do this because it is not in the European Union nor the European Customs Union. However it is in European Free Trade Association as per Figure 1. This means that it can not only trade tariff free with other European countries but gets to set import tariffs with countries outside the EU. Currently the UK abides by the import tariffs set by the European Customs Union. Therefore American cars like Tesla Motors are subject to a 10% duty when imported into all countries in the European Customs Union. So to say that America has access to the single market is a "silly" answer. America and China pay tariffs like any other country outside of the European Free Market. This is exactly why the European Union is in the process of negotiating trade agreements with the USA (Transatlantic Trade and Investment Partnership or TTIP) or perhaps more pertinently with Canada (Comprehensive Economic and Trade Agreement or CETA) to reduce or even get rid of tariffs on the movement of goods and services across the Atlantic. By this logic there is a potential for the UK to survive outside the European free trade area. Lets look at the options.
Figure 1: The EU and its current and major future potential (dotted) trade agreements
The Norway/Iceland/Liechtenstein Option – European Economic Area
If Theresa May pursues her line of thinking that immigration is to be controlled, then this is not an option. Membership of the European Economic Area means that Norway and Iceland and Liechtenstein hold a bilateral trade agreement between themselves and the European Union in one fell swoop whilst allowing the so called four freedoms of movement – people, capital, goods and services. Actually Liechtenstein is allowed to restrict the movement of people to 71 immigrants per annum, but this is understandable given it is basically a small town of 40,000 people. For these non EU countries in the EEA, being outside the EU means they have control over some important items – agriculture, fishing and import/export tariffs with countries outside the EU.
So why have the Conservatives stopped talking about the £350 million?
John Redwoods remarks on Newsnight that this is a silly question is an evasion of the fact it was mainly a load of nonsense. Being part of the European Economic Area still comes at a cost as Norway will pay approximately €1 billion euro per annum between 2015 and 2021 for the privilege, with little funding in return. As per Figure 2, this is certainly a low number compared to the UKs input in 2013 of €16.8 billion, but payments are relative to population size. Indeed, Norwegians pay approximately €200 per head vs €260 per Briton. Norwegians get very little in return from the EU except a pile of laws in which they have no input. At least the UK gets 40% of its contribution returned as per Figure 3. Furthermore, the £20 billion which the UK currently contributes to the EU makes up less than 2% of the UKs £779 bn annual budget as shown in Figure 4.
Figure 2: Money contributed and received by EU countries in 2013 (Source: EU Budget Office
Figure 3: Percentage Return on EU Monetary Contribution (Source: EU Budget Office
Figure 4: UK Budget 2016-17 totalling ~£779bn of which net EU payments are less than 2% of the total budget (Source: Office for Budget Responsibility)
But as Nigel Farage would go on to say, Norway has been able to go ahead and organise free trade agreements with many countries outside the shackles of the European Custom Union, which controls trade agreements of its members. Indeed, Norway and its EFTA counterparts do have some notable agreements – as per Figure 5 - in place with countries like China, Canada and one of Britain’s favourite arms buyers – Saudi Arabia. Comparing this to the more pitiful version of the European Customs Union in Figure 6. This shows that there are opportunities outside of the European Union as Switzerland have also shown.
Figure 5: Free trade agreements of EFTA countries. Norway has separate agreements with others, notably China. (Source: EFTA Website)
Figure 6: Current and future Trade Agreements of the European Customs Union. (Source: EC Trade)
The Swiss Cheese Option
In 1992, Switzerland voted 50.2% in favour of staying out of the European Economic Area, unlike the aforementioned Norway and Iceland. As a result of this Switzerland, has had to go and negotiate a total of 120 bilateral (or two way) contracts with each of the countries within the European Economic Area in order to allow the free movement of goods, services, people and capital. This free movement it at risk – in February 2014 the UK were beaten in the racist race by Switzerland, when they voted 50.3% in favour of imposing immigration controls. In theory Switzerland could do this bilaterally – say allowing immigration from France and keeping that agreement but stopping immigration from Romania and re-negotiation of that free trade agreement. However it appears what is stopping Switzerland from doing this is its presence in the Schengen area, which of course the UK is not part of.
Therefore, in theory the UK could pursue a Swiss like approach and negotiate deals with each of the European countries individually. It would also give leeway to negotiate more freely with the likes of China, and even Russia, as Switzerland are doing as per Figure 7. Despite all this, Switzerland still pays money to the EU – a total of ~£400,000 per annum or equating to €60 per Swiss, quite a bit cheaper than the €260 per Brit. However, it took the Swiss over a decade to negotiate all of these contracts and by that stage the damage to the UK economy would well and truly have been done.
Like Swiss cheese, this option has a lot of holes. If the UK went down this route, they would be stuck in a very deep and dark hole for some time working on contracts.
What of Turkey and the European Customs Union
Of course there are still is one country outside the free movement area which is part of the European Customs Union - Turkey. However when Turkey joined in 1995, it was been given some harsh contractual conditions. The EU has the potential to cancel any contract which Turkey negotiates with an external country. The Turks must obey all the laws and decisions of the European Court of Justice whilst having no say in the making of said laws. It seems like a much worse deal than being in the EFTA. Furthermore, the European Customs Union governs goods and not services. There is not guarantee that there would be a free movement of services, and as Figure 8 shows, services make up an increasing proportion of UK exports to the EU. This option is really only viable if the UK is will to bow down at the knees of the EU in exchange for having immigration control.
Figure 8: UK Value of Goods and Services to the EU from 2000 to 2015 (Source: ONS)
Maybe the UK can be like Canada or America?
On the European Commission website itself it states, “The EU wants to free up global trade in goods and services both through the WTO negotiations and through bilateral and regional trade agreements”. The EU is on the cusp of doing a lot of global trade deals lately as per Figure 6. The main ones in the headlines are TTIP (Transatlantic Trade and Investment Partnership) with the USA and CETA (Comprehensive Economic and Trade Agreement) with Canada.
This is supposed to be the holy grail of sorts for the Conservatives who want an easy “off the shelf” solution – even though it took ten years to negotiate in the first place. The deal has been done and is merely awaiting final ratification by the 28 member states (which may prove more arduous than it sounds). EU exports to Canada amount to 2% of its total while the UK amounts to ~6% of total EU exports so they sit relatively in the same ballpark percentage wise. CETA will reduce tariffs by ~95% between the EU and Canada. Canada will NOT have to pay money into the EU as part of this agreement pleading all those Brexiteers who want their £350 million to the NHS. Furthermore immigration will be limited to only the movement of specialists keeping the elite content. What joy.
However this is certainly not an off the shelf solution. There are big restrictions on the importation of agricultural products like meat and dairy due to differing EU laws on antibiotics, growth hormones etc which Canada does not currently abide by. Around 70% of British agricultural exports go to the EU as per Figure 8. However as Figure 9 also shows, the UK imports approximately double what it exports. Whilst Brexiteers would toe the line that “they wouldn’t want to put tariffs on us when we import so much”, at the same time the British would be very upset if they didn’t have a constant supply of fruit and veg year round. No more Spanish grapes, oranges ad courgettes. No more French wine and cheese. No more Dutch tomatoes (maybe that’s a good thing). The reality if that UK needs their products as much as they need our money.
Figure 9: Value of EU agricultural imports and exports (Source: ONS)
In a report by LEI Wageningen UR (1), the cost of British exports would go up by 5% even under new Free Trade Agreements and by up to 10% under World Trade Agreements WTO)
Furthermore, the banks would not be happy. CETA still places restrictions on the movement of services. Banks would still need to set up operations elsewhere in the EU to allow passporting, with some banks stating that up to 33% of employees would be moved overseas to accommodate this.
If the UK were to take CETA as an off the shelf solution, they may find the shoe doesn’t quite fit. The UK will need to go tailor-made, resulting in years and years of contractual negotiations.
The US is the EUs (and also the UKs) largest trading partner as per Figure10 so it would seem to make sense to set up a Free Trade Agreement.
Figure 10: EU top trading partners, 2002-2014 (Source: Eurostat)
To anyone who has watched the recent American presidency debates “The Donald” spoke at length about the “disastrous” NAFTA, or the North American Free Trade Agreement, pilfering jobs away from the common American to the hands of the common Mexican. This is why Europeans are so anti TTIP. American labour laws are pitiful in comparison to EU laws. Cheaper labour and cheaper land could do the same for the EU as NAFTA did for the US. As a result, the EU may be forced to erode some of its labour protection laws to compete. There has been much written about its potential hazards but at this stage it seems little is known of the details. The EC Trade website like to bury the details in mountainous and incomprehensible reports. The only thing I found of use was the childish “10 Myths about TTIP” (2) whereby the EU basically just say “that shouldn’t happen…..we will see”.
The first round of negotiations started in 2013 and it is anticipated to go on until 2020 so there is certainly no off the shelf solution. Nor indeed should this be a template. The EU and America differ wildly on so many levels, it would be easier for the UK to rip up the template and start again.
Other Free Trade Agreement
As Figure 6 shows the EU has a few other Free Trade Agreements in place. However even the most attractive of these economies – Chile, South Korea and South Africa – are far removed from the economic, cultural and indeed geographical proximity of the UK and the rest of the EU. Britain can take a page from here and there, but realistically, it will shave to start off on its own contractual path, whereby it will quickly wish it stayed at home in the EU.
As the world (and the EU in particular) is ever moving towards more and more free trade agreements, there may be a glimmer of truth in the Conservatives line of thinking that Britain can ascertain a free trade agreement with EU whilst having its own immigration controls. But those in European Union will never allow this unless it is on their own very harsh terms. Britain needs to EU more than the EU needs Britain. Switzerland has been negotiating for two years to escape the clutches of free movement from a much stronger position contractually and is getting nowhere. The UK is to be made an example of. For Tories like John Redwood to claim that the UK can get a new Free Trade Agreement is true. But it is also a lie. No one really knows what that would look like. Like Brexit in general.
It is very real. A hard Brexit would be a disaster for the UK
Brexiteers sometimes forget that the EU is beneficial, not only to immigrants but to many Britons who get summer jobs in Greece, internships in Brussels, banking jobs in Paris or retire in Spain. Brexit will of course also deny many younger folk in the bright lights of London, Birmingham, Glasgow etc to chance to meet their future French wife or Dutch husband. Or simply a multicultural evening dinner, where there are more cultural insights to be had than any contempory history book. But the incestuous Oxbridge clique that is UK politics of course cannot relate to any of this.
Maybe the UK is right. Maybe the European model is a shambles. But the same xenophobic and fascist ideology is lambasted when it comes from the mouth of Donald Trump. At least one is comforted in the knowledge that Trump is not in power, John Redwood and the Tory elite however……
1)“Implications of a UK exit from the EU for British agriculture”, http://www.nfuonline.com/assets/61142
2)“The top 10 myths about TTIP” http://trade.ec.europa.eu/doclib/docs/2015/march/tradoc_153266.pdf