HOWARTH Christopher tie

Christopher Howarth is a senior researcher working in the House of Commons. Prior to this he worked for Open Europe, as a Conservative Foreign Affairs Adviser and senior researcher to a Shadow Europe Minister.

Before the referendum David Cameron was admirably clear: “What the British public will be voting for is to leave the EU and leave the Single Market.” If anyone was in any doubt, his Government sent an ‘information’ booklet to every household with a highly partisan economic scenario based on just that – leaving the Single Market. The document ruled out remaining in the Single Market because:

“No other country has managed to secure significant access to the single market, without having to: follow EU rules over which they have no real say, pay into the EU, accept EU citizens living and working in their country”

Nick Clegg went further, if the UK left the EU we should not remain in a system where we had to accept EU laws without any formal say over their creation – “fax democracy,” Clegg wrote. “Is that really the future we want for the UK?” Of course not.

In case there was any lingering doubt, the CBI and the official Remain campaign, Stronger IN’,set out their cases based on leaving the Single Market, and Michael Gove for the official Leave campaign also stated in terms that a vote to leave was a vote to leave the Single Market.

Given that leaving the Single Market was one of the few certainties of the campaign, it is curious that the CBI, Treasury officials and Clegg himself are now discussing what they ruled out only a few months ago. They were right then, wrong now.

What is the Single Market/Internal Market?

So what is the Single Market they are keen to stay in? Firstly, the Single Market is not a unified Single Market (particularly in services), and is correctly called the ‘Internal Market’ as it is internal to the EU. It is not a free trade zone such as NAFTA: it is based on the harmonisation of laws, which is why the new Secretary of State for Brexit recently referred to it as a “Single Legal Area” – an apt description.

Over the decades, there have been widely differing views as to its extent. We have focused on free circulation of goods and services, but others saw it as a political project. To the French, harmonisation of social policy was vital to provide a level playing field and so was always to be an integral part of the internal market. To other EU states, regional policy was key to the internal market, to compensate them for exposing their economies to competition. Free movement of people was there at the beginning but, in truth, was never really an economic concept, more a citizenship right of a nascent state called Europe. Others believed that environment policy and ultimately economic policy centred on a single currency are all vital to the functioning of an internal market.

Source: Open Europe submission to HMG balance of competences review

The difference between the Customs Union and the Internal Market

The second level of confusion surrounds the EU’s Customs Union, which the Treasury is reportedly discussing remaining in, instead or probably in addition to the Internal Market. These are two different concepts.

The Internal Market at its core includes all the 28 EU states surrounded by a common tariff (tax) or customs wall. In addition to these Switzerland, Iceland and Lichtenstein are members of the EEA but not within the Customs Union. Switzerland has its own bilateral arrangement with the EU essentially the same as the EEA, accepting all of the EU’s laws in return for ‘access’.

Source: Open Europe, Howarth and Booth Trading Places 2011

The EEA states have to follow EU laws in most areas and in return can trade in goods and services on the same terms. As these states conform to EU laws, it is therefore possible to say that a state can be a ‘member’ of the internal market without being in the member of the Customs Union. The reverse however is not really possible.

The key characteristic of a Customs Union is that tariffs on physical goods are paid at a common border, once a good is imported it is free to circulate. This necessitates harmonisation of all external trade deals, otherwise if one EU state decided to conclude a bilateral deal allowing in goods at a lower tariff it would become the entry point for all EU states. All EU states therefore must have the same external trade agreements.

The EEA states however are outside of the Customs Union, and therefore retain the ability to conduct their own trade policy. This necessitates some administration to ensure the correct tax is paid. A good that goes into say Switzerland under a Swiss/China trade agreement cannot automatically travel on to the EU and if a Chinese component is placed in say a Swiss watch special rules (rules of origin) will determine whether tax is payable.

Staying in the Customs Union would mean following all the EU’s product standards and the Court in one way or other

A UK exit from the Customs Union could also mean tariffs being charged on UK exports to the EU and on the UK’s EU imports (the UK would incidentally collect around £4 billion more from the EU than UK companies would pay). However, even if a zero tariff deal is concluded there would be some extra administration. This would present a challenge for Treasury Officials and manufacturers with supply chains – i.e: the car industry. That may be, but staying in the Customs Union is not an option, as a study of the only example of it happening – Turkey – will show.

Turkey has a limited Customs Union agreement with the EU for industrial goods. As a result, their goods can circulate within the EU without customs. In return for free passage, the EU has demanded (perhaps not unreasonably) that Turkey upholds its product standards. To do this, the EU forced Turkey to accept the jurisdiction of the ECJ over its domestic economy, not just its EU exports (for more information read Lawyers for Britain here). This in turn binds the Turkish economy to the EU, which worked politically as long as Turkey was set to join.

To make matters worse, as Turkey is within the Customs Union it cannot sign their own trade agreements with foreign states, except in areas not covered by its agreement, in their case services and agricultural products. To rub salt into the wound, if the EU signs a deal to reduce tariffs with a third party, those goods can flow straight into Turkey even though Turkey is not automatically a beneficiary of the same trade deal and will not share in the customs duties. These imbalances have led many in Turkey to conclude the agreement is no longer in their interests.

The need for certainty. If not the Internal Market or Customs Union, then what?

If the UK wishes to have its own trade policy and be free from EU laws it cannot remain within the EU’s Customs Union. Likewise, if the UK wishes to regain control over its economy it cannot stay in the Internal Market, encompassing as it does the majority of EU policy areas, laws and case law. It is difficult to imagine the EU redefining its core project in an agreement with a departing member, and even if it did it is unclear the benefits of membership of a partially formed market would be worth the regulatory and democratic burden of EU laws and ECJ jurisdiction.

If remaining in these policies are unlikely, it is a vanishingly remote possibility, as some have suggested, that the EU would agree to allow the UK to remain in the Internal Market for certain sectors (i.e financial services) without accepting the rest of the Internal Market’s laws. It is equally difficult to conceive staying in a Customs Union for just some products (i.e: cars).

Ultimately it seems clear that the UK will not remain in David Davis’s “Single Legal Area”, and given we have just over two years to negotiate something else, politicians and officials should waste no more time on it and move on.

We should use our time to explore ways to access the EU market via mutual recognition of standards rather than through the harmonisation of laws, and seek EU agreement to a zero tariffs agreement on goods. We may also wish to seek a wider ‘partnership’ agreement to take in security, crime and policing, defence and foreign policy cooperation.

What we cannot afford to do is let those who refuse to accept the outcome of the referendum pour treacle all over the exit negotiations via time-consuming, uncertain and complex negotiations to stay in something that is not in our interests and commands no democratic legitimacy.

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