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Picture 28Ronald Stewart-Brown is Director of the Trade Policy Research Centre which is examining how the UK might leave the Common Commercial Policy/Single Market trading framework of the EU with a view to strengthening its negotiating position within the EU.

The UK Independence Party’s flagship policy sounds so simple. Britain should “withdraw from the political EU Superstate, and maintain a trade-based relationship with our European neighbours using a Swiss-style free trade agreement as the EU’s largest single trading partner”. Or as Lord Pearson of Rannoch, its new leader, more succinctly put it in his letter to the Daily Telegraph on 10th November last year: “The only way out remains the door.”

But if it’s so simple why have UKIP failed to persuade leading business opinion formers such as the CBI, the Institute of Directors, the Financial Times and The Economist to take them seriously? Few UK-based businesses dispute the heavy cost implicit in the Temporary Agency Workers Directive and the Working Time Directive (not to mention the likely near term loss of the UK’s valuable current individual opt-out from it). Few in the City favour the dirigiste Brussels approach to financial markets manifest in the proposed Alternative Investment Fund Managers Directive and the planned new EU supervisory agencies for banking, insurance and securities. Yet, in these areas at least, British liberal values seem to be perpetually on the retreat. So the trade case for continuing full EU membership rests implicitly on the premise that there is no realistic alternative. 

To attack this premise UKIP need to answer two questions. First, could the UK leave the EU unilaterally on terms that businesses involved in UK-EU trade would find acceptable? Secondly, could any free trade agreement the UK might negotiate with the EU be satisfactory to businesses involved in UK-EU trade? Unfortunately for UKIP the answer to the first question is a definite No whilst that to the second is far from clear.

Like it or not, the UK is bound by the Lisbon Treaty under the international law of treaties. However politically illegitimate it was for Gordon Brown’s government to force its ratification through Parliament without the referendum it had promised on the almost identical European Constitution Treaty, international law trumps individual states’ ideas of right and wrong. Think of the revanchist can of worms that could otherwise be opened up over borders around the world.  For the UK to seek to leave the EU in breach of the provisions of the Lisbon Treaty would be an extremely serious matter.

The only way the UK could leave unilaterally would be in accordance with Article 50 of the new Lisbon Treaty on European Union. This would give the UK the right to withdraw unilaterally if a mutually agreed basis for her doing so could not be negotiated within two years of the UK’s original notification to the European Council of her intention. But exercising that right would involve the UK leaving the Single Market and losing all the preferential trade advantages that gives her over the rest of the world in relation to the EU.

By far the most serious downside would be that manufactured exports from the UK to the EU would face the same tariffs (or import duties) as countries like the USA, China and Japan which have no preferential trade agreement in place with the EU. World Trade Organization (WTO) statistics give the weighted average of such tariffs as 2.7 per cent, which may sound low. But over half such imports enter the EU duty-free.  That suggests that around half the UK’s manufactured exports to the EU would face an average tariff of over 5 per cent, a decisive handicap in many price sensitive markets. UK car exports to the EU would be particularly hard hit as the EU tariff on “completely built units” is 10 per cent.

It would be against WTO rules for the UK to seek to remain in customs union (see box below) with the EU without a formal new agreement even if the EU were willing to agree to it doing so.  Furthermore there would be no reason why out of charity the USA, China, Japan and others would be willing to sanction UK exporters retaining a material competitive advantage over their exporters in EU markets without a formal new preferential trade agreement that complied with WTO rules.

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To put it plainly, unilateral outism is out. No one is questioning the time-honoured principle of parliamentary sovereignty. The problem is that exercising it by withdrawing unilaterally from the EU would have unacceptable consequences for many British exporters to the EU.

But could any free trade agreement the UK might negotiate with the EU be satisfactory to businesses involved in UK-EU trade? Leave aside the technical challenges of replicating many of the trade beneficial aspects of the Single Market in a free trade agreement. The biggest single disadvantage of the UK moving from the Single Market to a free trade agreement basis of trade with the EU would be loss of free movement of goods.

Free movement of goods is the process whereby merchandise moves freely from one EU member state to another in much the same way as it does between Yorkshire and Lancashire, subject to only a few practical restrictions like the limits on personal imports of drink and tobacco into the UK from the continent. Restriction of duty-free trade to only goods originating within a new UK-EU free-trade area (see box above) would be a major hassle for most businesses involved in UK-EU trade.

First, every consignment of goods from the UK to the EU on which the EU would charge duty if it came from countries like the USA would have to be subjected to a rule of origin test and vice versa. Secondly, UK exports to the EU which did not meet the relevant rule of origin test would become subject to EU tariffs and vice versa. Whilst it would be easy for the UK and the EU to agree to use the same set of rules of origin as apply in the EU’s existing free trade agreements with countries like Switzerland no one knows what proportion of UK-EU trade would fail to meet these rules.

It is true that the average EU tariff on Swiss exports to the EU is now only 0.5 per cent, but Swiss exporters have had 38 years to adjust to rules of origin based trade since the original Swiss-EU free trade agreement was signed in 1972.  There can be no doubt that the switch to a UK-EU free trade agreement would entail both material disruption to the logistics of UK-EU trade and an unquantifiable but real increase in its cost.

Proponents of the UK replacing our EU membership with a Swiss-style free trade agreement with the EU should at the very least recognise the significance of this major downside of doing so.  Ironically, free trade agreements are by no means a synonym for unqualified free trade.

One possible solution is to negotiate to stay in customs union with the EU outside the framework of the EU treaties and institutions on the basis of a simple new “plain vanilla” bilateral customs union agreement. Staying within the EU tariff band could reasonably be seen as a fair price to pay for continuing free movement of goods. Such an approach combined with other agreements to cover areas such as services, intellectual property, public procurement, competition and technical barriers to trade could attract the happy label of “Staying in Europe for Trade”. It would enable the UK to leave the Common Agricultural Policy and drop pointless tariffs such as those on bananas and sugar.  It would also approximate to the Common Market most people thought they were voting for in 1975, which was after all a customs union rather than a free-trade area.

Several important UK industries such as car and processed food manufacturing would favour continued protection by EU tariffs. UK agriculture would surely want continued tariff protection in sectors like beef and dairy, perhaps against imports from the EU as well as the rest of the world. Only a few non-agricultural EU tariffs like those on heavy trucks of 22 per cent and on buses of 16 per cent work seriously against the interests of the British economy by impeding imports from countries like China and Korea, and a successful Doha round would reduce even these to under six per cent. Whilst some would be concerned that our European friends would deliberately seek to manipulate European trade rules against the UK there are actually very few exclusively indigenous UK exporting industries which could be vulnerable to discriminatory regulation.

So how should the substantial minority of the UK electorate who want the UK to leave the EU altogether vote in the General Election? First, potential UKIP voters should observe that the UKIP’s only realistic election objective is to stop the Conservatives winning. Twenty or more seats where UKIP votes let Labour or the LibDems in could make all the difference between a hung Parliament and a working Conservative majority.

Secondly, they should note that David Cameron has promised he will never allow Britain to slide into a federal Europe.  He has also acknowledged that all 26 other EU member states would need to agree to the negotiating demands he has outlined on social and employment legislation, criminal justice and the Charter of Fundamental Rights. He and William Hague, the man deputed to head up negotiations, must know that would be difficult. It is therefore fair to deduce they are thinking more radically.

The problem is the UK’s negotiating clout under the Lisbon Treaty is quite limited. To be taken seriously Mr Hague would probably need to resort to threats to halt UK contributions to the EU budget, to block a new treaty or to legislate a new enabling power to disapply EU measures in areas such as social and employment regulation by statutory instrument. But that would be to question the rules of the club.

Ultimately the UK’s European partners and a new Conservative government may well end up agreeing that an amicable political parting of the ways would be best for both sides. That is the withdrawalists’ best hope. The gathering Eurozone crisis may strengthen their case.

Tuesday 5.30pm update

Ronald Stewart-Brown responds to comments made about his original Platform piece

Thank you to all who have taken time to comment.  I should like to respond as follows.

1. May I ask all those who still intend to vote UKIP to give my article a careful second read? Those who would like the UK to leave the EU as soon as possible are on common ground with those like myself who would like it to have the option of doing so if a future Conservative government cannot negotiate an acceptable accommodation within the EU: both groups need to know how we could do so.  My difficulty is that none of the exit solutions out in the public domain, such as UKIP’s, seem realistic. I base this view on a good understanding of the WTO multilateral trading system, interviews with some 120 business leaders and others covering a wide range of sectors involved in trade with the EU, and informal consultations with two leading lawyers with relevant expertise.

I believe the bilateral customs union approach I outline, combined with agreements covering other areas such as services, will work. But it cannot be presented to the Conservatives as a serious policy option without a strong cross-the-board business and media consensus in support. For the Conservatives to talk about the possibility of withdrawal without a serious plan for doing so would be madness.

2. Constraints on the UK’s freedom of action include the Lisbon Treaties on European Union and on the Functioning of the European Union, the World Trade Organization Agreements, the EU’s free trade agreements with countries like Norway and Switzerland to which the UK is party through the EU, and the Vienna Convention on the Law of Treaties which lays down the circumstances in which a country may withdraw from a treaty.

Also no government could change our trading relationship with the EU without the support of a majority of the business community. The issues are much more complex than most people realise. But I believe that retention of “free movement of goods” with the EU is likely to be a sine qua non for any alterations of our trading arrangement with the EU. That would mean staying in customs union with the EU. In my view the free-trade area alternative would be rejected by many businessmen in the UK and the EU once they came to understand what it would involve.

3. Those who argue that Norway and Switzerland are richer in income per capita terms than the EU or the UK are right. But from where we are now I don’t think the trading arrangements they have with the EU would be possible for the UK to achieve. I also like the idea of retaining the moral high ground of staying in Europe for trade in the way most of the British electorate thought they were voting to do in 1975.

4. British Watcher, Denis Cooper and others are right to point to the supremacy of Parliament. But it would surely be wrong for Parliament to act in a way which breached the Vienna Convention on the Law of Treaties. And secondly, even it were not wrong, the consequences of the UK leaving the EU without a new trade agreement would be unacceptable for much UK-based industry, starting with car manufacturing, as argued in my article.

5. David Cameron’s anger at the way the Lisbon Treaty was forced through Parliament without the promised referendum was manifest in his speech of 6th November. It was unfortunate that it was not made clearer that his “cast iron guarantee” of a referendum could no longer apply once the Lisbon Treaty was in force. But the reality is there was no way any retrospective referendum could meaningfully have been held once the Lisbon Treaty was in force.

6. Yorkshireman is right to observe that I have changed my tune since a speech I gave in Strasbourg in September 2005, as reported on by Roger Helmer MEP in The European Journal in January 2006. Ideally, if we left the EU I would have liked us to be free to negotiate free trade agreements with other English speaking countries around the world. But the fact is that free trade agreements often achieve much less than the politicians who promote them like to claim.

Dr Razeen Sally in his excellent iea monograph “Trade Policy, New Century” (2008) concludes that there are only three preferential trade agreements in the world that are genuinely “strong, clean ‘WTO-plus’” in effect: the EU, the NAFTA and the Australia-New Zealand Closer Economic Relations Trade Agreement. Even the UK’s largest non-EU trading partner, the USA, only accounted for 13.5 per cent of the UK’s merchandise exports and 21.2 per cent of its service exports in 2008.

A successful Doha round would substantially reduce tariffs and other impediments to trade around the world. I believe that with a newly independent voice in world trade negotiations the UK could do much to help free up the present negotiating logjam in Geneva, even though its freedom of action would be constrained by having to negotiate in tandem with the EU for most tariff lines.

7. David Walker is kind enough to say I make “some important points in a well reasoned argument, which should certainly be answered”. But I do not say that major businesses are almost all in favour of Britain remaining in the EU, only that leading business opinion formers such as the CBI, the Institute of Directors, the Financial Times and The Economist are.

In fact an ICM survey commissioned by Open Europe in November 2006 concluded that 60 per cent of the 1,000 Chief Executives they interviewed would like to renegotiate the UK’s involvement with the EU back to essentially just a free trade area although for reasons argued in my article and above I do not consider that was ever a practical proposition.

As regards David Walker’s comments on David Cameron, I agree he may find it difficult to secure the repatriation of any powers or resist demands for further economic and political integration unless he is prepared to countenance withdrawal. At present, as I argue above, the withdrawal option would simply not be open to him. Obviously I cannot speak for him, but I do believe that if it does become so, as I believe it will, he would be ultimately be prepared to do the right thing for his country. If I did not believe that I would not be running the Trade Policy Research Centre.

8. Ukipwebmaster asks “who pays this man’s salary”. The answer is no one. The fact is there is no university, institution or other organisation in this country with a budget for financing the TPRC’s line of research. Even in Whitehall we now have relatively little independent trade policy capability as the EU’s trade policy activities have become increasingly centralised in Brussels. The TPRC is funded by donations from private individuals none of whom accounted for more than 15 per cent of its aggregate revenue between its foundation in 2002 and now.

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