Lord Lilley is a former Secretary of State for Trade & Industy and for Social Security.
Language is important in politics. It can define accurately what we intend, but it can also be vague or innocuous to intentionally mislead people. Today, Global Britain has released a paper Chequers – the Single Market by another name to explain why the Single Market is not the success that is claimed, and how, by adopting the Chequers plan, we would be compounding its errors.
The evidence in the paper shatters the illusion that Single Market membership has been an irreplaceable boon to British manufacturing. That illusion lies behind the Chequers plan to keep the UK subject to Single Market rules on goods.
I confess that I bear some responsibility for nurturing this illusion. As the Trade and Industry Secretary who implemented the original Single Market programme I frequently lauded its putative benefits. Indeed, the initial idea was sensible. It involved mutual recognition of each member state’s product standards and removing those that were anti-competitive. So companies need make only one range for the entire Single Market, instead of 28 variants to conform to each member state’s rules.
But that benefitted American or Japanese manufacturers exporting to Europe as much as British or German firms exporting within Europe. European consumers benefitted through lower costs. European (and certainly British) firms gained little advantage. UK goods exports to original Single Market countries grew at under one per cent a year between 1993 and 2015, whereas our exports to countries we trade on WTO terms with grew three times as much at almost three per cent.
Sadly, the Single Market changed from mutual recognition to centralised, uniform and detailed regulation. This helped established firms to consolidate their grip on the market by making it harder for new-comers to enter – and burdened companies that only trade within their home markets in addition to those which export.
That may explain why continental industry, which started with a comparative advantage in manufacturing, captured such a strong share of the UK market that is now the EU27’s biggest export market.
As the paper makes clear, British manufacturers do relatively much better exporting outside the Single Market. But our greatest comparative advantage lies in services. Over half the value-added that Britain exports is in services where we have a substantial surplus worldwide. But, again, our performance in the Single Market is disappointing. A lower proportion of UK service exports than of goods goes to Europe, where our surplus is modest compared to that with America.
Because services are much less important to other members than to the UK, the EU has made little progress in removing restrictive practices, despite endless promises. One exception is the creation of ‘passports’ for financial services firms. As Financial Secretary to the Treasury, I negotiated the first directive creating a passport for banks enabling them to operate via a branch regulated by their home country regulator rather than setting up local subsidiaries. I was disappointed a few years later when my department could not find any British bank making use of passporting. However, since passporting was extended to a wider range of financial activities its use has become extensive.
Immediately following the EU referendum, concerns about the impact of the loss of passporting on financial services dominated the media. Interestingly, this has subsided. Banks did not protest when the Prime Minister acknowledged that passports would cease. And they scarcely uttered a whimper when Chequers offered to keep Single Market rules for products, but sought no continuing access for financial services. City firms have found ‘work arounds’ for loss of passports and equivalence. More important, they and the Bank of England have concluded that the City will be better off making its own rules than remaining a ‘rule taker’.
That raises the question: would we not be better off being free to make our own rules on goods as well, rather than be a rule taker? We would not use such freedom to scrap rules wholesale. But many could be streamlined and, above all, made less of a barrier to new entrants.
The most frightening aspect of Chequers is that it commits Britain to accept all future rules. Yet Britain is particularly strong in emerging industries like bio-tech, fintech, AI and genetic engineering – where rules have yet to be set. Irrespective of any unnecessary backstop or extension to a transition period, Chequers would be an act of self-harm by allowing rules to be made by countries that lack such industries and often apply extreme versions of the precautionary principle that throttle new developments.
We promised to leave the Single Market. We should not use too clever-by-half language to disguise the fact we would remain tied to it without any say in its restrictive practices. Chequers cannot be the basis for any new relationship with the EU.