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From a pure trade perspective, the existing alternatives to EU membership – the Norwegian, Swiss and Turkish models – all come with major economic drawbacks for the UK, including for key industries such as financial services.
12 June 2012
EU membership currently defines both the UK’s trade with the other EU member states via the single market and with non-EU countries via a common external trade policy. As a customs union, the EU therefore represents and negotiates on behalf of all 27 members at the World Trade Organisation (WTO) and negotiates bilateral free trade deals under what is called the Common Commercial Policy. Therefore, nearly all aspects of the UK’s trade, internal, external, goods and services are conducted by the EU, leaving only trade promotion in the hands of the member states.
Membership of the EU customs union, and the free movement of goods, remains a benefit to UK firms exporting to the EU. The UK has been instrumental in developing the single market in goods and promoting EU enlargement, which has helped to generate new markets, increased competition and reduced costs.
The EU remains by far the biggest destination for UK trade in goods, but for exports in services the picture is less positive. Services account for 71% of total EU GDP but only 3.2% of this is a result of intra-EU trade. The failure to liberalise services within the single market and member states’ reluctance to compete on the global stage in this sector means the EU is punching below its weight in global talks on services, to the detriment of UK interests.
Plainly, trade is only one part of the equation when it comes to assessing the costs and benefits of EU membership. There is a value to the UK’s ability to influence not simply the terms of trade but also EU foreign policy and enlargement.
However, the price of membership remains high. Many of these costs are not directly related to trade, such as the UK’s contribution to the EU budget, the loss of national control over key political decisions that affect the British economy and society, and an increasing regulatory burden.
Growing frustration with the costs of EU membership has led some to suggest the following alternative trading arrangements outside the EU:
This would free the UK from the Common Agricultural Policy (CAP), Common Fisheries Policy (CFP), EU-wide regional policy, and reduce its budget contribution. However, while guaranteeing access to the single market in services and goods, outside the customs union, access for goods would be subject to complex rules of origin and Britain would still be subject to EU regulations on employment and financial services but with no formal ability to shape them.
The Swiss-EU bilateral deal, without the CAP, EU fishing rules, EU-wide regional policy, and reduced financial contribution, offers more sovereignty and less EU regulation. However, the UK’s access to the single market would be dependent on the deal it could negotiate with the EU – the Swiss deal currently excludes the vast majority of services, including financial services.
The UK would continue to benefit from full access to the EU’s single market in goods by remaining in customs union with the EU but Britain would be bound by any external deals that the EU strikes in trade in goods without any formal way of shaping them. A separate deal on services would be required to maintain UK access to the single market in these sectors. It would be free from EU social and employment regulation, the CAP, CFP and EU-wide regional policy.
If the UK left the EU without securing a version of the options above, the UK could fall back on its WTO membership. This would see some exports facing relatively high tariffs (i.e. 10% on car exports) and market access for services would be limited.
From purely a trade perspective, therefore, all these options come with major drawbacks and EU membership remains the best option for the UK. Additionally, contrary to popular belief, all the alternatives to EU membership, except the ‘WTO option’, would require negotiation with and the agreement of the other member states, which would come with unpredictable political and economic risks.
This means that negotiating a new UK relationship with Europe outside the EU Treaties, i.e. leaving the EU, would present similar difficulties to renegotiating membership terms while remaining a member of the EU.
However, there are three factors that could alter the cost-benefit analysis of the EU in future:
In light of these trends and an increasingly sceptical UK public, in order to justify continued membership, the UK Government should seek to achieve a new model for EU cooperation based on different – and equally legitimate – circles of EU membership. In this structure, the UK should remain a full member of the single market in goods and services and of the EU’s customs union, but take a ‘pick and mix’ approach in other areas of EU policy. This would achieve a vital reduction in the non-trade costs of EU membership, such as the EU budget and the burden of regulation, while allowing the UK to remain at the heart of the EU’s cross-border trade.
A new model for the UK within the EU Customs Union and at the heart of the Single Market?Source: Open Europe
As the Eurozone is likely to need a new set of EU treaty arrangements to move towards further integration, which the UK must approve, Britain will have a unique opportunity to stake out its own model for EU membership.
There are a number of initiatives that would help the UK achieve greater EU trade benefits in future, including launching a new and far more sophisticated and proactive programme for building free trade alliances in Europe; securing one of the commercial portfolios in the European Commission in 2014 and making more use of EU Treaty provisions allowing a smaller group of countries to pursue further liberalisation if not possible at the level of all 27 member states. In addition, the UK Government should continue and step up its much welcome ‘commercial diplomacy’, promoting UK businesses and exports to non-EU countries to facilitate trade.
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