Chequers: the Single Market by another name

WhytheChequersplanonlycompoundstheUK’stradedisadvantage

EwenStewartandBrianMonteith

WithaforewordbyTheRtHontheLordLilley

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Chequers:theSingleMarketbyanothernameWhytheChequersPlanonlycompounds

theUK’stradedisadvantage

EwenStewartandBrianMonteith

22October2018

CONTENTS

Foreword 3

ExecutiveSummary 5

Introduction 6

TheproblemwithChequers 6

TheUKhasatradeproblem 8

Towardsfreetrade–amuchbetterideathanChequers 17

WhyChequersshouldbechucked 22

Conclusions 23

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FOREWORD

byTheRtHonTheLordLilley

ThispapershatterstheillusionthatSingleMarketmembershiphasbeenanirreplaceableboontoBritishmanufacturing.ThatillusionliesbehindtheChequersplantokeeptheUKsubjecttoSingleMarketruesongoods.

IconfessthatIbearsomeresponsibilityfornurturingthisillusion.AstheTradeandIndustrySecretarywhoimplementedtheoriginalSingleMarketprogrammeIfrequentlylaudeditsputativebenefits.Indeed,theinitialideawassensible.Itinvolvedmutualrecognitionofeachmember’sproductstandardsandremovingthosethatwereanti-competitive.So,companiesneedmakeonlyonerangefortheentireSingleMarketinsteadof28variantstoconformtoeachmemberstate’srules.

ButthatbenefittedAmericanorJapanesemanufacturersexportingtoEuropeasmuchasBritishorGermanfirmsexportingwithinEurope.Europeanconsumersbenefittedthroughlowercosts.European(andcertainlyBritish)firmsgainedlittleadvantage.UKgoodsexportstooriginalSingleMarketcountriesgrewatunder1.0%pabetween1993-2015whereasourexportstocountrieswetradeonWTOtermswithgrewthreetimesasmuchatalmost3%.

Sadly,theSingleMarketchangedfrommutualrecognitiontocentralised,uniformanddetailedregulation.Thishelpedestablishedfirmsconsolidatetheirgriponthemarketbymakingitharderfornew-comerstoenter–andburdenedcompaniesthatonlytradewithintheirhomemarketsinadditiontothosewhichexport.

Thatmayexplainwhycontinentalindustry,whichstartedwithacomparativeadvantageinmanufacturing,capturedsuchastrongshareoftheUKmarketthatisnowtheEU27’sbiggestexportmarket.

Asthepapermakesclear,BritishmanufacturersdorelativelymuchbetterexportingoutsidetheSingleMarket.Butourgreatestcomparativeadvantageliesinservices.OverhalfthevalueaddedthatBritainexportsisinserviceswherewehaveasubstantialsurplusworld-wide.ButagainourperformanceintheSingleMarketisdisappointing.AlowerproportionofUKserviceexportsthanofgoodsgoestoEurope,whereoursurplusismodestcomparedtothatwithAmerica.

BecauseservicesaremuchlessimportanttoothermembersthantotheUK,theEUhasmadelittleprogressinremovingrestrictivepractices,despiteendlesspromises.Oneexceptionisthecreationof‘passports’forfinancialservicesfirms.AsFinancialSecretarytotheTreasuryInegotiatedthefirstDirectivecreatingapassportforbanksenablingthemtooperateviaabranchregulatedbytheirhomecountryregulatorratherthansettinguplocalsubsidiaries.IwasdisappointedafewyearslaterwhenmyDepartmentcouldnotfindanyBritishbankmakinguseofpassporting.However,sincepassportingwasextendedtoawiderrangeoffinancialactivitiestheirusehasbecomeextensive.

Immediatelyfollowingthereferendum,concernsabouttheimpactofthelossofpassportingonfinancialservicesdominatedthemedia.Interestingly,thathassubsided.BanksdidnotprotestwhenthePrimeMinisteracknowledgedthatpassportswouldcease.AndtheyscarcelyutteredawhimperwhenChequersofferedtokeepSingleMarketrulesforproductsbutsoughtnocontinuingaccessforfinancialservices.Cityfirmshavefound‘workarounds’forlossofpassportsand

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equivalence.Moreimportant,theyandtheBankofEnglandhaveconcludedthattheCitywillbebetteroffmakingitsownrulesthanremaininga‘ruletaker’.

Thatraisesthequestion:wouldwenotbebetteroffbeingfreetomakeourownrulesongoodsaswell,ratherthanbearuletaker?Wewouldnotusesuchfreedomtoscrapruleswholesale.Butmanycouldbestreamlinedandaboveallmadelessofabarriertonewentrants.

ThemostfrighteningaspectofChequersisthatitcommitsBritaintoacceptallfuturerules.YetBritainisparticularlystronginemergingindustrieslikebio-tech,fintech,AIandgeneticengineering–whereruleshaveyettobeset.Itwouldbeanactofself-harmtoallowthoserulestobemadebycountriesthatlacksuchindustriesandoftenapplyextremeversionsoftheprecautionaryprinciplethatthrottlenewdevelopments.

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EXECUTIVESUMMARY

• ThereisanillusionattheheartofGovernmentthattheSingleMarketissocriticaltoUKtradingandeconomicintereststhattheEUreferendumresultandConservativeandLabourPartymanifestopledgestoleaveitshouldbeover-ruledbytheruseofadoptingacommonrulebookforgoodsandmostfoodsundertheChequersproposal.

• ThispapershowsthatmembershipoftheSingleMarket,orsimilar,viatheChequersproposalofacommonrulebookiseffectivelyremainingintheEUinallbutname.MoreoveritriskspermanentlylockingtheUKintotheworld’sslowestgrowing,mostregulatoryburdensomeandunderperformingbloc.

• TheUKtradeswiththeworld.ShehasasurpluswiththeUS,theworld’smostcompetitivemarket,andabroadlyneutralpositionwiththerestoftheworldexcludingtheEU.IncontrasttheUKhasa£96bndeficitwiththeEU.IsitnotoddthattheUKcantradewellwithcountieswhereithasnotradedealyethasamassivedeficitwhereithasacommonrulebookandsocalledfrictionlesstrade?

• ThispaperdemonstratesthatbeingamemberoftheEU‘commonrulebook’orSingleMarketharmsBritishtradinginterests.TheSingleMarketdoesnotplaytoUKcomparativeadvantageinservicesbutbindsusinongoods,wherewerunalargedeficit.

• ItdemonstratestheclearunderperformanceoftheEurozoneeconomicallywhichhasresultedinUKbusinessvotingwithitsfeetbydivestingoutoftheEUintofastergrowthareas–notablyAsiaandAustralasia.

• Itoutlineswhyvestedinterestssupportregulationasananti-competitivetooltothedetrimentofsmallandmediumsizedcompaniesandtheconsumer.

• WeshowthemajorUKtradingopportunityisincreasinglyinfastgrowingservicesareasthatareoftenhighmargin,moreimmunetodevelopedmarketunder-cuttingandenjoyingstructuralgrowth.

• WedemonstratethatwhiletheChequersproposaliswrappedupinadifferentlanguageusinginnocuoussoundingwords,likethecommonrulebook,thelegaltextisveryclear.ChequersmeanstheUKisboundbycommonrulesthatexclusivelyemanatefromtheEUwiththeUKhavingnosaywhatsoeverintheirframing.Itisnotapartnershipofequals.

• ChequersisthereforetheequivalentofremainingintheSingleMarketinallbutnamewhileabandoninganypretencetotakebackcontrolofresettinganyregulations–thusbreakingthespiritofthereferendumresultandthemanifestopledgesofbothConservativeandLabourparties.

• TheEUhasalreadyofferedGreatBritainasimilardealtoCanada.Weshouldbiteitshandoff.

• ThisdealmustbeforthewholeUKbyincludingNorthernIreland.Therequirementofafrictionlessborderisanotherrouse.NorthernIrelandalreadyhasaborderincurrency,tax,VAT,certainagriculturalstandards,socialprovision,pensionsandthelike.CanadaPlusoffersanearfrictionlessopportunitythatisawin-winforbothparties.

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INTRODUCTION

ItisaclichébutBritainisatradingnation.LastyeartheUKexported£615bnofgoodsandservicestotheworld.TradeisthelifebloodofthenationandthehistoricUKreferendumvotetoleavetheEuropeanUnionofJune2016providesthefirstopportunity,sincetheUKjoinedtheCommonMarketin1973,tooperateanindependenttradepolicydesignedtomaximiseBritishopportunities.Toputitanotherway,thisisalikelyonce-in-a-lifetimeopportunitytogetitright.

BREXITprovidesauniqueopportunitytore-bootUKtradeandtheUK’sopportunitiesforfutureprosperitybyre-takingcontroloftradepolicy.Whatwedowiththosetoolswillbeamajordeterminantofgrowthgoingforward.Brexitisnotapanaceainitself.Itwillbeasuccessifwecanadopttherightmicro-andmacro-economicpoliciesandtradingrelationships.Historywilljudgeitafailureifwedonot.

Thispaperisdesigned,usingofficialdataprovidedbytheONSPinkBookontradeandEuroStat,toprovidearoutemaptosecuringtherighttradedealforBritainandindeedtheEU.

Todothiswehighlightthecurrenttradingandassetbalancesheetpatterns,thebalanceofUKtradeandcomparativeadvantage,coupledwithananalysisofwheretheopportunitylies.WeexaminethereasonsforthecontinuingandgrowingasymmetryintradingwiththeEUandtherestoftheworldandwedrawconclusionsastowhatagoodtradedealmightlooklike.

THEPROBLEMWITHCHEQUERS

TheRemaincamp,includingourthenPrimeMinster,DavidCameron,wasveryclear.AvotetoleavewouldmeanleavingtheentireEUstructurethattheysaidincludedtheSingleMarketandCustomsUnion.Thisinitselfwasanobviousconsequence,astoremainintheSingleMarketwouldnotreallybetoleaveatall,asthevastmajorityofEUregulationsareSingleMarketrelated.ToremaininacommonrulebookwouldinflictontheUKascenariowhereshetookvirtuallyalltheruleswithoutasay,hardlywhatwaspromisedandsurelythecompleteantithesisof“takingbackcontrol”.

ItisthusdisingenuousoftheremainleadershipnowtoclaimthatvotersdidnotknowwhattheywerevotingforanditwasnotclearthatBrexitwouldmeanleavingtheCustomsUnion.ThereisaverylargebodyofwrittenandverbalevidencefromtheremaincampaignandindeedsubsequentmanifestocommitmentsfromboththeLabourandConservativepartiesthattheUKwouldleavetheEUSingleMarketandCustomsUnion.SadlytheChequersproposaldoesnotremotelymeetthereferendumormanifestocommitmentsgivenbyeitherthecurrentPrimeMinister,orLeaderoftheOpposition.

TheChequersproposalmaybewrappedupinadifferentlanguageusinginnocuoussoundingwords,likethecommonrulebook,butthelegaltextisveryclear.ChequersmeanstheUKisboundbycommonrulesthatexclusivelyemanateformtheEUwiththeUKhavingnosaywhatsoeverintheirframing.Itisnotapartnershipofequals.

Shoulditbeagreed,Parliamentwouldeffectivelybeforcedtoaccept,applyandobeywhatevertheEUproposedanddefactoboundwithanyrulingsbytheEuropeanCourtsofJustice(ECJ).WhilethecurrentUKinfluenceinagreeingregulationisminimal(theUKhasan8.4%shareofthevoteintheCouncilofMinisters)Chequersreducesthattozero.ThusChequersiseffectivelyremaininginthe

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SingleMarketinallbutnamewhileabandoninganypretencetotakebackcontrolofanysettingofregulations–thusbreakingthespirtofthereferendumresultandthesolemnelectionmanifestopromises.

Moreover,underChequersthereisnoabilityfortheUKtorepealanyexistingEUlawinthefieldsoftheSingleMarket,agricultural,environment,climatechange,socialwelfare,employmentandconsumerprotection.

TheproposalmakescleartheUKwouldnotbeallowedtoreduceregulationbelowtheEUlevelasaminimum,thusnegatingoneoftheprinciplebenefitsofBrexit–theabilitytofameourownlawsandreduceburdensomeandanti-competitiveregulation.GiventhattheseareasaccountforvirtuallyallEUstatutelawitishardtoseehowChequersinanywaymeansleavingtheEUinanymeaningfulwayatall.

TheproposaldoessayParliamentcouldchosenottoincorporatenewEUlawintoUKlaw,butthattheUK‘recognisesthiswouldhaveconsequences.’GiventheUKwouldhavepromisedtomaintainacommonrulebook,andaso-calledfrictionlessborderwiththeIrishRepublic,itisveryhardtoenvisageanyscenariowheretheUKcouldlegallytakesuchanactionaswebelievetheauthorsoftheproposalwellknow.

TheoreticallytheUKcouldsigntradeagreementswiththirdpartiesbutwhowouldwishtodothatwithacountryboundbytherulesofBrussel’s?Negotiationswouldhavelittlemeaningandthereisalmostnoscopetodeliver.

IfChequersformsthebasisforanagreementwiththeEUwebelievetheUK’sbodyoflawwillbebarelyonejotdifferentfromtheEUacquisinfiveyears’time.Moreover,asitisproposedChequerswillbeenshrinedininternationallaw,futureParliamentswillhavevirtuallynorealisticlegalabilitytorevisitthis.

WhatmakestheChequersproposalworseisthatitscompromisesaresoneedless.TheUK’sgovernmentiscaughtintheheadlightsofcontinuingestablishmentcampaigningthatacceptsmembershipoftheSingleMarketissocriticalitmustbepreserveddespitethereferendumandmanifestooutcome.ThispaperwillclearlydemonstratethisisamajorfallacythatneedschallengingasunderthecurrentarrangementstheUK’stradeisbeingmateriallyhamstrung.TheSingleMarketanditscommonrulebookarenotblessingsbutformacurse.

LockedintothefailingEU‘SingleMarket’anditscommonrulebooktheUKhasrunupahugeandgrowingdeficitwiththeEU.Despitethisweareabletorunasurpluswiththerestoftheworld.Thisseemsparadoxical–wearefailingwherewearetiedintotheEUstructure,currentlylegally–andyetsucceedingwiththerestoftheworldwherewearenot.

TheSingleMarketistheworld’sslowestgrowingbloc.Thathasbeenthecaseforagenerationnow.ItishighlyregulatedandhasfailedtoplaytotheUK’sstrategicadvantage–services.ThishascementedaperpetualandgrowingUKtradedeficitwiththeEU.

TheEU’seconomicunderperformanceisduetomanyfactorsbutoneofthemistheextraordinaryburdensomeandbureaucraticregulatoryframeworkEUcompaniesandconsumersareforcedtoadopt.Remaininginthatstructurewillmakeitalmostimpossibletostrikebeneficialtradedealswhilemaintainingsignificantadditionalcoststoconsumers.Moreover,regulatorycreepgoeswellbeyondsmoothingfrictionlesstradeintoareasliketheenvironment,employmentlawandsocialprotection,allareastheUKParliamentwouldbemuchabletolegislateforeffectively.

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ItiscriticaltounderstandthatonedoesnotneedtobeinsideorpartoftheSingleMarkettotradewithit.ItisanenduringfallacythatSingleMarketmembershipenhancestrade–itdoesnot.Allcountries,withatinynumberofexceptionsofthoseundersanction(likeSyriaorNorthKorea)havefullaccesstotheSingleMarket.

TakeChinaforexample,itisnotamemberbutenjoysgrowingtradewiththeEU,asdoestheUSandAustralia.IndeednoneofthoseexampleshaveanyspecialtradedealswiththeEUbuttradeflowsfreelyunderWorldTradeOrganisation(WTO)guidance.AllofthemcantradefreelywithanyEUnations.Yes,allcountiesneedtocomplywithSingleMarketregulation,justasallcountries,exportingtoChinahavetoacceptitslocalstandards,butitisabsolutelythecasethatthereisopenaccesstotradeforallnationsoutsidetheEU,orEuropeanEconomicArea(EEA)structures.

THEUKHASATRADEPROBLEM

WhiletheUK’stradingperformancehasimproved,overthelastcoupleofyears,withthecurrentaccountdeficitreducingfrom5.8%GDPto3.9%,theUKcontinuestorunsasignificantdeficit,whichremainsthemostseriousintheG7(Figure1).

ThisisimportantasithaslongtermimplicationsforthelevelofSterlingrelativetoothercurrenciesaswellaslongtermgrowthprospects.Whilecountriescananddorundeficitsforyears,ultimatelyanationneedsto‘payitswayintheworld.’

Figure 1: Current account balances of the G7 economies, 2007, 2014, 2015 and 2018 percentage of nominal GDP

Source Pink book 2018

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TheUK’stradedeficitisnotanewphenomenon.Indeedoverthelast20yearstheUKhasconsistentlybeenindeficit,howeverthemagnitudeofthisdeficithasescalatedsignificantlyoverthelastfewyearsascanbeseenfromthechartbelow.

Figure 2:UK Trade Balance 1995-2017 % GDP

Source Pink book 2018

WeshalldemonstratethatthetradeproblemisalmostexclusivelywiththeEU.TheUKbroadlypaysitswaywiththerestoftheworldbutrunsconsistentmassivedeficitswiththeEU.Indeedin2017thatEUcurrentaccountdeficitamountedto£96bn,oralmost5%ofGDP.

DoesitnotstrikethereaderasoddthatdespitetheEU’ssnail’spaceatnegotiatingtradedeals,(theEUhasrelativelyfewcomparedtocountriessuchasSwitzerlandandChile)andtheabsenceoffreetradeagreements,theUKcanrunasurpluswiththeUSandAustraliaandbebroadlyinbalancewiththerestoftheworld–andyetrunsaverysubstantialdeficitwithourneighbour,theEU,wherewehavecompleteregulatoryalignment,a‘commonrulebook’ifyoulike,intheEUSingleMarket?Surelythatalignmentwouldgiveusanadvantagetoperformbetterthanwedowithotherswhereitdoesnotexist?Sohowcanthisbe?Therearethreemajorasymmetry’sthatexplainit.

AsymmetryOne–TheUKisgoodatservices,notsogoodatgoods

TheUK’sbalanceoftradeisheavilyskewed,ascanbeseenfromthechartbelow.TheUKrunsasignificantandgrowingtradesurplusinservicesoffsetbyanevenmoresignificantdeficitingoods.Weknowofnootherdevelopednationwithsuchanimbalance:plus5.5%onservices,minus6.8%ongoods.

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Figure 3: UK trade in goods and services balance, current pr ices, 1995 to 2017, percentage of nominal GDP

Source Pink book 2018

Moreover,giventhetendencyforexcellenceclusterstodevelopgeographically,thelikelydirectionofUKinvestment,andexistingstrategicadvantage,weexpectthedependenceonservices,relativetogoods,toincreasefurtherovertime.

Thisisnot,inourview,acauseforconcern.Itisarguablyastrength,asgloballyserviceexportstendtobe‘higheraddedvalue’andlesspronetolowcostlabourmarketsundercuttinghighercostWesternsuppliers.

Furtherasdevelopingmarketsgrowtheytendtomoveuptheimportcurvefrombasicmanufacturedproducttoagreaterpropensitytoconsumeservices,examplesofthisincludefinancialservices,legalservices,logisticsandIT,culturalandmediaassetsandthelike–allofwhichaddsignificantvalue,aregenerallyhighmarginandinstructuralgrowth.ThistrendtoservicegrowthbodesverywellfortheUKinthelongerterm,particularlyinanageofglobalisationwherethereisgenerally‘goods’pricedeflation.

Thetablebelowclearlydemonstratestheasymmetry.A£96bncurrentaccountdeficitwiththeEU,£14bndeficitwithEFTAanda£16bndeficitwithAsiamatched£34bnsurpluswiththeAmericasanda£13bnsurpluswithAustralasia.

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Figure 4: UK trade balance by category £bn

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Goods Services P’mary Secondary Accnt

EU -95056 28032 -20099 -9085 -96208 EFTA -18000 9574 -5891 51 -14266 Americas 12500 33878 -12734 625 34269 Asia -33549 20221 1551 -4282 -16059 Australasia 2640 3880 6658 -152 13026 Africa -1732 5157 1671 -5049 47

Source Pink book 2018 [Primary and Secondary are balance of investment income and flows to non governmental agencies/ transfers etc. They are components of the current account together with the trade balance.]

ThegoodsdeficitwithAsiaisunderstandable,giventherelativelylowlabourcostsinmuchofthatcontinent.IndeedfreetradewithAsiahasincreasinglybenefitedBritishhouseholdsmateriallythroughgreatlyreducedpricingofgarments,electricalproductsandotherlowtomidtechconsumables.

ItisnotablehoweverthattheUKrecordsagoodssurpluswiththeAmerica’s(largelyUSA)andAustralasiaaswellaslargeservicesurpluses.GiventhatmanymultinationalsandGovernmentactorsconstantlyarguethattheSingleMarketiscriticaltotheUK’seconomydoesitnotstrikethereaderoddthattheUKcanrunbothgoodsandservicessurpluswithpossiblythemostcompetitivemarketswheretheUKhasnotradedeal,oftentradingonWTOterms,butmanagestorackupa£95bndeficitongoodswiththeEUwhereitsharesazerotariffenvironmentandacommonrulebook?

Superficiallythisdoesnotmakerationalsensegiventheso-calledadvantageofaccesstotheSingleMarketandcommonrulebookgivenourcurrentEUmembership.TheironyistheUKrecordsagoodssurpluswiththeUS,whereithasnospecialdealandmassivedeficitwiththeEUwheretheUKdoeshaveatradedeal.

Further,despitehavingnospecialtradedealwiththeUStheUKexports£60.7bnofservicestotheUSandenjoysaservicestradesurplusofover£29.5bn(SourceONSPinkBook2018).ThisexceedsthepositionwiththeEU,wheredespitebeing‘intheSingleMarket’theservicessurplusisjust£28bn.

Moreover,theUK’sservicetradesurpluswithnon-EUSwitzerlandof£8.8bnisoverathirdofthatoftheentireEUdespiteSwitzerlandhavingjust2%oftheEU’spopulation.Somethingisamiss.Themuch-vauntedSingleMarketdoesn’tevenbenefittheUKinitsveryareaofadvantage.Howcanthisbe?

Wewouldargueitisthecasebecausethe‘SingleMarket’–representedintheformofthecommonrulebookthatChequersseekstopreserve–doesnotplaytoUKstrengths.Itresultsinconformityingoodswithamyriadofpettyandoftenanti-competitiveregulationswheretheUKhasadeficit–butwheretheUKhasstrategicadvantageandasmallsurplus,inservices,thecommonrulebookbarelyexists.ThetradebarriersbetweenFranceandtheUKonGovernmentprocurementorpensionspolicyarefargreaterthanforexamplebetweentheUKandUS.

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TheevidencesuggeststhattheproblemoftheUK’stradedeficitwiththeEUisacommonrulebookthatweakensourabilitytotradeeffectivelyandwhereitisnon-existentorhardlydevelopedwetrademoreeffectively.ThiswouldexplainwhytheUKcanbemoresuccessfulintradingservicestotheUS,thanwiththeentireEU.TheSingleMarkethasbeendesignedtolargelybenefitthestrategicadvantageofFranceandGermanyinparticular,greatlytothedetrimentoftheUK.Thenumbersarestarkandtheyspeakforthemselves.

AsymmetryTwo–wedowellwiththerestoftheworldandverybadlywiththeEU

Britaincompeteswellwiththeworld.WeareabletorunconsistentsubstantialsurpluseswiththeAmericas(includingarguablytheworld’smostcompetitivemarket–theUS),surpluseswithAustralasiaandabroadbalancewithAfrica.ThedeficitwithAsiaisfairlysmall,at£16bn,whenoneconsidersthelabourcostcompetitiveadvantagetheregionenjoys.

BycomparisontheUK’stradingperformancewiththeEUisextremelyweakwitha£96bndeficitin2015.TheUK’stradepositionhasbeenconstantlynegativewiththeEU.However,since2010thepositionhassharplydeteriorated.ThechartbelowhighlightsUKtradeperformance,since2004,byregion.

Figure 6:UK Current Account trade balance by region £bn

Source Pink Book 2018

ThekeyreasontheChequersproposal,withitsruletakingapproach,willbesodamagingtoUKexports,inthelongtermisitlockstheUKpermanentlyintoanover-regulatedsystemthatfavoursgoodsoverservices.

ThesystemisnotdesignedforUKstrategicadvantage.ItneverhasbeeninthefortyyearsofUKmembershipandgiventhestrengthsandweaknessesofFranceandGermany,thetwoprincipleEUpartners,itneverwillbe.ThusitistrulybizarretotossawayoneofthecriticalopportunitiesfromBrexitbylockingUKtradeintopermanentunderperformanceintheEuropeanarena.

Further,theUK’stradingbalancewiththeEUisconstantlypooracrosstheboard,thenotableexceptionbeingtheRepublicofIrelandwheretheUKpostsconsistentsurpluses.Figure7includes

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thenotabledeficitsarerecordedwithGermany(throughimportingmanufacturedandengineeredgoods),France(food,wine,andluxuryproducts),Spain(tourism)andtheNetherlands(althoughinthelattercasetheRotterdameffectalmostcertainlyexaggeratesthetradestatistics.)

Figure 7: UK trade in goods and services balance with the EU and selected EU countr ies, 1999 to 2017 £bn

Source Pink book 2018

ContrastthiswithhowtheUKperformswithothernon-EUmajorglobaltradingpartners.WiththeexceptionoflowcostChinatheUKmorethanholdsitsownagainsttheUS,Canada,IndiaandJapan.

Figure 8:UK trade in goods and services balance with selected non-EU countr ies, 1999 to 2017 £bn

Source Pink book 2018

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ThegreatfallacyoftradeisthatacountryneedstobeinaSingleMarkettotradewithit.TheUK’sbalanceoftradeshowsthisismanifestlynottrue.TheUKdoesnothavetobe“inside”theUStotradewithit,whythenshouldtheUKhavetobe“inside”theEU’sSingleMarkettotradewithit?

Itistruethatonehastocomplywithlocalrulesandregulation–andrightlyso–butthatisnotaproblemforUKcompaniestradinggoodsandserviceswithChina,USandAustralia,threecountrieswheretheEUhasnoformaltradeagreement,sowhyshoulditbeaproblemwiththeEU?

Manypoliticianshavefallenintothetrapofbelievingthatmembershipandproximityareespeciallyimportant.Theyarenotnearlyasimportantasisoftensupposed.Whatgeneratestradeiscomparativeadvantage,innovationanddevisingproductsandservicesthataredesired,notreamsofregulation,conformityandmercantilismthattheEUissospecialisedin.Thisregulatorybehaviouronlyprotectsexistingvestedinterests,whichinthelongtermstiflethetradeandinnovation.

Moreover,theEU,byfirefightingtopreservetheEurozoneincreasinglyhasitselfavestedinterestthatdifferentiatesitfromtheUKandotherEurozonemembers.Thishasbegatfurtherregulation,notablyinthefinancialandmonetaryfielddirectlyharmingUKinterestsandproductivity.

Theironyisthat,despiteanoisylobby,theUKtradesveryeffectivelyglobally–justnotintheEU–provingthattheEUsystemoftradehasnotworkedtoUKadvantage.

AsymmetryThree–theglobalsizeoftheEUisininexorablestructuraldecline

In1991theUSandEuropeanUnioncombinedaccountedfor51.6%ofglobalGDP.China’sweightwasjust1.8%.TodaytheUSandEUaccountfor39.8%globalGDP.Chinanowaccountsfor15.5%oftheworldtotal,slightlysurpassingtheEurozonecombined.

AsisdemonstratedbelowtheUShasbroadlyheldglobalshareaccountingforjustunderaquarterofglobalGDP.TheEurozone,aftermanyyearoflargelyself-inflictedveryweakGDPperformance,hasseenitssharedeclinefrom22.1%10yearsagotojust14.8%today.Currentprojectionsareforthistodeclinetounder10%by2028.

Figure 15: Share of Global GDP %

Source World Bank

0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%

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Europeisourneighbourandallyanditwillalwaysremainavitaltrading,culturalandsecuritypartnerbut,thedeclineinitsimportanceoverthelastdecadeisstructural.FortheUK,themajorityofexportgrowthopportunitywillcomefromoutsidetheEU.Thisisanearinevitableconsequenceofdemographicchange,aGDPcatch-upfromalowbasebydevelopingmarketswithemergingdomesticwealth,andconsequentsalesopportunities,technologytransferandEUpolicyfailure,notablythroughthedysfunctionalandasymmetricperformanceoftheEuro.

ThatisnottosaythatEuropeannationscannotprosper,theycaniftheyadoptreasonablyopenfreemarketpolicies,butgrowthwilllargelycomefromelsewhereandUKplchasindeedbeenfollowingthatinexorabletrend.

InourviewmuchofthelacklustreperformanceoftheEurozoneis,however,self-inflicted.WhilethispaperisdesignedtolookatUKtradeopportunitiesandnotthesub-optimalstructureoftheEuro,therealityforthecurrencyistheinherentcontradictionwithintheEurozonefromlockingthemoreuncompetitivenationsintoperpetuallowgrowthasthesafetyvalveofdevaluationisremoved.ThisremainsunresolvedandinourviewwillcontinuetoresultinunacceptablyhighlevelsofunemploymentattheEUperipheryinthemediumterm,andcontinuinglongtermGDPunder-performance.ThisfailuredirectlyimpactsUKtradebyreducingopportunitygiventhelackoflongtermgrowth.

ThetablebelowshowsGDPgrowth,forselectedmajornations,since2009.EurozonecountriesareinredandgenerallyhavelaggedUK,emergingmarketandG7developedmarketgrowth.ThisunderperformancehasledtolacklustreUKexportgrowthtotheEurozone.

Figure 9: Cumulat ive GDP 2009-2017 (2009= 100) Eurozone member in red

Source ONS

ShiftingglobalweightsandgrowthopportunityinevitablyhashadaprofoundimpactontheUK’stradingpatternsandhasresultedinthelongdriftawayfromtradingwiththeEU,asourprimarypartner,ascanbeseenfromthechartbelow.In1999over55%ofUKtradewaswiththeEU.Todaythatfigurehasfallento43%–ascanbeseenfromthechartbelow.UKplcisvotingwithitsfeet.

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UK goods exports to the EU and non-EU areas, percentage of total UK goods exports1999 to 2017

Source Pink book 2018

GiventheclearfailureoftheEUtogrow,thescaleoftheregulatoryburdenandtheUK’sstrategicadvantageinserviceswhydoestheCBI–andotherbusinessorganisationsandlargecorporations–supportthecommonrulebookofChequersanddefactoSingleMarketmembership?

WebelievethereareavarietyofreasonswhythereisapparentsupportbybigbusinesstowardstheEU.Firstly70%ofFTSE100companyrevenuescomefromoverseas.WhiletheUSdollarzoneisthemostimportanttradingfactorsuchanoverseasdominanceshiftsboardroomthinkingawayfromthenationaltotheglobal.TheirpolicyconcernsandresultinglobbyingisinBrusselsandnottheUK.Thismayfavourbigbusinessbutitdoesnothelptheentrepreneurialcompanyorsmallerbusiness,letalonetheconsumer.

Further,itmattersnotmuchtoUnilever,forexample,ifregulationishighanditisdoubtlessmarginallyeasiertoadoptonestandardthroughouttheEUthananindividualoneforUKconsumers.Moreover,manylargecompaniesmayactuallywelcomeanincreasingregulatoryburdenbecauseitincreasesthebarrierstoentryintheirindustrymakingitharderforsmallerplayerstocompete.Whilethetwincosttotheconsumerofexcessregulationandreducedcompletionandchoiceissubstantialitmaybenefitcertainmultinationalcompanies.ThusadangerousgapbetweenthewaytheCBIandlargecorporationsactandtherestofthepopulationisgrowing.

Itisthereforeimportanttoremember,whenbigbusinesslobby’s,thattheirinterestandthatofthewiderpopulationisgreatlydivergingandnottotheadvantageofUKconsumers.

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TOWARDSFREETRADE–AMUCHBETTERIDEATHANCHEQUERS

ThepoortradingperformanceoftheEUneedstobeputinglobalcontext.Sincethecreditcrunchglobaltradegrowthhasbeenbelowtrendbut,atacurrent5%,isreasonablyrobust,ascanbeseenbelow.OpportunityismovingEastandacrosstheAtlantic.

Figure 11: Annual change in world export growth, weighted world GDP growth and UK export growth, chained volume measure as percentage, 1995 to 2017

Source Pink book 2018

Theoutlookforglobaltradegrowthremainsmoderatelyoptimistic,inourview,inthemediumtermbasedonglobaldemographics,continuingglobalproductivityimprovements,agrowingAsianmiddleclassandtheartificialstimulusofexceptionallylowinterestrates.

Howeveroneofthecriticalfactorsbehindastrongglobaltradingenvironmentisthetrendtowardsmuchlowerglobaltariffs.AccordingtotheWTOaveragetariffsintotheEUnowaverage4%orlessandwhiletheyremainstubbornlyhighincertainproductlines,agriculturebeingtheprimaryexample,theworldisincreasinglyembracingverylowtariffswithanumberofcountries,Singaporeinparticular,leadingthewaywithanearzerotariffregime.Lowtariffsaregoodforglobalgrowthandlowtariffsunderminetheraisond’etreofbeinginacustomsunionliketheEU’s‘SingleMarket.’

TheEU’srecordonreachingFreeTradeAgreementsisverypoor.CountriessuchasSwitzerlandandChilehavingstruckmoredealsandofhighervaluethantheEUandtheEUhasnoFTAswiththeleadingeconomiessuchasUSandChinaandemergingeconomiessuchasIndia.Thisproblemarisesbecausethe28EUmembershavebeenslowtoreachagreement,witheachhavingtheirownspecialintereststheywantexcludedfromanydeal.Asinglecountry,suchastheUKwillbeabletoachievemoreFTAsandmorequicklythantheEUcan.

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Figure 15: Average Global tar if fs

Source WTO

AfarbetterideathanChequersistoridetheglobalshiftintariffsdownwardsandstrikeoutandseektradedealswiththeUS,China,Australia–andindeedtheEU.Thesedealsshouldplaytoourstrengthsinservicesaswellaszerotariffsingoods.FarfrombeingatthebackofthequeuemanycountriesrelishtheregulatorycompetitionthatanunshackledUKcouldoffer.

WhereareEUtariffsnow?

ThechartbelowshowstheEU’scurrentexternaltariffstructurewherenotradedealhasbeenstruck.InotherwordsthisistheWTOoption.Outsidecertainagriculturalproductstariffsareverylow.

Figure 15: EU external tar if f structure

Source Eurostat

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IndeeditshouldbenotedthatagriculturalproductsimportedfromAfricaandotherdevelopingmarketsaresubjecttothesetariffscurrentlydirectlycostingtheUKconsumerandtheAfricanfarmerdearly.TheUK,withinthecustomsunionhasnoabilitytovarythesetariffs.UnderChequers,orsimilarderivativethatwillcontinuetobethecase.

WhatdoestheUKtrade?

Thecomponentsofservicetradeareoutlinedbelowbutthelion’sshareofthesurplusisaccountedforbyfinancialservices,partiallyoffsetbyalargedeficitintravel(largelynettourism).

Figure 5: UK trade in services export and import proport ions by type 2017 %

Source Pink book 2018

Thechartbelowdemonstratesservicesectorexportgrowthovertimewithotherbusinessservicesandfinancialservicesdominating.ThegrowthinIntellectualpropertyisalsonoteworthyandwebelieveitislikelytobeagrowingareaofstrategicadvantagefortheUKgiventhedominanceofUKuniversitiesinaEuropeancontextandastrongperformanceincultureandmedia,includinggames.

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Figure 5: UK trade in services exports £m 1997-2017

Source Pink book 2018

Forcomparisonthechartbelowhighlightsthebalancesinthetradeofgoods.

Figure 5: UK trade in goods export and import proport ions by type 2017 %

Source Pink book 2018

Wherearetheassetsheld?

TradeisacriticalpartofthemixbutifwealsoexamineUKassetholdingswefindasimilarpatterntotradewiththeimportanceoftheEUdiminishing.WhilethecontinentofEuroperemainsanimportanthomeforUKinvestmentasaproportionoftotalassetsheld,EUimportancehasbeendeclining,from49%ofUKforeignassetsheldin2005to39%today.MostofthegrowthinoverseasinvestmenthasbeentoNorthAmericaandAsiathattogethernowaccountforaslightlybiggerportfolioinvestmentthanournearneighbourEurope.Thisisdemonstratedbythechartbelow.

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Further,absoluteinvestmentintheEUpeakedin2008at£5102bn.Thelatestdataindicatesadeclineofnetinvestmentinexcessof£1000bn.

Figure 13: UK foreign assets by continent, £tr i l l ion, 2005 to 2017

Source Pink book 2018

ThescaleofdivestmentfromtheEUisstaggering.ThechartbelowlooksatglobalflowsthatindicateglobalinvestoruneasewithEUassets.

Figure 15: Net international investment posit ion by continent, £ bi l l ion, 2005 to 2017

Source Pink book 2018

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WHYCHEQUERSSHOULDBECHUCKED

WehavedemonstratedthattheChequersProposalseffectivelymeanremainingintheEUSingleMarketdefactoandwillresultintheUKbeingobligedtoincorporatenewacquisinalllawrelatingtotheSingleMarket,environment,climatechange,socialandemploymentlawandconsumerprotection–leavinglittlescopetoadoptanymeaningfulindependentpolicy.Worsestill,itwillallbesignedintointernationaltreatymakingitverydifficulttounwind.

WehavedemonstratedthatwhilemaintainingfriendlyandconstructiverelationswiththeEUismanifestlyinbothparties’intereststheEUhasbeenforageneration,andislikelytocontinuetobefortheforeseeablefuture,theworld’sslowestgrowingbloc.Moreoverwehave,shownthattheUKtradesinsurpluswiththeUSandbroadlyneutrallywiththerestoftheworldbutrecordsa£96bncurrentaccountdeficitwiththeEU.ItissuperficiallyoddthatwecantradejustfinewherewehavenospecialdealandmassivelyindeficitwiththeEUwherewedo.Whatsortofnegotiatorswouldwishtolockusintothatsortofrelationshipinperpetuity?

TheUKGovernmentneedstoraiseitsgameandquickly.TheUKhasauniqueopportunitytotradefreelywiththeEUandexpandourlinksglobally.TheoftenarguedobjectiontoadealsimilartoCanada–thesocalledCanadaPlus–isthatittheEUsaysitrequiresaborderdowntheIrishSeagiventheUKgovernment’ssomewhatmisguidedbackstopagreementwiththeEU.

WeconsiderthistobeafabricatedrusetokeeptheUKintheSingleMarket.Sadly,thereareclearlythosewithintheBritishgovernmentmachinewhohavelatchedontothissupposedprobleminordertojustifyremaininginsideacustomsunionandsinglemarket.YetaborderbetweentheUKandtheIrishRepublicalreadyexistsatmanylevels(includingcurrency,VAT,tax,duties,welfare,justice)andensuringsmoothacceptanceofstandardsshouldnotbeaproblem.Theirony,however,istheIrishRepublichasfarmoretolosethantheUKiftalksfail,givenhowdependenttheRepublicisontheUKfortradewith44%ofIrishexportsgoingtotheUK.

ThereisaclearroutemapforadealandindeedoneDonaldTusk,PresidentoftheEUCouncilhasregularlyofferedtoGreatBritain–itnowneedstobeofferedtothewholeoftheUK.WithgoodwillonbothsidestheIrishissuecansensiblyberesolvedastheEUwellknows.

Moreover,theBritishpopulationisnotimpressed.GlobalBritaindemonstratedwithoneofthebiggestopinionpollsevercarriedout,withover22,000votersquestionedinthetop44Conservativemarginalconstituencies,thatChequersisnotonlyunlovedbutthepopulationhasseenthroughitaswell.TheclearpollingevidenceisthepopulationknowsChequersisBrexitinnameonlyandbelievesitwillbebadforthemandbadforthecountry.ItcouldwellcosttheConservativePartypoweraswehavedemonstratedthatatinyswinginsupportshiftsthebalancetoaCorbyn/SNPcoalitionoraCorbynvictoryoutright.

Thelinkhttps://globalbritain.co.uk/brexit-polling/providesthefullpollingdatasetbutChequersisplayingwithfire.IttiestheUKtoafailingbloc,makestheUKaruletakerwithnosayonnewlaw,severelyhamperstheUK’sabilitytostrikenewtradedealsandwithnearcertaintyensuresthattheUKislockedintoasystemthatharmsourtradingrelationshipsinthelongtermgivenitwouldbeenshrinedininternationallaw.

OntopofthistheChequersproposalisinbadfaithasitclearlycontravenesthereferendumresultthatwassubsequentlybackedupbysolemnmanifestopledges.Ignoringthestatedandimplicitpromisestoacceptthepublic’sdecisionanddeliveraBrexitthatmeantleavingtheSingleMarketandCustomsUnionwoulddountolddamagetothedemocraticprocess.

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Putsimply,CanadaPlusformsthebasisofanoffer.Itisadealthatwouldworkforbusinessandplaystoourpotential.TheEUisusingtheIrishbackstopasanmethodtokeeptheUKintheSingleMarketandCustomsUniontoitsadvantage–itsbluffmustbecalled.

CONCLUSIONS

ThekeymythpropagatedinfavouroftheSingleMarketisthatitiscentraltoUKprosperity.Itisnot.WehavedemonstratedthattheUKtradeswellwiththeworldbutpoorlywiththeEU.ThisisoddastheUKhasnospecialtradearrangementswiththeUS,ChinaorAustraliabutrunsasmalltradesurpluswiththerestoftheworld,butaverylargedeficitwiththeveryregionwehaveacustomsunionwith–theEU.

TheEUisinstructuraldecline.Ithasunderperformedeveryotherregionintheworldforageneration.ThisisnotacoincidenceasotheradvancedeconomiesincludingtheUS,CanadaandAustraliahavepoweredahead.ItistheinstitutionalarrangementsoftheEUandthesinglecurrencyinparticularthathasresultedinrapideconomicdeclineandsociallyunacceptablelevelsofunemploymentinmuchoftheEU.TheEU’strendtowardscentralisedregulationunderminescompetitionandincreasesregulatoryburden.WithintheSingleMarketframeworktheUKwillcontinuetobebeholdentoneedlessregulationandlegalcreepasEUlawyersinterpretadefinitionofEUcompetencewellbeyondmerelytradingstandardsandintotomanyotherareasofnationallife.

TheEUhasalsofailedtosignglobalfreetradedealswiththeworld’smostimportantpartnersincludingtheUS,ChinaorAustralia.InsidetheEUtheUKcannotstrikeitsowndealswiththemanymuchfastergrowingnations.BecausetheEUisadiversegroupof28nationsagreementishighlyproblematicandcumbersome,hencethefailuretoreachagreement.OutsidetheEUtheUKcanmuchmorereadilystrikefreetradedeals.

ItisnowapparentfromcommentsfromtheUS,ChinaandAustraliaandothersthatfarfrombeing’atthebackofthequeue’othercountriesareverykeentostrikemutuallybeneficialfreetradedealswiththeUK.ThiswillallowtheUKtorebuilditshistoricmissionofencouragingglobalfreetradethathasgoneofftrackoverthelast40yearsastheUKhassurrendereditstradepolicy,sounsuccessfullytotheEU.

ItisalsoamyththattheUKneedstobepartoftheSingleMarkettotradewithit.Thisisclearlynotthecase.Allnationshaveaccess,outsideatinynumberundersanction(NorthKoreaandSyriaforexample)solongastheycomplywithlocalregulations.Thisisthecasetheworldover.OnedoesnotneedtojoinChinatotradewithitanymorethanoneneedstojointheEU.

ItisclearlyintheEU’sintereststoagreeazerotariffdealwiththeUK.TherearemanyreasonsforthisbuttheprimaryoneissimplybecausetheEUsellsmoretotheUKthantheUKsellstotheEU.ItwouldbenonsensicaltoundermineitsowntradeparticularlyatatimewhenEUgrowthissoweak.

If,however,theEUrefusestodosowithinreasonabletimeframe,theUKshouldleavetheEUwithoutaformalagreementon29thMarch2019,relyingonWTOrulesandstrikingfreetradedealswithourglobalpartners.ThisoutcomewouldbefarbetterthanwhattheChequersPlanoffersbecausetheUKwouldotherwisebesaddledwithacurrentmarginalinfluenceonSingleMarket

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regulation(12%voteintheCouncilofMinisters)fornosayinregulatoryframeworkatallwhilehavingtoacceptfreemovementofpeople.

Toremainunderthejurisdictionofthecommonrulebook,effectivelystillunderEUjurisdiction,havinglefttheEU,istheremainoptionthatdeliversasovereigntyillusion–withnosay,lowgrowthandahighregulatoryburdenthatwouldlockinperpetualtradedeficits.ThatiswhyChequersmustbechuckedandCanadaPlususedasthetemplateforanewrelationship.

Abouttheauthors…EwenStewartEwenisaneconomicconsultanthavingpreviouslybeenworkedformajorinvestmentbanksinTheCityasaStrategist.EwenjoinedGlobalBritainasdirectorin2012whenBrexitwasstillaconceptandhassincehelpedmakeitareality.BrianMonteithBrianworkedinfinancialPRinTheCityfromtheearly80sbeforeestablishinghisowncommunicationconsultanciesinScotland.HelaterservedeightyearsasanelectedmemberoftheScottishParliamentincludingfouryearsasConvenerofthePublicAuditCommittee.Hereturnedtopoliticalandstrategiccommunicationsin2007andworksinternationallyinEurope,AfricaandtheCaribbean.

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