Monday, 20 February 2017

Even as we leave it, Britain doesn't understand what the single market is

Both before the referendum and since there has been a persistent confusion about what the European single market is, and this confusion also informs the way in which the government plans to leave the single market.

The confusion is to think of the single market as being the same as a free trade area and, associatedly, to equate this with ‘tariff-free trade’. In brief (see here for more detail), a single market is not just about tariff-free trade and the removal of quotas; it is also about the removal of non-tariff barriers to trade and it is from this that most EU regulatory harmonization flows. Non-tariffs are the most technically complex and significant barriers to trade and are most especially pertinent to services. This is particularly important to the UK as it is a predominantly service-based economy.

Similarly, single market membership entails free movement of people not as a kind of a bolt-on which, for some ideological reason, the EU insists on but as a core part of the definition of what a single market is: a complete unification of the production and consumption of goods and services (including, also, free movement of capital). You can no more be a member of the EU single market without free movement of labour than you could have a functioning UK single market that restricted movement of people between different counties. To do so would by definition create separate markets in labour (and, for that matter, housing). In a sense, the absence of free movement can be seen as a species of non-tariff barrier in preventing a single market from fully existing (albeit that, as this helpful explainer shows, free movement of people is not the free-for-all that it is sometimes thought to be).

That this has not been properly understood is evidenced by an interesting insider account of the referendum campaign, written by Daniel Korski, formerly Deputy Director of David Cameron’s Policy Unit, in Politico. He records the frustration during the pre-referendum re-negotiation with the EU:  

“Nor would our counterparts in Europe acknowledge that the EU’s four freedoms are very much divisible. A country can reduce tariffs and remove trade barriers and still maintain restrictions on which foreigners are allowed to enter the country. This is what the United States has done since World War II, with NAFTA being the best example.”

These sentences absolutely expose the core misunderstanding: NAFTA is not a single market, it is a free trade area. They are fundamentally different things. The four freedoms are indivisible not because the EU won’t ‘acknowledge’ it but as a matter of definition. In this sense the EU’s expression that it will not allow ‘cherry-picking’ is a misleading one: the cherries cannot be picked because they are inseparable from the tree. It is a rich irony that the development of an EU single market was championed most enthusiastically by successive British governments since the 1980s, and yet they seem not to have understood what they were championing. Nor can it be said often enough that before the Referendum many in the Leave campaign explicitly said that leaving the EU did not mean leaving the single market.

The present government’s decision to cease to be a member of the single market is apparently based on a realization that membership isn’t going to be unbundled from free movement, but still seems to see this as just an intransigent negotiating position on the part of the EU and not a definitional issue of what the single market means. Hence what seems to be envisaged in the White Paper is to recreate just about every feature of the single market for the UK (even, on my reading, a form of ECJ jurisdiction, albeit via the back door of a dispute resolution system) except for free movement of people. Thus paragraph 8.1 states the intention that:

“Our new relationship should aim for the freest possible trade in goods and services between the UK and the EU. It should give UK companies the maximum freedom to trade with and operate within European markets and let European businesses do the same in the UK."

These words (along with several other indications in the white paper) suggest strongly all of the regulatory harmonization and non-tariff barrier avoidance that the single market entails, save for that relating to free movement of people. If it does not mean that, then it cannot mean the freest possible trade – just some form and degree of market access.

So the government’s aim is to ‘get round’ freedom of movement of people by creating between the UK and the EU something akin to the free trade area that Daniel Korski (and, by implication, David Cameron) believed the single market was, or should be. The idea is to shoehorn together two fundamentally different models of international trade.

It obviously remains to be seen whether such an arrangement will be created but my view is that it will not be possible – and, the crucial point, not because of a failure of negotiation but because it is a logical impossibility. You might as well say you are going to negotiate to sail your boat up the M1 as to say you are going to have ‘maximum freedom to operate within’ a single market without free movement of people.

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