The past returned to haunt colleagues recently – relationship with a dominatrix, an offshore company, an inheritance. So I was alarmed when a journalist called to discuss ‘two events in my past’. Mercifully they were two of my least controversial actions – negotiating the Uruguay Trade Round and implementing the Single Market – as Secretary of State for Trade and Industry.
Why the interest? Because Trade and the Single Market are key referendum issues yet I am the only MP with first hand experience of both. Sadly, when politicians debate issues of which they have no experience they seize on any plausible argument which supports their case. Unfortunately, in matters of trade what sounds plausible is often the reverse of the truth. So let me bring facts to bear on plausible assertions which dominate discussion of trade.
How important are trade deals? As a former trade minister it pains me to admit – their importance is grossly exaggerated. Countries succeed, with or without trade deals, if they produce goods and services other countries want. Thanks to the Uruguay Round, tariffs between developed countries now average low single figures – small beer compared with recent movements in exchange rates. So the most worthwhile trade agreements are with fast growing developing countries which still have high tariffs.
Is our net £10 billion contribution to the EU ‘a small price to pay for tariff free access to the EU market’? If we left the EU with no trade deal – inconceivable given the tariff free zone from Iceland to Turkey – our exports would face EU tariffs averaging just 2.4% 1 . But our net contribution to the EU budget is equivalent to a 7% tariff. Paying 7% to avoid 2-3% is miss-selling that dwarfs the PPI scandal!
So if we left before finalising a trade deal we could use our contribution to ensure our exporters are no worse off 2 and still have several billion £s left over for the NHS. Our partners will not delay a deal once they realise British exporters will not suffer, whereas theirs would face tariffs to enter the UK – their biggest market, bigger than the USA.
Does ‘EU membership help us negotiate free trade deals with the rest of the world’? Tariff free access to the fast growing, protected markets of Asia, Africa and Latin America would be worthwhile. Unfortunately, EU membership prevents us negotiating free trade deals – and the EU has negotiated few deals for us: none with China, India, Brazil.
Does the EU’s size mean it gets better deals than we could alone? From my experience that is the reverse of the truth. The more countries involved in a trade deal the harder, slower and worse the result. All 28 EU members have a veto on their negotiations which is why EU deals take so long and exclude so much. Bilateral deals are simpler, quicker and more comprehensive.
Hence Chile has deals covering countries with collective GDP five times the EU’s deals. Even Iceland – population less than Croydon – has a Trade Agreement with China – as does Switzerland.
A study 3 of bilateral deals by Switzerland, Korea, Singapore and Chile shows they boost trade far more than the EU’s. Indeed, UK exports have grown slower under two thirds of EU trade deals 4 .
Although services are particularly important to the UK, a third of EU deals exclude services whereas Switzerland invariably includes them. So could an independent UK.
Would Britain have to renegotiate from scratch the EU’s existing trade deals? Under the ‘principle of continuity’ in international law we can novate existing EU treaties to the UK. We should start that process ahead of leaving the EU.
Would negotiating continuing free trade with the EU take as long as the EU-Canada deal? Trade deals to remove tariffs involve complex trade-offs between differing tariffs on thousands of products and facing up to the vested interests they protect. Negotiating continuing tariff-free trade between the UK and EU simply means keeping zero tariffs. Zero to zero is pretty simple!
Do only European Economic Area members have access to the Single Market? The Single Market is talked about as if it were some inner sanctum accessible to a privileged few. In fact, every country has access to the Single Market – with or without tariffs. The Single Market programme, which I implemented, involved harmonising product rules – sensible, since businesses can now make one product range for the European market, not 28. But that benefits American and Japanese exporters as much as German or British firms. Although often invoked as particularly benefiting UK service companies, in fact UK service exports to the EU have grown less rapidly since the Single Market reforms than any member state except Greece and Italy. 5
Will we lose out if we don’t help shape the rules? People assume Britain benefits from participating in setting these rules. But rules provide a framework within which all companies operate – not an advantage to any individual country. Britain set the rules of tennis but rarely wins Wimbledon! British exports to the EU have grown less rapidly since the Single Market than they did before 1993, less than our partners’ and much less than non-EU countries’ exports! Maybe that is partly because we suffer EU regulations on 100% of our companies (costing our economy billions of £s) whereas non-EU firms need only comply with EU regulations on activities carried out within the EU.
How important is the right to passport services to the EU? Passporting lets financial institutions operate throughout the EU via branches supervised by their home country regulator without seeking authorisation from local regulators. Having introduced the Single Market measures, I decided to make a speech extolling how they had removed barriers to trade, not least through passporting. Unfortunately, my officials could not find a single company doing business it previously could not do! Banks were almost invariably operating, not through branches, but via subsidiaries which still needed local authorisationzand regulation.
Since then the UCITS, MiFID and AIFM directives have extended passporting rights to otherfinancial service providers who do take advantage of it. However, most UCITS fundschoose to operate via subsidiaries in Luxembourg and Dublin without causing an exodus ofjobs from London. Also the AIFM directive provides for recognition of equivalent standardsof regulation by non-EU providers which is intended to be granted to Hong Kong andSingapore, so could scarcely be refused to the UK post Brexit.
After claims that failure to join the Euro would cause a mass exodus to Frankfurt and Paris, no-one seriously pretends that MiFID firms would depart on mass even should some firms need to operate via subsidiaries.
Historically many foreign financial firms set up in London to escape their home country regulators. Long before the Single Market was established there were more American banks in London than in New York as they escaped onerous American rules like ‘regulation Q’. Big Bang attracted another wave into London. Also, prior to the Single Market, when other EU countries could still give preference to their domestic financial service industries their attempts to do so had a perverse effect and drove business to London. Should the EU impose their planned Financial Transactions Tax, as well as extending the heavy handed regulation which stopped their national banking centres becoming world centres, we can look forward to a further influx of financial business to the UK.
London’s strength did not derive from our membership of the Single Market but from Common Law, UK accounting standards, flexible regulation, good governance, the time zone, the English language etc. It is no coincidence that the four great world finance centres – London, New York, Hong Kong and Singapore – all have a similar basis of Common Law, and related institutions. Only New York is part of a continental block. The rest have benefitted historically from independence from their big neighbours whose own financial centres gained little from being part of a larger jurisdiction.
I am convinced that the City, where I used to work, has most to lose in the long term from the gradual erosion of its historic advantages if we stay in the EU subject to regulation by countries who are at best indifferent and at worst hostile to what they refer to as "Anglo-Saxon Finance Capitalism". But once again many in the City establishment follow the herd or oppose change, even changes which are in their own interest, just as they opposed Big Bang, leaving the ERM and opting out of the Euro.
1. Trade Policy Research Centre, Discussion Paper, Ronald Stewart-Brown and Ben Lodge March 2014.
2. To avoid challenge under WTO rules, support for exporters to offset tariffs would be channeled through an Export Growth Fund or tax relief.
3. Myth and Paradox of the Single Market by Michael Burrage, Civitas 2016.
4. Burrage examines results of the 15 deals which have been in force for at least 5 years. Thefive which did boost growth were with Turkey, Chile, Lebanon, Fiji and Papua New Guinea!
5. Myth and Paradox of the Single Market by Michael Burrage, Civitas 2016.