Re-using the referendum hymn sheet, the same politicians, businesses and pressure groups who predicted doom and gloom from the decision to vote Brexit are now forecasting postponed doom and gloom if we opt to choose a “hard Brexit” or a “closed Britain” – leaving the EU’s single regulatory zone and trading under WTO rules.
Established businesses which do well under the status quo are always afraid of even minor changes to the trading and regulatory environment. But politicians have a duty to set conditions for the general good of the whole economy in the long term. On this the Remainers are severely overestimating the gains from Single Market membership while underestimating both the gains from leaving and the huge risks of remaining. This facilitates their bizarre assertion that being outside somehow need lead to a more closed Britain.
First, let’s take the importance of the Single Market. The European Commission itself (which has no incentive to underestimate) believes this common regulatory zone has raised EU-wide GDP by just 2.1 per cent overall. That figure was calculated for 2008, at the height of the boom. As the economist Andrew Lilico has outlined, for the UK we can imagine this would be less significant still: the UK trades less with other EU members than the EU average and specialises in services where the Single Market is less complete. We were also already fairly liberal in regulatory terms during this period (meaning the benefits from any harmonisation measures would be less pronounced for us).
The Treasury believes that, despite this, leaving the Single Market could somehow cost up to 6 per cent of GDP in the long term. But this is based on huge dynamic gains, for which there is little to no historical evidence. Indeed, in future we expect EU trade to become relatively less important. Despite hopes for a flexible economy able to adjust to the changing pattern of global demand, Single Market membership would mean 100 per cent of the economy would continue to be bound by often damaging regulation emanating from Brussels. This should be of particular worry to the City, given the EU’s frequent attacks on so-called “Anglo-Saxon” finance. Indeed, as Remainers helpfully pointed out during the campaign, the Single Market solution is undesirable post-Brexit because we could no longer vote against new regulation imposed upon us.
This is not the only risk. Staying in the Single Market would mean a continuation of budget payments to the EU (net 0.5 per cent of GDP), something only likely to rise given the centralising ambitions of Brussels. The need for the Eurozone to integrate further to solve the euro crisis also risks the institutions of the EU increasingly being dominated by a single currency bloc, potentially to the detriment of the UK.
What business might fear is a big bang – a changed tariff and regulatory environment all in one go. But steps can be taken to mitigate the transition. The depreciation of the pound already vastly outweighs any adverse tariff effect on exporters to the EU. Last week’s announcement that existing EU workers have a right to remain within the UK negates risks for businesses employing EU staff. And the government’s Great Repeal Bill, through repatriating the body of EU law and regulation, means any changes to the regulatory environment would be incremental. It also means the EU should be willing to agree to an equivalence tariff-free arrangement on the point of exit – given the mutually beneficial nature of free trade.
Whether we become a more “open” or “closed” economy has nothing per se to do with the Single Market. Indeed, while the common regulatory zone prevents damaging government action in certain areas, the most significant upside gains from leaving the EU come from leaving the Single Market and customs union altogether.
Being willing to leave both and trade under WTO rules would at a stroke end the uncertainty that protracted negotiations would bring. The UK could declare unilateral free trade, slashing tariffs which would lead to more specialisation and an effective tax cut for consumers. We would repatriate our gross contributions, be able to deregulate or reassess regulation in areas where it was beneficial incrementally, and kill stone dead the ratchet of more EU centralisation. This would not only fulfil the electorate’s instruction to “take back control”, but could, alongside a programme of agricultural reform, leave the UK more open not less.
This article was first published in City AM.