The UK Can Afford to Walk Away from the EU Without a Trade Deal Suggests New Research

With Brexit negotiations fast-approaching, a wide-held fear is that if both sides are unable to reach an agreement after two years the UK will be forced into adopting World Trade Organisation rules by default.

But, should we really fear such an outcome?

New research shows that the UK can actually afford to walk away from the negotiating table should the EU and UK fail to reach an agreement.

The research contained in a new book on the matter reveals, “data shows that the Single Market has not delivered the export growth it was expected to.”

The findings are presented in a book titled “It’s Quite OK to Walk Away” by scholar Michael Burrage who is now a director of Cimigo. Cimigo is a market research company based in Ho Chi Minh City, Vietnam, and conducts market and corporate strategy research in the Asia Pacific region.

The book is published by think-tank Civitas and comes mere days before the UK triggers Article 50 of the Lisbon treaty.

The findings will certainly provide confidence to that wing of the UK government that is prepared to adopt a hard negotiating stance with Europe.

But for most observers failing to reach an amicable trade deal is a hard proposition to accept.

There is a universal belief that maintaining access to the EU’s single market will be important to the UK’s future prosperity as it aids the ease of trade between UK and EU firms.  

The new book says the problem in the UK at present is that there is a distinct bias towards the benefits of the European Union’s single market.

This assumption on the value being part of the EU’s single market is however not grounded in fact but rather in the assurances by successive UK governments it is argued.

Indeed, “no UK government has ever sought to monitor its impact until the rushed analysis, now widely held to be unreliable and untrustworthy, produced by the Treasury just before the referendum,” argue Civitas.

There is no authoritative evidence against which to assess the economic consequences of the Government’s decision to leave the Single Market and, potentially, trade with the EU under World Trade Organization rules.

Export Boost of EU Single Market Membership Overstated

Burrage has used seven international databases to assess the benefits of the Single Market for the UK, comparing its performance with that of other EU members, and with non-members who have traded with the EU.

“The data shows that the Single Market has not delivered the export growth it was expected to,” says Civitas in a summary of Burrage’s findings.

Burrage also shows how other supposed benefits of the Single Market are largely imaginary.

“There is no evidence that Single Market membership has had a positive impact on UK GDP or productivity growth. The idea that the Single Market has been good for jobs is belied by the astonishing employment record of its members compared with other developed economies,” say Civitas.

Furthermore:

“The benefits of Single Market membership have been illusory, while its costs are real, onerous, and unacceptable to a majority of the British people.

“Theresa May’s decision to withdraw the UK from the Single Market has been criticised by some for jeopardising the economy.

“But, as she and her ministers embark on negotiations over the UK’s future relationship with the EU, we should not fear the prospect of walking away.”

UK has Become a Bad Exporter Since Joining the EU

The key metric in this report is the growth of exports, since that is what the Single Market was expected to deliver for the UK, and is often thought to have delivered.

The data presented shows, by multiple measures, that this has not happened.

By comparison with the Common Market decades from 1973 to 1992, the Single Market years from 1993 to 2015 have been an era of declining UK export growth to the EU.

When ranked among the top 40 fastest-growing exporters to the other founder members of the Single Market the UK comes 36th.

It has been surpassed by numerous countries trading with the EU under WTO rules.

Moreover, the growth of UK exports to the 111 countries, with which it has itself traded under WTO rules since 1993, has been four times greater than that of its exports to the EU.

“The cross-national data on goods exports lends strong support to the UK Government’s decision to leave the Single Market, and to seek a comprehensive bilateral free trade agreement. However, the experience of 14 countries that have been trading with the EU under WTO rules also offers reassurance to the UK negotiators who may have to decide that no deal is better than the bad deal they have been offered by the EU,” says Burrage.

But Services Sector Exports at Risk

However, Burrage concedes there are risks for one of the UK’s most important sectors - the services sector.

He notes that national aggregate statistics may hide sectors that have benefited from Single Market directives.

“Banking is the notable example since passports authorised under several EU directives enable banks to trade anywhere in the EU,” says Burrage. “Estimates show that, in the absence of a specific agreement, there is a risk of a significant decline in the pan-EU services of UK-based banks.”

These estimates are, however, unable to say how far alternatives, such as subsidiaries or access by third countries deemed equivalent, would reduce or eliminate these risks.

Aviation is another service sector cited by Burrage that might suffer from leaving the Single Market, though the probability of leaving without some agreement on this is considerably lower.

But, the evidence in the databases drawn on by Burrage suggests that the other supposed benefits of the Single Market are largely imaginary.

“There is, for example, no evidence that Single Market membership has had a positive impact on UK GDP or productivity growth, one of the main expectations both of EEC membership and of the Single Market,” says the author.

Foreign Direct Investment and the EU

And there is another interesting view that will shake the consensus view of what the single market means for the UK.

Burrage argues it is extremely difficult to determine whether Single Market membership has boosted foreign direct investment (FDI) in the UK.

Since 2007, the European Commission has itself been concerned about the failure of the Single Market to attract international investment, and it has not revived, as it has in many other areas, since the financial crisis.

The mean value of FDI stock of EU members is low by comparison with many independent countries, which does not suggest that EU membership per se has been a powerful attraction.

“Overall, the evidence shows that the disadvantages of nonmembership of the EU and Single Market have been vastly exaggerated and that the supposed benefits of membership, whether for exports of goods and services, for productivity, for world-wide trade, or for employment, are largely imaginary,” says Burrage.