#Brexit Facts
Current Brexit debate makes it clear for Britain that leaving the EU would also mean leaving the European Single Market. Surprisingly again, there is no clear communication on the economic implications of this decision as well as on how much damage would leaving the Single Market cause to the UK economy.
In this post, I will discuss why the EU Single Market access mattered for the UK and whether or not a Free Trade Agreement with the EU could be a good substitute to the Single Market?
The short answer to the second question is ‘NO’! The EU Single Market access cannot be replaced by a trade arrangement for various reasons:
Services Trade with the EU matters to the UK economy!
The EU is the largest trade partner of the UK in services. The UK sells more services to the EU countries than it buys from them. In 2015, services trade with the EU generated a surplus of £21 bn. In addition, more than 80% of the UK jobs are in services and services production creates more value added in the UK compared to the manufactured goods.
The picture is radically different when we look at trade in goods with the EU. The UK doing much worse in exporting manufactured goods and has a structural trade deficit with the EU in goods. Moreover, the UK manufacturing sector is extremely small (accounts for 10% of total employment) and much less productive compared to other advanced economies.
All in all, services trade is key to the UK economic growth!
Why would a Free Trade Agreement with the EU not work for services?
A Free Trade Agreement for goods ensures that no taxes, tariffs and other barriers would be imposed on goods that are traded within a specific area. This could function pretty well between the UK and EU as goods can be easily traded from distance and be shipped from the seller country to the buyer.
Things get much more complicated when it comes to trade in services: First al all, services trade means setting up shops and offices overseas and people travelling to sell and buy the services in question. This goes without saying that the free movement of people becomes one of the key elements here. More importantly, trading services makes it necessary that the same set of rules applies to all trading partners. To illustrate, take services like finance, healthcare, restaurants, airlines etc. Their free trade from one country to another requires common rules and regulations to establish a level playing field. In the same way, to guarantee a standardised product quality to customers, mutual recognition of the traded products would be necessary.
Here the difference between the Single Market and a Free Trade Area becomes critical: There is no comprehensive free trade deal in place between major economies so far. By definition, a free trade area in services would require free movement of capital and people (in addition to goods) and the establishment of a single set of rules.
One thing is sure that the EU would always set the rules for the EU market. If the UK decides to continue to sell services to the EU market, it would need to implement the EU regulation without having any possibility to influence it. This is exactly the case of Norway. In order to keep its Single Market access, Norway contributes to the EU budget (as much as the UK) and allows the free movement of people.
To summarise, in contrast to what was said in the Brexit propaganda, UK setting its own rules and freely trading services with the EU is simply not compatible! This is also surprisingly missing from the current Brexit negotiations debate which, to my sense, will end up but taking or leaving whatever deal the EU will offer to the UK.
I hope you found this article helpful. Please leave me a comment for feedback and questions.