The UK, led by Margaret Thatcher, drove the creation of the Single Market. Here’s how we could lose if we now leave it.

by ukcivilservant

The creation of the European Single Market was driven by Prime Minister Margaret Thatcher and her appointee as a European Commissioner, Lord Cockfield. They recognised that a genuinely open market had to be free of all regulatory obstacles (aka non-tariff barriers) to the free movement of goods and services. The Single Market was essentially completed by 1992 and exporters can now call on the European Commission and European courts to remove any new obstacles.

The downside, of course, was that individual member states could no longer develop regulations to suit their own cultures and economies – and so we see a certain Europe-wide homogeneity. Indeed, much standard setting is now worldwide: Ford’s Mondeo being the first of many vehicles designed for a worldwide market.

But the growth of ‘just in time’ manufacturing means that many firms are still very concerned that their businesses on both sides of the UK/EU border might experience significant post-Brexit impediments and delays in ports and at customs posts.  I understand that one major bank has estimated that – if the UK were to lose unfettered access to the Single Market – the consequential non-tariff barriers could impose a cost on exporters equivalent to a tariff of 10-15%.

The rest of this post contains examples of the various non-tariff barriers that might appear post-Brexit, without seeking to draw conclusions about the likely impact of those barriers, which is for others, more expert than me, to assess.

The most quoted example was the Germans attempt to impede the import of Cassis de Dijon, a blackcurrant liqueur which has an alcohol content of only 15-20%. German law used to require all fruit liqueurs to have an alcohol content of at least 25%. While this may have pleased the producers of German spirits, the rule was bad news for the French producer and denied German consumers the delights of French crème de cassis. The EU court said that the German rule interfered with free movement of goods: it stopped French cassis (which had been lawfully produced in France) from being sold in Germany. The Germans sought to justify their rule on the grounds of public health, as they wanted to avoid the proliferation of alcoholic beverages with low (<25%) alcohol content since these might be a stepping stone to indulging in stronger concoctions. The court wasn’t convinced. The German rule was found to be against EU law and so had to be removed.

More recently, Bulmers Cider used the European Courts to ensure that it could sell its product in 0.33l bottles despite a Belgian Royal Decree that such bottle sizes were banned. This led to importers into the UK being able to ignore UK ‘prescribed quantities’ whilst domestic packers had to comply – so the UK, too, then had to abandon  prescribed quantities. A neat bit of deregulation courtesy of Europe!

It might be helpful if we look at seven different types of non-tariff barrier:

1. Innovation: There could be problems if the EU were to develop regulations affecting the sale of UK products elsewhere in the EU without input from the UK. Vehicle regulations, for instance, are frequently amended to permit the introduction of new technologies, to improve cyclist safety, to reduce emissions and so on. This isn’t a problem as long as

  • UK officials (briefed by UK companies) are on the committees that present the changes to Ministers for approval, and
  • we have plenty of notice of the date on which the changes come into force.

However, if we leave the Single Market, there will no longer be any UK officials at EU meetings, so we may no longer know what changes are being proposed, nor when they are likely to be introduced, and we can be pretty certain that our competitors will encourage their governments to promote changes that will disadvantage those products in which UK manufacturers have strengths not shared by EU competitors.

This problem is mitigated in the case of established products by a complex set of international agreements which facilitate the international marketing of vehicles and many other products – see Andrew Chapman’s first very helpful comment below for more detail.

But the problem will be greatly magnified if we are interested in selling new technology, such as bio-engineered products or the control systems that will permit driverless cars. It will be very difficult quickly to take such products to market if we are not able to influence the regulations that will allow such products to be sold throughout the EU.

Vehicle emissions rules are a good example of the sort of problem that can arise.  A German backed proposal would have allowed manufacturers to work to an average of their emissions across their whole fleet – so BMW could produce luxury cars that produce more emissions than the average but offset those with smaller, less polluting models.  This was a big problem for Jaguar Land Rover, who only make top-end luxury cars.  The UK eventually gained a derogation to protect JLR in the emissions rules.  But this would not have been possible if we had not been involved in the design of the regulations.

James Dyson (inventor of bag-less vacuum cleaners) hit a similar problem when he was surprised by new EU energy-saving rules which meant that competitors’ machines were only tested when they were empty of dust which therefore under-recorded the environmental impact of the vacuum cleaners that used bags. The result was that he is no longer allowed to make vacuum cleaners with a motor that exceeds 1,600 watts. (This rule change had been mistakenly approved by Department of Energy officials and Ministers who had not realised the implications for Dyson.)

It is, however, only fair to point out that Eurosceptics complain that the need to achieve harmonisation can significantly delay the innovative process. It would be much better, in their view, if we could innovate as fast and as often as we wish, and leave the rest of the world clamouring to buy UK products.

2. Intellectual Property Rights (IPR), and Manufacturing Regulations and Standards: Trade will be disrupted if there develop two separate systems of IPR protection, and of the certification of safety etc. standards in fields such as chemicals, medicines, IT, and communications. These are, for instance, currently harmonised in the form of CE Marks, the Restriction of Hazardous Substances (i.e. lead/mercury-free) Directive, the REACH (chemicals) Regulations and the Good Manufacturing Practice Guidelines. Maybe we can safely assume that the UK will continue to impose such European regulation on UK business, in order to help exporters and importers? But UK Ministers and officials may not be able to influence the future development of such regulations, and may come under pressure to develop our own regulations maybe leaving us in a weaker (and more regulated) situation than now.

3. Food health scares (whether justified or not) almost inevitably lead to import restrictions which usually continue far longer than necessary following lobbying by domestic farmers and other producers. The United States, for instance, will begin to allow the import of British beef and lamb from January 2017, nearly 20 years after they were deemed unfit for consumption during the UK’s vCJD (mad cow disease) scandal. This is worth £35 million a year. But the EU was persuaded by the UK to lift its import ban (which had anyway applied to beef only) much more quickly – around ten years ago.

4. Services:- Mutual Recognition: UK professional qualifications are currently widely accepted through the EU. But architects, lawyers, nurses, accountants, hairdressers and many others will not be able to practise outside the UK if there is no reciprocal freedom of movement, and they could anyway well find that they meet ‘interesting’ local barriers if they were to seek to offer their services in the EU after Brexit.

There is a related issue in the financial services sector where the ‘single passport’ system allows e.g. Japanese banks to base themselves in London but offer finance (for instance for vehicle sales) throughout the EU. But continuing to subscribe to this system would mean accepting continued convergence between UK and EU regulations, so limiting the extent to which the UK would be free to go its own way.

The debate about whether EU membership encourages or stifles innovation is very relevant, of course – see above.

5. Packaging and Labeling: This is an easy one. Text TOO BIG, too small, wrong colour? More information needed? Change the regulation and the UK will either have to fall into line or else UK exporters will need to cope with two sets of regulations – one UK, one EU – if they are to avoid having their products stuck in Customs warehouses.

This leads nicely to …

6. Customs Formalities: There are currently almost no customs documentation, checks and delays when products cross the Channel. This will have to change, and this will add delay, and hence cost, to all export businesses – and importers as well. Rules of Origin may well be a huge problem as the other 27 Customs authorities will need to be sure that products being imported from the UK – at UK/EU tariff rates – did not in fact originate elsewhere.

It will also become very easy for an unfriendly bureaucracy to hold products for many days or weeks whilst they laboriously double check that the products comply with all the necessary product, labelling, rules of origin, and other regulations. “It’s such a shame that the appropriate expert is on holiday just at the moment and, no, I am not too sure when he will be back. And there is unfortunately such a backlog …”

The classic example was in 1982, well before the creation of the Single Market. The French Government, determined to protect the video cassette recording (VCR) market from the invading Japanese, selected Poitiers to be the customs bottleneck. Poitiers was chosen for two reasons: First, symbolically, because it was the town where the medieval Franks had turned back the Muslim hordes in 732 AD. Second, because Poitiers is right in the middle of France, so maximizing the journey the VCRs would have to take from any French sea-port. The New York Times reported that “tens of thousands of video tape recorders built in Japan and avidly sought by French customers are currently stacking up in warehouses. A handful of customs inspectors, hand-picked for slowness, has cut the clearances from 100,000 per month down to 8,000.”

7. Subsidies: Not really a barrier – but European rules currently prohibit much inter-member state competition to ‘buy’ inward investment, and these ‘state aid’ rules are policed pretty firmly, especially when one member state complains that another member state is being over-generous. But there is likely to be much less concern when the loser is the UK, and the grateful recipient of new investment – and jobs – is within the EU.

We, of course, will be equally free to start subsidising industries that are losing out to EU competition. You will have your own view about whether this will be a good thing.

So ….

What about Inward Investment? Imagine yourself sitting in Tokyo or Mumbai deciding whether to put down a new production line either in the UK or in an EU member state, both of which are vying for your attention and appear to offer similar costs and benefits – except for the threat of new non-tariff barriers, and the inability to influence European manufacturing policies. Did anyone ever get fired for choosing to invest in a market of 450 million people?

There is no short-term economic damage but slowly, year on year, the UK would begin to fall behind.

But, but, but … surely all these behaviours will reduce competition, raise prices, lower member state economic growth rates and harm EU consumers? Their imposition would surely damage EU GDP, maybe as much as the UK. Yes – but that applies to all trade barriers, including tariffs. Often, however, it makes political and social sense to impose tariffs and non-tariff barriers if they protect jobs in regions of high unemployment and/or in sectors that are under economic pressure. And large companies can be very persuasive when encouraging politicians to protect their business models against ‘unfair’ competition from those awful Anglo-Saxons.

Notes

Exports of goods and services to the EU in 2015 totaled £134bn and £89bn respectively. The equivalent figures for exports to non-EU countries were goods £149bn, services £136bn.

“Access to the single market” is a meaningless phrase. The key question is: “Can we trade without hitting tariff and non-tariff barriers”.

This is the fourth version of a blog originally published on 1 October 2016. I am very grateful to those who have commented – including those who commented below – and so helped me correct and improve the text. Further corrections and additional arguments would be very welcome – to 68rtsw8@gmail.com please.

 

Martin Stanley

www.regulation.org.uk  &  @ukregulation

And also  www.civilservant.org.uk  &  @ukcivilservant

Advertisements