Policy Research in Macroeconomics

Single Market Mythologies

What is the Single Market?

Last week a cross-party group of MPs tabled an amendment to the Queen’s Speech calling on the government to commit to staying in the EU single market.  As a result of their support for the unsuccessful amendment, three Labour shadow cabinet members were forced to resign.

The amendment revealed a possible confusion by its supporters about the nature of the single market and the European Union.  The wording of the amendment, which includes no reference to citizens’ rights guaranteed by EU treaties, implicitly suggested that 1) the single market provides trade access to the 27 countries of the Union; and 2) that the single market is the most important aspect of EU membership, indeed its core. 

Both are wrong.  Under international trading rules exporters anywhere in the world can export to or import from the European Union – have “access”.  The average tariff for non-EU members is less than 3%.  The average for a specific country depends on what it exports.  One of the highest EU rate falls on automobiles (10%), though this tariff is unlikely to negatively impact on UK car producers.  EU car imports were three times exports in 2016 (€14.6 billion in exports to the EU 27 compared to imports of €44.7 billion).

EU trade with non-EU countries also indicates nuances on the issue of “access”.  In 2015 the 27 EU (other than Britain) exported over a third of their goods to non-EU and non-UK countries.  For three of the four largest countries the share was over 40% (Italy 43, Germany 42, France 41 and Spain 36).  A rather surprising EU trend has been the relative decline of intra-trade, from 69% in 2003 to 63% in 2015 (Eurostat Figure 5).

More important than the structure of EU trade is that the post-WWII European unity movement was not primarily about trade and certainly not about free trade.  The European Union represents the continuation of the post-war project that began with the formation of the European Coal and Steel Community in 1951, whose purpose was not competition but cooperation among the members (Belgium, France, Germany, Italy, Luxembourg and the Netherlands).  

For the next three decades the central purpose of this and subsequent stages of European integration was peace among European governments that had been engaged in colonial rivalry, proxy wars or direct conflict for over a century.  Overwhelming emphasis by the European Commission on the purely economic aspects of European integration – the “single market” – dates from the (Thatcher-inspired) Single European Act of 1986, and then the Maastricht Treaty and introduction of the euro.  This emphasis derives from the growing hegemony of neoliberal ideology in Europe, especially in the German government and the German central bank (Bundesbank).

The Single Market and Saving Jobs

A commonly encountered anxiety cited by the amendment rebels is that withdrawing from the EU single market will result in UK job losses.  The logic behind this anxiety seems so obvious that no reasonable person would contest it:  British businesses hire people who produce goods and services and a portion of these are exported to EU countries; ending full EU membership would reduce these exports and as a result those businesses would lay people off.

More EU exports mean more British jobs; therefore, less EU exports mean fewer British jobs.  As obvious as this logic may seem, when deconstructed into its analytical parts we discover that it is at best partially true and could be wrong.  

To make this simple I start with what is usually cited as the worst outcome, that the UK government reaches no agreement with the Council (the formal body for EU governments) on future trading arrangements.  As a result British exporters must pay EU tariffs on their goods (there are no tariffs on services which are regulated by other rules).  

As a result of British goods increasing in price in EU countries, exports may fall and employment in the UK may fall.  However, for at least two reasons total UK employment may not fall.  First, if EU tariffs cause UK exports and employment to decline, then it must also be the case that UK tariffs will make EU exports decline.  The lower EU exports may in part be replaced by UK production, which would increase domestic employment.  

If goods trade between Britain and the EU 27 were equal (our EU exports = our EU imports) and in similar products, we would expect the UK tariff gain to more or less equal the EU tariff loss.  In 2015 the balance was a negative €120 billion (about £86 billion), which was over two-thirds of the average of imports and exports.   Because of this deficit we can reasonably conclude that the net impact on UK employment of EU trading through tariffs is not likely to be negative, though it could result in job losses in some sectors offset by gains in others.

Second, sales lost in the EU 27 countries by UK good exporters might be diverted to non-EU countries.  UK goods trade with non-EU countries has grown faster than with the EU 27.  This is part of a more general trend, with the EU 27 countries increasing their extra-EU trade faster than EU internal trade.  To a great extent the austerity-constrained slow growth of the EU economies explains the relatively stagnant internal goods trade.

Politics of the Single Market

That tariffs induce increases in domestic employment should come as no surprise.  It is a trade policy known to past generations as “beggar thy neighbour”.  As the great British economist Joan Robinson explained 80 years ago, tariffs do indeed tend to increase employment in the tariff raising country.  As a result, employment falls in the country hit by the tariff, inducing its government to match or exceed the level initial tariff attack.  The result can be a tariff war in which political relations among trading partners deteriorate, in the extreme case to armed conflict.

Rather than facilitating trade for its own sake, the creation of the European Coal and Steel Community and the subsequent European Economic Community sought to prevent this sequence, tariff wars leading to political conflict.  The wording of the amendment to the Queen’s Speech mentioned at the outset of this article sought to preserve membership in the single market without simultaneous commitment to the political and social goals of European cooperation and unity.  

If that interpretation of the amendment is correct, it embodied a narrow, purely economic view of our relations with the continent.  This focus on the single market as a “free trade” goal desirable in itself is part of the globalization ideology that has weakened support for EU membership in Britain as well as across Europe.  It may well be that those voting for the amendment acted on their convictions; if so, the convictions were definitively neoliberal.

One Response

  1. If, as you suggest, those who voted for the amendment are pro tariff-free trade for the UK as a member of the Single Market, it doesn’t necessarily mean that they also endorse laissez faire economics or that they are against all regulation of markets. So to label their instincts ‘neoliberal’, – which also implies an ideological attachment to shrinking the state- is quite a leap, and neither accurate or fair.

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