David Davis doesn't understand

Opinion piece (Prospect)
06 September 2016

David Davis, the Secretary of State for Exiting the European Union, gave little away yesterday in his first statement to the House of Commons on the process for Brexit. But he did say, “Access to the Single Market is not really up for grabs. It is there for everybody. There are many, many countries, many countries outside the European Union that do a better job, frankly, of exporting to the single market than we do, even without a trade arrangement. So of course we want to have access to the Single Market. We don’t need to be a member of it to do it.” His remarks betray his failure to grasp the nature of the Single Market and his failure to acknowledge the Single Market’s role in boosting trade in goods and services among its member-states.

Of course, non-EU member-states are free to export to the EU, but they have to contend with EU tariffs on goods and non-tariff barriers that make it hard to export services into the EU market. A Japanese car manufacturer exporting to the EU faces tariffs, which explains why Japanese car firms, such as Nissan and Toyota, (and their US competitors, Ford and General Motors) produce cars in the single market to circumvent these costs. Even if the UK succeeded in negotiating tariff-free access to the EU market (a big if, given that the EU demands Switzerland abide by freedom of movement rules in return for tariff-free access), exporters from the UK into the single market would still face rules of origin: the non-EU content of the goods would be subject to tariffs.

More crucially, the UK would lose access to much of the EU’s services market. The EU has been gradually reducing non-tariff barriers to services among its member-states by agreeing common regulatory standards or mutual recognition of standards. The UK has been perhaps the principal beneficiary of this; in 2015, 45 per cent of UK exports comprised of services and the EU is easily the most important market for them. A graphic case in point is financial services: London is the Single Market’s financial hub, but it can only perform this role if Britain is in the Single Market; outside of it London-based firms with lose the right to sell their services unimpeded across the EU.

Davis is right to stress that the UK’s export performance is mediocre; and there is no shortage of supply-side failures to account for that, from poor infrastructure to weak skills. But he is plain wrong to contend that Single Market membership has no impact on UK trade with the rest of the EU. All the evidence suggests that the UK exports far more to the EU than can be explained by geographic proximity and income levels: the CER estimates that Britain’s membership of the Single Market has boosted British trade with the EU by 55 per cent. Were the UK to cede access to the Single Market, it would become a significantly less attractive place to manufacture goods to export to the EU, as the Japanese embassy made clear over the weekend. British services exports—which have risen two and a half times as fast as goods exports over the last 10 years, as exports of business and financial services have boomed, would inevitably take a significant hit.

Of course, Davis may be assuming that the UK will secure continued access to the bits of the single market that it likes—such as the single market for financial services—while opting out of the bits it doesn’t, such as free movement. But why would the other members-states agree to that? The single market is a package deal: it is all or nothing.

Simon Tilford is deputy director of the Centre for European Reform.