The UK and the single market By John Springford
This article was submitted as evidence by the Centre for European Reform for the review of the balance of competences between the United Kingdom and the European Union (Internal market)
What are the essential elements of an internal market and against what criteria should we judge its economic benefits? How deep does it need to be to be effective? There is no threshold beyond which the removal of trade barriers becomes ineffective, at least in economic terms. Barriers to trade are numerous, and eliminating them is a potentially limitless process. Thus, a truly internal market may only arise in a highly centralised nation-state. Once countries have cut tariffs to zero, import quotas can go, then goods safety standards can be harmonised. Free labour and capital movement allow the two main elements of the production process to move to the places where they may be most productively deployed. A completed single labour market would have common qualifications, pensions, and unemployment insurance. Tax differences distort trade – especially consumption and corporate taxes – and so a ‘completed’ internal market would harmonise tax rates. It is more useful to think about the European single market as a continuous bargaining process between member-states, who want both the growth in trade that arises from integration and also regulatory sovereignty – but must choose. The degree of integration reflects how far nation-states are willing to go. Negotiations between nation-states will not arrive at a magic formula that perfectly balances national regulators’ knowledge of local markets and firms, democratic accountability, and trade opening. Trade-offs and deals, based upon memberstates’ perceptions of their interests, predominate. There is, no doubt, poorly drafted and economically costly regulation that emanates from Brussels, and some of it is more illiberal than Britain would choose. Much employment legislation probably imposes more costs than it confers benefits. But the single market’s bargaining process means that losses must be set against gains. No ‘Goldilocks’ formula for a perfectly functioning market is available.
Has the bargaining process delivered much trade? And at what regulatory cost? Unfortunately, an accurate cost-benefit analysis of single market legislation is impossible. There are over 3,000 single market directives and regulations in force, each of which gives benefits to producers, workers, or consumers, as well as imposing costs on them. European Court of Justice rulings add to the body of single market law. And its costs and benefits vary by member-state, because national governments are free in many cases to strengthen EU regulations, by adding rules as they are written into national statute. Some have attempted to quantify the costs incurred by the British economy by EU regulation. We should be very wary of these estimates, for two reasons. First, they are based on the UK’s impact assessments, which mostly do not put a number on the benefits. Second, they do not evaluate the counterfactual: would regulation imposed by British authorities be less costly? However, various empirical analyses have been conducted to examine how much extra trade the single market elicits. One is the ‘gravity model’, which establishes how much trade one might expect between countries, given the size of their economies, their distance from one another, and other factors like a common language. If EU countries trade with each other more than the expected amount, this means the EU’s single market and, to a lesser extent, the euro are responsible. The UK Treasury estimates that the EU’s internal market as a whole – customs union, four freedoms of movement, and removal of non-tariff barriers – has boosted trade between EU members by 38 per cent of GDP. The Treasury researchers found a much smaller impact on Britain than for the EU as a whole – it led to an increase in trade of around 7 per cent of GDP.1 The European Commission estimates that the single market programme from 1992 produced
1: UK Treasury, ‘EU membership and trade’, 2005. .
The UK and the EU single market March 2013
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