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Brexit and the EU Single Market

One question asked by many people is what happens regarding the UK's participation in the European "single market" as a result of the UK's decision to leave the EU. Even among many people who are opposed to continued EU membership, the single market is widely perceived as a positive feature  of the European Union from the UK's perspective and from the business perspective.

But it is not always well understood exactly what the single market consists of.  In fact, there are a number of different strands or elements which make up the rules which define the single market.  Not all of these are beneficial to the UK and some aspects of the single market rules are downright harmful.

The elements which make up the “single market”

The single market (in fact called the “internal market” in the EU Treaties) is defined in Article 26(3) of the Treaty on the Functioning of the European Union (TFEU) as follows:-
The internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties.

1. The Customs Union and the Common Commercial Policy

Article 28(1) TFEU states that:
1. The Union shall comprise a customs union which shall cover all trade in goods and which shall involve the prohibition between Member States of customs duties on imports and exports and of all charges having equivalent effect, and the adoption of a common customs tariff in their relations with third countries.
The EU customs union means that goods are not subject to tariffs when they cross borders between Member States within the EU.  This is obviously beneficial for free trade.  But there is a down side.  The fact that the EU is a customs union means that all Member States including the UK must apply the EU common rate of customs tariffs to all goods entering them from outside the EU.  Member States are not allowed to vary from these rates in either the higher or lower direction, since this would lead to goods entering the EU through the ports of the country with the lowest tariffs and then being re-exported to other Member States tariff-free inside the customs union.

It also means that Member States are not allowed to conclude trade agreements with non-Member countries.  Such agreements are covered by the EU’s “common commercial policy” which is one of the EU’s “exclusive competences”. So, only the EU as a whole can do trade deals with non-EU countries.  The problem with this is that, largely thanks to the diverse and sometimes protectionist interests of certain powerful Member States, the EU has in fact been remarkably poor in successfully concluding trade agreements with countries outside the EU’s own sphere of clients states in Eastern Europe, North Africa and ex-colonies of some of its members.

One consequence of belonging to the customs union is that the UK is required to impose high tariffs on some categories of goods where the UK no longer has any significant domestic industry to protect - for example, textiles and footwear.  This results in UK consumers having to pay higher prices for these goods than they are available for on the world market, with the benefit of the higher prices going to the protected industries in other EU states.

Accordingly, being in a customs union is far from being an unmixed benefit of EU membership.  While tariff-free movement of goods is beneficial to UK exporters and to UK consumers who sell products to or buy products from other EU Member States, the down side is (1) having to comply with the EU common customs tariffs which can drive up prices of goods from non-EU states, and (2) being unable to negotiate trade agreements separately from the EU.

However, being inside a customs union is not the only way to enjoy tariff-free access to its market.  The alternative is to have a free trade area (FTA) agreement with it.  The difference is that an FTA does not require its members to adopt uniform external tariffs in trade with third countries nor to give up their independent ability to do trade deals with them.  This is because an FTA only applies to goods which originate within the members of the FTA, so the problem of third country exporters avoiding higher tariffs by routing imported goods through one member of the FTA with lower external tariffs does not apply. On the other hand, it is necessary for customs authorities between the FTA members to check that goods do originate within the other FTA member (according to “rules of origin”) in order to be entitled to tariff-free access.

Currently, there is only one major non-EU country which is within the EU customs union, namely Turkey.  There are numerous European and non-European states which enjoy tariff free access to the EU single market via free trade agreements, including the EFTA states (Switzerland, Norway, Iceland and Liechtenstein). In fact, all European countries outside the EU have tariff-free access to the EU single market under FTAs with the exception of Russia and Belorussia.

2. General rules against barriers to free movement of goods and services

A second and very important aspect of the EU single market is that under general rules contained in the Treaty on the Functioning of the European Union (TFEU), Member States are not allowed to apply laws or regulations which unjustifiably prevent or discriminate against goods or services imported from other Member States. 

There is a large body of case law which the ECJ has built up in this field.  These general rules apply both to governmental regulatory actions, and also to certain actions by private companies - for example, attempting to enforce intellectual property rights in one Member State in an attempt to keep out goods which the company owning the rights has itself placed on the market in another Member State - normally in order to keep prices higher in the Member State of importation.

These general rules on free movement are beneficial both to exporters of goods and services and to consumers, since they will tend to lower prices and widen choice.  But again, there is no actual need to be inside the EU single market in order to enjoy market access based on these general rules - most of the EU’s trade agreements with non-EU members contain some or all of these general rules.

3. Harmonisation of laws and regulations

The third and more controversial aspect of the single market is the harmonisation of laws and regulations.  The starting point is the uncontroversial point that differences between laws and regulations which apply to goods and services can act as a barrier to trade.  Therefore, having a system where rules and regulations are the same across all Member States can reduce those barriers.

However, there are problems with this approach.  First, under the EU system there is constant pressure to regulate upwards: the most stringent level of regulation among the various member states tends to get copied into the common EU regulation and then replicated across all Member States.  Secondly, with very limited exceptions,  harmonisation measures can be imposed on dissenting member states by Qualified Majority Vote (QMV).  This has particularly adverse consequences for the UK in certain sectors, notably in financial services where the UK’s interests tend to diverge markedly from those of the Eurozone countries who have the power to pass measures under QMV against the UK’s opposition.

It is a truism that an exporter who wishes to export goods or services into an export market will need to satisfy the regulatory standards imposed in that market.  However, a clear down side of being within the EU single market is that only 15% of the UK economy is involved in exports into the EU but 100% of the economy consisting of sales to the domestic market and non-EU export sales is subject to the single market regulatory burden.

4. Free movement of persons

Under Article 45 of TFEU, the free movement of “workers” is also an aspect of the EU single market.  This was comparatively uncontroversial at the time when the UK joined the EEC in 1973, when standards of living in this country and in other Member States did not diverge too far.  It has become controversial since the accession of the former communist Eastern European states with their lower standards of living led to high migration flows into the UK.

While this is a component of membership of the single market under the EU treaties, it is not an intrinsic or necessary condition of access to the single market for goods and services.  The EU’s external trade agreements do not in general contain provisions allowing from the free movement of workers. The exceptions are in its agreements with the four EFTA states, which were concluded at a time before the mass migration problem from Eastern Europe arose.  (For example, the EU/Swiss agreement on free movement was concluded in 2002: Official Journal L 114 , 30/04/2002 P. 0006 - 0072)

5. Social policy and employment rights

Some people who believe in the benefits of the single market for UK business are unaware that workers’ rights and social policy are regarded as an aspect of the EU single market.  This includes health and safety measures, which can be imposed under QMV.  Notoriously, the Working Time Directive was imposed against the opposition of the UK when the European Commission re-badged this social measure (against which the UK would have had a veto under the Treaty) as a “health and safety” measure.

There are however numerous other EU measures in this field, which the ECJ tends to interpret in a very expansive manner.  For example, it has recently held that under the working time directive, a worker who falls sick while on holiday is entitled to more holiday time in lieu to compensate.

UK businesses are of course competing in global markets with companies from countries which do not have these EU-style social rights.  Having such rights is not a necessary condition for market access.  If the UK had a free hand in this area of law, it would not lead to a bonfire of workers’ rights or the ending of all protection, but it is very hard to believe that the costs to business cannot be reduced without harming essential interests of employees by escaping from this detailed and restrictive straitjacket of single market rules.

6. “Fortress Europe” restrictions on trade with non-EU states

Finally, there is a very important but often neglected feature of the EU single market.  This is the restrictions which single market rules impose upon Member States against trade with non-EU states.  An example is the ECJ case about licensing of agrochemicals (Case C-100/96 R v. MAFF ex p British Agrochemicals Association [1999] ECR I-1499), where the ECJ ruled that it was contrary to Community law for the UK Ministry of Agriculture to grant licences to products from non-EU countries which were identical to,  and from the same source as,  agrochemicals licensed here.   Thus, the UK was compelled to ban the import of these products from a non-EU country because they had not gone through the EU-mandated regulatory system even though there was actually no objective reason at all for excluding them.

The same “Fortress Europe” mentality also applies in the field of intellectual property, where the ECJ has ruled that trade mark rights can be used by trade mark owners to exclude their own genuine goods from the EU market.   Tesco bought stocks of genuine Levi jeans in North America where they were on sale cheaper than their UK prices and imported them to the UK.  However the ECJ ruled that Levi Strauss could use its trade mark rights to prevent the importation and sale of its genuine jeans, because it had not consented to the placing of these particular consignments of jeans on the UK market (Case  C-415/99  Levi  Strauss  &  Co  v  Tesco  Stores).

The extraordinary thing about this series of cases is that the ECJ has interpreted EU law in order to compel the UK to impose restrictions against imports of goods from non-EU states in circumstances where imposing such restrictions would be diametrically contrary to the single market rules and principles if it had been a case of trade inside the single market.  And yet the effect on the market and on consumers is just as damaging: it allows multinational companies to milk UK consumers for higher  prices than they charge in their own home markets.  The ECJ’s reasons for imposing these restrictions are frankly hard to discern, but seem to stem from a doctrinaire desire to isolate the EU single market from world markets.

This is an undoubtedly damaging aspect of the single market, which is suffered by countries within the single market who are subject its regulatory obligations and to the ECJ’s interpretation of those regulatory obligations.  Outside the EU, the UK would be free to adopt a much more permissive and pro-free trade approach in its relations with non-EU states, to the benefit of consumers and of industry based here.

Conclusion

Although the “single market” is most often viewed positively in economic terms, in fact it consists of a number of different elements some of which are positive, some of which are more equivocal, and others of which are downright negatives.  In this category are the fact that it requires the UK to impose sometimes inappropriate tariffs and prevents the UK from negotiating its own trade agreements, and the “Fortress Europe” regulatory restrictions against imports from non-EU countries which damage consumers and drive up costs needlessly.

Access to the single market is not the same as, and does not necessarily require, membership of the single market with all the negative aspects which that involves.

Further reading: Daniel Hannan MEP argues that the "single market" is a misleading title: see
Remain campaign is misleading voters on the Single Market