John Redwood: The UK, the single market and the customs union

John Redwood

This week the pound weakened a little. This was put down to people in the markets thinking the government would order a “hard” Brexit, which they expect to be bad news for future trade and output.

This was a surprising reaction, as the Prime Minister’s language was little different from her past speeches and interviews on Brexit. She has denied there is any such thing as hard or soft Brexit. She has always said the UK will want to run its own border policy, which means ending freedom of movement with the rest of the EU. She has always said she wants to remove the powers of the European Court of Justice and restore to the UK the ability to make and enforce its own laws.

Neither of these aims is compatible with staying in the so-called single market. The UK government has also made clear its wish to negotiate free trade agreements with non-EU countries. It has set up a specialist Department of Trade to do this. Being part of the EU internal market and customs union would not allow one country to pursue its own free trade agenda with the rest of the world.

The truth is there is no single market to belong to for a non-member of the EU. The single market is defined as the EU’s internal market by the Treaties. Members of the internal market are also members of the whole EU. As we are constantly reminded by the Commission and others, members of the EU/single market have to accept the four freedoms, which include freedom of movement. They have to make contributions to the budget. Belonging to the single market but not belonging to the EU is unlikely to be on offer.

The Prime Minister has also ruled out being like Norway or Switzerland. They belong to the European Economic Area, accept the laws of the EU internal market, and accept freedom of movement. The EEA has been seen as a grouping a country can join, with the thought in mind that it is on its way to becoming a full member of the EU. Both the Swiss and Norwegian governments in the past have wanted to join the EU but have been unable to persuade enough voters to agree.

The issues to be settled in discussions between the UK and the rest of the EU after the official notification of our departure has been sent in the form of the Article 50 letter relate to future access to the EU’s internal market. The discussions will centre around which agreements, collaborations and joint workings will continue and what will be the basis for that. The central one is future trade. There are two obvious models that could be adopted.

The first is to go to Most Favoured Nation trading under WTO rules. This would entail the imposition of a low average tariff on goods. The rest of the EU would have a far higher tariff cost on its exports to the UK than the UK would face on its exports to EU, thanks to difference in volume and the nature of the goods. Agricultural products attract high tariffs, and cars are taxed at 10%. The substantial tariff income enjoyed by the UK state in such an event could be given back to UK consumers and companies to compensate them in legal ways under WTO rules for the extra tariffs they are paying. The second is to continue with current tariff free trade, and register the current arrangements as a Free Trade Agreement with the WTO. Some people think there is a third way, something between the two, a UK deal. This could prove difficult to negotiate, and too much delay trying to do so would add to the uncertainties.

It was interesting that some market commentaries also attributed the further rise in the FTSE100 to the weaker pound. The FTSE 250 and small cap indices also rose, though these companies get less benefit from a lower pound. The rise and rise of the UK markets over the last month seems to be more related to the continuing good economic news. This has surprised all those forecasters who expected a winter recession or slowdown, and is leading to numerous upward revisions to forecasts. We are watching the activity figures carefully. So far they tell a good story, despite the worries of some over future trade and investment. Future market progress will require good advances in company earnings, and no big disappointment over other matters.

John Redwood is Charles Stanley’s chief global strategist.