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Analysis
Forgoing EU benefits is 'act of self-harm'

Forgoing EU benefits is 'act of self-harm'

Single market responsible for hundreds of thousands of UK jobs

by David Warren in London

Wed 23 May 2018

One of the most puzzling aspects of the arguments over Britain's exit from the European Union is the way the single market and customs union have been spun as something sinister from which the UK needs to escape so it can trade freely with the rest of the world.

The single market and customs union secure frictionless trade with the EU, Britain's largest export market. They also attract foreign direct investment into the UK, creating – according to government figures – 1,600 jobs per week in 2016. Why, then, has this powerful contributor to UK prosperity suddenly become a 'protectionist cartel' or something that 'dissuades' us from trading outside the EU, as the deputy chair of the Conservative party recently asserted?

I was a diplomat for nearly 40 years and spent much of that time promoting British trade and attracting foreign investment, particularly from Japan. Membership of the single market and customs union was a magnet for the latter, and no hindrance to the former.

The UK sells around £10bn worth of goods and services to Japan every year: power generation equipment, machinery and pharmaceuticals, as well as whisky and financial services. In value added terms, it is Britain's seventh largest market.

The EU is about to finalise a free trade agreement with Japan, the initial discussions on which started more than seven years ago. This will increase EU exports to Japan – now around £50bn – by up to one-third. All EU exporting countries – which includes the UK until March 2019 – will benefit.

Britain has a better chance of negotiating a bilateral free trade deal after Brexit with Japan than with some countries. But the UK cannot presuppose that Japan will simply cut and paste the existing deal. Tokyo will want to explore what concessions it can get from Britain that it couldn't secure in negotiations with the EU. And once the UK exits the existing framework, it will no longer benefit from the concessions that the EU has negotiated. The critical point is that being in the customs union and single market does not hold Britain back – as Germany, the world's third largest exporter, demonstrates.

Of course the UK wants to sell more. But trade is as much a function of world economic flows and geography as it is of governments' efforts to boost it through treaties and marketing campaigns. That is why, although the share of UK exports to the EU as a proportion of trade with the world is falling slightly, they still represent over 40% of total flows – around £240bn a year.

The importance of the existing arrangements for attracting investment is even greater. Over the last 40 years, Japanese investment in the UK has grown to over 1,000 companies, creating more than 140,000 jobs directly and many more hundreds of thousands in supply chains. It was Prime Minister Margaret Thatcher who first led this inward investment drive with Nissan and other car companies in the 1980s. The crucial selling point was that these investors would become British companies, selling into Europe through the customs union. This ability to trade without friction is as important today as then.

This is especially obvious in the automobile industry. Japanese car companies in the UK make millions of transactions every month with European supply chains. None of these have to be reported for customs purposes while Britain is in the customs union. That is the arrangement that Japan – and every country whose companies help to make the UK a centre for international investment – want to preserve.

Diehard Brexiters, who see 'taking back control' of every political and economic lever as the fundamental objective, will object to anything resembling a customs union. These are political arguments. But in the world of investment projects, factories, supply chains and jobs, these choices are not binary.

The existing arrangements support Britain's economic clout in the world. The UK is not held back by its inability to sign bilateral trade deals. Dispensing with the benefits it currently enjoys would be an act of self-harm. And if the response to that is that maintaining the current regime should make Britain wonder why it is leaving the EU in the first place, all one can say is – what a very good question.

David Warren was UK Ambassador to Japan between 2008-12. He is Chair of the Japan Society of the UK, an Associate Fellow of Chatham House and Adviser to Migration Matters Trust.

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