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Briefings

Single market: overview

in | by Hugo Dixon

Access to the single market is the most important reason for Britain to stay in the EU. But what exactly is the single market and how beneficial is it for us?

The EU’s free market has gone through various versions. Version 1.0 was what used to be called the common market, established by the Treaty of Rome. It was underpinned by the “four freedoms”: the free movement of goods, services, capital and people. The idea was that there would be free trade throughout what was then called the European Economic Community (EEC). Tariff barriers, or import taxes, were abolished between the original six members by 1968.

The countries also agreed to have a common external tariff. So France, Germany, Italy and the others imposed the same taxes on imports from outside the EEC. That was necessary. Otherwise, goods from, say, Japan could have come into the EEC via the country with the lowest tariffs and then circulated freely through the rest of the common market without paying any extra tax. The combination of free trade within the EEC and a common external tariff is known as a customs union. This was the system Britain joined in 1973.

Free markets and trade bring big economic benefits. If people are free to buy goods and services from abroad, they can shop around for the best prices and quality. It’s not just ordinary consumers that benefit. Companies are consumers too. If they get a better deal on what they buy from other companies, they will make more profits and give their own customers a better deal. The same logic works for governments, the biggest consumers of all. If they can shop around, they should be able to offer better quality public services and/or need to tax their people less than they otherwise would. Meanwhile, if companies are free to sell abroad, they can expand, create good jobs and generate wealth.

Similar arguments apply to the free movement of people and capital. Workers have more opportunities for interesting and well-remunerated careers if they are free to work anywhere within the EU. Companies have a larger pool of employees to choose from – allowing them to attract higher skilled or cheaper labour. Equally, when capital is free to move around, investors can get better returns on their money and successful firms can raise capital more easily and so grow faster.

Free trade also allows countries to specialise in what they do best. Take pharmaceuticals. The UK has expertise in making drugs, based on a strong research base and a 100-year track record. Two of the world’s pharma giants – GlaxoSmithKline and AstraZeneca – are headquartered here. A number of other EU countries, especially France and Germany, are also fairly strong in drugs. But most are not. It can take 15 years to develop, test and get regulatory approval for a new drug. Scientists need to investigate thousands of chemicals before hitting on a successful compound. Rather than every country trying to invent and then manufacture cutting-edge pharmaceuticals, an efficient market drives expertise into concentrated hubs.

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This specialisation and concentration leads to economies of scale. If a company can operate on a larger scale, it can get more efficient. The money it invests in research, manufacturing, marketing and so forth can be recouped by selling to the whole EU, and indeed global, market rather than having to be charged to just one national market. As it ramps up production, its average costs go down. EU consumers benefit, provided lower costs are passed through in the form of lower prices.

Jet engines are a good example. New technology has to be developed and thoroughly tested to make sure it is safe. Britain’s Rolls-Royce spends over a billion pounds a year on research and development. If each EU country built its own engines, their cost would be so prohibitive that none would be competitive. As it is, Rolls is the only European company at the top end of the market competing against America’s General Electric and Pratt & Whitney. Economies of scale allow it to invest in new technology and win customers on a global scale.

To ensure that economies of scale and efficiencies actually benefit consumers, there has to be competition between suppliers. If a single company can get a lock on a market or, by working with rivals, form a cartel, consumers will not benefit. Equally, if governments are allowed to subsidise national champions, that will prevent free and fair trade. The subsidised company will win more market share than it deserves, knocking out more efficient firms.

This is why competition policy has always been an essential part of the common market. The Commission has the power to investigate and punish monopolies and cartels, stop governments subsidising companies and block mergers that would be anti-competitive. Over the years, it has got better at promoting competition. Particular progress was made when Britain’s Leon Brittan was competition commissioner from 1989 to 1993.

Vigorous competition between firms has another advantage. When companies face the heat from rivals, they are spurred on to become more efficient and innovate. Being part of a large single market, therefore, has many benefits for the UK. What’s more, over the years, that market has got bigger and bigger. When we joined the then EEC, it had 257 million consumers. Now it has 510 million. In 2014, its GDP was $18.5 trillion. That’s a little bigger than America, whose large internal market is one of the sources of its economic success. Its GDP was $17.3 trillion.

When the Confederation of British Industry surveyed its members in 2013, it found overwhelming support for Britain to stay in the EU. Eight times as many wanted to stay as to quit. What’s more, six times as many warned they would be likely to cut their own investment rather than increase it, and eight times as many thought they would employ fewer people if we left the EU.

Exports to the single market help support 4.2 million jobs, 3.1 million directly and 1.1 million indirectly. We would be foolish to compromise our access to this market.

This is an excerpt from “The In/Out Question: Why Britain should stay in the EU and fight to make it better” by Hugo Dixon. 

Factchecking by Sam Ashworth-Hayes