WTO membership: third-class access

in | by Hugo Dixon

If we quit the EU and don’t negotiate any special deal with our former partners, we would have to rely on our WTO membership to secure access to the single market.

Advocates of this approach often argue that the EU is growing much less rapidly than other parts of the world – such as the “Brics” (Brazil, Russia, India and China). They also say that being in the EU makes it harder for us to trade with these markets because we have shut off their imports behind the EU’s tariff barriers. That artificially diverts our trade into the EU and away from other countries. A variation on the theme is that, if we quit the EU, we would regain a glorious period of trade with Commonwealth nations, many of which are now growing rapidly.

There is much that is wrong or muddled in these arguments. For a start, EU membership hasn’t artificially diverted much trade away from other countries: the Treasury has estimated it diverted only 4% of our trade with non-EU countries. What’s more, the EU’s trade-weighted tariff barrier is 1%. It could and should be lower. But, in most industries, tariffs are no longer the main obstacle to trade.

EU membership does not prevent us trading with other countries. It certainly doesn’t stop Germany. Its exports to China are three times as large as ours. And even though some Brics are growing faster than the EU, that’s hardly a good reason to jettison a market that is responsible for 44% of our exports and more than half of our imports. UK sales to the Brics were only 7.2% of our total exports in 2014. Even if we tripled those, that would make up for the loss of less than a third of our EU exports. What’s more, two of the Brics (Brazil and Russia) are struggling economically while all of them are hard to make money in because of corruption. The sensible strategy is not an either/or one but to trade with both the EU and the rest of the world.

It’s not even clear that a Britain outside the EU would be more open to trade with the rest of the world than it is today. True, some eurosceptic free-marketeers would want us to throw open our markets to all-comers. But many companies would argue that they would then be facing unfair competition and that we should only open our markets if others opened theirs. They might even press for barriers to be raised.

Meanwhile, those dreaming that we could somehow reconstruct the trading patterns of the British Empire via the Commonwealth are being romantic. Of course, we should boost trade with Australia, Nigeria, New Zealand, Pakistan, Canada, Bangladesh and so forth. But they do not form a single trading bloc. They all have their own strategies based on maximising trade, often in their back yard. They wouldn’t just open their arms and give us priority because we have quit the EU.

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    Australia, for one, is keen on Britain staying in the EU. Its foreign minister wrote to the British government in 2013 saying Australia “looks forward to seeing [the UK] continue as a leading economy and effective power. Strong, active membership of the EU contributes to this.”

    Finally, WTO membership would not guarantee us anything more than third-tier access to the single market. British goods would have to penetrate the EU’s tariff barrier, which is still important in areas such as agriculture and cars. Even more important, our goods and services would face many of the “non-tariff barriers” that we have spent years patiently removing. Non-tariff barriers are practices that make it difficult for goods and services to be sold across national frontiers. Examples include rules that cars must have brakes that conform to a specific national standard or that companies wishing to supply the government must be based in its country.

    Relying solely on the WTO would be particularly damaging given that 78% of our economy is based on services and the WTO has managed to do precious little to open up trade in services, including finance.

    Remember, too, that many companies invest in the UK as a launch-pad for serving the entire EU market not just the British one. We are the world’s sixth largest recipient of foreign direct investment after China, America and Brazil. The stock of inward investment is equal to over half our GDP, the highest among the world’s biggest 10 economies. Foreign investment generates jobs; it also boosts productivity since it tends to be the most successful firms that expand abroad.

    Japan made the point in its submission to our government’s review of EU powers in 2013: “More than 1,300 Japanese companies have invested in the UK, as part of the single market of the EU, and have created 130,000 jobs, more than anywhere else in Europe. This fact demonstrates that the advantage of the UK as a gateway to the European market has attracted Japanese investment. The Government of Japan expects the UK to maintain this favourable role.”

    Hitachi, the Japanese industrial giant which has a factory in County Durham making trains, rammed home the argument. Its chief executive, Hiroaki Nakanishi, said in 2013 that he’d met David Cameron and “strongly requested” that the UK stay in the EU. He explained that he was hoping to sell trains across Europe and our government had asked him to set up the supply chain in the UK. If we left the EU, he’d have to reconsider how to manage the whole business.

    Relying just on the WTO would not mean all our trade with the EU would vanish; nor that all companies based in the UK which want to serve the EU would shift their operations across the Channel. But some of the trade and some of the investment would go. That would have a negative impact on jobs and productivity. Given our flexible economy and labour market, we would eventually create new jobs. But wages would have to fall and, for a while, unemployment would rise. We would, in other words, end up poorer.

    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