On Thursday 23 June, Britain will hold a referendum on whether or not to remain a member of the European Union. Prime Minister David Cameron’s Conservative Party is deeply divided on ‘Brexit’. Much of this debate has revolved around the implications of an exit for British trade and investment. While Britain may be relieved from some EU constraints with an exit, it is doubtful that Britain will enjoy more regulatory sovereignty.
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For those on the exit side, they say that membership of the single market imposes too many regulations on Britain, and that Britain’s trade with countries outside Europe would be higher if it left. Those on the other side counter that the single market has boosted trade and investment between Britain and the rest of the EU, and conclude that leaving would weaken Britain’s economy.
The EU’s single market employs three tools to boost trade. First, it eliminates tariffs on goods. Second, it establishes the right of companies and people to sell their goods, services or labor, or to invest, in other member-states. Third, it reduces the cost of potential exporters having to comply with 28 different rule books.
However, there are two ways in which the UK’s membership of the single market may constrain its trade with non-European countries. The first is membership of the EU’s customs union. Trade is tariff-free between member-states, but the EU sets tariffs on imports from outside the bloc. The second is the way in which the EU removes non-tariff barriers: in doing so, it may regulate at a European level in a way that makes trade with non-European countries more difficult. Together, these may divert British trade from lower cost producers outside the EU, to higher cost ones inside. If more trade is diverted than created, Britain may gain by leaving the single market.
But a question here it that – if Britain exit, would it achieve the result of a more favorable trading environment that it desires? Or, would it effectively negotiate its own right within or outside the EU? It is clear that if Britain were to from full membership of the EU Britain, it will need to erect and manage new trading relationships. Among all the options, hardly any is straightforward and favorable for Britain.
One option is to sign a free trade agreement with EU. However, an FTA with the EU would not leave Britain free to set its own regulations. As part of any deal with the EU to create an FTA, the EU would make demands on labor market rules and health and safety, and in all likelihood competition policy would be subject to mutual regulatory oversight.
Another option is that Britain join the European Economic Area (EEA). British firms would have unimpeded access to the single market and would continue to benefit from the EU’s trade deals with other countries. But Britain would have no say over EU trade policy, and in order to qualify for EEA membership, the UK would still have to abide by EU regulations while enjoying very little input into the drafting of those regulations.Also, the UK could opt to trade with the EU under WTO rules. The UK would not have to comply with EU regulations, but it would face the EU’s Common External Tariff (CET) and substantial NTBs to trade.
Also, the UK could opt to trade with the EU under WTO rules. The UK would not have to comply with EU regulations, but it would face the EU’s Common External Tariff (CET) and substantial NTBs to trade.
Given the constraints outlined above, it is doubtful that UK would be any freer outside the EU. It would not be as powerful as it may seem in negotiating an FTA with EU. Meanwhile, it would find it very difficult to negotiate trade agreements with non-EU countries and it would hardly be better off by trading under other rules than the ones it currently enjoys. So, would the UK realize its envisage of liberalization of trade through Brexit? Probably not.