The challenge facing UK trade negotiators following the EU referendum has been spelled out by a report from one of the country’s leading thinktanks, showing that membership of the European single market is worth an additional 4% of GDP to the economy.
The Institute for Fiscal Studies said that Britain could enjoy the same sort of access to the world’s biggest market on the same World Trade Organisation terms as other non-EU member states such as the US, China or India.
But it said membership of the single market provided additional benefits that might be lost depending on the deal struck by ministers in Theresa May’s government.
Ian Mitchell, research associate at the IFS and an author of the report, said: “From an economic point of view we still face some very big choices indeed in terms of our future relationship with the EU. There is all the difference in the world between ‘access to’ and ‘membership of’ the single market.
“Membership is likely to offer significant economic benefits particularly for trade in services. But outside the EU, single market membership also comes at the cost of accepting future regulations designed in the EU without UK input. This may be seriously problematic for some parts of the financial services sector. Choices in these domains will most likely be far more important than any deal on budget contributions.”
The IFS said single market membership meant elimination of trade barriers not possible under existing trade deals. These included so-called “non-tariff” barriers such as licensing or regulations that make it harder to export goods and services.
The thinktank added that service sector exports were becoming especially important to the UK, accounting for 44% of total exports in 2015, up from 31% in 1999. Two-fifths of service sector exports go to the UK, whereas the Bric countries (Brazil, Russia, India and China) account for less than 5% together.
“Single market membership is particularly important for financial services”, the IFS said. “‘Passporting rights’ mean that UK-based financial firms can service EU businesses and customers directly. To maintain these rights would likely require membership of the European Economic Area.
“But that would come at the potentially considerable cost of submitting to future regulations designed in the EU without input from the UK. The UK may have to make some very difficult choices between the benefits from passporting and the costs of submitting to external imposed regulation.”
The UK’s newly created department of International Trade headed by Liam Fox is keen to negotiate free trade deals with countries outside the EU. The IFS said that new agreements would mitigate the economic cost of giving up single market membership.
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