Brexit: Is Owen Paterson talking nonsense about tariffs and the single market?

(AFP)

Owen Paterson, the former Environment Secretary and high-profile Brexit-supporter, has objected to the idea that the UK might pay into the EU budget for continued "access" to the single market after Brexit.

“The United States, Japan Australia, they do not pay for access to the market”, he told the BBC's Today programme on Monday.

“Normally, if you want to pay for access to a market you pay a tariff. And we don’t want to have tariffs. We want to have reciprocal free trade. So I think that is one area where I think emphatically, we will not want to pay anything.”

Not even if that means we lose a great deal of trade as a result? Mr Paterson was asked by his BBC interviewer.

“No because we pay a tariff, which of course hits them much harder because they have this massive surplus with us. Last year they had a surplus of £71.8bn. The Germans sold us 950,000 cars. It’s absolutely in everyone’s interests that we get a reciprocal free trade deal."

“It’s a complete nonsense that we as an independent, sovereign, nation of the same level standing as countries like US, Australia or Japan should pay something. I also think it would probably be against WTO [World Trade Organisation] rules anyway because they’d be discriminatory.”

The remarks have caused some degree of bafflement and derision on social media.

So what is Mr Paterson talking about? Do his comments make sense? And what is the true situation with regard to the UK and the single market post-Brexit?

1. What is Mr Paterson on about?

   There appear to be a host of conceptual confusions behind his remarks.

   So let’s break it down.

   The single market was established by the EU in 1993 (with considerable input from Margaret Thatcher and the UK in the late 1980s) in order to break down non-tariff barriers between EU trade in goods and services.

   Crude tariffs on the movements of physical goods around the EU had already been abolished. But there were many other effective barriers to trade, such as different regulatory standards and licencing rules in different EU states.

   The single market was designed to abolish these barriers through a process of regulatory harmonisation, managed by the European Commission (which is itself answerable to the European Council of leaders and the European Parliament) and overseen by the European Court of Justice.

2. So we currently pay for membership?

   Yes, along with other benefits of membership of the EU club.

   But the important point is that other non-EU states such as Norway also pay for quasi-membership.

   "Quasi-membership" is a term that should be used rather than the meaningless and misleading "access".

   Norway pays around £740m a year for quasi-membership according to estimates from the Full Fact website. This works out as around £140 per head of their population. Britons currently pay roughly £220 per head to the EU Budget.

   The lower fee reflects the fact that Norway is unable to have any substantive input into setting the rules of the single market (having no representation in the European Commission or the European Council). It has to live with whatever rules are decided by its EU neighbours.

   Yet it benefits economically from being able to sell its goods and services into the single market extremely easily. Norway clearly regards this benefit as worth paying for.

   This is the basis for the assumption that Britain, if we left the EU but wanted to remain part of the single market, would also have to pay an annual fee.

   Norway also accepts free movement of labour from the EU on the same basis – because the EU demands it as a condition of membership.

3. So tariffs are a red herring?

   Yes, the prospect of tariffs on UK goods exports to the EU arises if the UK fails to secure a free-trade deal with the EU to kick-in after Brexit.

   This is a serious danger - especially for UK car and food exporters - but has nothing to do with the single market.

   The UK could conclude a free-trade deal with the EU but still be outside the single market - indeed this is the current objective of Theresa May's Government.

4. But isn’t forcing us to pay to trade with the EU illegal, as Mr Paterson says?

   Under international trade law, as overseen by the World Trade Organisation, a country can charge tariffs on other countries’ goods imports provided the tariff is no higher than what it charges any other country.

   This applies unless there is a free trade deal between two countries that covers most of their trade.

   Under those conditions tariffs can be lower between the two parties than those levies charged on imports from other countries. Yet these provisions have nothing to do with the issue of whether the UK is required to pay to be a quasi-member of the single market club.

   There is no legal issue with us paying a single market fee, just as there is no issue with Norway doing so.

   It is true that Japan and the US, as Mr Patterson says, do not pay to be a member of the single market club and yet still trade with the club.

   Yet the point is that they also don’t benefit from the regulatory harmonisation within it. This means their services exports to the EU, in particular, are considerably lower than they would otherwise be – and lower, proportionately, than the UK’s services exports to the EU are.

5. What about Mr Paterson’s suggestion the Germans might waive the fee because they sell so many cars to us?

   The issue of car exports relates to questions of a free trade deal and the customs union (which relates to the dropping of border checks) rather than the single market.

   It’s conceivable that Germany might be keen for a free trade deal with the UK because of its £32bn goods trade surplus with us in 2016 (although the idea that this would dominate all other considerations in Berlin seems like a Brexiteer fantasy).

   But there is no reason at all to believe that Germany would be happy to waive the single market fee, not least because Norway and others would demand that they should not pay a fee either.

6. So is it really worth us paying to remain part of the single market?

   Economists are pretty confident that the services-heavy UK economy has benefited from single market membership over the past 25 or so years.

   And most credible forecasts suggest we would be worse off if we only had a free trade deal with the EU, rather than remaining part of the single market.

   But the crucial point about the UK and the single market is that our economic status quo is membership - and breaking the status quo has a cost.

   Let’s give just two concrete examples to illustrate.

   Firms based in Britain sell financial services into the EU using the single market “passport”.

   We are also currently part of the single market in aviation services.

   If we to suddenly be wrenched out of the single market, both those important industries (banking and airlines) would have serious disruption. It would almost certainly be worth the nation paying to stay in the single market at least for a transition period to avoid or minimise that disruption.

   It might also well make economic sense for us to remain in the single market indefinitely too, like Norway, given services account for such a large and growing share of our exports and the prospects for services exports are very dependent on the regulatory and licensing harmonisation of the single market.

   However it's important to recognise that the value of quasi-membership would certainly be worth less than our existing full membership because there would be no substantive British input into the rules.