International trade – the Single Market free trade area

That may seem a peculiar title, given the hype in the UK over the Single Market, but that is why Mrs Thatcher was so supportive of it at its inception, through the signing of the Maastricht Treaty on 7 February 1992.

The Single Market is about free trade, not just removing tax barriers, but also removing hidden trade barriers – for example, individual countries with peculiar labelling requirements aimed at protecting local businesses. It has got nothing to do with myths like straight bananas, but it does mean common standards across the EU, many of which are for the protection and safety of consumers.

On 1 January 1973, Ted Heath’s government took the UK into the “Common Market”, something which UK politicians and commentators now hark back to with rose tinted spectacles as a free market. It was not a free market. There were a lot of barriers to trade including tax rules and more hidden blockages to trade. The Common Market needed urgent reform which is what led to the Maastricht Treaty. One of the changes that the UK drove was the free movement of labour, as to date there had been significant border controls for not only goods, but also people. Please note the time scale.

Like many UK VAT consultants in 1991 and 1992 I was heavily involved in getting ready and implementing the changes that arose during the formation of the Single Market. I remember speaking at a couple of major CBI events pointing out some of the negative aspects and Intrastat, which had, and still has, criminal sanctions, and was to be used to compile cross border trade statistics. I argued it was an unreasonable burden on business, could be achieved just as accurately by statistical sampling of a smaller population of businesses, and a criminal sanction for trade statistics, which were already notoriously unreliable, was just plain unreasonable. I still hold those views.

However, my main concern was the VAT rules, where we had some big changes to make trade in goods, and to a lesser extent, trade in services easier between member states. The aim was to remove the burden of VAT on cross border transactions – in other words treat the whole of the EU as a single market so you could sell just as easily to Madrid as you could to Manchester.
Sitting around the Single Market was the trade wall created by the Customs Union. Here businesses from outside the EU had to knock on the door, ask to come in and then pay an entrance fee to gain access to the market.

There have been revisions over the last 25 years, but largely it has worked well so that a massive amount of UK goods and services are exported to other EU member states.
Politically, in the UK, the sticking point is not having the free trade area, but the movement of labour within it. I won’t go into the arguments presenting themselves over the last year or so, but anyone with a need for labour, whether cheap or skilled, will understand the UK’s need to bring this labour into the country. Similarly, skilled UK people work in the rest of the EU. And of course, EU companies, when selling goods or services to other EU countries may need to send staff there to do the job, and the free movement of those staff is essential to getting the job done.
So, the question is, what will happen after Brexit, now less than two years away unless the UK sees sense and accepts the offer of a transitional arrangement? I say that partly because the UK is intent on a basis of negotiation that no deal is better than a bad deal (I’ve no idea what the parameters are for a “bad deal”, and nor does anyone else as far as I can see) and partly because I know and understand the timescales required to make changes in the EU, the political arguments that are made, and things being held up because a smaller state, or even region, as in the case of Walloon in Belgium during the negotiation of the Canada/EU trade agreement, wants something that may not be at all connected with the issue at hand – it is a bargaining point for them. That latter issue may be a fault with the way the EU is organised, but it will only be changed from within.

So, having set a more accurate scene, what will happen when the UK leaves the EU? Well the first point is that the current UK Government, which is likely to be returned in the General Election on 8 June 2017, is likely to retain its determination to leave both the Single Market and the Customs Union. The UK will be knocking on the door. It will have to pay to get in, and that may be in terms of a national bill, or duty paid by importers of goods, or both (more likely).

When doing things inside the EU, including performing services, installing or assembling the goods you’ve sold, keeping customer stocks – the list goes on – if “simplifications” cannot be agreed, UK companies would have to register for VAT in at least one EU country, and for those trading EU wide, all of them. Similarly, EU suppliers of goods and services would have to register for VAT in the UK.

Each would have to comply with the rules in the countries where they have VAT IDs. And local VAT would have to be charged.
On top of that UK suppliers’ staff may not be permitted to travel freely to EU member states, or rules could be applied requiring local staff to be used – and, of course vice versa.
There would be no protection from other “hidden” trade barriers. As regards the hidden barriers, like labelling, even whilst outside the EU, UK businesses would need to adhere to those rules if they want to successfully export to EU member states. Part of “coming out” was to ditch red tape “imposed by Brussels”. Well, the UK may well succeed in ditching some Brussels red tape (I have absolutely no idea what, apart from getting rid of Intrastat which would please me), but it would find that at least an equal volume of red tape for exporters to the EU is created – Intrastat goes (hooray) and exporters of goods have to go back into standard customs clearance procedures which will be a lot more costly and demanding than Intrastat.

You can see why, therefore, business leaders, in the main, have been calling for a “soft Brexit” and if nothing else retaining access to the Single Market, although by implication the UK would need to remain within the Customs Union. One country within the Customs Union is Turkey with whom UK business, endorsed by the Government, entered into a £100marms contract in January 2017. Unless that contract consists of boxes of Lee Enfield rifles capable of being shipped straight away, BAE might find itself with additional costs on the contract. At the time of signing the contract, the intention was that this would open the way to £16bn trade between Turkey and the UK. How will that materialise when the UK and Turkey sit either side of the Customs Union’s wall?
So, what must businesses trading between the UK and the EU do? I think the old maxim of planning for the worst and hoping for the best is about the best strategy, unless you’re big enough to negotiate a sweetheart deal.

So, this provides a glimpse of the issues which both UK and EU businesses face as the UK strides purposefully towards the Brexit finishing line. I’d guess as far as business is concerned, we’d all hope that that is not also a cliff edge.

Steve Botham