One of the puzzling aspects of the arguments over Brexit is the way that the EU single market and the customs union have been spun as something sinister from which we need to escape, so that we can be free to trade with the rest of the world. Together they secure frictionless trade with our largest export market, and attract foreign direct investment into the UK, creating – according to Government figures, 1,600 jobs a week in 2016. Why has this powerful contributor to UK prosperity suddenly become a ‘protectionist cartel’ or something that ‘dissuades’ us from trading outside the EU (as the Deputy Chairman of the Conservative Party asserted on a recent ‘Any Questions’)?
I was a British diplomat for nearly 40 years and spent a fair proportion of that time promoting British trade and attracting foreign investment – particularly from Japan. Membership of the single market and the customs union was a magnet as far as the latter task was concerned, and no hindrance to the former.
Firstly, exports. We sell around £10billion – goods and services – to Japan every year: power generation equipment, machinery and pharmaceuticals, as well as Scotch whisky and financial services. In value added terms, it’s our 7th largest market, unsurprisingly when we remember that it’s the third largest economy in the world.
The EU is about to finalise a free trade agreement with Japan, the initial discussions on which started over seven years ago. This will increase EU exports to Japan – now around £50billion – by up to a third. All EU exporting countries – which includes us until March next year – will benefit. We have a better chance of negotiating a bilateral free trade deal after Brexit with Japan than with some countries. But we must not kid ourselves that the Japanese will simply cut and paste the existing deal: they will want to explore what concessions they can get from us that they couldn’t secure in a negotiation with 28 member states first.
And once we are out of the existing framework, we shall no longer benefit from the concessions that the EU has already negotiated. The key point is that being in the customs union and single market does not hold us back – as Germany, the third largest exporter in the world, demonstrates. Neither we nor they are waiting for the right to sign bilateral trade deals before trading with the world. Of course we want to sell more. But trade is as much a function of world economic flows and geography as it is of Governments’ efforts to boost it through trade treaties and marketing campaigns. That is why, although the share of UK exports to the EU as a proportion of our trade with the world is falling slightly, they still represent over 40% of total flows – around £240billion a year.
And the importance of the existing arrangements for attracting investment is even greater. Over the last forty years, Japanese investment in the UK has grown to over 1,000 companies creating more than 140,000 jobs directly and many more hundreds of thousands in supply chains. It was Mrs Thatcher who first spearheaded this inward investment drive, with Nissan and the other car companies in the 1980s. The crucial selling point was that these investors would become British companies, selling into Britain’s largest export market through the customs union. This ability to trade without friction is as important today as it was then.
Nowhere is this as obvious as in the automobile industry. The Japanese car companies in the UK have literally millions of transactions every month with their European supply chains. None of these have to be reported for customs purposes while we are inside the customs union. That is the arrangement that the Japanese – and every country whose companies help to make Britain a centre of international investment - want to preserve in whatever new regime we negotiate after Brexit.
Hard-line Brexiteers, who see ‘taking back control’ of every political and economic lever as the fundamental objective, will object to anything resembling a customs union. These are political arguments. But in the real world of investment projects, new factories, component supply chains operating to ‘just in time’ disciplines, and jobs, these choices are less binary. The existing arrangements help to support Britain’s punching its economic weight in the world. We are not held back by our inability to sign bilateral trade deals. Dispensing with the benefits we currently enjoy would be an act of self-harm. And if the answer to that is simply that maintaining the current regime should make us wonder why we are leaving the EU in the first place, all one can say is – what a very good question.
David Warren is a former ambassador to Japan, an Associate Fellow of Chatham House and an adviser to Migration Matters Trust