The Institute for Fiscal Studies has produced a report setting out what it sees as the benefits of full membership of the Single Market, as compared to access to the Single Market (see here). While lawyers don’t normally get involved with analysing economic reports, it is interesting to look at how the IFS defines the Single Market, particularly by way of comparison to access to the EU.
Throughout the debates on Brexit, it has been apparent that there is a general misunderstanding as to what the Single Market is, and whether a right to supply goods and services into the EU is, in fact, the same as access to the Single Market.
The Single Market is product of the European Union treaty system. The Member States have agreed that for all relevant purposes they are a single trading bloc where differences between Member State “domestic” rules cannot impede provision of good or services, or supplies of capital or workers, or establishment of business by nationals of other Member States. The EU treaty system has created a market where all Member States are part of a single and vast domestic market. So if a country is a Member State of the EU, it is in the same position as any other Member State, and cannot be discriminated against. This result, i.e. that you are treated as part of the “domestic” market of the all EU Member States, does not obtain if you are not an EU Member State.
This categorization as part of the “domestic” EU market is important, because it is what allows the EU to protect the Single Market from other suppliers. WTO trade rules in principle do not allow countries to discriminate between domestic and third country suppliers. However, this “national treatment” principle found in Article III of the GATT for goods, and in a different form for services in Article XVII of the GATS, is subject to a number of key exceptions which are explored below.
Countries such as the US and China, which do not have any specific free trade arrangements with the EU, can still sell goods and services into the EU, can supply capital, and in some cases workers into the EU. They can also set up subsidiaries in the EU. But this position of access is far less advantageous than being a Member State and being part of the Single Market. The materials differences are:
- the EU imposes tariffs (and in some cases quotas) on most imports from both countries. In some cases, e.g. agricultural goods, these tariffs can be prohibitive: US and Chinese exporters are permitted to sell into the EU, but it is often not cost-effective to do so. Today, UK exporters do not face such tariffs or quotas when selling within the Single Market;
- the EU has the right to control which services are supplied into the EU, and in most case, how those services are to be supplied, and in what amounts. Today, UK service exporters do not face any such controls when selling within the Single Market;
- the EU reserves the right to impose various trade measures on imports, mostly of goods, from third countries. These include anti-dumping, anti-subsidy and safeguard measures. Use of these measures can again make the cost of supply into the EU prohibitive. Today UK exporters do not face such measures when selling within the Single Market, but can face State Aid measures in certain cases;
- neither China nor the U.S. has any say in how the EU regulates the Single Market, and has no seat at the table in how the Single Market rules are developed.
The EU has complex free trade agreements with a number of countries such as Mexico, South Africa and South Korea, and soon to be Canada and Singapore. These countries, can in the same way as the US and China still sell goods and services into the EU, can supply capital, and in some limited cases workers. While these FTAs have reduced tariffs between the EU and the third country, and have brought in more generous services packages, these FTAs do not replicate fully the ability to be part of the Single Market. They certainly do not allow FTA counterparties to have decisive influence in EU legislative processes. The tariff and services elements in a UK FTA could get close (even very close) to the position that the UK currently has on the Single Market. It is also possible for the EU-27 and UK to agree not to impose the various trade measures as between themselves as the imposition of these measures is in any event discretionary (but whether such an agreement would be consistent with WTO rules is an open question). However, like any other FTA counterparty, the UK would always be outside the legislative process that sets the rules for the Single Market. The big issue with trying to replicate the Single Market via an FTA is not the legal impediments, but the likely reaction of EU Member States in relation to at least two critical issues. If the UK is able to arrange unrestricted access for its goods and services to the EU, then EU-27 Member States are likely to ask why the UK should have those rights when it would not be: (i) making a contribution to the EU budget; and (ii) accepting free movement of EU workers. If these Member States then insist that in return for full unencumbered access for goods and services, the UK does indeed have to pay into the EU and accept free movement of workers, then that starts to look like issues that were key drivers in the original Brexit vote.
Therefore, while it is in principle possible to replicate the Single Market via an FTA, there are legal reasons why it would never be identical, and why as a practical matter, EU-27 Member States are unlikely to want a leaving Member State to get too close to what they had as a Member State.