By André Sapir, a Senior Fellow at Bruegel. He is also University Professor at the Université Libre de Bruxelles (ULB) and Research Fellow of the London-based Centre for Economic Policy Research. Originally published at Bruegel.
The Trade and Cooperation Agreement signed between the European Union and the United Kingdom goes against six decades of UK efforts to avoid being economically disadvantaged in Europe. Tracking the evolution of the EU-UK relationship over the last 60 years can help in understanding this.
To appreciate fully the significance of this new chapter in the EU-UK trade relationship – and the ironies it brings with it – it is useful to examine how that relationship has evolved over the past 60-plus years. The UK is now outside structures it helped create and that, indeed, were fundamental to UK efforts over six decades to avoid being economically disadvantaged in Europe. It should be noted that what follows focuses solely on trade, which is the core of the TCA. This article does not delve into areas such as monetary integration or the EU budget, which were important when the UK belonged to the EU, but are marginal for the TCA.
During the 1950s, most European countries traded with one another (and with many countries outside Europe) on purely GATT (the General Agreements for Tariffs and Trade, created in 1947) terms, applying the same non-discriminatory MFN (most-favoured nation) tariff to imports from all sources. This meant, for instance, that the United Kingdom applied the same tariff on imports from France, Sweden and any other GATT country, and that Germany applied the same tariff on imports from France, the UK or any other GATT member.
This situation changed in 1958 with the creation of the European Economic Community (EEC) by the original six members, and the gradual introduction of the customs union, entailing the abolition of duties and quotas between member states and the establishment of a common external tariff vis-à-vis third countries. Automatically, third countries found themselves at a disadvantage on the EEC market, with its members now applying the common external tariff on imports from the UK or from any other GATT member, but gradually imposing no tariff on imports from their EEC partners.
To gain an idea of the magnitude of the disadvantage caused by the EEC for third countries, one needs an estimate of two factors: the size of the EEC market compared to other markets, and how high its external tariff was. Both were relatively large. In 1958, the EEC accounted for nearly two thirds of the GDP of Europe (excluding Soviet bloc countries, Yugoslavia and Albania), and the average tariff of the original six members was 13% for non-agricultural goods and much higher for agricultural products. The loss for European producers located outside the EEC was thus significant.
In response, the UK and six other European countries established in 1960 the European Free Trade Association (EFTA). Like the EEC’s customs union, this free-trade agreement (FTA) involved the abolition of duties and quotas between its members, but, like all other FTAs, it did not adopt a common external tariff. Instead, each EFTA country continued to apply its own MFN schedule to imports from third countries.
By itself, the creation of EFTA did not eliminate the disadvantage that, for example, UK exports faced on the German market compared to French exports after the creation of the EEC. But it partly compensated for this loss through better market access to other EFTA markets, such as Sweden. But the ultimate objective of the EFTA governments was to use EFTA as a bargaining chip to negotiate duty- and quota-free access to the EEC market in exchange for reciprocal access to the EFTA market (in 1960 the combined GDP of the EFTA members amounted to nearly 50% of the EEC’s GDP, making agreement not unrealistic). This attempt failed initially and, like producers in other countries in Europe and elsewhere, UK and other EFTA producers had to continue trading with the EEC on relatively disadvantageous GATT terms (Table 1, column (1)).
For the UK, the EEC’s initial refusal to create a free-trade area with EFTA was more problematic than for any other EFTA member. As the largest EFTA country (about 60% of EFTA GDP), EFTA membership offered little compensation to UK exporters for the loss of access to traditional markets now inside the EEC. In a context of relatively poor domestic economic performance, this situation prompted the UK government to submit a first application to join the EEC in 1961. It was rejected in 1963, triggering a second UK application in 1967 that was again rejected. Finally, the UK joined the EU in 1973 after the departure from office of the main stumbling block, French President de Gaulle.
This marked the beginning of the second chapter in the relationship between the EEC and the UK. The UK’s accession to the EEC had two ripple effects for other EFTA members and for Ireland, all of which were highly dependent on access to the UK market. The first consequence was the accession, also in 1973, of Denmark and Ireland to the EEC (Norway voted on it, but decided against). The second was the creation of a free-trade area between the EEC’s customs union and the remaining EFTA members, which now also included Iceland. Since the EEC had already established FTAs with Greece, Spain and Turkey, it meant that, by 1973, EEC trade with European countries (excluding socialist countries) was mostly duty- and quota-free (Table 1, column (2)). The accession of Greece to the EEC in 1981 barely changed the situation (Table 1, columns (3)).
The third chapter in the UK-EEC relationship opened in 1985 and closed in 2004. The EEC – joined by Portugal and Spain in 1986 (Table 1, column (4)) – and its custom union had been highly successful in abolishing tariffs and quotas among its members. But it had done nothing to remove non-border measures, such as product conformity procedures, that continued to hamper trade in goods. Nor had it removed barriers to trade in services or the free circulation of capital and labour. This task fell to the Delors Commission and one of its two British members, Lord Cockfield, sent to Brussels by Prime Minister Margaret Thatcher to eliminate bureaucratic barriers to trade within the EEC. Cockfield’s 1985 White Paper on ‘Completing the Internal Market’ and the accompanying 1986 Single European Act formed the foundations of the single market, as the common market was then renamed.
The central role of Thatcher and Cockfield in the creation of the single market is well known. Martin Sandbu has even suggested in the Financial Times (30 December 2020) that “Thatcher was the political force behind a genuinely unified European market for goods, services, labour and capital; Arthur Cockfield …was its intellectual architect and bureaucratic engineer”. The creation of the single market in 1993 didn’t just boost trade and growth for the 12 EEC members (column (5) in Table 1). As argued by Baldwin (1995) and verified statistically by Sapir (2001), the single market programme also produced a “domino effect” for EEC neighbours, whose access to the EEC market was threatened by its closer integration.
In the space of three years, five EFTA countries requested EEC accession: Austria (1989), Sweden (1991), and Finland, Norway and Switzerland (1992). Austria, Finland and Sweden ultimately joined in 1995 the European Union, the successor of the EEC founded in 1993. Meanwhile, Norway (whose citizens had rejected EU membership), Iceland and Liechtenstein joined the newly formed European Economic Area (EEA), giving them access to the EU’s single market on terms equal to those of EU members. Switzerland, whose citizens rejected accession to both the EU and the EEA, also gained access to the EU’s single market, though on less equal terms than EEA members. Turkey, which had applied for EEC membership in 1987 but was only declared eligible to join the EU in 1997, upgraded its FTA with the EU to a customs union in 1995. Finally, the former socialist countries of central and eastern Europe established FTAs with the EU.
By 1995, the EU counted 15 members. Nearly all other European countries had close economic ties with the EU, trading with it on better than World Trade Organisation (the successor to GATT, established in 1995) terms, a situation partly linked to the UK’s decisions to join the EEC in 1973 and to help create the single market two decades later (Table 1, column (6)).
The fourth chapter in the UK-EU trade relationship came with the EU accession of eleven former socialist countries of central and eastern Europe, plus Cyprus and Malta, two former British colonies, starting in 2004. This fourth wave of EU enlargement, which was strongly supported by the UK, created the biggest customs union and single market in the world, made up of the 28 EU members, the only countries belonging to both the European customs union and single market. Turkey also belonged to the customs union, but not to the single market; three of the EFTA members (Iceland, Liechtenstein, and Norway) belonged to the single market, but not the customs union; and the fourth EFTA member, Switzerland, belonged to large parts of the single market, but not the customs union (Table 1, column (7)).
This situation has now been modified profoundly by the decision of the UK to leave the EU and to leave both the European customs union and the single market. The UK-EU trade relationship is now governed by the TCA, which is fairly similar to the FTAs between the EU and major, advanced non-European countries, such as Canada (the Comprehensive Trade and Economic Agreement, CETA) and Japan (the EU-Japan Economic Partnership Agreement, EUJEPA). These agreements also provide preferential access for trade in goods, though not completely duty- and quota-free as the TCA does, a difference which, together with the difference in geographical proximity, explains why only the TCA includes level-playing-field conditions. Like the TCA, the agreements with Canada and Japan also provide some preferential access for trade in services and the removal of some non-border barriers to trade in goods and services, but considerably less so than within the single market.
Hence, the UK now finds itself in a trade relationship with the EU on terms that are far less favourable than those enjoyed by EU members or other EU neighbours like Norway or Switzerland, which enjoy duty- and quota-free access to the EU market for goods, and full or significant access to the EU single market for goods, services, capital and labour. The TCA’s terms are also less favourable than those of Turkey for trade in goods (since rules of origin are absent in the customs union but not in the TCA), though they are better for services (since the EU-Turkey customs union does not cover services; Table 1, column (8)).
The UK’s decision to leave the European customs union and single market is doubly ironic.
The first irony is that this decision is indirectly related to the single market programme and the fourth enlargement, two EU policies spearheaded by successive UK governments. The single market birthed the single currency in which the UK refused to participate and which left it frustrated at being excluded from important decisions, especially during the euro area sovereign debt crisis, as Ivan Rogers, a former UK ambassador to the EU has vividly explained. Moreover, the single market in conjunction with the eastern enlargement brought large inflows of foreign workers to the UK who were initially welcomed but eventually generated a backlash because of perceived pressure on certain public services.
The second irony is that the decision runs completely counter to the UK’s efforts during the past 60 years to avoid being economically disadvantaged in Europe, starting with its decision to create EFTA in 1960. Today, the UK finds itself outside the EU and with less favourable access to its market than any other European country. All its former EFTA companions have either joined the EU, or remain outside the EU but inside the European single market. True, by staying outside the EU, the UK will be free to set its own rules, but it will have to continue to adhere to EU rules in order to retain access to the EU market, which combines size and geographical proximity like no other market in the world. The future will tell whether this fifth chapter in the UK-EU trade relationship is temporary or lasting, and what the short-, medium- and long-term consequences will be.
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Very interesting historic overview. Thanks a lot!
Next thing would be to make a branch of the Atlantic Dorsal passing through the Irish Sea, then the Channel, and finally extending through the North Sea. This will help to keep English-spoken herring, pilchard and mackerel schools native and solely valid for Britannic Fish&Chips. [I hope I can be forgiven for these stupid jokes. Truly stupid, I know] I might end asking for mountain ranges between Catalonia and the rest of the Iberian Peninsula.
Forgiveness not needed, considering we’ve got the leader of the House of Commons, one Jacob Rees-Mogg, saying the following in Parliament “…we’ve got our fish back and they’re now British fish and they’re better and happier fish for it…”.
He really is such a malicious and odious individual.
The case for giving a nationality to fishes is somehow weak. Even when the UNCLOS convention gave exclusive rights for exploitation in the 200 nautical miles zone, declaring fishes as nationals is, even if just colloquial, stupid nationalism.
I was reminded of that yesterday, when I went for a cycle with a Japanese friend to the fishing village of Howth in Dublin. I had scampi and chips from the wonderful Beshoffs fish n chips shop there, we sat out on a cold park bench watching the fishing boats come and go. ‘Its just like tempura!’ My friend said when she tried my scampi. I explained to her that the ‘scampi’, was once called Dublin Bay Prawns for some reason, but now in shops they are given the french name langoustine, as it sounds much posher and they can charge three times as much for them. But somehow, I don’t think asking for langoustine and chips will ever catch on in Beshoffs.
It could be said that there are to ways for global transactions and relationships: globalisation and integration. The CEE became integrative (inwards) and globalised (outwards) at the same time but the UK wasn’t interested in the first part and went for the global side.
Isn’t Richard North always saying the new FTA doesn’t cover services? Which services are covered in the new FTA?
I believe they cut a deal for power but I am pretty sure that’s it. Lawyers, accountants, bankers, haulers all very much have to change how they operate. Services deals take way longer to negotiate than trade deals so this outcome was widely expected given the short time frame for consummating a deal, but the failure even to try was surprising.
Was there anything to the argument that the UK was anticipating a major deal with the US, one so favorable that the EU would be mssed very little?
That was delusional, although Johnson sold that line hard. Trade volumes are largely a function of geographic proximity. Experts repeatedly said there was no way trade with the US would substitute meaningfully for EU trade.
And that’s before the fact that Congress made clear they’d never approve a UK trade deal if the UK breached the Good Friday Agreement.
I kinda thought so- much of what Johnson and his sycophants said was delusional, so any result would have to be the same. Wonder how the next election will pan out, given that Labour is in a chaotic state?
I was born in Kent and have siblings and other close relatives in the UK. My wife is of Scottish birth but German and Italian heritage. We live together as long term Australian residents and citizens, but pre-Covid 19 we visited Germany, England and Scotland every two years for family reasons and enjoyed short holidays in many different other European countries alongside these visits.
We have both expressed horror, incredulity and numerous expletives during the tortuous, unbelievably incompetent and self destructive process of Brexit. I for one can see nothing but disadvantage to the vast majority of British people and businesses on a wide range of issues and interests. Obviously, my views have been considerably influenced by the numerous and well informed NC threads on the subject. Brexit has also considerably reinforced my long held view of Rupert Murdoch as an evil, self-serving and socially destructive influence on the world. Australia’s greatest shame.
Having said all of that, I have also seen eloquently argued opinions in more mainstream and libertarian financial and investing newsletters and publications to the effect that the EU is fatally flawed by its adoption of a single currency. The argument mainly being that the single currency works to the trade advantage of the more productive and efficient EU members (especially Germany) by its value being suppressed somewhat by the inefficiencies of other EU countries, notably the so called Club Med members. Furthermore, the Euro precludes the ability of the latter countries to devalue their currencies ( or let the markets do it for them) so as to restore export competitiveness.
These articles and opinion writers conclude that the EU will break up sooner rather than later largely because of the financial stresses assoclated with the adoption of the single currency. The ravages of Covid19 have obviously increased financial pressures worldwide, and especially in Europe.
Said opinion writers are therefore generally of the opinion that the (?dis) UK is better off out of the EU now, despite the obvious short term pains; rats leaving a sinking ship, so to speak.
I would be very interested in the opinions of other NC contributers who are far better economically informed than I am on these ideas, especially given that the opinions of these other nonNC writers are obviously written from positions of financial self interest.
A belated Best Wishes for a better 2021 to all NC participants – at least we seem to be getting rid of Trump, so at least that is a start I suppose.
I agree that the euro benefits Germany and disadvantages Greece on a structural level, but the UK managed to dodge that bullet by refusing to join the euro in the first place.
I wonder if the Tories might have been persuaded to keep the Single Market access by reminding them that it was Thatcher’s invention – but then, their rich friends wouldn’t be able to flood the UK with shoddy goods.
Regarding the impact of the UK joining the EEC, you can also measure the magnitude of that shift on the Commonwealth countries, who had previously had that preferred status. In 1976, New Zealand went into such a sharp recession that its population actually shrank (mostly emigrated to Australia) because of the loss of preferred trading status with the UK.
Yes, I can clearly remember that when I emigrated from England to Australia as a fourteen year old in 1967 all butter was imported from either NZ or Australia. On every visit since butter in England originated in Denmark or France.
A few observed examples of the effects of English abandonment of NZ: when I first visited NZ from Australia in 1992 I was amazed at the prevailence of aged Morris, Austin and Rover cars, along with a few newer, very small capacity Japanese cars: NZ simply could not afford to import many cars given the sudden loss of its most important market for the excellent agricultural produce which dominated its export revenue, and largely still does.
This situation has created a very can do, DIY attitude in NZ, which still persists to some extent with local manufacturing ( not like us lazy Aussies, who mostly dig stuff out of the ground and import cheap manufactured stuff, mostly from China, to the serious detriment of local manufacturing). One of the more curious results in NZ was the birth of a thriving vintage car restoration industry, with wealthy collectors from around the world sending their prized old cars to NZ for restoration.
And yes there are many expatriate Kiwis living and working in Oz long term – and the NRL is a major beneficiary!
And a personal side effect: having had a vasectomy in 1986 after the birth of two daughters within my first marriage, my second wife and I had to rely on IVF and donor sperm to create my third daughter following the tragic death of her son by previous marriage. The sperm donor was a Gold Coast Kiwi.
Following that I rescinded my one man boycott of NZ which I had established in disgust at the killing of a seventy year old Australian Airline (Ansett) via an atrociously mismanaged takeover by Air New Zealand in 2002. Incidentally that resulted in several deaths by suicide amongst former Ansett employees during subsequent years.
Some of the dominoes of European politics.
Yes, while I agree with Ignacio that this is an excellent and very readable summary of the history, it does make some of the usual assumptions, such as the idea that free trade with fewer barriers is always a good thing. Take “favourable trading terms,” for example. That’s typically used to mean: as free from tariffs, duties, quotas and other impediments to free trade as possible. But terms like that are usually reciprocal, so it also constrains you from applying those controls to protect your domestic industry. That can be a good thing if it helps drive out inefficiency, but if foreign producers enjoy structural advantages that you can’t replicate then it can (and often does) lead to the death of entire industries in some countries. A globalist might say that they were inefficient and deserved to die, but it still has political and economic consequences for the country in question. And that’s before getting to the issues around tight coupling and political risk that result.
The article is focused on the what rather than the why, and does a good job of that, but there’s another discussion to be had around why the UK and other countries around the world have been reversing direction like this, and whether it calls any of the assumptions underlying globalization into question.
I’m of the opinion that tariffs are economically inefficient on a certain level, but are still probably the most efficient way to maintain a strategic level of domestic production. I don’t think that it is a great idea for keeping many jobs, there are IMO probably more efficient ways of putting people to work, but there should IMO be space in treaties for a certain amount of protectionism, with the understanding that it makes the overall system poorer, but perhaps more resilient. Or to avoid regulatory arbitrage on environmental or human rights grounds, we share the air and oceans, so discouraging pollution makes sense too.
On the EU I think that a UBI would help a lot with the inequality. People say that it’s beneficial to Germany the way things are, but to my understanding that view assumes that they get their debts paid back to them and that the system does not blow up in their face.
The most successful countries at defending/building up domestic industries tend to use a range of formal and informal methods to do it – tariffs are one of them, but its a pretty crude way to do it. The Japanese and South Koreans have long used informal ‘rules’ which made it very difficult for foreign owned companies to operate in competition – US and European retailers, for example, usually find that nobody will sell or rent them properties unless they go into a junior partnership with local company. The South Koreans would often sign up to trade deals with the US and then flat out ignore the rules domestically.
Even within the EU there are many ways in which countries protect their own industries, the Germans are particularly good at this, usually by keeping lots of regulations at the regional level which can make it very difficult for operators who are not part of those networks.
Noted (and I had the feeling when I was writing it that ‘tariffs’ was a lazy and inaccurate shorthand for all of that) but I would file all of that under covert ops in the sense that they are still paying lip service to the idea that free trade = good at all times while they are doing it.
I would love to see a more nuanced discussion that recognizes the negative consequences of trade liberalization as well as the benefits, and allows for more informed and sensible policy decisions and negotiations. An alternative theory of some kind would be useful, just as MMT has been useful in conversations about austerity policies.
Its important to recognise that the Eurozone is very much a separate construction to the EU, something the UK never quite got its head around. Quite a few EU countries such as Sweden and Denmark have opted out, while non EU countries like Montenegro and Kosovo adopted it. For all sorts of reasons, its a horrible construct, but its stayed stable now for 2 decades – plenty of informed observers were convinced it would fall apart in the last financial crisis, but they were wrong (so far).
One reason for its success of course is that for many countries, it has been a success. There is no desire whatever to leave it in the core European countries, from Ireland to Finland to Portugal. But it was undoubtedly a mistake for Italy, Spain, and of course Greece to join. But having said that, Portugal had if anything a weaker economy going into the Eurozone than Spain or Italy, and it has prospered.
It should be pointed out of course, that the arguments against monetary union can operate at all sorts of scale. You could make a pretty good argument that the pound sterling has been a disaster for all the peripheral regions of the UK as its been maintained at a rate that suits the London region economy, not everyone else. If you were to rerun history, you could make a pretty convincing argument that had Scotland and Wales gone independent and adopted the Euro in 2000, they’d be in a much better position now, while England would be screwed as (a little like Switzerland) its industry would be hamstrung with an overstrung currency.
Another point worth making is that for all the problems of the Euro, for small countries having their own currency is usually worse. Small peripheral countries with open economies, even prosperous ones, find it very hard to keep their currencies stable – even Denmark and Sweden have struggled, and almost inevitably end up finding they have little choice but to match their currency to their larger neighbour, as Ireland had to do for 80 years prior to the Euro. Maintaining your own monetary policy and independent currency is a luxury for larger countries only. This is the prime reason why the Euro is very, very popular in smaller European countries.
Irony lost on these people…
This article brought back memories of “freedom fries” and France’s pivotal support for the America Revolution.
Pip-Pip!
In addition to Brexit, in April the UK is about to implement its IR35 rules for the private sector, which will require clients (not contractors, their ‘end clients’) to specify whether or not someone working for them is an employee – which is in the process of decimating contract working in the UK, as it is causing loads of overcautious multinationals to ditch their contract workers.
This is in ways a very good thing – Uber/Deliveroo workers, for instance, will need to be employed in the UK, now – but for people who find contracting to be favourable, e.g. for flexibility of location and work etc., this is quite a bad thing.
Unfortunately, I’m in the latter category and just found out I’m affected by this myself – and am looking at a very hasty move out of the UK (by April, in the middle of lockdowns etc.) – and trying to find a way to make my old employer/client take me back on after I move (not as simple as just moving elsewhere for some reason – I’m trying to get setup with a friend who runs a similar overseas contracting business, who works with the same employer/client, so I can work through them). I’ll be pretty boned if that doesn’t work out.
Worth NC taking a closer look at this looming event, as it looks like it may amplify the effects of Brexit on many – even though it has been coming down the line separate to Brexit.
The UK lashed out and placed the blame on the EU because no one had the faintest idea what the real problem was.
Free markets, free trade and EU membership will bring us all prosperity.
Did you mean ten years of austerity?
Obviously something had gone badly wrong.
“Try and pretend it never happened” the Remainers
Oh dear, they are not going to get very far that way.
You need to place the blame somewhere and then explain how you’ll fix it.
The Conservatives blamed it on the EU and everything would be fine after Brexit.
This is where the trouble starts, because the EU wasn’t actually the problem.
You can’t just say the status quo is fine, when it isn’t.
Liberals really need to start putting a bit more effort in to find out what is causing today’s problems.
Populists just have to find a scapegoat, and say they have found the problem.
Trump just had to find some scapegoats to blame to get into power.
Liberals don’t seem to know how to fix things.
It might be a third irony in what the UK wanted to achieve with its Brexit – to reverse the reversing (forget my tautology here) of their economy back to the industrial age although it seemed that a lot of industrial workers voted in favour for Brexit because they wanted this reverse but not to reverse that reverse. Let me explain.
With a free influx of European labour force (e.g. Eastern builders and plumbers and Western chefs and baristas, to simplify), it significantly cut the cost of labour in a final price of their products and essentially made the UK the fifth economy from the seventh it used to be back then. But it also cut wages (hence plebs voting for Brexit against immigrants) and now drags more capital out of their fancy and posh gig economy and all rent-seeking FIRE sector (hence establishment offering Brexit because “that’s what peole asks, right?).
If the UK economy regains control in that post-industrial economy and leave all that manufacturing and industrial fuss to the EU, then it’s fine and dandy for them because now they don’t need what they strived for 60 years anymore and they are in control of necessary imports, indeed. YMMV, of course.
The London Review of Books provides a good, detailed analysis of Great Britain’s involvement with the EU and its precursors at: