Assuming Britain does not remain in the single market, then even if the United Kingdom managed to negotiate a free trade agreement, exporters would face additional costs in selling into the European Union. These would include extra costs of clearing customs and the administrative costs of complying with the European Union’s rules of origin.11 They might also face other non-tariff barriers, such as quotas. They would also still need to adhere to European product standards in order to export freely to the union. To avoid producing some goods in one way to meet European Union standards, and others in another way, firms would presumably just continue to comply with most current regulations.
However, these factors would be an inconvenience rather than a major barrier to trade. The important fact is that other countries, such as the United States, manage to export successfully to the European Union despite facing these barriers. What’s more, the single market does not appear to have given Britain that much of an advantage in exporting to the rest of the union over countries that are outside the single market in recent years. Between 1993 and 2011, the United Kingdom was only the 28th fastest growing exporter to the other 11 founding members of the single market.12 Similarly, it is easy to forget that the United Kingdom successfully sends half of its exports to countries that are not in the European Union despite, for example, incurring the costs of clearing customs to do so.
Furthermore, those parts of the economy that do not export to the European Union (and make up the vast majority, 85%, of Britain’s GDP) would benefit from their freedom from European Union rules and regulations, with which they currently have to comply. With the single market as it stands, the United Kingdom needs to apply European Union regulations to the whole of the economy, even though only 14% of its output is exported to the European Union. So, for example, the National Health Service must comply with the Working Time Directive and retailers are affected by the Agency Workers’ Directive. Nevertheless, the benefits of getting rid of European Union regulations should not be overstated as Britain would probably want to keep many of them anyway.
Another potential cost to leaving the single market is that, even if a free trade agreement was secured, the United Kingdom would miss the chance to drive forward, and benefit from, efforts to complete the single market in services. Such an extension would involve more harmonisation of product standards in services, reducing the fragmentation of regulatory systems for services across the European Union and stopping discrimination against service providers in other countries – an example would be special online offers only being available to people browsing the internet in certain countries.
It is often argued that Britain would help itself more by staying in the European Union to drive these reforms forward. The United Kingdom’s comparative advantage these days primarily lies in services, rather than manufactured goods. But claims that Britain would benefit disproportionately from the completion of the single market in services are arguably overdone. Although the United Kingdom has a trade surplus on services with the European Union, Britain’s total services exports are equivalent to 12% of its GDP – the same proportion as European Union services exports as a share of European Union output. If the United Kingdom did stand to benefit disproportionately from further services liberalisation, that could in itself be a reason why it has so far had limited success in getting the rest of the European Union to prioritise such reforms. It is not clear that that will change.