British-American Business Council
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
The Business Secretary makes the case for Britain's membership in the European Union.
It’s an honour for me to join you this evening. The British-American Business Council is an important fixture in this country and in the United States – promoting an open trading environment with our respective governments. As you’ll know, the US and the UK are each other’s largest foreign investors – with that investment supporting over a million jobs in each country. Here in the Midlands, where the US is similarly the number one foreign direct investor, the local BABC chapter plays a major role in the regional economy.
I’m also delighted to share this platform with Ralph [Speth], who – with backing from the Tata Group – has turned around the fortunes of Jaguar Land Rover. JLR has created around 9,000 jobs in the UK over the past two years, and is continuing to invest in our auto sector – including its new engine plant in the West Midlands, which the Coalition has supported with a Grant for Business Investment. On a personal note, I value Ralf’s contribution as a member of the Automotive Council, which enables a healthy dialogue between the sector and my department, and has set the benchmark for collaboration between industry and government. This approach is responsible, in part, for international vehicle manufacturers committing £6 billion to projects in the UK over the last two years. That includes investment from US car makers like Ford and GM, and I’ve gained a lot from visits to the USA, when I was able to highlight the strengths of the UK research base and flexible workforce.
EU-US free trade agreement
You won’t be surprised to hear that I fully endorse what Ralph has just said about the significance of a EU-US free trade agreement. This FTA would be the biggest bilateral agreement in the world. The EU and US account for almost half of world GDP and one third of global trade flows. Every day, around €2 billion worth of goods and services are traded bilaterally. So this is a once-in-a-generation opportunity that we should move quickly on while the politics on both sides of the Atlantic are favourable. The Prime Minister’s visit to discuss this issue with President Obama underlines the importance our government attaches to it. Eliminating low tariffs alone could add billions to both our economies. A bolder agreement that addresses non-tariff barriers – including regulations, standards and intellectual property practices – would achieve even more. There are some formidable problems – overcoming vested interests in agriculture, national sensitivities around audio-visual products, growing EU worries about American energy cost competitiveness – but they are surmountable.
The UK, of course, was instrumental in getting the Transatlantic Trade and Investment Partnership off the ground. Now, during the UK’s G8 Presidency, we will be making the strongest possible case for trade liberalisation, and we look forward to launching the FTA negotiations soon. Our aim is to agree the EU mandate in time for the G8 Summit in Northern Ireland, with a view to actual negotiations beginning in early summer.
These efforts, I believe, need to be considered in two contexts. The first is the failure, so far, of multilateral trade talks. A global multilateral agreement involving the big emerging markets is a first, best solution. But we should not let the best be the enemy of the good. With Doha stalled, we need the EU and US to show leadership and prove their commitment to open markets. A successful conclusion, in which we agree on common standards and rules fit for the 21st century – particularly in new and emerging technologies – would be a yardstick for others to follow. I’m particularly keen to make it easier for smaller firms to export – who lack the resources of the multinationals to work around regulatory barriers.
The second context, however, is a more domestic affair. A few weeks ago, we saw UKIP make gains in the council elections. We are talking about 7.5 per cent of the electorate who were expressing dissatisfaction on a variety of issues. But, nonetheless, this vote has been interpreted as an opportunity to revisit the issue of UK membership of the EU. In many ways, this protest vote echoes other outbursts around Europe in the past few years. After a big crisis especially, history tells us that there will often be a populist response – a politics of identity in which emotions are easily excited. Outsiders, foreigners or minorities become scapegoats for a country’s problems and it is possible to make big inroads by offering seductively easy solutions.
Last week, Nigel Lawson became the most prominent figure in UK to recommend exiting the EU – and he since has been joined by other Tory “big beasts” from the past – Lord Lamont and Michael Portillo, and also Labour’s Denis Healey. The band-wagon has now picked up several of my coalition colleagues. But let me deal with the Lawson article. He cited an intolerable regulatory and fiscal burden and attacks on the City, as well as the claim that the EU diverting us from greater prizes in Asia. But the main underlying issue was his belief that the Eurozone had set Europe inexorably on the road to political union, which the UK could not and would not join.
The case for the European Union
Now, Lord Lawson is an influential political figure who deserves to be treated with respect. He has been right on some big issues like bank reform, though perversely contrarian on the science of climate change. In 1975, he voted in favour of the common market. His article in the Times was carefully argued – which makes it all the more necessary to scrutinise his argument and the evidence he put forward.
What we must avoid is a silly, emotional argument built around stereotypes. As it happens, I understand Lord Lawson lives in France most of the time and is very happy there, while I am a so-called pro-European who speaks no European languages competently and much prefers Britain, even with our climate. Let us stick to the facts and be as objective as we can about the costs and benefits of continued membership of the EU and, within it, the Single Market.
There are valid arguments on both sides. Membership has led to a high degree of interdependence, such that around three million workers have jobs linked to trade with the EU, some of which would be at risk from withdrawal, depending on the alternative arrangements.
The single market is estimated to have boosted EU GDP by about 2 per cent. Against that, there are regulatory costs – from standardisation and from EU social and environmental policies – some of which we could otherwise avoid. There is also the net budget contribution of £8 billion after rebate, half of one per cent of GDP. Academics and other experts have tried to show that Britain is a net beneficiary or a net loser, reflecting their own partiality. Over the next few years, much ink will be spilt trying to prove that the balance is red or black.
But the key issue is the counter factual. What does non-membership actually mean? Is there a clearly defined alternative arrangement to which the UK could move with minimal disruption or uncertainty? As Lord Lawson is honest enough to concede, there are “transitional” costs of leaving the EU and the unquantifiable effect on business confidence – already fragile – of removing the current certainty. Posing the question of alternatives is a crucial step, as we are discovering, in the parallel debate on Scottish independence – with secessionists variously arguing for a new Scottish currency or for accepting the disciplines of the Bank of England in a sterling area. In a similar way, there are very different alternatives to UK membership of the EU: let us call them Min and Max.
Min involves a Norwegian type of arrangement: remaining within the Single Market. This retains the benefits of the Single Market but also the budgetary cost of the continued contribution and the costs of regulations over which the UK would no longer even have a vote. It is difficult to see why such a half-way house would commend itself to opponents of EU membership since it retains most of the costs; nor is there any reason to assume that a divorce settlement would be as generous as it was for Norway. The news this week of the Commission’s unannounced inspections into the oil sector, including at Statoil premises in Oslo, demonstrates vividly that a Norway-type arrangement does not move you beyond the reach of EU law.
In practice, we are talking about Max: moving the UK to a position comparable to Canada or the USA, vis à vis the EU today (or, closer to home, to that of Turkey or the Ukraine – though Turkey is inside the EU customs union for goods, and Ukraine has negotiated an FTA with the EU, albeit not yet in force. Lord Lawson is clear enough that this is what he envisages – others have been less clear – and is willing to face the costs of getting there. Let us be clear what they are.
Unless we could quickly negotiate a generous free trade agreement with the EU, UK firms would face tariff and non-tariff barriers – including the likes of JLR. Indeed, our car manufacturers save hundreds of millions of pounds by not having to pay the common external tariff to export to the EU. European regulation, despite its flaws, makes it possible for car manufacturers in the UK to export across the EU without incurring additional approval costs. The same goes for more than 90,000 small UK businesses – those with fewer than 50 staff – who trade with the EU. For them in particular, operating from outside the Single Market – without the benefit of common regulations applying to all Europeans – would prove extremely tricky.
But that is only the beginning of it. Many inward investors, in both manufacturing and services, have invested in the UK because they see us as a business-friendly location and a gateway to the EU: the largest single market in the world, bigger than the US and Russia combined. We could reasonably expect an exodus of the non-EU firms headquartered in this country, precisely because they regard the UK as the gateway to Europe. The UK currently hosts more non-EU firms than Germany, France, Switzerland and the Netherlands combined, and remains the favourite destination for firms looking to establish a European HQ. And these companies in Japan, China, the USA and elsewhere whom we are currently trying to attract to the UK will, quite reasonably, think again if they believe we are planning to leave the EU.
The counter argument is that none of this will matter much – after a painful transition involving lots of problems – if, somehow, we can tap into growth elsewhere. The Eurosceptics really do need a reality check. What do they think is happening now? Exports from the UK are growing rapidly to countries like Russia, China and Brazil – not in any way inhibited by membership of the EU. And we often lag well behind Germany and even France and Italy, where exporters never saw emerging markets and the EU as alternatives.
For all the dynamism of economies in Asia, Latin America and elsewhere, let’s not lose sight of the fact that the EU is not just the largest single market in the world by a long way. It is the UK’s most important trading partner – almost half of our exports are destined for the EU, and seven of the UK’s top ten trading partners are member states. One in 10 UK jobs depend on trade with the EU.
By contrast, China accounts for 2.5 per cent of our exports, India and Russia both under 2 per cent, and Brazil under 1 per cent. The Government is rightly – and after years of neglect by our predecessors – helping business to tap the clear growth opportunities in these markets – but the EU could remain our most important market for another couple of decades. And despite the fact that the Eurozone is passing through severe economic problems – as are we after our own financial crisis – there are many growth opportunities and opportunities for further markets opening- through a digital single market, say, or a single market for energy.
And it is the EU which is leading negotiations to open up trade with Canada, India, Japan, Singapore, the ASEAN and Mercosur countries – and now, of course, the USA. That’s on top of the recent free trade agreement between the EU and South Korea, estimated to be worth up to £500million annually to the UK economy. It is far from obvious that the UK could, on its own, command the same attention or sense of priority from these countries in negotiating trade agreements.
Critics, including Lord Lawson, are also being rather melodramatic when they talk of a bureaucratic “monstrosity” imposing regulatory costs that are uniquely severe on the UK. Although it would be difficult to credit it from the rhetoric , much of this monstrous regulation is designed to open up the Single Market and its Four Freedoms through harmonised standards or mutual recognition: free trade in goods and services, and freedom of capital and labour movements. Ironically, much of the popular antipathy to the EU derives from these freedoms (especially movement of workers), but those opposing membership of the EU must vehemently claim to be dedicated to these same four freedoms. Moreover, being a part of the EU has not prevented us from having one of the most deregulated labour markets in the world, one that has generated over a million private sector jobs in the last two years. Where regulation has been genuinely excessive and problematic, as with the Working Time Directive, opt outs have been negotiated and are being successfully defended.
A great proportion of the regulation that business regularly complains about is of a local variety: the hoops that business must jump through created by our immigration controls, the planning system, our complex tax regime or health and safety – very few of which are determined by Europe. Even where the EU bears responsibility, it is fanciful to think that the alternative to EU rules would be no rules. Much of the so-called “red tape” is generated by the need of business for regulatory certainty. An “independent” UK would also generate measures for consumer, environmental and social protection.
In particular, he despairs of the regulatory stranglehold which Brussels is threatening to impose on UK banking and the financial services sector. I share many of his views on banking, notably his concern that our banks have become too large and concentrated for the good of the economy. We are now following his advice in separating, through an electrified fence, retail and investment banking operations. It is hardly surprising that the EU is also trying to tighten bank regulation after the harm caused by the banking crisis. Some of the proposed regulation is, however, overly prescriptive and excessive, especially in relation to sectors of financial services which did not precipitate the financial crisis. But let us not exaggerate. Until recently, the UK was able to shape the EU’s Markets in Financial Instruments Directive to its advantage.
And I doubt very much that our ability to relieve these burdens would be improved if we suddenly flounced out of the EU. As I’ve stressed, London is seen by global investors and firms from outside the EU as a prime entry point to the EU’s single market in financial services, thanks to the system of common regulation and the UK’s competitiveness in this industry. There are thousands of foreign-owned financial companies in the City, including several hundred from the US. Many of then would question the value of a UK location were it to cut itself adrift. But we should not allow, in any event, the interest of Canary Wharf to trump those of Birmingham, and the rest of British industry.
No serious friend of British business would be advocating the break-up of Britain’s relations with the EU. We can’t have hearts ruling heads. Today, as part of the Balance of Competences Review, I have launched calls for evidence on trade and investment, research and development, and on the free movement of goods – so we have some objective analysis of what EU membership means for the UK.
Of course there needs to be reform in the EU. Our relationship will certainly evolve as the Eurozone consolidates – necessitating, in due course, a referendum on any substantial change in constitutional arrangements, as Parliament has recently agreed. In the meantime, there is much work to be done in completing the Single Market and advancing trade liberalisation globally and, bilaterally, with the USA. It is simply self-indulgent and reckless for parties or individuals to risk so much just to address some protesting voters in a council election.