The single market can be used to define the countries within the European Union as somewhat of a single territory through removing barriers to trade. This means that trading between two different countries should be as seamless as trading within two nearby individual cities.
The terms of the Single Market require:
- the free movement of goods
- the free movement of services
- the free movement of capital
- the free movement of labour
As well as this, taxes, quotas and tariffs between countries are abolished. The single market also aims to eliminate “non-tariff barriers” by setting the same rules on things such as safety regulation between all its members.
On the other hand, it is possible for countries and states to be a part of the Customs Union and not the Single Market. Examples of these include Turkey, Andorra, and the Isle of Man. Places such as Norway and Iceland are members of the Single Market, but not of the Customs Union.
A customs union refers to a common system of tariffs or import quotas between a group of countries, which is then applied to countries outside of this membership. Once a good arrives in one of the member countries, this good can be traded to other member countries with no additional tariffs, but the initial tariff between the member and non-member must have been paid. Individual countries within a customs union cannot negotiate their own prices with other countries that they wish to participate in trade with. The point of the EU’s customs union is to ensure ease and efficiency in exports whilst keeping imports cheap.
If the UK opted to stay in the Customs Union, this means that it would be the EU which negotiates free trade deals with other countries, and not us. Although, by staying within the Customs Union, this does mean that the border between Ireland and Northern Island will remain open – something which both economies benefit from.
If the UK leaves both the Single Market and the Customs Union, this means that a free trade deal could occur. Through leaving the Customs Union, the UK could produce their own free trade agreements with BRIC Economies, for example, and the EU. However, striking a free trade deal is usually very lengthy in process and may not cover all goods from all industries. This can be detrimental depending on which industry is being left out. Furthermore, services may be hard to pose free trade deals with. This is because non-tariff barriers exist, such as differences between rules and standards of things like education and banking, making deals complicated to finalise. The UK Economy is a particularly service-based economy, with this making up approximately 80%.
On the other hand, a free trade deal is handy as this means that there are no tariffs, taxes or quotas implemented on the trade between two parties.
The EU has 56 free trade deal agreements with countries all over the world. However, it is important to note that the EU, being the largest customs union in the world by output, holds a great deal of power when it comes to negotiating.
The UK and the EU, nonetheless, are very close trading partners. In 2016, 44% of the UK’s exports (within goods and services) were sold to the EU. The UK consumed 53% of the EU’s exports in the same year.
As the diagram shows, whilst the rate of exports to the EU is decreasing over time, nearly half of our exports go to a single party, making them extremely important to our economy.
If no trade agreement is to be made between other EU countries, then the World Trade Organisation rules would apply to goods and services. The UK also runs a trade deficit with the EU of approximately £70 billion. Therefore, WTO tariffs and taxes could be very harmful to our economy.
With Brexit negotiations still under way, it is hard to say what will happen for certain. The deals which occur or do not occur will have very important effects on the future of the UK Economy, though.