BY: ANDRÉ SAPIR
On 1 January 2021, the United Kingdom left both the European customs union and the single market. Its trade relationship with the European Union is now governed by a Trade and Cooperation Agreement (TCA), which establishes a free-trade area in goods and services broadly comparable to recent trade deals between the EU and major, advanced non-European countries such as Canada and Japan.
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)).
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