3. The benefits of EU membership to British business have significantly outweighed the costs

Chapter 3 – The benefits of EU membership to British business have significantly outweighed the costs

Like any international arrangement, UK membership of the EU has had advantages and disadvantages. When countries sign bilateral treaties or join multilateral institutions, there will always be aspects of these arrangements that are trade-offs; the benefits of co-operation almost by definition come with some form of compromise. But, for the UK, the net benefits of EU membership have been extensive.

For many sections of the British economy, the EU’s Single Market is the defining factor in the debate. By establishing an overarching set of regulatory principles, the Single Market’s four ‘fundamental freedoms’ enable goods, services, people and capital to move between countries within the EU with the same rights as in the home state – in theory maximising all aspects of openness between economies worth a quarter of world GDP in total. The creation of standardised rules and reduced barriers to cross-border trade within the bloc allows UK firms to buy and sell goods and services in an expanded market, seek capital and employ staff from across the Continent, and tap into the economies of scale that can drive competitiveness and thus contribute to the productivity improvements needed to underpin Britain’s wider global trading ambitions. Three-quarters of CBI members of all sizes and sectors pointed to the creation of this common market as having a positive impact on their business.[1]

For some businesses, however, loss of UK control over many aspects of regulation can lead to negative outcomes; indeed, some believe that the costs of poorly drafted regulations outweigh the benefits of EU membership. Furthermore, the UK also pays a significant fee to be a member of the EU club.

To come to a position on the overall benefit or cost of EU membership, all these considerations need to be assessed in the context of the modern, complex global economy in which the UK operates.  Pure import and export figures are no longer as clear a guide to a nation’s trade performance as they once were, as the international supply chains that cross borders and industries now mean that components are often imported and exported around the world multiple times before the finished product is sold to its end user. The Single Market has supported – and helped to shape – this complex economy. And, by leading the drive towards a more outward-facing EU, the UK has also benefitted from the EU’s trade and regulatory clout in helping to open the UK’s economy to an even larger pool of specialised products, capital and labour from across the globe.

When assessing the degree to which the EU has, in practice, supported the global trading role to which the UK aspires, it is necessary to establish whether the overall balance of advantages and disadvantages is positive – especially in those areas that are of vital significance to business.

There are six areas of primary concern to business where the EU has an impact on the openness that underpins the UK’s global trading ambitions:

  1. The role of the EU in giving UK firms access to European markets in goods and services
  2. The role of the EU in driving investment and giving UK firms access to global capital
  3. The role of the EU in allowing UK firms to draw employees from a global talent pool
  4. The EU’s impact on the regulatory environment underpinning the Single Market
  5. The direct budgetary costs of membership and the impact of funding on competitiveness
  6. The role of the EU in giving UK firms access to global markets

Analysis in these areas – as well as a review of studies into the impact on overall UK GDP – shows that membership of the EU has been a material and lasting positive for British business in pursuing their global ambitions. It is not unreasonable to infer from a literature review that the net benefit arising from EU membership is somewhere in the region of 4–5% of UK GDP or £62bn to £78bn per year – roughly the economies of the North East and Northern Ireland taken together. This suggests that each UK citizen has benefitted from EU membership to the tune of around £1,225 every year for the last 40 years.[2] This analysis is backed up by business opinion:  71% of CBI member businesses reported that the UK’s membership of the EU has had a positive overall impact on their business.[3]

3.1 Access to European markets for goods and services has been the biggest positive for the UK economy

Access to the EU’s Single Market in goods and services has been a major benefit for the UK economy, giving UK businesses access to the biggest Single Market in the world, allowing them to exploit the economies of scale that can drive wider competitiveness, and bringing them into complex pan-European supply chains that bring indirect benefit from sales and exports from European firms right across the EU and beyond. For CBI members, access to and participation in European markets has been the largest single benefit of EU membership for the UK, with 76% of firms of all sizes and sectors stating that the creation of the common market specifically had a positive impact on their business.[4]

The dismantling of tariffs and non-tariff barriers within the European Union has boosted European and UK trade

UK firms’ access to the European Union market is much more substantial than that covered by a standard free trade agreement and goes deeper than the UK’s access to any other international market. The EU has eliminated tariff barriers and customs procedures within its borders and, since the establishment of the Single Market, it has taken strides towards removing non-tariff barriers by enforcing EU-wide competition law and co-ordinating product regulations. This gives UK firms unparalleled access to a market with over 500 million people and a GDP of .6 trillion.[5]

Studies of the impact of the European Union and the Single Market on trade overwhelmingly agree that it has unleashed a large expansion of trade within its borders – beyond that which could have been achieved without co-ordinated action on non-tariff barriers. The EU still suffers from ’border effects‘ (the cumulative impacts of non-tariff barriers and differences in language and culture on trade) – trade between the states of the US is around 70% higher (as a percentage of GDP) than that between members of the EU15.[6] But a recent study has shown that the EU has lower barriers – and therefore greater trade and supply-chain integration – than any other trading bloc in the world.[7]

The UK’s membership of the European Union and its predecessors has therefore helped create substantial trade flows between the UK and its European neighbours. The share of today’s EU27 in total UK goods trade was already rising before entry, from 23% in 1948 to 41% in 1972 but, after UK entry, this rocketed to 52% by the end of the 1970s, and peaked at 59% in the early 1990s.[8] The rise of emerging markets has seen the EU’s share decline but, even so, the EU currently remains the UK’s most significant market by some distance: it was the destination for 45% of all exports in 2012 and half of goods exports specifically, and the establishment of the Single Market helped trade between the UK and the rest of the EU27 grow by 74% in real terms from 1997 until 2006, the year before the financial crisis began.[9]

Undoubtedly, UK–EU trade would have grown even if the UK had not been a member. However, a number of studies have shown that Britain’s trade with other members of the Single Market was higher than it would have been if the UK had not been a member – up to 50% higher for some member states.[10]

Exhibit 25: Access to European markets has significant benefits for UK firms

Adnams: Has seen a rise in their sales across the EU in recent years as British beers have become more popular. For the Suffolk based brewery, Scandinavia is their largest market, accounting for 40% of sales.

Sage: For the UK's largest software company, the free movement of employees across its European offices has been a big plus in their expansion of their existing software business around the EU and into new markets. Their SagePay operation provides online payment services to 50,000 predominantly small and medium sized businesses across Europe. Further work on completing the digital Single Market and establishing common e-payment regulations offers significant scope for further growth.

The trade boost to other EU states as a result of UK membership, particularly the accession countries of Eastern Europe, has an indirect benefit to the UK of increasing prosperity in key export markets for UK firms. This, in turn, can increase demand for UK goods and services.

A larger ’domestic‘ market helps drive competitiveness and economies of scale

One of the most significant benefits of openness to a larger market, and the trade that has come with that, is the economies of scale – and commensurate productivity improvements – that this has brought. Through the creation of an enlarged pan-European market for trade, the EU has been a key driver of UK competitiveness, both in Europe and when competing in the global marketplace.

As explained in Chapter 2, a key benefit of openness to a larger market is the potential for improvements in competitiveness and productivity. Greater competition from abroad drives innovation and forces costs down, and a large ’domestic‘ market allows competitive sectors to expand far beyond the limits of national economies to operate on a pan-European level. 

The competition a large Single Market brings can be seen in the number of firms in a particular sector, and in the mark-ups being charged to consumers in that sector. A lower score on the Hirschman–Herfindahl Index (HHI) indicates that more firms participate in the market and thus it is more competitive: as the Single Market developed between 1997 and 2006, the median index was found to have declined 28% in the EU15 and 35% in the EU27 for motor vehicles and by 17% in the EU27 for pharmaceuticals. [11] In a related vein, a study measuring firms’ average mark-up over costs found that the establishment of the Single Market had helped reduce mark-ups in manufacturing by 32% by the end of the 1990s – significantly benefiting both end-consumers and those businesses that use manufactured goods as inputs to their final products. [12]

Although difficult to quantify, there is tentative evidence that the Single Market has had a positive impact on innovation too. Europe Economics found that research & development spending as a proportion of EU27 GDP rose from 1.8% to 2.0% from 1995 to 2009. While it is not clear that this increase can be attributed solely to the Single Market, and the level remains low compared to the United States and Japan, it should be noted that many of the countries that entered the EU in 2004 saw substantial increases in R&D spending, driving innovation and helping to boost EU competitiveness. [13]

The Single Market underpins access to European supply chains

The UK’s membership of the Single Market has helped the UK take advantage of, and be part of, integrated pan-European supply chains, allowing domestic firms to source inputs from the most efficient sources possible as well as expand their own export numbers by selling into larger European supply chains. For UK companies either at the top or operating as part of supply chains, international co-operation is a vital part of their competitiveness, with final products today made up of intermediate parts from around the world. For many sectors – aerospace and automotive, for example – the opportunity that the EU Single Market has created to co-operate with partners in other countries through supply chains has been the foundation of global success (see Exhibit 26).

Exhibit 26: UK access to EU supply chains boosting trade around the world

Cheese Cellar: This SME sources cheeses, chocolate and charcuterie from around Europe, as well as using local produce, for exports to global markets such as the UAE, Hong Kong, Sri Lanka and the Caribbean.

       

Wright Group: Northern Ireland based Wright Group is the UK's second largest bus manufacturer. The EU Single Market is an important source of key components including chassis and engines. Working with European partners is a key part of the company's growth plan in high-growth markets such as Singapore, China and India who value the UK firm’s history of innovation in developing low-floor and hybrid busses.

The provisions of the Single Market help to underpin supply chains: if UK intermediates are to be combined with intermediates from elsewhere in the EU, it helps if EU goods comply with the same standards and regulations as the UK’s and can be moved easily across borders.

The UK is already substantially integrated into European supply chains. According to world input–output data, in 2009 7bn of the UK’s total of 3bn of exports to the rest of the EU27 was used as inputs to industries rather than being consumed directly. Britain’s world-class financial services industry was particularly important in this regard, accounting for bn of exported intermediates (58% of Britain’s total financial intermediate exports).[14]

machine cogs industry

Integration into European supply chains means that Britain imports from the EU not only to meet consumer demands but also to obtain intermediates for production in the UK. Imports are therefore every bit as important to UK competitiveness as exports, which means that even sectors that are not prolific exporters can be heavily exposed to EU trade. The UK imported 1bn of intermediates from the EU27 in 2009, the health & social sector being particularly prolific with imports of bn (principally of pharmaceuticals and other chemicals).

The importance of EU imports to UK export performance cannot be underestimated: a significant quantity of EU imports is embodied in UK exports, with OECD estimates suggesting that 8% of the value-added in UK exports in 2009 originated in other EU member states, compared to 3% from the United States (domestic value-added was 83% of the total). In the transport equipment sector, the proportion of EU value-added was as high as 16%.[15]

Historic successes present a solid platform for future opportunities

The historic benefits of access to the European market have been a significant net positive for UK business and have provided a strong platform for increased jobs and growth in the UK economy. The EU can continue to play the role of facilitator of access to the European market over the coming years and bring new opportunities for UK firms as it breaks down barriers that still exist to certain parts of the Single Market and updates how the Single Market is defined for the 21st century economy.

The two big areas for future opportunity are in developing a Single Market for services – a major economic strength of the UK – and in updating the Single Market for the digital age.

  • Whereas intra-EU trade in goods amounts to a third of the size of the EU’s manufacturing sector, the corresponding figure for services is around 3%.[16] For the UK, as a global leader in services exports, this undeveloped market has significant potential.
  • Digitalisation is not just revolutionising the way firms do business, it is also a key lever which can be used to unlock broader economic benefits: a larger ‘online’ consumer base, job creation and retention, together with support for high-growth industries.

Progress towards a completed Single Market – including on digital and services – could add up to 14% to EU GDP after 10 years with a 7.1% increase in UK GDP, according to a BIS study.[17] Although the total elimination of all barriers is not feasible – cultural and language barriers will always remain, as an extreme example – these figures nonetheless point to the huge gains potentially available.

Overall, access to the EU market in goods and services has been a major benefit for the UK economy, expanding the potential market, allowing UK firms to become part of complex supply chains, and increasing trade. For CBI members, access to and participation in European markets has been the largest single benefit of EU membership for the UK.

3.2 Membership of the EU has given UK businesses access to the finance they need to grow

A thriving domestic economy trading globally and with Europe relies on the ability of companies to obtain affordable finance. Capital and financial services are needed to start a company, invest in necessary infrastructure and equipment, improve skills and research for further growth – or simply to keep the business going.[18]

Membership of the EU has significantly helped in boosting access to capital for the UK’s economy. It has unlocked global and European direct investment into the UK, to help start up factories,  build office space, stimulate R&D and support innovation in creative industries; provided new investment avenues for UK companies; and has given UK-based businesses – from small to FTSE 100 – access to a globally competitive financial market on their doorstep.

The UK’s access to the EU Single Market has attracted investment from around the world

Investment from around the world brings jobs to the UK and helps boost productivity to allow UK firms to compete on the global stage. The UK is the leading destination for EU FDI and an attractive global destination for investment – with the second-largest stock of FDI in the world [19] – and it remained Europe’s top destination for FDI projects in 2012, securing a higher number of projects and larger market share than in 2011.[20]

47 %

Nearly half the UK's stock of FDI comes from the EU

The UK has several strong domestic benefits that have enabled it to maintain its investment attractiveness. The CBI’s report Making the UK the best place to invest stressed the importance of the UK’s world-class universities, rule of law, flexible labour market and ease of doing business for inward investment. According to EY’s UK attractiveness survey 2012, investors continue to highlight domestic factors, such as the level of demand in the UK for their products and the UK’s economic growth, as key factors underpinning investment decisions. Building on these domestic strengths, being part of the EU’s Single Market has helped increase the UK’s stock of FDI – both from European firms and non-EU global companies.

Today, the UK receives a substantial share of intra-EU FDI: the EU accounted for 47% of the UK’s stock of inward FDI at the end of 2011, with investments worth over .2 trillion. The UK is the preferred destination for French investments, and European countries take up half of the top ten origins of UK investments.[21] This investment from member states also provides a strong platform to attract further investment to the UK from non-EU international partners (see Exhibit 27)

Exhibit 27: International businesses invest in the UK for access to the Single Market and its workforce

Fujitsu: For the Japanese firm, which employs almost 14,000 people in the UK & Ireland, the UK's influence in Europe has been a vital tool in helping shape pan-European public and private-sector demand for the business services they provide. While there is still a great deal of progress to be made on the pan-European services market, the UK's leadership in services is proving to be an increasingly powerful export tool globally into emerging markets.

EDF Energy: The Hinkley Point C project is a showcase of the value of the UK’s attractiveness to EU and third country investors. An important Anglo-French collaboration on nuclear energy, the project would be the first new nuclear power station in the UK for more than 20 years. Chinese investment in the project was announced in October 2013 and opens the door to further Chinese investment in the UK’s nuclear sector, offering the potential for the UK to play a leading role in the development of new nuclear capacity around the world. A stable investment framework for energy infrastructure projects will be an important factor in securing foreign investment, including for Hinkley Point.

This UK performance reflects a wider increase in intra-EU investment in most member states, driven by EU integration that created better conditions for investment between EU member states: intra-EU investment accounted for 30% of all FDI involving EU countries from 1985 to 1988, but it rose to 62% over the next five years, during the period of implementation of the Single Market.[22] Regional integration increases FDI flows in two major ways. It can boost ‘vertical’ FDI as companies can benefit from locating different parts of the production process in different member states to maximise efficiency. Secondly, if integration succeeds, firms outside the region are likely to be attracted by more competitive production conditions, particularly if the market size is large. Economic literature suggests that market size is the strongest driver of FDI as third-country investors will have greater incentives to invest if investment provides access to a much larger market. This integration has not only ensured that the UK has benefitted from inward investment, it has also allowed UK firms to take advantage of the investment opportunities throughout the EU – raising supply-chain efficiency and increasing profits that return to the UK to be re-invested in jobs and research & development.

Exhibit 28: the EU has allowed UK firms to take advantage of investment opportunities throughout Europe

Vodafone: The company has expanded significantly beyond its UK origins. Its local UK operating business now generates less than 3% of the Group’s adjusted operating profits. As a pan-European business (which also has a significant emerging markets presence), Vodafone has benefited in the past from EU policies to establish Europe-wide mobile standards. Complementing its £1 billion acquisition of Cable and Wireless Worldwide in the UK in 2012, Vodafone recently announced the €7.7 billion purchase of the Kabel Deutschland cable business in Germany to boost its presence in that market.  The majority of Vodafone's shareholders are resident in the UK and include many of the pension and savings funds relied upon by millions of UK citizens. Vodafone employs more than 8,000 people in the UK and is a source of indirect employment to tens of thousands more.

Since 1992 and the creation of the Single Market, inward FDI flows to the EU from around the world have doubled and they currently represent 2% of the EU’s GDP. The UK’s membership of the EU – and the access to the Single Market that this brings – has also seen an increase in the UK’s openness and attractiveness to investment from around the world. Furthermore, an econometric study from the National Institute of Economic and Social Research (NIESR) found that the level of FDI from US manufacturing multinationals in the 1990s was significantly higher than it would have been if the countries analysed – including the UK – had not been members, even after controlling for GDP, growth, factor prices and unit labour costs.[23]

Today, the UK’s access to an integrated Single Market – providing a ‘gateway to Europe’ – remains a significant positive factor in attracting investment flows from across the globe. According to EY’s 2012 attractiveness survey, ‘gateway factors’ are among the top factors influencing decisions to invest in the UK, with the ability to use the UK as a base for export the second most cited factor (see Exhibit 29).

Exhibit 29: Although not the only factor, being a ‘gateway’ to the EU is critical to the UK’s attractiveness as a place to invest.

In some cases it is the combination of EU membership and strong domestic factors that brings companies to the UK. For instance, the UK’s place as a large English-speaking EU member makes it particularly attractive to overseas businesses looking to enter the European market but struggling with the barrier of working in multiple languages, as highlighted in the CBI’s report Making the UK the best place to invest. For a number of key sectors and companies, however, investment is particularly contingent on unconstrained access to the EU’s Single Market, as highlighted in the sections on the automotive industry and financial services sector later in this chapter. These are also amongst the sectors in the UK that receive the most inward investment (see Exhibit 31). The evidence from international investors submitted to the UK government’s Balance of Competences Review in 2013 also demonstrates the importance of access to the EU Single Market for foreign investors (see Exhibit 30).

Exhibit 30: Japan, a major investor in the UK, values the UK’s EU membership

The UK is the preferred European destination for Japanese investments, and its government highlighted the UK’s membership of the EU as a major reason for why Japanese companies choose to invest in the UK in their response to the UK government Balance of Competences Review.

The UK, as a champion of free trade, is a reliable partner for Japan. More than 1,300 Japanese companies have invested in the UK, as part of the Single Market of the EU, and have created 130,000 jobs, more than anywhere else in Europe. This fact demonstrates that the advantage of the UK as a gateway to the European market has attracted Japanese investment. The Government of Japan expects the UK to maintain this favourable role. [24]

Exhibit 31: Inward FDI is important to a broad range of UK industries, not just those directly involved in exporting

The EU has cemented the UK’s position as the world’s leading financial centre, securing access to financial markets for UK businesses

Through a large market and common regulation, the EU has helped the UK develop a substantial domestic financial services sector. The strength of the UK’s financial services industry also supports a much wider nexus of business and professional services such as accountancy, auditing and legal services: while financial services contributed 8% of UK GVA in 2012, these business and professional services contributed a further 6%.[25]

In addition to providing value to the economy on its own, this has helped improve the availability of capital for UK companies as they benefit from access to a globally competitive financial market at its doorstep, secured by the UK’s EU membership. Providing ‘invisible infrastructure’ to the UK economy, the financial services sector helps UK firms finance domestic and overseas expansion not only through bank finance but also through bonds, equity-backed securities and other forms of corporate finance (see Exhibit 32). For example, many companies looking to export high-value manufactured goods benefit from having a financial centre in the UK that can help raise money for investment as well as hedge against currency risk all in one place.

Exhibit 32: The UK’s financial centre helps SMEs and MSBs achieve their growth opportunities

As set out in the CBI’s report Future Champions, MSBs could be worth an additional £20bn to the UK economy by 2020, but only if they can access the finance they need to grow. Although there is still potential for improvement, the UK financial services sector has created initiatives to help boost affordable capital for small and medium-sized businesses beyond traditional bank lending:

Public equity markets for SMEs: The main public equity market in the UK and Europe for high-growth businesses is the Alternative Investment Market (AIM), operated by the London Stock Exchange. AIM offers smaller growing companies a public market with access to both retail and leading institutional investors within a regulatory environment designed specifically to meet their needs. Since its launch in 1995, more than 3,000 companies from across the globe have chosen to join AIM, collectively raising over £80.6bn (including £44.6bn in further issues).

Retail bond markets: In 2010, the London Stock Exchange launched a platform for retail bonds (Order book for Retail Bonds (ORB)) which are bought by individual investors rather than major institutional investors. Investors in retail bonds can buy or sell a bond at any time through the ORB and check its price on the London Stock Exchange like a share. Issues on ORB have ranged from £25m to £300m, with most bonds issued between £50m and 75m, and businesses have so far raised around £3.2bn.

3.3 Labour mobility in the EU brings benefits for British business, but being open may mean being tougher

As set out in Chapter 2, labour mobility is an important component of the openness that drives productivity improvements. As one of the basic freedoms of the EU Single Market, the free movement of labour allows businesses to employ people with the skills they need from across the Continent. It facilitates service exports where personnel need to physically be present to provide a service and has also allowed many UK citizens to take up opportunities to work and live abroad. In total, 13.6 million EU citizens (2.7% of the EU’s population) now live in other member states and there are 2.4 million citizens of other EU countries living in the UK, making up 3.7% of the total population.[26] In 2012, 5.2% of employed people in Britain were born in other EU member states – a little over one-third of all those who were born overseas.[27] At least 750,000 UK nationals live in other EU countries.[28]

"

The free movement of labour allows businesses to employ people with the skills they need from across the Continent.

However, free movement for labour is perhaps the most controversial of the EU’s four freedoms. While the UK economy has benefitted from the creation of an EU-wide market for talent, and indeed from immigration more widely, the level of migration to the UK was greater than expected from the more recent accession countries: the number of people born in the A8 countries[29] working in the UK increased from 0.4 million in 2004 to 0.7 million in 2012.[30] Taken together with immigration from countries outside the EU, this has created some local social pressures. British business wants to protect the advantages that derive from free movement of people and therefore understands the political need to address any costs, both perceived and real, to wider society.

The EU’s free movement of people has had a number of benefits to the UK economy

There is significant evidence that, rather than taking a slice of the economic pie away from the existing population, immigrants add to the productive potential and level of demand in an economy, thus raising long-term GDP. For example, a NIESR study found that immigration from the EU accession states over 2004 to 2009 added 0.84% to the UK’s long-term GDP.[31]

At a business level, the EU facilitates the free movement of labour across 28 European countries, which helps companies match labour supply to demand for the skills they need; indeed, 63% of CBI members stated that the free movement of labour within the EU had been beneficial to their businesses, with only 1% saying that it had had a negative impact.[32] And this is not only for bigger businesses. For SMEs, free movement of labour is undoubtedly an important benefit of EU membership: 69% of CBI members with 250–499 employees and 55% of those with 50–249 employees said that it had had a positive impact. Large-scale labour and skills shortages can now be addressed across the EU through migration in a way that was previously confined to population movements within individual states. For example, access to skilled labour from within the EU is a key factor in the ability of Alderley Systems – a Gloucestershire-based company employing 150 people locally that makes metering and water treatment systems for the international oil and gas industry – to achieve the tight deliveries required by its international clients. Without the facility to enhance skilled staff teams at short notice it could not function as a business, with Eastern EU countries so far proving the best source of tradesmen with the necessary skills.

A secondary major benefit of free movement of labour is the ability of UK firms to easily recruit employees with specialised skill sets from across the EU, which is increasingly important given the UK’s high-value-added industries. In highly productive sectors, such as financial services, this has created a pool of talented staff from around the EU that firms can employ in the UK. It also allows UK specialists to be deployed internationally more easily. In over 45% of cases where the UK was chosen as an FDI location by financial services firms, access to skilled staff, including EU nationals, was cited as one of the core reasons for choosing the UK.[33]

As a related point, free movement for labour has facilitated cross border staff mobility for pan-European companies, enabling companies to flex their EU staffing resources accordingly.  For example Kingfisher PLC, Europe’s largest home improvement retailer, has a pan-European senior management team which operated as one team across its six EU markets. In practical terms, this means staff move around the business, bringing their skills to different EU operating companies and benefitting from the experience of working in different operating companies.

63 %

Percentage of CBI members that said the EU's free movement of labour had a positive impact on their business

Similarly, for UK providers of highly specialised services, free movement of labour has helped create pan-European markets. Firms rely on the ability to send staff to other countries to provide their services. Barriers such as onerous visa and work-permit requirements would limit the ability of these firms to function across the EU. For example, cyber-security has created a growing demand for specialised staff to deal with a problem that costs UK companies an estimated £27 billion annually; the free movement of labour provided by the EU enables companies such as Thales to deploy staff across the EU at short notice and have access to a wider pool of expertise to provide a niche service, the demand for which is hard to predict and often requires rapid deployment. Equally, UK academic institutions and industries reliant on tourism benefit from free movement across the EU and the absence of visa requirements for students and visitors.

These benefits to business and the economy should be considered in light of the impact they have on jobs and wages. As is the case with all immigration flows into Britain in recent years (see Chapter 2), there is in fact little quantifiable evidence that migrants from the A8 countries have had any large impact on the employment or wages of UK-born citizens. A8 migrants are thought to have boosted GDP, as the increase in numbers adds to the level of production in the economy, but the immediate impact on GDP per capita seems to be broadly zero.[34] Over the long term, however, the fact that migrants to the UK are generally of working age could have beneficial consequences for Britain’s dependency ratio, and consequently for growth per head.

While immigration generally has benefitted the UK, it has led to perceived social pressures which business cannot ignore

The significant increase in net immigration following EU enlargement has led to perceptions of a strain being put on some services in localised areas of the UK.

Some believe that rapid immigration has put pressure on social infrastructure. Although there is strong evidence that immigration has an overall net positive fiscal impact, localised pressures and delays in redeploying resources can occur. A Home Office report has documented some of these pressures, although non-economic migrants such as asylum seekers were found to place a greater burden on infrastructure than economic migrants who account for the vast majority of movement within the EU. This has been especially concentrated in some local areas and has given rise to legitimate concerns about the ability of some areas to absorb and integrate a population influx.[35]

Also, and despite the evidence above, a rapid rise in immigration has created the impression of an unacceptable call being made on UK welfare systems by people who have not contributed to those systems. While these are primarily social (rather than business) issues, much of the debate around the UK’s relationship with the European Union is dominated by the issue of migration.

Being open may mean being tougher, but making the case for both is vital

The principle of free movement of labour that underpins much of the immigration seen from EU member states was established at a time when the European Community consisted of countries of predominantly similar economic development. This, coupled with the small number of countries involved, allowed immigration to occur without large fluctuations in numbers and speed of immigration, enabling social security systems to adapt more easily to any pressures when they occurred.

Although the principle of free movement of labour is still wholeheartedly supported by the business community for the reasons outlined above, consideration should be given to reforms that address, for example, unbalanced entitlements to welfare. This must be done in a way that allows the principle of free movement to remain, but operate in a way that works practically for member states in the now enlarged and more economically diverse EU.

Similarly, part of the answer to making the case for free movement of labour involves employers working with government to improve skill levels in the UK workforce, to ensure that UK workers have the skills to compete with European workers who take advantage of the right to free movement.

If the UK is to have a global trading role, it must maximise labour mobility as a component of boosting productivity, regardless of the status of the UK’s membership of the EU. Business therefore needs to recognise the strength of public feeling on immigration since this could undermine public support for having an open economy and, as a consequence, the UK’s global trade ambitions more generally.

It is only by taking account of the concerns of the wider public that labour mobility across the EU, and the significant economic advantages that go with it, will be maintained.

3.4 Common rules are needed, but the UK’s lack of unilateral control over regulations is seen as the biggest downside to EU membership

A Single Market needs commonly agreed rules. This allows firms full access to the market on equal terms, and ensures they are able to fully exploit the economies of scale that a large market can bring. In this respect, the drive by the EU to harmonise regulations, standards and processes across the Single Market has had significant benefits for businesses. As outlined above, cross-border trade in goods and services, investment flows and labour movements in the EU have grown significantly and, for many companies, the move into exporting or international operation is made easier by the EU’s harmonised policies on many key areas of business regulation.

As a result, product standards, labour regulations and common business practices are subject to regulation at an EU level in many areas. Removing these non-tariff barriers between member states is one of the most important differences between a Single Market and a customs union. For UK firms operating in the EU market, the UK’s ability to influence these rules has had a significant impact on their ability to compete.

Despite frustrations with a number of specific pieces of legislation, the majority of CBI members continue to believe that the benefits of EU membership through enhanced market access and competitiveness outweigh the costs of regulation. 71% of CBI member companies reported that, on balance, the UK’s membership of the EU has had a positive impact on their business – with over half (52%) saying that they had directly benefitted from the introduction of common standards. Only 15% suggested this had had a negative impact.[36] 

However, while the EU has less extensive influence over UK law than is often stated (see Exhibit 33) and the UK is influential in shaping EU law itself (as will be explored in Chapter 4), the impact of poorly thought-out EU legislation is a major issue for businesses. In a survey of CBI members, 52% of businesses said that they believed the overall burden of regulation on their business would fall if the UK were to leave the EU.[37] There is clearly a significant problem that needs to be addressed to ensure that the benefits of the Single Market are not diluted or even outweighed by the negatives of unnecessarily costly or bureaucratic regulation.

Exhibit 33: The impact of EU law on the UK is overstated

The regulation that transposes EU rules into UK law makes up a significant, but often overstated, percentage of UK legislation. While figures as high as 70% are regularly mentioned by politicians and media commentators, the evidence suggests that the figure is much lower. According to the House of Commons Library, between 1997 and 2009 6.8% of UK primary legislation (Statutes) and 14.1% of secondary legislation (Statutory Instruments) had a role in implementing EU obligations, ranging from passing reference to explicit implementation.[38]

A single set of rules can help business if it is well designed

As discussed earlier, having a single set of rules deepens market access and supports integration and economies of scale. Common frameworks of regulations and standards for automobiles, pharmaceuticals and electronic equipment have created economies of scale for manufacturers by reducing compliance costs and expanding the size of the market (see Exhibit 34). Such common standards can also lower administrative costs by reducing the burden of compliance with multiple sets of rules and requirements when trading across borders or when servicing the needs of EU customers. Moreover, common regulations create a level playing field for all businesses to boost fair competition in the market by outlawing compromises on levels of safety and environmental regulations.

Exhibit 34: Common rules across a large market bring huge opportunities for UK businesses

Baxter Healthcare: For the US based manufacturer of medical devices and pharmaceuticals, the attractiveness of the UK as a place to invest was significantly increased by the development of the Single Market. Their plant at Thetford in Norfolk manufactures a range of healthcare products, employing over 400 people, and has recently completed a £20million investment programme. The creation of the Single Market enables Baxter to supply products from this site across the whole EU based on harmonised regulatory procedures.

Portakabin: The UK's early adoption of new technology and approaches has enabled York-based Portakabin to expand into Europe, aided by the development of standardised regulations and product safety standards that allow the firm to exploit economies of scale to sell to 28 markets with one product. However, further alignment of pan-European regulations is needed to ensure a more level playing field. Strong growth in demand for its products across the EU and a recent major acquisition in Germany have helped establish Portakabin as Europe's second-largest manufacturer of portable and modular buildings.

 

Common EU regulations and the co-ordination they bring between domestic regulators in EU member states also help tackle cross-border challenges more effectively. For example, UK advocacy at an EU level on climate change has led to action to introduce emissions targets, a challenge that simply cannot be addressed on a unilateral basis at national level.

Exhibit 35: The EU Emissions Trading Scheme – action at EU level to overcome cross-border challenges  

Emissions trading is the most effective way to reduce emissions and stimulate low-carbon investment in Europe, and it should remain the cornerstone of an EU energy and climate change policy that can help overcome challenges through joint endeavour. However, while technically operating effectively, the current EU Emissions Trading System (ETS) is not delivering on its potential, meaning that European economies are missing out on vital investment. If not reformed effectively, Europe risks fragmentation towards 28 different national systems for reducing emissions and stimulating investment, undermining the level playing field the EU ETS provides across the EU and creating huge complexities for businesses operating across the different member states. The EU must act swiftly to reform the EU ETS to ensure that the system works for all businesses, with competitiveness concerns placed at the heart of reforms, so that all EU member states can feel the benefits of cross-border co-operation through a policy that supports a dynamic, low-carbon Europe.

Furthermore, the development of EU-level rules that support the world’s largest Single Market can also bring global opportunities. First, the adoption of regulations at EU level has led to their international adoption and thus created benefits for EU firms who are then able to compete on the global stage without additional compliance costs and with the assurance of fair competition with international competitors. A prominent example of this has been the adoption or adaptation of the EURO emission standards for goods vehicles in countries as diverse as Australia, Russia, Thailand, China and India.[39]

Secondly, the adoption of voluntary standards has a major effect in opening markets and preventing non-tariff barriers to trade. Basing national technical regulations on international standards, in line with the WTO TBT Agreement, means that products can be placed on the market across the globe without additional requirements needing to be met. In many sectors, such as medical devices and the electrotechnical sector, standards are global, with international standards being adopted in Europe.

Finally, and importantly given the development and predominance of regional blocs in global trade matters discussed in Chapter 2, the EU has been able to use its clout to keep regulatory divergence between blocs to a minimum. In the absence of true global requirements in a number of industries, this has allowed UK firms to continue to be able to trade around the world without significant alternation in conditions between jurisdictions. The most striking example of this has been in financial services, where the development of EU financial services legislation over the past 20 years has broadly kept the EU and US regimes in line (in large part due to UK influence, as is discussed in Chapter 4), allowing the UK’s financial services sector to act as a crossroads between regimes and attract business from both sides of the Atlantic. 

Exhibit 36: Respected EU standards bring global opportunities for UK firms

       

ARCO Limited: The Hull-based distributor of personal protective equipment has benefitted from the increasing adoption of EU standards around the world, allowing them to develop a significant export business. With sales in over 100 countries worldwide, the company opened its first Chinese office in 2005 and also distributes in a range of Middle Eastern and African markets.

   

BSI: The UK’s National Standards Body coordinates the European position on the role of standards in the US-EU trade negotiations, and is leading the work at European level on the use of standards to stimulate transformation in the services sector. In addition,  BSI is negotiating with its counterpart in China to establish a new system which will enable British Standards to be more widely accepted in China.

 

Fane Valley: This farmers’ co-operative based in Armagh City, Northern Ireland, now exports 85% of its output of meat and dairy products. While the majority of its products go to the EU, export opportunities in Africa, China and South America are growing, with the strength of EU standards playing a major role in establishing the credibility of the brand with consumers in those markets.

The frameworks of regulations and standards that help create a pan-European market has also had significant consumer benefits. Some of these have come from direct pan-EU regulation intended to bring consumer benefits – such as recent moves to bring down mobile phone roaming charges and the use of standards defining voluntary agreements on common mobile phone chargers – or as a result of the extensive consumer benefits that come from increased competition – for example, the pan-European open skies agreement has led to a sharp decline in the cost of air fares across the EU and a significant increase in the number of options for customers.

Assessment of the gross cost of EU regulation alone does not show the whole picture – looking at the impact on business in the round is important

Figures on the cost to the British economy of EU regulation differ significantly. One analysis of the issue suggests that, since 1998, the total gross cost to UK business of implementing the 2,000 pieces of business regulation has been as much as £176 billion, with £124 billion of this related directly or indirectly to the implementation of EU policies.[40]

However, while there are certainly costs to EU regulation, the net costs of regulation are often over-estimated, with many analyses, including the one above, failing to factor in the potential benefits of harmonised regulation and the market access it facilitates. Simply adding up costs taken from impact assessments – without netting out those costs between sectors, employers and consumers and without factoring in any benefits – is a misleading way of assessing the overall regulatory impact.

Moreover, when assessing the impact of EU regulation on UK business, it is important to take account of the counterfactual; that is to say, whether it is likely that domestic regulation would be required if EU regulation ceased to apply, either to maintain desired standards in the home market or to fulfil the UK’s international obligations.

"

While there are certainly costs to EU regulation, the net costs are often over-estimated.

In many cases, the UK would be likely to regulate domestically in the absence of EU rules to maintain standards to which UK consumers and workers had been accustomed. For example, a large proportion of the £2.6 billion per year gross cost to UK business of the Working Time Directive is the result of employees being entitled to paid annual leave.[41] The Directive requires that workers are given at least 20 days paid annual leave, but the UK’s regulations that transpose the Directive go further, requiring at least 28 days. With little domestic debate over reducing paid leave entitlements, a large proportion of this cost would remain if working time rules were set domestically rather than in Brussels. As another example, even if the UK could choose to repeal the REACH Directive, it would still require businesses to comply with some rules for the safe use and disposal of chemicals. Moreover, as discussed in more detail in Chapter 6, were the UK outside the EU, British businesses seeking access to EU markets would still have to comply with most regulations – including controversial examples like REACH – over and above any alternative domestic regulation in order to meet the criteria for selling into the EU market.

This counterfactual analysis applies equally to the UK’s obligations as part of the various international institutions of which it is a member. Some of these institutions are outside the EU but often confused for EU institutions. A notable example is the European Court of Human Rights in Strasbourg, a body which has previously caused controversy in the UK with its rulings on the UK’s blanket ban on allowing British prisoners to vote..

However, the real focus of this international element of the counterfactual concerns those regulations in areas where the UK has global ambitions and so benefits from global standard setting. Whether through signing up to the WTO’s GPA rules on public procurement (currently implemented via EU Public Procurement Directives) or fulfilling its G20 obligations to follow the Basel III regulatory standards on capital adequacy in the UK banking sector (currently implemented via the EU’s Capital Requirements Directive IV), the UK would be likely to introduce UK regulation even if it ceased to be bound by EU regulation so that it could continue to push the global regulatory standards that benefit its businesses by allowing them to compete fairly with international competitors.

Any assessment of the burden of regulation and the extent to which the original legislation needs to be altered to reduce this burden needs to take account of the implementation element of regulation: much EU regulation, although it originates in Brussels, is implemented and calibrated in the UK. Indeed, for CBI members, the number one priority for ‘reform of the EU’ was addressing the poor implementation of EU rules in the UK. While different legal frameworks across member states do pose challenges for legislating at EU level – for example, directives written for a civil law system may require a greater level of detail when translated into UK common law, where the letter of the law seeks to ensure compliance – but this must not be used as an excuse for poor or expansionist UK implementation. While the UK government’s ‘Red-Tape Challenge’ has had a positive impact, ‘gold-plating’ of EU directives is still perceived as a problem in the UK at both a central and local government level. One example of the scale of the problem can be seen in the UK’s record on government procurement. A report in 2010 found that public procurement using the EU procurement directives in the UK took 50% longer and cost 50% more than the EU average. Only Greece and Malta had slower systems and the UK was home to the most expensive procurement processes in the EU.[42] The UK’s TUPE regulations, which implement the EU Acquired Rights Directive, are another example of ‘gold-plating’. Welcome changes are planned for 2014 to make it easier to manage workforce transitions and the government has committed to making the case for greater flexibility in the EU Directive. While these are welcome steps, it will still be too difficult legally for firms to fairly harmonise terms and conditions by comparison with elsewhere, highlighting the fact that the UK government must do more to stand up for the UK’s interests when implementing EU rules.

Finally, it is worth considering the overall impact EU regulation has had on the UK economy and assessing the extent to which this has really been a drag on the UK’s global competitiveness. Despite some unwelcome regulation that British business would prefer to be repealed, the fact remains that the UK appears to be lightly regulated in comparison with other EU states and international developed competitors, including in those areas where the EU has competence to legislate. The World Economic Forum recently ranked the UK as the 10th most competitive economy in the world.[43] As Exhibit 37 shows, the UK’s capital, labour and product markets are among the most liberal in the developed world, which calls into question whether the EU is actually placing an insurmountable barrier to global competitiveness through the regulation agreed at European level.

Exhibit 37: The UK’s capital, labour and product markets are among the developed world’s least restrictive

While CBI members of all sizes and across all sectors of the economy are clear that the benefits of EU membership outweigh the costs of regulation, there are undoubtedly problems caused by poor EU regulation and its domestic implementation. In an ideal world, business would seek national control over employment legislation and some other social policies – and, even if control remains at EU level, business is keen to see reform to the approach taken to regulation. However, given that EU markets remain competitive despite this regulation, they conclude that it is not worth losing the wider benefits of the EU simply to regain control of those competences.

But poor and unnecessary regulation is a significant frustration for business

Nevertheless, there remains a significant problem with poorly thought-out regulation that stifles business while failing to deliver the hoped-for results. There is also a sense that the Commission constantly seeks to accrete power in a form of ‘mission creep’.

EU attempts to bring in regulations detailing the allowed size and shape of bananas or bans on olive oil containers are often highlighted as examples – some real, some exaggerated – of meddling EU regulation that is nothing but detrimental to business and the UK way of life. They undoubtedly raise issues of proportionality and subsidiarity, but business is more concerned with those EU regulations that affect the ability of UK firms to create jobs and growth.

For CBI members, the biggest complaints centre on the rising cost of compliance and the increasing cumulative burden of regulation. Regulatory approaches that take a uniform approach to a diverse set of national systems have created problems. CBI members are particularly frustrated by EU attempts to apply a one-size-fits-all approach across the diverse range of labour markets and industrial relations systems in EU member states – 49% stated that the introduction of common labour market rules had had a negative impact, with particularly strong views expressed by mid-sized businesses.[44] This is a trend that has been exacerbated by the increasingly expansive judgements of the EU courts, which have taken an approach of maximising the effect of directives. This is something that businesses want to see tackled as part of any reform.

"

EU regulation that is out of step with global regulatory trends hinders the ability of UK and EU companies to compete in the global market place.

With each national labour market facing its own unique challenges, EU-wide solutions to problems in some but not all member states can have unintended consequences for the other member states. The Temporary Agency Work Directive is a prime example of this situation. It was introduced to remove the unreasonable restrictions on the use of temporary workers that existed in some countries and to ensure equal treatment for temporary workers in others. But the impact in the UK – where workers were already paid 92% of the level for all comparable employees[45] and where there were no unreasonable restrictions to remove – has been an additional cost to employers of £1.9 billion per year.[46] These costs arise primarily from having to apply new onerous compliance processes, without the large benefits for businesses or workers experienced from liberalisation in other countries. The CBI did not oppose the idea of a Directive in principle, if it was well-targeted, but this did not turn out to be the case..

The Working Time Directive is also frequently cited as a particular frustration for businesses. The priority of firms when regulating working hours is that they retain a degree of flexibility to be able to manage their workforce effectively. The freedom for individuals to opt out of the cap on weekly working hours is a vital source of this flexibility. In addition, it is also very popular with employees who want to determine how many hours they work to suit their lifestyle choices, for example often wanting to work overtime to increase their earnings or to work longer hours while overseas in order to complete a job quicker and return home to their families earlier. Despite its importance to businesses, the Directive being valued by many workers and the fact that the majority of member states use it, the consistent drive from Brussels to challenge it is creating disruptive uncertainty for UK and other EU businesses.

Beyond labour market regulation, there are further concerns for the UK’s more globally focussed sectors that centre on cases where EU standards are out of step with global regulatory trends. The implications for UK companies operating internationally can be minor and entail only small costs to duplicate compliance standards. However, in sectors where EU regulations are significantly stricter than those in other markets, this can be a major source of cost for businesses, reducing their global competitiveness. For example, proposed EU data protection regulation threatens to diverge from other international approaches and hinder the ability of UK and EU companies to compete in the global digital marketplace. This is a major concern for British business, and threatens to hinder their attempts to break new markets and sell around the world.

The EU needs to make sure that all regulation reviewed or put forward will support Europe and the UK’s growth. Rules must therefore be made to work in a global context and for businesses of all sizes, and they must be adequately assessed and evaluated to ensure that they are delivering against their objectives.

3.5 There are direct budgetary costs to EU membership, but the net costs are less extensive than often reported

As one of the largest economies in the EU, the UK has historically been one of the largest contributors to the EU budget in absolute terms with a gross contribution of €17.4 billion in 2011. The UK receives most of that money back through the ‘rebate’ and the EU’s major funding programmes – research funding, agriculture and regional aid – leaving a net cost of €7.3 billion or 0.4% of GDP.  As a comparison, this is around a quarter of what the government spends on the department of Business, Innovation and Skills, and less than an eighth of the UK’s defence spend.  It is the equivalent of around £116 per person, the sixth-highest per capita level behind Sweden, Denmark, Finland, Germany and the Netherlands.[47]

£116

The annual direct net budgetary cost per person of EU membership

There is a net direct budgetary cost to EU membership – as well as complex and bureaucratic funding streams that reduce the transparency and accountability of how EU funds are spent

Every member of the EU contributes to the EU budget which covers everything from farm subsidies to scientific research. This year, the EU’s total budget will be around €130 billion or around 1% of EU GDP. The three largest categories of European expenditure are for research and innovation, regional development and agriculture.[48]

The UK is a significant recipient of EU funds and does well from EU research funding. Under the 7th Framework Programmes (FP7), the UK received €4.9 billion between 2007 and 2013, which represented 15.1% of the available total, ahead of France (11.5%) and behind only Germany (16.2%). The UK’s university sector was particularly successful, receiving more than French and German universities combined.[49]

In many of the UK’s most competitive sectors, EU funding has been a major driver of innovation right across the UK. By being part of the EU, the UK is able to shape research priorities in aerospace, automotive, pharmaceuticals and chemicals that directly benefit UK firms and also create more innovative supply chains around Europe with which UK firms can partner. 49% of CBI members stated that access to EU funding streams had had a positive impact their business.[50] As an example, EU funding for work on 14 public-sector projects in the UK allowed The Agency, a provider of advertising, marketing and technology services based in Bath, to develop first-in-class case studies which helped them win work in the US and the Middle East. The EU has also helped the Southwest National Composites Centre become a world leader in advanced materials with a significant funding contribution of £9m.

In addition to funding innovation, EU programmes have been a major driver of regional development. This development funding has helped finance a number of regeneration programmes across the UK, particularly in deprived parts of England and the devolved nations. In England alone, European Regional Development Fund investments have helped over 12,000 businesses to start or expand, creating over 40,000 jobs.[51]

Nevertheless, the UK remains a net contributor, and the priorities the EU sets and the processes for delivering these desired outcomes limit the overall benefit the UK obtains from EU funds.

A recurring theme with EU funding is that the priorities set do not correspond with spending that the UK would choose to make if it decided independently where funds should be allocated, especially frustrating given the bureaucracy involved in handing over money to the EU only for it to be returned to member states minus an administration fee via EU funds.

These issues have led some to argue that the UK could do better if it funded its own research, regional and agriculture programmes. Given that the UK is a net contributor, there is a clear logic that the UK could more than pay for such programmes from its own resources if funds were not being directed to the EU budget.

"

There is a net budgetary cost to the UK in terms of the EU membership fee but – at only £116 per person each year – this is more than justified by the wider net benefits.

For example, while it should be noted that the size of the UK’s net contribution to the Common Agricultural Policy (CAP) was a significant factor is securing the UK’s annual rebate of £3.6 billion, the UK is a significant overall contributor to the scheme. In the current budget period, the UK contributed €33.7 billion while payments to UK farmers totalled £26.6 billion, making the UK the fourth-largest net contributor to the CAP at £7.1 billion.[52] Although some argue that participating in the subsidising of agriculture on a pan-European basis rather than through a national subsidy scheme is effectively a prerequisite to exporting to the European food market, the UK could, in theory, fund a more generous scheme of support to its farmers outside the EU.

There are also distinct drawbacks to the UK’s participation in other EU funding schemes. Securing EU funding is often a complex, bureaucratic process, and the monitoring systems of the EU greatly restrict the purposes for which EU funding can be used, reducing the flexibility of national authorities. Furthermore, although the complex nature of the funding systems themselves makes it difficult to account fully for expenditure, there is clearly a lack of transparency in the EU’s accounts, with the most pressing concern being the failure of the Court of Auditors to fully approve the EU’s accounts for the past 18 years.

There are wider benefits of pan-European approaches to funding for the UK and European economies

Despite the complex nature of some EU funding streams and the overall net cost to the UK, there are nevertheless a number of wider benefits to the UK from participating in pan-European funding structures, especially given that the net cost is low.

First, the pan-European nature of research funding has benefits that could not be replicated nationally. An EU structure has helped UK companies and universities produce innovative technologies by facilitating collaboration across borders with a range of academic and commercial partners. The whole is greater than the sum of the parts.

Secondly, the benefits to the UK of EU regional funding go beyond a simple measurement of direct costs and benefits in monetary terms to the UK itself. Just as specific EU programmes like broadband funding have benefitted specific sectors of the UK economy, EU programmes have contributed to significant economic development in the accession countries through infrastructure investment and regional funding. In turn, this is creating stronger markets for UK products in those other EU countries. For example, the EU’s recent funding drive to boost broadband capacity and uptake in Central and Eastern Europe has  played a role in creating a new market for internet shopping in the region. Tesco has recently launched online shopping services in Hungary, Slovakia, Poland and the Czech Republic, highlighting one of the indirect benefits that EU funding can bring for UK businesses.

Some have argued that regional funding for wealthier EU countries could be removed from the EU budget and restored to member states. Although this would potentially reduce the domestic bureaucracy associated with those schemes and restore national flexibility in countries like the UK, it would still mean a net contribution by wealthier countries to fund regional development in poorer member states. It is in the UK’s national interest to help fund the development of less wealthy member states, not least because this helps provide increased demand from those member states for UK goods and services.

There is a net cost to the UK in terms of the EU membership fee, and it can be argued that the process of securing funding is unnecessarily bureaucratic and complex and that there are serious failings in terms of the transparency of the EU’s accounts. However, these arguments can be offset to some extent by the fact that the pan-European nature of research funding has benefits that could not be replicated nationally, and, ultimately, the low net cost of £116 per person is justified by the wider benefits.

3.6 The EU has helped open global markets to UK firms on terms that support their ambitions

The net benefits to British business of EU membership  are further strengthened when one considers how the EU has also helped British business access a range of international markets beyond Europe. Adopting an outward-looking approach that builds links to these markets is a central part of fulfilling the UK’s global ambitions.

The EU’s status as one of the world’s largest trading blocs has allowed it to play a leading role in global trade discussions as well as sign numerous bilateral Free Trade Agreements (FTAs), helping UK businesses to import and export more profitably to non-EU markets. Although the value of the EU’s clout in trade negotiations is partially offset by the cumbersome nature of negotiating as part of a bloc of 28 countries rather than as a single nation, it is unlikely that the UK could have secured more far-reaching deals outside the EU, and even more unlikely that the UK would be able to do this while maintaining its current level of market access to the EU.

The negotiating clout of the EU has helped set the terms for global trade

The sheer weight of the EU  – its economy accounted for 23% of the global total in dollar terms in 2012[53] – has driven forward negotiations at the GATT and, later, the WTO that have reduced worldwide barriers to trade in goods and services. This has helped create a rulebook for global trade backed up by robust enforcement mechanisms.

Over the last decade, the UK has benefitted from the EU’s influence in pushing a pro-free trade agenda at the WTO, including through pursuing options to reopen the Doha Round of WTO trade negotiations. It also plays a vital role in defending industry on those occasions when UK and other European business interests are negatively affected by non WTO-compliant trading practices by third countries.

However, in the wake of slow progress at the WTO in recent years, the EU has directed its negotiating power to advance the negotiation of bilateral FTAs, a move that has been strongly welcomed by the CBI. As a result, the EU is currently a signatory to 30 FTAs with over 50 partners including key high-growth markets like South Korea, Mexico, Chile and South Africa. Including the EU itself, British firms have thereby gained full access to a tn market. If FTA negotiations with Canada, Japan and the US are successfully completed and fully implemented, the total market open to UK exports would nearly double to tn – and an EU-US deal would help set the benchmark terms for future global trade deals. If the EU were to complete all its current free trade talks tomorrow, the European Commission has estimated it could add 2.2%, or €275 billion, to the EU's GDP. [55]

Exhibit 38: UK business benefiting from EU FTAs

Herbert Smith Freehills: The signing of the EU–South Korea FTA in 2011 has made it easier for UK companies to operate in the country's highly regulated services sector, allowing law firm Herbert Smith Freehills to open a new office in Seoul in early 2013.

Bombardier Transportation: The firm’s Derby factory delivered 15 trains to run on the Gautrain commuter network between Pretoria and Johannesburg following a contract facilitated by the EU–South Africa FTA.

Infrastructure investment and delivery: The EU–Colombia FTA has helped open up the Colombian market to UK companies and it provides opportunities for UK’s firms looking to tap into the Columbian government’s recently announced ten-year, billion infrastructure investment plan. With UK firms’ long experience of delivering international projects (and using private finance to deliver projects), the proposals offer significant opportunities for advisory, financing and construction work. UKTI recently set itself a four-year goal to help UK companies win at least five £75m infrastructure contracts.

However, it is not simply the quantity of FTAs and the sheer market size captured within these that is the major advantage that British business gains from EU membership; the quality and scope are increasingly important to the UK’s modern economy.  The incentive for other countries of access to the large EU market has allowed the EU to successfully pinpoint trade barriers that typically fall outside the scope of many free trade agreements negotiated by other economies.  For many CBI members, the EU’s ability to negotiate on non-tariff barriers such as divergent product standards, approval processes and environmental regulations has opened up new trading opportunities for businesses (see Exhibit 38). Furthermore, in addition to NTBs, key EU FTA negotiations have resulted in extensive market access commitments on services and public procurement, as well as rules provision on issues such as competition and intellectual property rights that are not realistically achievable at the WTO level due to their high level of ambition.

The EU’s weight in international trade talks and leadership in regulatory setting has helped the EU to set the global standard for many key regulations which have brought a dividend for European and UK businesses looking to operate right across the world. Notably, any FTA signed between the EU and the US, the world’s two biggest economies, could lead to compatible approaches to regulatory setting and compliance over such a large percentage of the global economy that it would help set the standards for the rest of the world.

Despite partially restricting the UK’s trade flexibility, the opportunities provided through collective EU trade negotiations are unmatchable elsewhere

There is significant complexity and a lack of nimbleness in EU trade negotiations – both in the internal process and in reaching a final agreement – but the opportunities this provides for the UK and its most internationally tradable sectors means that efforts at co-operation from an EU base are the best option for the UK to pursue its global trade agenda.

Allowing the EU to conduct trade negotiations on behalf of the UK brings some downsides. First, there is the simple fact that, as one of 28 EU states, the UK cannot guarantee that its priorities will always be represented in trade talks and cannot fully dictate which markets are prioritised for FTA negotiation. Some argue that the UK could have been more nimble in negotiating its own trade deals –with the US or Commonwealth countries, for example. Moreover, the number of places to influence the negotiation process has resulted in competing national interests and defensive positions being pushed by sectoral lobby groups in some EU states, slowing down some FTA negotiations and reducing the scope for reaching agreement on contentious issues such as agriculture. For example, this has been a feature of recent negotiations involving both Canada and Mercosur. This is not helped by the institutional procedures involved in negotiating FTAs that can lengthen the process and present stumbling blocks to completion, including the need to square off interests in both the Council and the Parliament.

However, not all of the perceived sluggishness to EU FTA negotiations can be laid fully at the door of the EU itself; the UK going it alone would come up against similar barriers to quick deals being signed. FTA negotiations have become increasingly complex in the last decade: non-tariff barriers have increased in their relative importance to tariffs as practical barriers to trade for business, and their ’grey’ nature often makes them more difficult to address adequately. At the same time, disguised forms of local industry support in target FTA countries – as well as lobbying campaigns by interest groups trying to use political issues to derail negotiations, such as labour rights in the EU-Columbia FTA or data protection in the ongoing EU–US negotiations – can slow the pace of signing of FTAs. It is likely that the UK would face similar hurdles were it to attempt to pursue its trade agenda outside the EU.

Despite these limitations to EU trade policy, UK business is clear that continuing to pursue a trade agenda within the context of the EU is the best way forward to fulfil the UK’s global ambitions. The nature of the modern FTA, the quality of the FTA that UK industry requires to properly realise global business opportunities, and the size of market the UK offers to potential trading partners all indicate that the UK would struggle to match the deals it can achieve and the market access it can attain if it attempted to strike out alone with trade negotiations.

Although the UK is one of the world’s largest economies, it is several times smaller than the world’s largest (the EU, United States and China). It is difficult to envisage how a country the size of the UK could succeed in breaking down the required regulatory barriers to trade with a major country in its own separate trade negotiation. For example, the UK would struggle to negotiate mutual recognition of a UK product standard with the US or the EU on its own, whereas any deal between the EU and US would probably set the subsequent terms for any UK–EU or UK–US deal.

At the very least, the UK would find itself in a long queue to sign deals with major economies on similar terms to those being signed by larger blocs such as the EU. It is likely that FTAs with the UK would take second place to agreements with the EU in the priorities of third countries, since access to the EU’s Single Market is a huge attraction for companies looking to boost their exports. The clear message coming from a number of the UK’s major non-EU trading partners, such as Canada, China, the US and Japan, is that, while they value the UK as a trading partner, they would strongly prefer an EU-level trade deal complete with harmonised standards, regulations and processes (see Exhibit 39).

Exhibit 39: Membership of the EU makes the UK more attractive to potential trading partners and increases their desire to sign an FTA that involves the UK

The EU is well-positioned to negotiate timely FTAs. It is questionable whether, if the UK was outside the EU, the UK would be as well-placed to negotiate access to these markets on behalf of companies based in the UK; and possible that these companies would be at a competitive disadvantage relative to their European peers.

Also, trade partners would likely put a lower priority on negotiating with the UK alone, compared to negotiating with the EU, which allows access to the markets of its 27 Member States. The overall opportunity for UK firms to gain access to emerging market economies, and benefit from the liberalisation of fast-growing emerging economies, is significant.

British American Business and American Chamber of Commerce in the EU Response to the UK government Consultation on the EU Internal Market, July 2013 [56]

For Canada, and for Great Britain as a member of the EU, this will be a historic step – a monumental one, in fact: a joint Canada–EU study has shown that a commercial agreement of this type would increase two-way trade by 20 percent.

Stephen Harper, Prime Minister of Canada, Address to the Houses of Parliament of the United Kingdom, June 2013, discussing the EUCanada trade negotiations. A political agreement was announced on 18 October 2013. [57]

The UK has been one of the leading voices in Europe shaping EU trade policy priorities and protecting the openness of the EU’s market to international trade. Despite the arguments about the UK being held back by slow negotiations, the quality and deep coverage of FTAs matter more than the speed at which they are negotiated. For businesses, the evidence is clear that EU-level FTAs offer far more advantages than bilateral UK FTAs. The prospect of access to the EU market gives the EU a significant leverage with which to address non-tariff barriers and protectionist policies which the UK would struggle to replicate. The recent landmark trade deal between the EU and Canada shows that the EU is now focussed increasingly on signing the deals that can drive forward the global ambitions of its member states, with this deal estimated to boost UK exports to Canada by nearly a third.[58] In order to ensure that the UK has access to the emerging markets that are driving global growth and the developed markets that continue to offer opportunities for British business, the EU has represented the best tool to date – and it is likely to continue to do so for the foreseeable future.

3.7 The GDP boost from the UK’s membership of the EU far outstrips the costs

Chapter 3 has focused on those aspects of EU membership that are vital to the UK in evolving its global trading role to take advantage of the opportunities that structural shifts in the global economy are offering. It has shown that, on balance, the EU has been a positive for British business in pursuing its global ambitions. While there have been clear costs to membership – most notably the direct net budgetary cost of the membership fee and cases of unnecessary and damaging regulation – overall, the majority of  British business is in favour of membership. 

"

The UK has been one of the leading voices in Europe shaping EU trade policy priorities and protecting the openness of the EU’s market to international trade.

It is also worth noting that most macroeconomic analyses have come to a similar conclusion – although they vary in their areas of focus and in the rigour of their assessment. Taking the EU membership as a whole – including the benefits of harmonised rules underpinning market access, free-flowing capital and mobility of labour set against any downsides of poor regulation, trade diversion and net budget contributions – the clear majority of credible analyses that have tried to calculate the overall macroeconomic impact of EU membership on the UK find a significant positive impact (shown in detail in Exhibit 40).

While some studies cite the benefits of open markets and the removal of barriers to trade to be worth up to 5% of GDP, most studies cited find that the net benefit of EU membership to the UK is around 2–3% of GDP – the equivalent of between £31bn and £46bn a year in 2012 prices, up to £1,750 per household per year, £736 per person, or roughly the entire economy of the North East of England.[59]

Attempting to estimate the overall net benefit of EU membership is extremely challenging. Although various advantages and disadvantages of membership can be identified, some are difficult or impossible to quantify. Generally, analysts focus on the more tangible ‘static’ benefits of membership, such as the creation of trade or lower prices for consumers arising from greater competition, at the expense of the unseen ‘dynamic’ benefits, such as the investment and innovation fostered by more intense cross-border competition. As an extreme example of the less tangible dynamic benefits, it is very difficult to translate the role of the EU in post-War reconciliation and preserving peace in Western Europe for six decades into a numeric contribution to GDP growth.

London

On the costs side of the ledger, the static negative impact of unwarranted regulation on prices and employment is easier to identify than the positive dynamic impacts that it may have on integration, innovation and ultimately growth, affecting any numeric cost–benefit analysis. On top of that, any attempt to agree the various pros and cons of membership into a measure of the overall complexity. And none of the analyses measure the impact of trade deals with countries outside the EU that the UK might not hvae been able to secure otherwise

The upshot is that analyses of the overall impact of EU membership tend to be non-overlapping: they focus on different aspects of membership, use different methodologies and counterfactual assumptions, and often cover different periods in Europe’s history. Since these studies are not mutually exclusive (as detailed in Exhibit 40), it is not unreasonable to infer that the net benefit arising from EU membership is somewhat higher than 2–3%, perhaps in the region of 4–5% as a conservative estimate.

The GDP benefit to the UK economy of EU membership could therefore be estimated – from a simple aggregation of the literature available – at between £62bn and £78bn per year. That is roughly the combined economies of the North East and Northern Ireland taken together.

This suggests that households benefit from EU membership to the tune of nearly £3,000 a year – with every individual in the UK around £1,225 better off. [60]

Exhibit 40: The majority of credible analyses that have tried to calculate the overall macroeconomic impact of EU membership on the UK find a significant positive impact
Table of information

3.8 Analysing the most tradable sectors of the UK economy highlights the positive balance of pros and cons of EU membership

The conclusion that the overall impact of EU membership on the UK economy has been positive is reinforced when analysing the most internationally–exposed sectors of the UK economy. Twelve sectors account for around 80% of UK exports, imports and foreign direct investment, and 40% of employment. However, three of these sectors are ‘fragmented’ in the sense that their output is so varied that economic dynamics do not apply consistently to the sector as a whole.

Of the remaining nine sectors, six are most exposed to the international economy based on their tradeability – the amount of importing and exporting in the sector – and their share of FDI (see Exhibit 41).

  • Advanced industries – aerospace
  • Advanced industries – automotive
  • Pharmaceutical & chemicals
  • Technology, media and telecoms
  • Financial services
  • Natural resources
Exhibit 41: The most internationally-exposed sectors of the UK economy

The following pages demonstrate the overall positive balance of advantages and disadvantages of UK membership of the EU for five of these sectors.

This does not mean that the remaining parts of the British economy do not receive the benefits of EU membership. On the contrary, even those sectors that do not participate directly in international trade at all almost invariably are involved in international and European supply chains, whether by providing inputs and services to Britain’s exporting business or by importing inputs for further manufacture or sale. The retail industry, for example, is largely domestically focused when it comes to output but is extensively involved in importing goods for sale. Furthermore, all sectors of the economy and firms of all sizes can and do benefit from the international movement of labour and of investment and capital.

80 %

12 sectors account for 80% of UK exports

3.9 The benefits of EU membership to UK business have significantly outweighed the costs

Whether focused on those aspects of EU membership that drive productivity through enhanced openness or on the wider macroeconomic benefits membership has brought, the EU has undoubtedly been a positive for British business in pursuing its global ambitions.

£1,225

The approximate value per year of EU membership to every individual in the UK

Worth approximately £1,225 a year to every individual in the UK, membership of the EU has also brought benefits to businesses of all sizes in varying sectors right across the country. There will always be costs to membership – both overall and to individual sectors or firms – but the positive balance of benefits is clear for an open, complex economy like the UK’s.

There is, however, a question as to whether the UK can continue to harness these factors that underpin its new global role over the coming years. Whether the UK is able to do so or not will rest to a large extent on its ability to influence the direction of the European Union, which is explored in Chapters 4 and 5.

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UK membership of the EU has brought benefits to businesses of all sizes in varying sectors right across the country. There will always be costs to membership, but the positive balance of benefits is clear.


References

[1] CBI/YouGov, Survey of CBI members’ opinion on the impact of the EU on their competitiveness, available at

[2] The nominal GDP of the UK was £1,562bn in 2012 (ONS), and there were 26.8m households (DCLG).

[3] CBI/YouGov, Survey of CBI members’ opinion on the impact of the EU on their competitiveness, available at

[4] CBI/YouGov, Survey of CBI members’ opinion on the impact of the EU on their competitiveness, available at

[5] Haver Analytics G10 database/Eurostat

[6] BIS, ‘The economic consequences for the UK and the EU of completing the Single Market’, 2011

[7] J. De Sousa, T. Mayer & S. Zignago, ‘Market Access in Global and Regional Trade’, 2012

[8] Haver Analytics IMFDOT database/IMF Direction of Trade.

[9] ONS Pink Book 2013. Export values are converted to constant prices using the UK GDP exports deflator (ONS).

[10] Europe Economics, ‘Optimal Integration in the Single Market: A Synoptic Review’, 2013

[11] Europe Economics, ‘Optimal Integration in the Single Market: A Synoptic Review’, 2013

[12] Harald Badinger, ‘Has the EU's Single Market Programme Fostered Competition? Testing for a Decrease in Mark-up Ratios in EU Industries’, 2007

[13] Europe Economics, ‘Optimal Integration in the Single Market: A Synoptic Review’, 2013

[14] World Input–Output Database and CBI calculations

[15] OECD Stat

[16] Open Europe, ‘Trading Places: Is EU membership still the best option for UK trade?’, 2012

[17] BIS, ‘The economic consequences for the UK and the EU of completing the Single Market’, 2011

[18] CBI, ‘Ripe for the picking: A guide to alternative sources of finance’, 2013

[19] UNCATD, ‘World Investment Report’, 2012

[20] EY, ‘Attractiveness Survey Europe 2013: Coping with the crisis, the European way’, 2013

[21] EY, ‘Attractiveness Survey Europe 2013: Coping with the crisis, the European way’, 2013

[22]Howard J. Shatz and Anthony J. Venables, The geography of International Investment, World Bank Policy Research Working Paper POLICY 2338, 2000

[23] Nigel Pain & Garry Young, ‘The macroeconomic impact of UK withdrawal from the EU’, 2004

[24] Embassy of Japan in the UK, The UK governments review of the balance of competences between the United Kingdom and the European Union: Contribution by the government of Japan, 2013

[25] Haver Analytics UK Database/ONS.

[26] Eurostat population database

[27] ONS Labour Force Survey

[28] Eurostat population database, 2013.

[29] Estonia, Latvia, Lithuania, Poland, Hungary, the Czech Republic, Slovakia and Slovenia. Although Cyprus and Malta also joined in 2004, they are typically not included in the UK migration aggregates since there was already substantial migration from those countries prior to 2004.

[30] ONS Labour Force Survey

[31] Dawn Holland, Tatiana Fic, Ana Rincon-Aznar, Lucy Stokes & Pawe