Labour’s 2024 election manifesto promised that Britain would not rejoin the EU Customs Union or Single Market. People voted Labour on that belief. Yet, it is already clear that these words were never to be relied upon.

The Prime Minister and his colleagues are becoming increasingly open about that fact. In his speech at the Munich security conference last month – that is, in carefully considered words, not casual remarks – he said “we must look at where we can move closer to the Single Market”. Rachel Reeves said in the same week that “deeper economic integration is in all of our interests”. Peter Kyle, the Business Secretary, said last week that “having two sides that are aligned, that’s where the magic happens”. David Lammy and Wes Streeting have both told us we should look again at the customs union. They really aren’t hiding it.

The words in the manifesto are in fact not a promise but a distraction. They are intended to get us to look the other way while the Government gets on with doing the opposite. In real life, Labour is already negotiating to join the Single Market, and is dipping a toe in the waters of the customs union via the EU’s carbon border adjustment scheme – tariffs by another name – as well as opening the EU migration taps once again, rejoining Erasmus, and promising to pay for it all.

The view which underlies this new direction of travel can be encapsulated in three propositions. First, that it was unnecessary to leave the Single Market and Customs Union when we left the EU; Second, that leaving those things caused serious economic harm to the UK; And third, that becoming once again more closely aligned with EU economic policy will therefore improve Britain’s economic prospects.

These are all mistaken.

Taking back control

When we left the EU we left the Single Market and Customs Union. Some said that we didn’t need to do that. Why then did we do so?”

To understand that, we have to look at how they work. Being part of the EU Customs Union means that you lose control of most of your economic relations with the outside world. Your trade with other members of the Customs Union is free of tariffs and quotas, but you have no control over those tariffs or quotas with the rest of the world. You can’t decide to protect your own industries, even for national security reasons, and you might be forced into protecting other countries’ industries even if you don’t want to.

If most of your trade is with the other members of the Customs Union, then you might gain. But Britain’s trade with the EU has been declining for years. For historical, political and cultural reasons our trade and economic links are mainly with the faster-growing parts of the world outside the EU.

Being part of the EU’s Single Market is different. Despite the name, the Single Market isn’t a single thing. It is a set of laws that have expanded over the years to regulate most of the EU’s economic life. Free movement of people is a fundamental part of it. Laws are set in Brussels and member states must comply.

The existence of the Single Market is what enables free trade within the customs union. Any product circulating within the EU, whether imported or made there, must meet EU standards, thus theoretically removing the need for checks at the borders between EU states.

Only these two things together, the customs union and the Single Market, give you the famous “frictionless trade”. If that’s what you want, there is no point of being part of one and not the other.

Nevertheless, no non-EU country has in fact chosen to be part of both, because none think that to do so would be a good deal, given that they’d be handing to Brussels most of the tools to run an economy without getting any say in the decisions.

Staying in the Single Market alone could have been possible, and some Brexiteers advocated it. In my view this could only have been conceivable as a resting place to avoid the chaos of the exit process, not as a final destination.

But by the time Boris Johnson and I came to power, the country had already had quite enough chaos already. We saw that being part of the Single Market would still have left the EU in charge of most of our economy, notably the City and financial services, and would have required us to keep accepting free movement. The trade-off made no sense. We just needed to get the job done. Why would we finally quit the EU’s institutions while leaving those institutions still in charge of most things that mattered?

That’s why the 2019 Tory election manifesto included a clear plan to leave the Customs Union and Single Market, with no alignment in future either. If you didn’t like that, you didn’t have to vote for us. However, the country did like it –overwhelmingly in fact – with a share of the vote nearly 10 per cent bigger than that which Keir Starmer now claims as a mandate to change our deal.

Cost of Brexit

I’ve always been open about my belief that there was a small cost to leaving the EU’s economic embrace, but that it would be outweighed by the positive consequences of the reforms and liberalisation we could introduce outside the EU. As economist Gerard Lyons put it, British economic performance would look like the “Nike swoosh”: an initial small dip, and then take-off.

Has it worked out like that? Well, in all the noise of the chaotic Brexit process, Covid-19 and the Ukraine war, it is hard to see any underlying trends. But we can be sure of a couple of things.

First, Britain’s economic problems date from well before Brexit. When you look at data comparing British and US economic performance after the 2008 crash, US growth resumes on the same trajectory. Britain’s, in contrast, never really recovers. That’s the real turning point. Brexit can’t be the cause of something that changed in 2008.

Second, Britain’s growth pattern has not changed compared to our major European comparators. Both before and after Brexit we have grown at roughly the same pace as France and Germany, sometimes a bit faster, sometimes a bit slower. Brexit is simply not visible in the data.

So what has been going on? For me the best explanation is that there probably was a small one-off hit from leaving the Single Market and customs union, maybe about 1 per cent of GDP, as the economy adjusted to the new situation. That cost is now long paid.

Moreover, it is balanced by the effects of the admittedly timid reforms we have made since them. Perhaps, most importantly, we have stayed out of the EU’s innovation-killing AI regime. The EU’s AI Act has placed fixed regulatory obligations on products of all kinds, physical and virtual. In contrast, Britain’s lighter approach has been based on asking the regulators to apply five guiding principles, not a lengthy set of detailed rules. Our AI industry has welcomed this, seeing it as more flexible than the EU model. The EU is having to adjust its rules under competitive pressure, but most observers think it is still damaging its own AI interests.

Something similar has happened in financial services. There, our industry had to cope with a more or less complete break between the pre- and post-Brexit arrangements. Rather than bewailing this, the Government and the City have set off in a new direction, based on flexibility rather than on harmonisation around detailed rules. The 2023 Financial Services and Markets Act 2023 gave new powers to the UK financial services regulators to deliver growth and enhance international competitiveness. This approach has broadly continued under Labour with last year’s Financial Services Growth and Competitiveness Strategy. One early result of this has been the abandonment of any government plans to guide investors on what constituted sustainable “green” finance, based on an acceptance that this was best left up to the market. Limits on contactless card payments have been scrapped (they remain at €50 in the EU). And Britain has in some areas moved in line with the US (notably in delaying the implementation of the Basel 3.1 global banking sector changes). Rules on short selling and on transaction reporting have changed or are changing. Very gradually, Britain is setting out an overtly competing financial services model to that of the EU, without going as far as a total breach.

There has been some innovation in “agrifood”, notably on gene editing, in England anyway, though the EU is putting in place its own legislation which will be similar. British rules on animal welfare were always a bit tougher than the EU’s and have since become more demanding still. In some areas, Britain has dropped the EU’s obsessive approach to the regulation of pesticides and food additives.

And we have reduced tariffs in many areas. Britain has removed all “nuisance” tariffs, that is those under 2 per cent; those on inputs used by UK firms; and those on goods we don’t produce such as cotton, pasta, fruit juices and spices, certain plastics, gardening supplies, cut flowers, many textiles, and more – about two thirds of tariffs in total. Successive governments certainly could and should have done more, but our tariff schedule is now quite different to that of the EU. And so it should be.

There hasn’t been much economic analysis done on the impact of post-Brexit economic divergence, perhaps because so many people believe that there hasn’t been any. But it is plausible to think that the impacts might be around 1 per cent of GDP or approaching that, especially from AI divergence. In short, the impact of Brexit and the impact of reforms so far probably broadly balance each other out or close to it. In short, we have had a very flat Nike swoosh.

Those who continue to vilify Brexit will claim that Brexit shrank our economy by 4 per cent, or maybe up to 8 per cent, depending on who you listen to – and that the 1 per cent figure is implausibly low.

Don’t believe it. The 4 per cent figure is from the OBR. It is not an immediate hit to the economy. It is a statement that the economy would be 4 per cent smaller than it otherwise would have been in 15 years’ time. That is a very different thing.

Much has indeed got worse since 2020 – but not because of leaving the EU. What we are hearing is the sound of chickens finally coming home to roost. The furring up of the arteries of the British economy, the retreat from markets, the imposition of crazily high energy costs through net zero, the growth in taxation and spending and, of course, financing the massive public debt from the pandemic, is all now crushing incomes and growth. That is what still needs to be addressed – and happily, outside the EU, we have the ability to do so.

Danger ahead

Advocates of rejoining the EU would do well to bear in mind that just because there is a cost attached to one economic change, that doesn’t mean you recover that cost if you reverse it. Economies adjust to the new conditions, meaning there is a further cost in having to adjust again.

This is why rejoining the Customs Union and Single Market is not some sort of miracle cure. It would also bring yet another cost – and, worse, put us in the EU’s regulatory grip once again, making us incapable of ever delivering the upward bit of that Nike swoosh.

Outside the Customs Union, we have done some major trade deals of our own, in addition to the one with the EU itself – which many seem to forget exists at all. We are now part of the CPTPP, the big free trade agreement that links the leading Asian and American countries, and we have deals with India, Australia and New Zealand.

Go back into the Customs Union, and all this has to be reversed. We would lose the CPTPP entirely. In other areas, we would have to join the EU’s own trade agreements, the most recent of which give no priority to UK export interests, not surprisingly because we weren’t EU members when they were negotiated. We would have to raise our external tariffs again, and any commercial agreements that assumed the old ones would be up-ended. And – it must be repeated, because it is so often forgotten – we get no say in EU decisions. If they want to put tariffs on Chinese EVs or Thai sweetcorn, as they have in recent months, we must comply.

This is why joining the Customs Union is a cost not a benefit. This has been most recently set out in a paper from the think tank the Prosperity Institute, whose paper shows that rejoining would actually cause a loss of 0.5 per cent of GDP in the first year, rising to 1.3 per cent after five years. In short, the Customs Union is no panacea. It would make things worse, not better.

The same problem arises with the Single Market, but in a different form.

Of course, Labour claim that they aren’t getting involved in the Single Market, merely engaging in closer “alignment” with the EU. Why not align with EU rules, they ask, since we export so much to them?

This is entirely misleading. Of course when you are exporting to the EU, your goods must meet EU standards. That’s the case now. The important thing is what happens on your own, home market.

One choice for your home market is to have your own laws and standards, as we have since we left the EU. Another is to voluntarily follow another set of standards, such as the EU’s. Labour are trying to claim that that is what they are planning in food and animals trade. In fact, they are doing something different again – becoming part of the EU’s Single Market for agrifood.

They are doing that because they have to. Countries voluntarily following their standards makes no difference to the EU, except to their self-esteem. The EU will only drop their trade barriers when a country is actually part of the EU legal system: operating EU laws, enforced by the Commission and the Court and, of course, paying for that privilege. And that’s what’s happening.

Labour got caught in a trap of their own making. They promised not to join the Single Market, but also promised a closer trading relationship, including some sort of agrifood deal. Their problem is that the only way to get that food deal and that closer trading relationship is to become part of the Single Market. Maybe they didn’t understand that at the time. They do now. Given this choice, they have chosen to ignore the manifesto and fall in line with Brussels.

So, now they have to claim that this is good for the economy. They claim this agrifood agreement will give us a boost of 0.3 per cent of GDP in a decade or so.

Well I doubt it very much. For one thing, it doesn’t even give us friction-free trade because we aren’t in the Customs Union, so even in its own terms it fails. For another, we lose the capacity to innovate. Stuck in their regulatory system, Brussels’ risk-averseness in areas such as pesticides, novel foods and gene editing will put our innovative scientific sector back in the slow lane. (Indeed, parts of the agrifood sector are already arguing that they need a transition period to adjust – rather underlining how much change has already happened.) And finally, we lose the ability to import cheaper food from outside the EU, because EU regulations keep it out.

In short, if you were going to pick a part of the Single Market to join, you really would not choose agrifood. And, once again, some recent work has put this into perspective. The Growth Commission, a distinguished group of non-partisan international economists, has just published a study arguing that bringing the country back within the ambit of EU veterinary and food regulations would not only be of no benefit, it would in fact cost the UK 0.5 per cent of GDP.

More focus on the end than the means

It won’t be worth it in any other area either. The City too is starting to make clear that it doesn’t want to go back under EU rules. This sort of pick and mix approach to EU collaboration is never going to work for the UK. However you look at it, a large global economy cannot afford to let other countries set its trading and regulatory rules.

Even faced with the fact that the economic gain would only be marginal, rejoiners insist that the global situation – war, chaos, unpredictability – means it’s better to be part of a bloc anyway. I agree that more defence collaboration amongst Europeans, in which I include Britain, if backed by spending not borrowing, can only be a good thing. But we don’t need to be members of the EU for that. And getting more serious about defending ourselves should not come at the cost of undermining our fast-fraying special relationship with the US.

Those who claim we’d be better off back in the EU should be honest with themselves and the public about what that would involve: full freedom of movement with the EU – 450 million people, each having the right to come here. No end to net zero unless you can persuade the EU Commission, the European Parliament and twenty-odd European states. Never being able to leave the ECHR or properly regain control of our borders. Subordination to the EU view of civil order and freedom of speech. £20bn-plus every year into the maw of the behemoth. The endless rows. The one against 27 on one thing or another.

The problem is that Labour and our foreign policy establishment support more collaboration among Europeans without caring much about the means. They are far too ready to assume that collaboration with the EU can only happen on the EU’s terms. That’s the mindset that has got Britain stuck in the tractor beam again and slowly returning to orbit around Brussels. It needs to be resisted. Only from a position of confident independence can we actually be a successful partner with the EU. The truth is that the only intellectually honest approach is to accept either the trade-offs of being out, or the trade-offs of being properly in. Being somewhere in the middle just gives us the worst of both worlds. It is an unstable position and much more likely to tilt us in than out.

Do we really want all this again? Can we really face it? If we don’t, we must stop it now.