44. The effects of membership on British industry will stem principally from the creation of an enlarged European market by the removal of tariffs between the United Kingdom and the Community countries, and, less importantly, from other tariff changes.* The response of British industry will be broadly of two different kinds. First, there will be the immediate reaction of a British exporter to each annual reduction in the tariff on his exports to the Community. This response will involve a decision whether, for example, to maintain his prices and so increase his profit margins, or reduce his prices and so expand his sales. But secondly, and in the long run far more significant than this response to relatively small annual changes in tariffs, will be industry's decisions on how to take advantage by structural changes of the opportunities opened up by the creation at the end of the transitional period of a permanent, assured, and greatly enlarged market. Manufacturers will be operating in a "domestic market" perhaps five times as large as at present, in which tariff barriers cannot be put up against them however well they do. There will in consequence be a radical change in planning, investment, production and sales effort.
45. Any calculation of the effects on the balance of trade of these tariff changes will only produce a valid estimate if it takes account of the parallel existence of both these influences operating on industry. And a simple summation of estimates of industry's immediate responses to the small annual tariff changes involved would reflect only the false assumption that no other changes were taking place. The Government do not believe that the overall response of British industry to membership can be quantified in terms of its effect upon the balance of trade. They are confident that this effect will be positive and substantial, as it has been for the Community.
46. Growth and prosperity in any country, including of course each of the six Community countries, depend first and foremost upon the size and effective use of its resources of manpower, plant, equipment and managerial skill. It is essential to deploy these resources to the maximum benefit, and this requires the pursuit of appropriate economic policies. This requirement would be mandatory upon the United Kingdom in any event. However, the general economic and commercial environment within which a country operates is also a vital element in its success in creating wealth and promoting welfare. The environment can be conducive to growth, or it can be unfavourable to growth. It is generally agreed that for advanced industrial countries the most favourable environment is one where markets are large, and are free from barriers to trade. These conditions favour specialisation, the exploitation of economies of scale, the developing and marketing of new products, and a high level of investment in the most modern and up-to-date equipment. Through increased competition, they foster the more efficient use of resources over a wide area of industry and help to check the trend to monopoly positions on the part of large-scale organisations.
* British exporters will benefit from preferential access to those markets associated, or having special trade arrangements, with the Community. On the other hand they will share with Community exporters their present preferential position in other EFTA countries and in the Irish Republic; and must expect a faster erosion of existing Commonwealth preferences, which have, however, been steadily eroded over recent years and which would probably continue to diminish in future even if we remained outside the Community.
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