Boiling the referendum down: the Single Market

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If you boiled this referendum down to what is really being asked it is whether to stay in the Single Market, or leave and negotiate a Free Trade Agreement with the EU.

The Single Market and a Free Trade Agreement sound pretty much like the same thing – they both allow us to trade. But, in fact, they are quite different.

The Single Market is about creating a large and level playing field. The idea goes back 250 years to the great Adam Smith who said that productivity, and therefore our standard of living, depends on the size of the market.

Of course to be a true market there has to be competition. This means two things: first a single set of rules – so we have a level playing field – and mutual recognition so we respect each others’ goods and services. Then we trade and the market decides which is best.

And how we trade is the big difference between goods and services. To sell goods to one another, basically we put them on a train, plane or automobile and send them overseas.

But how do we sell services? We can sell them from one foreign country to another but, more often than not, we have to actually be located in that country to do the selling or they have to come to our country to do the buying.

Now a level playing field means that we have the same right of establishment anywhere in the EU and they have the right of establishment in the UK. This is how we trade our services.

The next issue is whether we really have to be concerned about any of this. Are services a big deal? They are. The latest figures show 83% of in jobs in the UK are in the service sector: from advertising, broadcasting, computing, designing, education, finance, GPs, health services and the list goes on and on to zoo keepers.

We may not put them on a ship but we can and do sell each one of those services to 27 other nations in the EU. In fact, we’re rather good at this. We have a surplus in our balance of trade with the rest of the EU of £21bn – which has doubled in the last seven years.

Now this £21bn surplus is small beer compared to our £89bn deficit in goods trade with the EU. But it is worth remembering that services exports have higher ‘value added’ (or less import content) than goods – which is what ultimately matters for our prosperity.

Having a Free Trade Agreement for goods is pretty straightforward. They take time to negotiate, but being the fifth largest economy in the world, this would come in time. There are plenty of examples out there. And we sell more goods to us that we buy from them.

The things that we are relatively good at, that employ most of us, are better paying jobs and that are the area of growth are services. And there and no comprehensive free trade agreements in services between rich countries anywhere in the world.

Yes, the soon-to-be completed and much heralded deal between Canada and the EU covers some services, and maybe the most ambitious yet, but comprehensive it certainly is not. Transparency measures are not the same as the right of establishment.

What would a comprehensive services deal require? A single set of rules and mutual recognition and, of course, this implies free movement of people and capital so we can set-up firms in the EU and they in our country. This is what the Single Market means.

So where does this leave us? It seems reasonable to assume that the EU will always make laws for the EU, whether we are taking part in the process or not.

Then voters have a simple choice. We can accept sharing rule making and being part of a large international market for trading services. Or we can decide to make our own rules only and accept that the market for trading our services will be smaller. But we cannot expect to make our own rules and expect the size of the market to be the same.

Written by Dr Angus Armstrong, Director of Macroeconomics at the National Institute of Economics and Social Research.

Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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  • Gareth

    Dr Angus,

    Thank you for an interesting article. I would like to raise a couple of points:

    1) The single market in services within the EU has never been “completed”. According to Open Europe “there is no ‘single market in services’ in any meaningful sense of the term. This is due in part to the sheer diversity of service sectors in the EU, and because these sectors are regulated by a complex mix of national and EU regulation”
    http://openeuropeblog.blogspot.co.uk/2013/10/we-cant-complete-eu-single-market-in.html
    http://archive.openeurope.org.uk/Content/Documents/Pdfs/APPGreportservices2013.pdf

    2) The “freedoms” associated with services, namely the right to incorporate, and to provide services across borders, are in practice widely available with countries we do not even have a trade agreement with, let alone a political union. Eg many UK companies have subsidiaries in the USA and vice-versa, and *skilled* workers from the UK are in practice able to work in the USA, and vice-versa.

    In the light of these facts how important, really, is membership of the EU single market to UK service providers?

  • Angus Armstrong

    Dear Gareth,

    Thank you for your message.

    Can I respond:

    1. I completely agree with your first point. One can read this in either of two ways (a) nations are reluctant to open up to services trade, meaning that there may be limited future gains, or (b) there are very substantial future gains from much greater liberalisation. The recent direction has been clear with the services directive, but there may be deviations yet.

    2. On your second point, it is a measure of extent. In the EU a regulated domestic company has the right of establishment etc. without additional host country regulation. This is clearly very different. For example, a UK bank wishing to set up in the US (a) may need to set up a subsidiary not a branch – very different animals, (b) be regulated by the Fed, and (c) yes, you could move staff if they have visas and there are no locals etc., but again different to the single market.

    I hope this helps and thank you for your comments.

    Best wishes, Angus

  • Suzi Havant

    “And we sell more goods to us that we buy from them”

    I think I know what you mean but can you make it a bit clearer pease?

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