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.