Britain’s leaving the EU but wants to remain within the tangible goods custom union. But trade in products is becoming less important. What matters is more European investment in physical and social infrastructure
In July, the UK government agreed its position ahead of final negotiations with the EU about the terms of Britain’s withdrawal next spring from the 28-member organisation.
Its statement issued from Chequers, Prime Minister Teresa May’s country retreat outside London, drew criticism and support.
The statement led to the resignation of two cabinet ministers who believe it represents an unacceptable retreat from previous policies and constitutes a rejection of Britain’s 2016 EU referendum result.
Some forecast disagreements about the statement within the ruling Conservative Party will lead to a collapse of the government and early elections.
Others say the EU will reject it and the UK will leave the organisation without a deal.
Many hope the UK will remain in the EU on present terms either temporarily or permanently.
A campaign is building for a second referendum that will allow British voters to reject both May’s proposed agreement and no deal.
These are uncertain times for British politics.
But one thing is clear.
The divide between industries that produce tangible goods and those that create services is at the heart of the debate.
The Chequers statement calls for tariff-free trade between the UK and the EU in tangible goods.
An agreement is being sought that would allow the UK to collect tariffs on goods entering Britain that are bound for the other 27 EU members.
Service trade between the UK and the EU 27 will not be covered. EU protectionist measures will be applied to UK services sold into Europe.
This has led to protests from some service creators, particularly in the financial services industry. Supporters of the EU argue that restrictions on service exports from the UK will be disastrous for Britain.
The reality, of course, is that EU service industry protectionism is both limited and ineffective.
More than 80 per cent of UK GDP is accounted for by services. Only a small proportion of this is due to service exports. EU rules on services, other than those that affect employment and the environment, are limited.
Services are largely locally-traded. As economies shift away from tangible good manufacturing, the proportion of GDP accounted for by trade falls.
This trend will continue as services continue to grow as a proportion of the total output of advanced economies.
Regulating services, particularly in the manner envisaged by the EU Single Market initiative, is difficult and impossible in many cases.
Tangible goods have physical characteristics. Their mass, shape and physical composition can be defined.
Services don’t. You can’t define them.
And if you can’t define them, you can’t manage or regulate them.
The only course of action is establishing detailed rules not only about how service creators behave but also how service consumers interact with service providers.
This would involve establishing a centrally-controlled system of human regulation more intrusive and complete than any yet attempted in human history. It would be authoritarian and inefficient. And in the end, it would collapse.
Economics2030 argues that human beings should be allowed as much freedom as possible to interact with others as they seek to create value.
A common external barrier to trade between the EU and the rest of the world flies in the face of this principle.
It’s bad economics.
So, staying outside EU rules on services is not a bad thing.
But does that mean that the EU common external tariff on tangible products is a good one?
The answer again is no. Forcing countries, companies and communities to adhere to a single set of trade rules on the grounds of economic proximity gets no support from Economics2030, or in conventional economics either.
Happily, EU tariffs average 5 per cent (though they’re far higher on food imports), a level that discretionary economic management policies allowed to EU member states can counter.
Is the Chequers’ statement acceptable?
The answer is yes. But it’s far from optimal.
The production and trade in tangibles is declining as a proportion of GDP in all economies. Tariffs on manufactured goods will become increasingly insignificant. The common external tariff is a measure whose time has passed.
That is why President Trump’s call on 25 July for all tariffs to be lifted on EU-US trade makes sense.
What matters far more is the physical and social infrastructure needed for constructive interaction among and between the companies, the communities and the people of the EU.
That would require far more extensive EU intervention to promote infrastructure investment across Europe, particularly in low-income member states that are losing young and talented workers to high-income ones.
Perversely, EU rules that allow owners of capital to move what they own around the EU and between the EU and the rest of the world is the single biggest reason why investment in infrastructure in many parts of Europe is egregiously inadequate.
Companies are avoiding investment in physical assets of any kind. Immovable infrastructure in low-income nations is a particularly unattractive. Corporate balance sheets show they prefer intangible investments including digitalised financial ones.
Monetary policy in the Eurozone, rather than offsetting this trend, restricts the capacity of governments to spend on capital assets.
The best way to promote growth and employment across the continent is by encouraging private and state investment in physical assets that support service industry value creation.
This suggests that the right way forward for the EU is for it to support far greater direction of the flow of resources into infrastructure.
The price would greater centralisation of economic decision-making, something which the present state of EU politics will not countenance.
But wouldn’t it also be simpler and easier to suspend the commitment to free capital movement and allow each EU government to develop policies that would help the economies they manage to retain financial surpluses they produce?
The tangible-service economic divide remains key to developing a new approach to economic management in the EU.
But the door it opens is the barrier to long-term investment that is constraining and sometimes preventing sustainable growth and real economic integration across Europe as a whole.