OECD secretary-general Angel Gurría summarised succinctly, last week, the extent to which globalisation has led to the interconnectedness of countries through trade. In a speech in Paris, he said: “A good produced in the EU and exported to the US includes components from China and Japan, using raw materials and services from Australia, Russia or India. Indeed, today we have to think about goods and services as ‘made in the world’”.
This, he suggested, offers stark lessons for trade policy. Not only is protectionism self-defeating in today’s global economy (where imports are required for exports), but administrative costs at borders can deter firms from locating key parts of value chains in particular areas.
This all has a particular resonance for the current domestic debate about our future with the European Union. Eurosceptics (of which I am one) wish to repatriate significant powers from the EU while maintaining what would loosely be described as “free trade” with it. But wonderful as this sounds, only a few people have given thought to what this would mean in practice.
Leaving the customs union and single market, and coming to a bilateral free trade agreement with the EU, would eliminate duties on our EU exports. But this is not the same as having the completely “free movement of goods” we currently enjoy.
The Trade Policy Research Centre has shown that our exports would then be subject to so-called “rules of origin” tests – rules designed to ensure duty-free trade would only apply to goods largely manufactured in the UK-EU free-trade area.
The practical implications would be that UK exports of, say, cars to the EU containing Chinese parts would have to comply with these regulations or else face a 10 per cent tariff. For many manufacturing firms, in particular, this would undeniably be time-consuming and disruptive, and would probably mean they were less likely, all else given, to locate here.
Eurosceptics who want a looser relationship based on trade therefore face a choice in what sort of relationship we can hope for. Either we push for a bilateral customs union agreement, which keeps us in the single market and continues to enable the free movement of goods without tariffs or rules of origin tests (the price of which would be the inability to run an independent external trade policy). Or we can instead work towards a bilateral free trade agreement, which enables us to run an independent trade policy, but also means we are bound by the rules of origin requirements.
On balance, some might settle that rules of origin tests are a price worth paying for the sort of free trade agreement that Norway or Switzerland already enjoy. But they should not pretend that firms would not face disruptive difficulties, or that the make-up of firms locating here would not be likely to change.
Ryan Bourne is head of economic research at the Centre for Policy Studies.