LONDON – As the United Kingdom continues to be gripped by the great Brexit debate, and will be so for many months to come, a surprising statement comes from the chief economist of the Bank of England, Andy Haldane. It is the Haldane view that leaving the European Union single market will have little material effect on the British economic growth — at least for the next three years.
But how can this be? Surely the whole debate has revolved round the damage that would supposedly be done to British business and exports by being denied access to the single market, with all its protective tariff walls, its standards and regulations. Will not the daily flow of goods, components, processes and personnel between Britain and the rest of the continent be fatally interrupted and penalized, cutting off British exporters from what is said to be the world’s largest single market area?
Or is it possible that this highly esteemed expert has perceived something about the nature of modern trade which has escaped the more excitable politicians and their advisers?
Certainly there are some changes in the very nature of modern international trade between the Group of Seven advanced nations and the so-called developing countries that have not been much noticed. The first is that since about 1990 a huge shift has taken place in the respective shares of global GDP as between the North and the Atlantic west on one side and in favor of the South and the Asian east on the other.
As information and communications costs have spiraled down to near zero, and as information storage capacity has grown at an exponential rate, the pattern of production by the world’s manufacturing giants has become heavily internationalized and dispersed. Processes and stages in the production of a single item or piece of machinery or consumer product have become spread between a dozen separate economies. The back-and-forth trade between richer countries of the 21st century has been replaced by a much wider flow of trade in goods, in components and above all in services between the richer North and a number of very fast developing but hitherto “poorer” countries. Suddenly production processes almost everywhere have become many times more internationalized.
This is what Richard Baldwin, in his groundbreaking book “The Great Convergence,” describes as a new kind of globalization — over which governments have far less control than before, and which puts a question mark over the whole economic doctrine of nationally based comparative advantage, as proposed by the famous British economist David Ricardo.
The change has led to a turbo-charged growth in the flow of know-how, information packages, data and services of all kinds — financial, legal, design-related, instructional, managerial, human resource-linked, scientific, research-based, covering marketing systems, accountancy, insurance, creative industries of every kind, tourism facilities, travel organization. McKinsey & Co. estimates that data and information flows now generate more wealth than all global goods trade. Just for the record, for those who like mind-boggling figures, the world now generates 2.5 quintillion bytes of data every day. This is the boundless digital ocean soup in which international trade is now conducted.
It so happens that all of this kind of export commerce, now becoming totally dominant in global exchange, is extremely favorable to the British economy, of which no less than 80 percent lies in the services sector. Almost half of British overseas earnings come directly from services, and, on top of that, official figures confirm that 37 percent of the total value of manufactured goods products also consists of services. Categories of services and manufacturing are becoming inextricably blurred.
Now here is the key insight, which may have triggered the chief economist’s remark. These huge digital export flows, so central to British prosperity and growth, cannot be caught by any tariffs, whether their source is inside or outside the single market. They know no national boundaries. They have certainly been subject to endless local and national marketing restrictions throughout the EU, preventing, say, free selling of financial or insurance products or consultancy services. As a member of the EU for the past 40 years, the U.K. has struggled in vain from within the club to get these restrictions eased and a genuine European market in services established. Perhaps it will have better luck from outside.
As for manufactured goods, 80 percent of the global traded total are already tariff-free, while if the EU were to impose tariffs against a departing Britain they would be mostly insignificant, especially if offset by a low pound. Meanwhile, in the former developing world tariffs have been dismantled and barriers to inward investment lifted, China being the classic example.
Either way, the bottom line is that this revolutionary and disruptive new pattern of trade that has recently emerged is barely touched by the single market or the EU Customs Union. Hence the conclusion that whether the U.K. is in or out of the existing EU single market makes very little difference. Haldane puts a three-year limit on his estimate. But the trends described above can only get stronger.
Complex global value chains, now slicing up different stages of production in different countries — again with little global control — make the old-style protected single market even less relevant (and harder to police), and the new pattern of globalization ever stronger.
It seems fair to suggest that Haldane’s three-year time frame may turn out to last very much longer. It could be that robots and artificial intelligence are going to be a far more serious challenge to jobs and growth for millions than any exclusion from, or inclusion in, a protected zone like the single market. In that case the priority for a modern economy to prosper becomes skills, education, creativity and innovation.
Nothing else is going to matter very much.
David Howell is a British Conservative politician, journalist and economic consultant.
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