Brexit: Trade in Goods (EUC Report)

Lord Howell of Guildford Excerpts

Tuesday 18th July 2017 Lords Chamber

[Lord Howell of Guildford (Con)]

My Lords, I congratulate my noble friend Lady Verma and her team on what is in many ways a profound and eye-opening report. It brings home the staggering complexity of modern trade flows. One listens to the debate raging about whether we should be in or out of the customs union, or in or out of the single market. I sometimes feel we should take a lesson from the electron particle, which, as scientifically minded Members of your Lordships’ House well know, can be in two separate places identically at the same time. It may be, as we analyse exactly what the trade flows are, that some of that is within reach. A little unhelpfully, my speech will be about services, not goods. By services I mean the whole range of provision of service: knowledge, products, data flows and information flows; and not just financial services but services of every conceivable kind—managerial, consultancy and design services—which are a bigger range even than financial services.

The really interesting thing about the report is that it is one of the first I have read in many years which understands that the service sectors are completely intertwined and combined with the manufacturing sector. I know that on the surface 39% of our total service exports go to the EU and 49% of our total goods exports, which is 43% of the total. But box 1 in the report indicates that 37% of so-called goods, as defined, reflect service-sector values. We are dealing here with a world that the statisticians have left us completely muddled in, with the division between goods and services being totally out of date in the digital age. We are an 81% service economy: that is where 81% of our GDP comes from and we are extremely good at it.

Actually, in the digital age all finished products are also largely services. This has been so for the past 20 years. Some 15 to 20 years ago I wrote a book in which I argued that we should change the word from “manufacturing”, meaning made by hand, to “mentafacturing” because every single finished product—the humble screwdriver or even a box of matches—has in it a very large service and knowledge product content. Indeed, if you think about the promotion of sales, the organisation of the labour force, the actual production, the aftersales and the design—every element of every single product you can think of has a huge service element in it. I defy anybody to tell me of a product that is not largely embedded with services.

There is a fascinating bit in the report which brings home what I am saying very vividly. We all know the automotive industry would face troubles if it had to face a lot of tariffs in its constant criss-cross flow of components with continental Europe, as would the Airbus wing-makers in north Wales, as we have heard. But when you start unravelling that situation, you find that of the 815,000 people employed by the automotive industry, only 169,000 are physically in automotive production at all; the rest is entirely services: finance, promotion, advertising, aftersales, connections with retailers—the whole business. That is a good example of how, if those 646,000 people cannot operate properly, that is the end of the automotive industry. There has to be a total union between the two.

Your Lordships may ask: why is he going on about services when surely this is about finished products in containers and container ships sailing from Felixstowe? It is important because the world of services is growing very quickly. Indeed, McKinsey tells us that with digitisation, it overtakes goods in terms of global generated value. It is not a world that is too concerned about tariffs. It has other problems. Non-tariffs, licensing, regulation, standards and a thousand other things, which the noble Lord, Lord Hain, mentioned, are the problems for the service industry. If we look in an absolutely cold-eyed and clear way at our success or failure in our 40 years in the European Union, it has not been a great success for services at all. Professional services throughout Europe are confronted by endless local and national roadblocks—endless difficulties—and the idea of a single market with services flowing freely here, there and everywhere is an illusion. It never existed in that way and does not exist today.

Furthermore, we are on the brink of a further huge development in the service sector through digital fabrication, which is already booming and will bring the whole business of data transmission and data flows right to the centre of international commerce and trade.

This is a world in which being in or out of the single market, or of the customs union, is not really the key thing. The key thing is to find trusted friends in areas where services can be marketed and exchanged, and where there is as much common background and willingness to trade as one can possibly design. The noble Earl, Lord Sandwich, mentioned the Commonwealth and it so happens that the DNA of common language is the ideal fertiliser for the expansion of trade and services. That, frankly, is where we will have to look very much more, whether we like it or not, for the markets in which to trade our gigantic service qualities and differences.

I am not for one moment saying that tariffs or goods are things that can be brushed aside. It would obviously be nice if we could get a free trade agreement with zero tariffs; if we do not, there will certainly be disruption to the endless flow of items and components that criss-cross the channel, as we have all heard described. But even in the worst case, if we do not succeed in getting a zero-tariff agreement, there are simplified customs procedures. The report describes the “Authorised Economic Operator” scheme, which is an interesting way of regular exporters finding that they can operate without the usual delays, hassles and form filling of customs. EU tariffs are anyway remarkably low; they are at zero for 25% of all product lines. So this problem cannot be brushed away completely but it is mitigated by the fact that goods trades have escape routes—ways around the awful prospect of long truck queues, customs delays and all the other horrors that would come with an elaborate tariff wall between us and the European Union.

The truth is that services and the booming area of data transmission were never going to be affected hugely by the EU single market. There never was a single market for services in that sense. The task now is to develop new markets for services, especially in countries using English as a working language and areas where there is vast connectivity, as in the Commonwealth. We have a professional services linkage system there, of a kind that never gets reported on but is vast. To get there, we need not just to go around trying to find free trade area agreements but to use our soft power in entirely new ways to promote myriad services.

I will take one final moment on the EEA type of transition. To me, it is a no-brainer that the transition—of course there has to be one, whatever it is called—should be through an EEA-type agreement, in line with the EEA agreement articles of 2007, to which the noble Lord, Lord Owen, drew our attention the other day. It is obvious that that is the transition area where we will be able to develop certain of the freedoms we want. It is quite untrue to say that it precludes limitations on immigration or FTA deals. It does not; if your Lordships examine the articles, there is plenty of room for intervention by national Governments or border controls, as the noble Lord, Lord Hain, rightly indicated. They are not just for emergencies but when, in the words of the articles, intervention serves a precise public purpose, as ours will certainly do. The idea that one is imprisoned by not failing to move in line with the popular will, and away from the European Union, is false. In the EEA-type scene, we are dealing with far more flexibility than has been acknowledged by lawyers, experts and others so far.

The truth is that Britain is a gigantic generator of knowledge, creative ideas and information resources. It is becoming more and more so and, in or out of the European Union, we will stand or fall by marketing these services to the world.