BDDXNM Car production in VW factory in Bratislava, Slovakia.
Car production at a VW factory in Slovakia © Alamy

Whatever tasks it later took on — justice, human rights, foreign policy — the EU was from the beginning a trading bloc. In 1968, just over a decade after the European Economic Community was founded, the European customs union was completed, with a common external tariff and the intent of establishing free trade within the area.

Nearly 50 years later, the internal market — or single market, as it came to be known — remains a work in progress. The “four freedoms” — movement of goods, services, capital and labour — are a founding principle of the EU. But although the spread of intra-EU commerce is clear to see, a combination of inertia and subtler forms of restrictions on trade mean the single market has fallen short of its potential. The forthcoming departure of the UK from the EU will be an interesting test case of how far limiting access to the single market will damage economic growth and trade.

The full single market, including abolishing non-tariff barriers in goods, dates only from 1993. And that initial burst of integration only went so far. Markets such as those in energy, capital markets and the digital economy remain fragmented nearly a quarter of a century later. There have been subsequent pushes to harmonise further, including the “Lisbon Agenda” package of reforms in 2000, but they have underperformed expectations.

It is straightforward to point at individual sectors and note how the single market has enabled them to create highly efficient cross-border supply chains. The auto industry is an obvious example.

When two waves of eastern European countries joined the EU, in 2004 and 2007, Germany’s fiercely efficient carmakers promptly outsourced lower value-added parts of their production process to countries with cheaper labour. This acted rather more like a higher-cost (and higher productivity) version of the “Factory Asia” phenomenon that linked many east Asian economies in a supply chain for electronics in the 1990s.

The growth of cross-border trade also goes well beyond tariffs. The use of streamlined customs and inspection procedures means that, despite the increasing complexity of regulation, goods crossing borders within the EU are subject to a minimum of delay and paperwork.

The resurrection of the British car industry is a case in point. The rise of foreign manufacturers investing in the UK after the decline of the indigenous auto sector owed much to access to the EU market.

Factories like the Nissan plant in Sunderland, one of the largest in the UK, have thrived because of the supply chain of components and finished cars that zip back and forth over EU borders. The increasingly vocal warnings from UK manufacturers in a variety of sectors — cars, chemicals, pharmaceuticals — underline the extent to which their business model is reliant on the just-in-time production facilitated by the single market.

Toyota Nissan plants map

On the Joni Mitchell principle that ‘you don’t know what you’ve got till it’s gone’, economists’ estimates of the effect to the UK of leaving the single market are dramatic. Monique Ebell of the National Institute of Economic and Social Research (NIESR) estimates that leaving the single market will cause British exports to the EU to drop by 59 per cent, a fall that would only partly be ameliorated by the UK signing a bilateral trade agreement with the EU.

At the same time, attempts to calculate the overall benefits of the single market have ended up in uncertainty and less than spectacular results. A report published by the Bruegel think-tank in 2015 concluded that while the single market had most probably increased GDP, the effect had been muted by remaining barriers in the EU, particularly in the service sector, and a failure of national governments to put in place complementary policies to enable their companies to seize the opportunities available.

The EU economy did not keep pace with the surge in productivity in the US in the 1990s, for example. The ratio of output per worker and hourly wages to those in the US slowed and even went into reverse during that decade. Internally, despite the persistence of state-level regulation in areas such as insurance, the US national market is far more integrated than that in the EU. Trade between EU member states is about four times lower than the trade between US states.

Regulations at a national level may no longer be explicitly discriminatory against companies or workers from other states, but inertia plus the specialist knowledge needed to set up in a foreign country plus language barriers mean that there is less cross-border services trade than the architects of the single market envisioned.

And when new technologies such as digital information-sharing arise, national interests frequently assert themselves to slow their adoption. Researchers at the European Centre for International Political Economy think-tank estimate that member states have taken 22 direct and 35 more indirect measures that restrain data flows across borders.

Company records, accounting data, banking, telecoms and government-held information are all subject to restrictions. Because of the reliance of ecommerce on data flows, such measures could actually harm traditional trade in goods as well as constraining the growth of new forms of services.

Despite various dire predictions down the years, the single market has survived. The free movement of workers essential to many industries, particularly in construction and the service sector, has been preserved, despite discontent in several of the richer member states — and the contribution of worries over immigration to the Brexit vote. Yet it remains — will always remain — a work in progress, with the ambitions of its creators in continual tension with the frictions and national interests of the EU member states.

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As globalisation and the world trade order come under unprecedented attack, FT writers examine the consequences of populist politics, economic dislocation, and technological change for the future of global trade.

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