Comment

Services and the UK-EU trade negotiations

Sarah Hall / Jun 2020

Image: Shutterstock

 

The fourth round of UK-EU trade negotiations concluded last week. However, when summarising the negotiations, the EU’s chief negotiator Michel Barnier stated that ‘no significant progress’ had been made. Understanding the possible implications of different outcomes from the negotiations has therefore become more urgent than ever.

Much of the attention on the negotiations has focused on the goods and manufacturing sectors. In many ways, this is understandable. The impacts of any disruption to goods’ supply chains, such as for food or medicines, are much more immediate and tangible than the possible relocation of bankers from London to Frankfurt.

However, as our recent report Brexit and Services explains, the UK is a services economy and services are a UK success story. Services make up around 80% of the UK’s economy and the UK runs a trade surplus in services.

The EU’s single market is the most important destination for UK services. This reflects the ways in which the single market goes much further than is typical for free trade agreements to support services trade. For example, financial services in the City have used passporting rights to serve EU clients from their base in London, contributing to London’s dominance alongside New York as a leading international financial centre.

UK negotiators have frequently noted that the UK seeks a comprehensive free trade deal similar to ones that the EU has already agreed, most notably with Canada. In some ways the draft text of the deal sought by the UK published in May 2020 supports this stance with some sections being identical.

However, in some areas, including in relation to services, the UK’s draft text goes beyond the market access provided for in Canada’s free trade agreement with the EU. This points to an acknowledgement by UK negotiators of the strategic importance of services in the UK economy.

For example, the UK wants to make it easier for UK professionals like lawyers to deliver services to EU markets. And on financial services, the UK draft proposes the establishment of a Financial Services Committee that would meet once a quarter to oversee the implementation of the agreement. This points to the importance the UK attaches to financial services; the equivalent committee within the EU’s free trade agreement with Canada usually meets once a year for example.

However, the UK is seeking to secure this enhanced degree of market access without the level of regulatory alignment that would be typical of the EU. For example both Andrew Bailey, the current Governor of the Bank of England, and his predecessor Mark Carney have made clear that they do not want to see the City becoming a ‘rule taker’ from Brussels.

Give the UK’s insistence on regulatory autonomy and the EU’s concerns it perceives of regulatory competition as a result of this, there is no guarantee that a trade deal on services will be secured. Without a deal UK companies would face significant new barriers to doing business in the EU from having too few HGC permits, to losing passporting rights for financial services produced in the UK. UK film and TV producers would also find it harder to sell their programming to the EU and performing artists would face additional costs to touring in the EU.

Given this, it is not surprising that many businesses in the services sector are already planning for a future outside the single market. In financial services for example, around 300 financial firms have already begun to plan for the UK’s departure from the single market at the end of the transition period. This includes relocating staff or assets to a number of different European financial centres including Frankfurt, Paris, Amsterdam, Luxembourg and Dublin.

Meanwhile, the UK government has plans for a different orientation for services beyond the EU’s regulatory orbit. Much remains uncertain about the directions these developments will take the UK services sector in. And the uncertainty has been heightened by the ways in which COVID-19 has impacted the sector.

The signs are that it is hard to overestimate the ways in which Brexit, either with or without a free trade agreement is likely to change UK services in important ways, even if not all of these changes become clear immediately at the end of the transition period, whenever that is.

 

Sarah Hall

Sarah Hall

June 2020

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