Britain’s Services Trade Can Flourish Outside of the EU’s Single Market

December 15, 2016

Services trade is of fundamental importance to the UK economy. How Britain negotiates its interests in services trade with the EU, the WTO, and third parties will have a significant impact on its economic well-being post-Brexit. Negotiating sensible agreements across all these fronts may not be as difficult as many are suggesting.

Britain certainly should be able to agree a schedule for services with the WTO that is of much higher quality than the current EU one. Every WTO member has a schedule of commitments that detail tariffs and quotas covering trade in goods and sectoral commitments and reservations covering trade in services. While the EU’s tariff schedules for goods applies uniformly to all EU members, its schedules for services are Member State-specific and riddled with restrictions and carve outs for specific countries. As a liberal, open, and services-orientated nation, Britain applies few of these types of restrictions to its services commitments.

To maintain its existing arrangements for services trade with WTO members, the UK will need to certify that its current EU schedule will apply as its own WTO schedule post Brexit. There is no reason why any other member would object to this because the EU schedule is already Member State specific. Indeed the UK will be able to go further than the WTO’s Most Favoured Nation (MFN) services commitments with its most important trading partners, including the EU.

When thinking about services trade between the UK and EU it is important to remember that levels of trade liberalization are relatively underdeveloped compared to trade in goods. Services make up around 70 per cent of Europe’s output but only account for around a fifth of the EU’s internal trade. The Brexit negotiations are not simply about maintaining existing trading terms but an excellent opportunity to negotiate new arrangements that further liberalise services trade to the UK’s advantage. There are a number of ways that the UK can develop more favourable terms after Brexit.

First, the issue of “passporting” is one area of deep integration that will need to be settled during the Brexit negotiations. Passporting allows firms with headquarters in EU states to conduct business in all other 27 states from the EU or EEA base. Around 5,000 British firms use passports to do business in Europe, and 8,000 EU and EEA firms use it to do business in the UK. Firms in the City rely on these to operate freely across Europe while having most of their staff and operations in London.

Officials in Brussels have suggested that these privileged “passporting” arrangements – in its current Single Market form – would not survive a clean, hard Brexit. There are, however, some workable alternatives that would allow all parts of the financial sector in the UK to carry on providing services without interruption. An extended equivalence model, for example, would preserve access for third countries who operate under an equally robust regulatory framework as the EU. This should be straightforward as the UK’s regime is based on EU rules and all EU laws will be brought on to the UK books under the Great Repeal Bill.

Second, the UK should aim to sign the forthcoming plurilateral Trade in Services Agreement (TiSA) that is currently being negotiated between the EU and a number of other key WTO members. Participating countries in TiSA account for some 70% of total world trade in services. If Brexit is not complete when TiSA is open for signature, this should not be a problem for London or Brussels. The UK is already a WTO Member in its own right, EU services commitments are largely Member State-specific, and customs union-related restrictions for goods do not apply for services.

Third, Brexit provides an opportunity for the UK to settle its position in relation to the development of a new Capital Markets Union (CMU). The CMU is a project that aims to reduce fragmentation in financial markets, diversify financing services, strengthen cross-border capital flows, and improve access to finance for business. Britain, under Lord Hill as the EU’s Financial Services Commissioner, had led the way on these negotiations. There is no reason why the UK should not agree to become part of the CMU once plans have been fully developed. In its current form, the CMU is largely about removing the regulatory barriers to the free flow of capital, rather than an attempt to promote further integration among member states under a single market supervisor.

Fourth, the UK should study the dozens of FTAs that the EU has already negotiated with third countries that include trade in services provisions of interest to the UK services sector. Britain should seek to replace these EU-negotiated FTAs with its own agreements between the UK and the relevant third parties. An early candidate should be the recently signed Canada-Europe Trade Agreement (CETA). CETA is a high-quality agreement that, in the services area, uses a superior “negative list” approach to liberalization and includes significant provisions on domestic regulation, mutual recognition and electronic commerce, and chapters on telecommunications and financial services.

Finally, the UK’s Brexit negotiators may also be well advised to take CETA as the natural starting point for negotiations on the UK and EU’s future terms of trade covering services. The Canadian Government claims CETA gives Canadian service suppliers the best market access the EU has ever conceded in an FTA. In most service sectors, Canadian suppliers “will be on an equal footing with EU service providers…” Since Brussels has been willing to open services markets to Canada, without the conditions of free movement and EU budget contributions it previously demanded of Norway and Switzerland, the UK should be able to negotiate a high-quality services agreement with the EU, including reciprocal passporting arrangements if the UK government wanted to keep them.

The reality is that the UK has many realistic options outside the Single Market, and both the UK and EU have much to gain from negotiating a sensible agreement on services.

A shortened version of this piece appeared in CityA.M. on 15 December 2016.


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