Post-Brexit trade in services: Understanding the implications
BREXIT MINI-SYMPOSIUM | PART FOUR
Post-Brexit trade in services: Understanding the implications
By Dr. Avidan Kent Senior Lecturer at the University of East Anglia
Just like almost any aspect of the economy, the UK industry’s ability to trade in services is likely to be affected by the looming Brexit. The manner in which UK’s service providers, and consumers, will be affected will be determined by the type of arrangement that the UK and EU will agree on, if any such arrangement will be agreed upon. Naturally, therefore, any attempt to discuss the impact of Brexit should be accompanied with the usual disclaimer – no one, including academics, or politicians, really knows at this point what will be.
The UK is currently enjoying a significant surplus when it comes to international trade in services. The numbers vary from one source to another, but roughly speaking, according to the Office for National Statistics, UK service providers exported in 2016 services worth over 142 billion pounds.1 Imported services amount to roughly 68 billion pounds. During the Brexit referendum, the ‘Leave’ campaign repeatedly complained about the UK’s trade deficit vis-à-vis the EU. In the particular case of trade in services, however, the UK in fact enjoys a surplus of about 28 billion pounds.2 In 2017, services accounted for 40% of the UK’s exports to the EU.3 The UK exports relatively sophisticated services, notably financial services, and other professional and technical services, in such fields as transportation, communication, law, engineering, accounting, management and so on.
This rather favourable state of affairs is going to change following the Brexit. Exactly how it will change, no one really knows, at least until a more specific deal will be concluded with the EU. But what kind of impact may one expect?
Trading with the EU
UK service providers are currently exporting their services to the EU under the rules of the common market. These rules are, to say the least, very generous in terms of market access.4 The free movement of services is one of the ‘four freedoms’ based on which the internal market operates. Art 26(2) of the Treaty on the Functioning of the European Union (TFEU) states that:
‘The internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties.’
Art 49 TFEU adds that:
‘restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.’
Art 56 TFEU completes these rules by adding with respect to the cross-border provision of services, that:
‘restrictions on freedom to provide services within the Union shall be prohibited in respect of nationals of Member States who are established in a Member State other than that of the person for whom the services are intended.’
These legal instructions are completed with a line of Directives, notably the Services Directive which is intended to simplify and facilitate trade in services within the EU. The Services Directive instructs, for example, states to set up ‘points of single contact’ – online one-stop-shops, that are providing administrative assistance to foreign EU service providers on issues such as local procedures, licences, local regulations and more. The Services Directive further prohibits discrimination between service providers and instructs states to eliminate restrictive requirements.5
Other EU Directives further complete the regulatory picture. Notably a line of directives on the recognition of professional qualifications allow (regulated) professionals such as doctors, nurses, lawyers and many others who are qualified within the EU, to provide services in other EU Member States with very few restrictions.
The market access that is currently enjoyed by UK service providers within the EU market is not absolute, but in terms of comparative international law in trade in services, it is as good as it gets. According to research on this topic,6 the EU membership is far more effective in increasing trade in services than other free trade agreements.
What kind of market access will UK service providers enjoy after Brexit?
Again, it all depends on what kind of an arrangement the parties will agree on. The alternatives range from a complete membership in the common market (which is unlikely at this stage) to a ‘no-deal’ scenario (which seems increasingly likely as time goes by). Let us evaluate the ‘no-deal’ scenario, in which the relevant regulatory framework will be the rules of the World Trade Organization (WTO).
During the Brexit referendum the ‘Leave’ campaign constantly assured British voters that the UK’s trading relationship with Europe will not be affected. The public was promised a ‘bespoke deal’ with the EU, but was further reassured that even if such a deal will not be concluded, the worst case scenario will mean a fall back on WTO Law. Such a prospect, it was explained, is not so bad as WTO tariffs are historically low. There is some truth in this argument; indeed the current average tariff on goods is historically low; the EU’s average Most-Favoured Nation tariff on goods is 5.3%, and with respect to many types of goods tariffs were entirely eliminated.7 Perhaps unsurprisingly, ‘Leave’ speakers neglected to mention that in the case of trade in services, considerable trade barriers are still in place. In fact, according to some studies, trade barriers on services are equivalent to 40% tariffs if compared with trade in goods.8 Trade barriers are especially significant with respect to ‘mode 4’ services, which require the movement of service providers into the country in which the service is being provided.
Indeed many UK service providers will face new difficulties to trade with the EU in a ‘no deal’ scenario.9 For example, UK airlines are expected to face difficulties as the EU did not make any concessions under WTO Law regarding aviation. Financial services providers, will not be able to enjoy ‘passporting rights’. British lawyers will not be allowed to work, or set up law firms, in some of the EU countries as their qualifications will not be recognised. Digital services may have to face a reality in which the movement of personal data to and from the EU will be more restricted. Media services are currently not included at all in the EU’s WTO trade concessions (cultural services are excluded from the EU’s schedules).
Also of importance is the issue of enforcement of whatever limited rights UK service providers will enjoy under WTO Law. Currently, where a service provider is denied the right to provide a service within the EU, he or she can simply approach the local court and demand that EU law be enforced. Under WTO Law, however, the service provider’s recourse to justice will be far more restricted. The only way to enforce the law in this case is through the WTO system, which is based on state to state litigation. In other words, a small service provider will have to convince the UK Government to take a case against another country. While big businesses may be able to do so, small businesses will find this very difficult.
Trading with the EU’s business partners
It must be remembered that not only the access to the EU market is on the line. There are other markets that are currently relatively open to UK service providers due to free trade agreements concluded by the EU. Some of these agreements provide valuable benefits for the service industry. For example, the EU-Korea agreement has liberalised the access of many sectors, including telecom, transportation and legal services in the South Korean market. The EU-Canada agreement (CETA) is described as the ‘most comprehensive trade agreement the EU has ever concluded with regard to trade in services’.10 Among other benefits, EU service providers’ personnel can be posted for up to 3 years in Canada. The parties also agreed on a framework for mutual recognition of professional qualification, which will enable regulated professions to work in the other party’s territory. Following the departure of the UK from the EU, the UK will no longer be covered by these agreements. The UK government seems very keen to ensure that the agreements with all those third parties will continue to cover UK exporters also in the future.11 Whether this is politically or even technically possible, remains to be seen.12
Moreover, there are more free trade agreements in the EU’s pipeline, some of which are expected to be of great significance. Only recently an agreement was concluded with Japan –the world’s third largest economy.13 The currently negotiated Trans-Atlantic Trade and Investment Partnership (TTIP) with the United States is of obvious importance. This agreement is expected to include very beneficial rules on the trade in services, such as concerning mutual recognition of professional qualifications, as well as e-commerce.
There are of course, certain trains that the UK may still catch. Under the WTO, for example, a Trade in Services Agreement (TiSA) is currently being negotiated. 23 WTO members are currently participating in the negotiations of the TiSA, including giants like China and the United States and indeed also the EU. Together the negotiating parties account for 70% of world’s trade in services. If concluded, the TISA is expected to lead to a massive expansion of the WTO framework on the trade in services. Possibly, it will alleviate some of the blows that Brexit may inflict on service providers. It should be remembered however that the prospect of the TISA is currently fairly weak, and that it will take many more years to conclude, if it will ever be concluded at all.
So to sum things up, in this author’s view, things will become more difficult for the UK’s international service providers. The government’s line is that the UK’s new position will allow it to become more global and to conclude deals that will eventually recover the lost market access resulting from Brexit. Let us hope that it will, and quickly so.
Trade in services is the UK’s winning card. It is the one battle that the UK is winning in this anarchy that is called ‘globalisation’. Based on the current rules, UK service providers have managed to create very impressive trade surpluses, including with the EU. Unless the promised ‘bespoke’ deal will eventually be concluded, the post-Brexit rules will leave service providers in a less competitive position, in Europe, and elsewhere.
In light of the above, it seems that the UK government’s current position is, to say the least, questionable. The Chequers Brexit Declaration focuses on goods, aspiring to establish a UK-EU free trade area for goods. Regarding services, it is stated that ‘[w]e would strike different arrangements for services, where it is in our interests to have regulatory flexibility, recognising the UK and the EU will not have current levels of access to each other’s markets’.14 This position is repeated in the government’s July White Paper.15 For example, regarding professional and business services, it is stated that ‘The supplementary provisions would not replicate Single Market membership, and professional and business service providers would have rights in the UK and the EU which differ from current arrangements.’ Regarding financial services, it is stated that ‘The UK can no longer operate under the EU’s “passporting” regime, as this is intrinsic to the Single Market of which it will no longer be a member.’
Peter Mandelson aptly summarised the problem with the strategic decision to prioritise goods over services:16
‘As a former EU trade commissioner, I know how complicated trade negotiations are and why they always end up with fewer gains on both sides than either expects. So I am sympathetic to the government’s desire for something more ambitious and more customised to Britain’s needs. And I understand why the CBI has welcomed this ambition, particularly because it has chosen to prioritise international manufacturing businesses and their supply chains over services. However, it is services rather than manufacturing that make up the bulk of the UK economy and to relegate them makes no sense.’
The decision to prioritise goods over services, as Peter Mandelson writes, makes no sense. For now, it seems that both the government and the media are more worried about horrific images of long lines of lorries in Dover, or the types of creative solutions that the Irish border will necessitate. These problems are without a doubt important. But the public debate, and scrutiny, regarding the future of the trade in services, will have to be intensified. Economically speaking, not many topics are of greater importance for the UK’s future economy.
1Office for National Statistics, ‘Statistical bulletin: International trade in services, UK: 2016’ https://www.ons.gov.uk/businessindustryandtrade/internationaltrade/bulletins/internationaltradeinservices/2016 . This figure is excluding travel, transport and banking, so the real number is even higher than that.
2Matthew Ward, ‘Statistics on EU-UK Trade, Briefing paper number 7851 (31st July 2018) https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7851#fullreport
3 Ward (n 2).
4 E.g. ART 56-57 TFEU + 49/54 on establishment + free movement of people.
5The reader should note that not all services are covered by the Services Directive – see Art 2 of the Services Directive. Other sectors (financial sector, the postal sector, telecommunications, transport) are covered through specific regulations.
6Monique Ebell, 'Assessing the impact of trade agreements on trade’ (2016) 238(1) National Institute Economic Review 31 'https://www.niesr.ac.uk/publications/assessing-impact-trade-agreements-trade
7The reader should note that the EU’s tariffs on specific products is still considerably high (e.g. 10% on cars). See full review here https://publications.parliament.uk/pa/ld201617/ldselect/ldeucom/129/12902.htm
8Lionel Fontagne´, Ame´lie Guillin, and Cristina Mitaritonna, ‘Estimations of Tariff Equivalents for the Services Sector’, No 2011-24 (Paris: Centre d’Etudes Prospectives et d’Informations Internationales, 2011), as cited by Panagiotis Delimatsis, ‘The Evolution of the EU External Trade Policy in Services – CETA, TTIP, and TiSA after Brexit’ (2017) 20 Journal of International Economic Law 583.
9See more on this issue in this House of Lords report ‘Brexit: Trade in non-financial services’, 22/03/2017 https://publications.parliament.uk/pa/ld201617/ldselect/ldeucom/135/135.pdf
12See inter alia here https://cer.eu/in-the-press/eu-has-36-free-trade-deals-non-eu-countries-will-they-roll-over-britain-after-brexit and here https://blogs.sussex.ac.uk/uktpo/2017/09/27/grandfathering-ftas-and-roos/