Brexit and services: the vital component of the UK economy that the trade deal won’t cover

They make up 80 per cent of UK GDP and 40 per cent of its trade with Europe. But services firms will be left badly exposed by Johnson’s planned free trade agreement

January 09, 2020
He may not reach a deal—and if he does, will it be adequate? Photo: WIktor Szymanowicz/NurPhoto/PA Images
He may not reach a deal—and if he does, will it be adequate? Photo: WIktor Szymanowicz/NurPhoto/PA Images

Brexit is now a near certainty, but the future trade terms with Europe are all to play for. This is one of the most pressing economic questions the UK faces today. The EU is by far our largest export market and any restriction of access would have a severe impact.

Commentators have shown justified concern that the UK is already setting itself up to fail in negotiations. They worry in particular that the transition period will not provide enough time and that Johnson will pull us off a second cliff edge rather than extend it.

But one specific area that deserves far more attention is services. I asked cabinet ministers, former civil service chiefs and industry experts for their assessments and it is clear that there is a major risk to UK prosperity here in the months ahead. For even if Johnson strikes a deal, it is unlikely to provide adequate terms, thus threatening not just financial services but the services sector as a whole—and the UK’s reputation as a world leader in this field.

There is no disputing the importance of services to the UK economy. Goods, from farming products to manufactured wares like car parts, have received far more attention. But services account for 80 per cent of the UK economy and 40 per cent of its trade with the EU, with financial, legal, engineering and tourism services among those exchanged between firms in the UK and different member states. Currently this trade is governed by the EU single market and agreements around movement of people, recognition of qualifications and common regulation. But when we leave these preferential terms will not be replicated and services firms which trade on the European market will have reduced access. What happens then?

Of course the government, for its part, is positive about the opportunities ahead. Liz Truss, International Trade Secretary, told me that “Having the ability to negotiate new Free Trade Agreements after we leave the EU, while forming a close economic partnership with our European neighbours, will unleash the potential of the sector, creating new opportunities for people and companies across the UK.”

That sounds optimistic. But in other quarters the mood is less buoyant. They fear that services trade could be left badly neglected by any deal Johnson manages to strike by the self-imposed deadline of December 2020, and that agreements with third countries will not compensate.

Ivan Rogers, former UK permanent representative in Brussels, told me we should expect nothing more than “a quick and dirty tariff- and quota-free deal” with Europe. He has written that we are in practice heading for “no deal in services” even if a bare bones agreement is in place.

For Philip Rycroft, former head of the Brexit department, “There is precisely 0 per cent chance that the UK will get as good a deal on services as it has now." Nick Macpherson, formerly head of the Treasury for ten years, concurred that Brexit’s net impact on services trade “can only be negative.” Any agreement with Europe which excludes them “could do a lot of damage” because “the UK exports more in services to Ireland than to China, India, Brazil, Japan and Australia put together.”

Meanwhile Peter Mandelson, former trade and industry secretary, was willing to predict that the “minimal trade agreement” Johnson seeks “will not cover” services.

Indeed, few free trade agreements do, and that is one of the reasons for disquiet. For countries around the world have struck countless trade deals between them, but these are almost always primarily for goods, the removal of tariffs and quotas and sometimes harmonisation of standards. An equivalent agreement in services is near-unprecedented beyond the EU single market. That means it is very difficult to achieve.

Rycroft said “most existing trade deals are relatively light on services, so the precedents for a good UK-EU trade deal in services are weak… UK service businesses will have to get used to the prospect of trading on worse terms” with firms in the single market.

There is a debate about precisely how deep the EU single market for services runs, but clearly privileged access is preferable to erecting additional barriers.

What’s certain is that the new environment will have widespread impact on firms that trade. Asked which firms could be particularly vulnerable, Macpherson said he would “worry about financial services.” This could be a high-profile casualty of Brexit, with the City losing its EU “passport” and relying on an inferior regulatory instrument called “equivalence.” But he also stressed the risk to “professional services more generally.” David Henig, who was a senior official at the Department for International Trade, is concerned for those industries “where professional qualifications are required, such as for lawyers or architects.” In addition if there is “no agreement on data transfer that would be difficult for a lot of services businesses.”

Worse still, it may be smaller businesses that bear the brunt. Larger firms can activate contingency plans because they have the resources, but smaller firms do not always have that luxury. As Macpherson explained, “bigger companies should be able to find a way round Brexit by creating subsidiaries within the EU: indeed, most already have.” Henig added “smaller companies that rely on travelling to provide services in the EU are more likely to be affected (think perhaps small IT services suppliers or travel companies).”

It is vital that the government seeks maximum access for businesses in the months ahead. Industry figures including Carolyn Fairbairn, director general of the CBI, also stressed to me the pressing importance of a good services deal. Tradeable services are often the most valuable and productive sort.

So why has this issue not been prioritised? One explanation is that greater access on services would come with conditions that, as Mandelson put it, are “unlikely to be acceptable to Johnson.” In exchange for maintaining current access, the UK would have to accept at the very least level playing field conditions and, more likely, full single market membership and the free movement of people—arguably for practical as well as political reasons. Commission President Ursula von der Leyen drilled the point home in comments in London on Wednesday.

This unpalatable trade-off has no doubt played a large role. But services have also been relatively absent from the public debate and that is more difficult to explain. True, it is easier to conceptualise trade in goods: we can imagine lamb travelling from New Zealand across the globe to our supermarkets more easily than we can picture what trade in something like architectural services might look like. It is also the case that goods are especially relevant to procedures at bordersand so were given new prominence as we searched for solutions to the Irish border dilemma.

But we will need to recognise the importance of the services sector sooner rather than later. Johnson will face an uphill battle to strike any deal at all within the year, let alone one that provides adequate provisions. Truss reassured me that “the UK’s stellar services sector is in demand across the globe.” Away from government soundbites, Henig argued some firms will fare better than others, mentioning some areas of consultancy, while of course businesses which do not trade with the EU will be shielded from the worst of the problem.

But much of the sector relies on its current access to Europe. The coming months will be critical. Johnson must seek protections, making sensible concessions where necessary and requesting a transition extension to gain more time. Services is an area where the UK currently excels. The PM now has parliamentary authority to do what is in the national interest and ensure that remains the case.