The impact of Brexit on services has not received nearly enough attention

The focus is on goods but services generate 80 per cent of national output

January 22, 2019
International Trade Sectrary Liam Fox. Photo:\  unreguser/Xinhua News Agency/PA Images
International Trade Sectrary Liam Fox. Photo:\ unreguser/Xinhua News Agency/PA Images

Services industries are the engine of Britain’s economy. They generate 80 per cent of its national output, an even bigger proportion of jobs and almost half its exports, on which—unlike on goods—it earns a healthy surplus. And in a number of areas, such as banking and finance, media and legal services, they are world leaders.

Brexit threatens to deal a heavy blow to this flourishing sector, possibly even harder than to manufacturing. Yet, except for concerns expressed about the City of London’s future, the impact on services has received far less attention than on manufacturing, a far smaller sector of the economy. That is in part because the problems of goods trade across the Northern Ireland border have dominated the increasingly chaotic Brexit debate in Westminster.

The independent National Institute for Economic and Social Research estimates leaving the single market, where 40 per cent of Britain’s services exports are sold, and concluding a free trade agreement with the EU, would reduce UK-EU services trade by 61 per cent in the long-term, or more than a quarter of total UK services trade.

Services industries embrace a hugely diverse spread of activities, from hairdressing and street-cleaning to education, media and brain surgery.

Roughly two thirds of the UK’s services exports to the EU are supplied across borders from bases at home—something the single market has greatly simplified. It means a company based in London can supply customers in France or Germany almost as easily as in Scotland or Cornwall.

After Brexit, barriers are likely to go up around the EU, making exporting from the UK more complicated and expensive. That prospect is prompting many British services companies to safeguard their access to the single market by shifting operations and staff pre-emptively to locations in Ireland or on the continent, many of which are competing energetically to woo them.

Of course, as Brexiteers like to point out, the single market for services is incomplete, far more so than for goods. But it is still in some respects more integrated than the US market where, for example, many states restrict public procurement and construction contracts to local suppliers and do not recognise legal or medical qualifications earned in other parts of the country.

EU single market rules, by contrast, require all member states to treat services suppliers from elsewhere as they do local ones. That means, in principle at least, that bankers, lawyers, doctors, retailers or media companies based in any EU country are free to do business in all the others and that each country accepts others’ national regulatory systems as being as good as its own.

How severely Brexit affects Britain’s services trade will depend on the form it takes and what kind of deal, if any, the government strikes in future negotiations with the EU after Brexit has taken place.

At one extreme, crashing out without a deal would lock UK-based suppliers out of the single market and leave them dependent on World Trade Organisation terms, which barely cover international trade in services. At the other extreme, Britain could continue to enjoy most of the advantages of single market membership, but only at the cost of surrendering all influence over its rules.

In-between lie a range of other options. One would be an arrangement whereby the EU and the UK continued mutually to recognise each other’s regulations and standards. However, that could be complicated, especially as Britain insists on the right to change its own rules after Brexit.

Another route would be to negotiate a free trade agreement, as the EU has done with about 40 countries in the world. The catch is that even the EU’s most recent and advanced agreements, such as those with Canada and Japan, chiefly cover goods and provide for only very shallow liberalisation of trade in services. It seems unlikely that any deal with the UK would achieve much more.

But if Britain’s choices about its future trade relations with the EU face limitations, what about those with the rest of the world? One of Leavers’ main arguments is that EU membership has cramped Britain’s trade by preventing it striking deals with fast-growing economies elsewhere and that Brexit will free it to exploit exciting new opportunities.

Dream on. For one thing, the EU already has trade deals with a number of those countries and is negotiating with others, leaving the UK struggling to renegotiate them. For another, services deals are notoriously hard to do because they involve negotiations that are both technically complex and require a willingness to reform often politically sensitive areas of countries’ domestic policies.

Britain has sometimes made that task even harder for itself. For instance, a major stumbling block in the EU’s negotiations with India has been Delhi’s refusal to open its retail sector to competition, a key UK demand, unless Britain grants more short-term visas for Indian workers, which London refuses to do.

Staying in a customs union with the EU would impose a further constraint by stopping Britain from concluding its own trade deals on goods. It could still try to forge agreements limited to services. But these are even harder to do, which is why none has ever been done.

Rather than dreaming of glorious—and probably illusory—new global trade opportunities, Britain might do better to focus on holding on to what it already has by limiting the threat Brexit poses to its services industries. There is one way to do so: staying in the single market by joining the European Economic Area, which includes the EU, Norway, Iceland and Lichtenstein. However, Theresa May has ruled that option out.

Perhaps she will change her mind, as some in parliament are urging her to—though that would infuriate Brexiteers in her own party because it would leave Britain subject to EU rules. Ultimately, the question will come down—in services, as in so many other areas—to how big an economic price Britain is prepared to pay for the national independence and sovereignty that enthusiasts of Brexit claim it will bring.