The UK is the second largest exporter of services in the world. The majority of these services are non-financial, encompassing a broad range of sectors such as ICT (information and communications technology), telecoms, broadcasting, fashion design, aviation, tourism, education, and professional services such as accountancy and law. These non-financial services are critical to the UK’s economy, fuelling growth, creating employment and supporting goods exports. At a value of £161.8 billion in 2015, they accounted for 32% of all the UK’s exports and generated a £33 billion surplus for the UK’s trade balance.
The EU is a significant trading partner—receiving 39% of the UK’s non-financial services exports. The UK generates a surplus in its trade with the EU in many of the high-growth industries of the future—such as professional business services, digital and creative services. This report puts forward recommendations to the Government to ensure the UK remains a world leader in services exports after it leaves the EU.
Trade in services is inherently different from, and in many ways more complex than, trade in goods. Services are intangible and can be traded either online, in person, via a subsidiary business located in another territory or (increasingly) embedded within manufactured goods. We note that current statistics on the UK’s trade in services only capture some of the ways in which services can be traded, and probably underestimate the importance of services trade for the UK.
Unlike trade in goods, trade in services is largely unaffected by tariffs, but instead can be restricted by non-tariff barriers. Such barriers may not only increase the cost of trade but can also prohibit trade altogether. For example, without the right qualifications or licence, some UK service providers may not be able to deliver a service abroad.
The interrelationship between the different ways services can be traded is reflected in the EU Single Market’s founding principles—the ‘Four Freedoms’, namely the free movement of goods, services, people and capital. Accordingly, the Single Market supports trade in services by removing barriers and reducing transaction costs. While it is true that the Single Market in services is less integrated than that of goods, it would be a mistake to conclude that it is unimportant. In fact, the Single Market remains the most integrated regime for services trade in the world. It was therefore unsurprising that witnesses told us they favoured remaining in the Single Market when we launched our inquiry in October 2016. This view was overtaken by the Prime Minister’s announcement on 17 January 2017 that the UK would leave the Single Market and seek a new trading partnership with the EU based on a “bold and ambitious” free trade agreement (FTA).
In light of this announcement, this report analyses those aspects of Single Market membership that witnesses favoured retaining, in order to outline what a UK-EU FTA would need to include to represent a ‘good’ deal for the UK’s services industry. The report focuses on the UK’s largest exports to the EU in non-financial services: professional business services; digital services; creative services; air services; and tourism, education and health-related travel services. We further examine the implications for each sector if no agreement with the EU were reached and trade took place under World Trade Organization (WTO) rules.
We conclude that, in negotiating a UK-EU FTA, the Government should to seek to secure market access in specific respects. Reciprocal arrangements will also be important. For example:
Negotiations on a FTA and the UK’s withdrawal from the EU should recognise the link that exists between trading services and the cross-border movement of persons. The continued movement of workers and service providers in both directions is seen by the UK’s booming services sectors as necessary to support growth. Without provisions in a FTA, trade in tourism, education and health-related travel services between the UK and the EU will also be restricted.
While full market access has been taken for granted as part of the UK’s EU membership, outside the Single Market access in each individual area will need to be negotiated if it is to be included in a UK-EU FTA. In some cases there is no precedent to draw on, and we therefore conclude that the UK’s FTA with the EU will have to be uniquely comprehensive. A dispute resolution mechanism will also be a feature of the UK’s future trading relationship with the EU. We urge the Government to consult service providers fully, in particular SMEs, for whom costly and protracted legal proceedings are often prohibitive, and to bring forward initial proposals for such a mechanism at the earliest opportunity.
A ‘no deal’ scenario, or a deal which gave no special consideration to UK trade in non-financial services, would risk significant damage to these sectors. For instance, WTO rules do not provide for trade with the EU in aviation or broadcasting services at all. Instead, UK firms would have to rely on outdated and restrictive agreements. While the UK’s global standing in services may mitigate some negative consequences, faced with a ‘no deal’ scenario, businesses could be forced either to re-structure or relocate in order to continue to operate in the way that they do today. Moreover, WTO rules would also not sufficiently facilitate the cross-border movement of persons that supports the UK’s trade in services with the EU, nor would they ensure the free flow of data. Rules on market access also differ between EU Member States—increasing the regulatory complexity for UK firms.
Given the consequences of a ‘no deal’ scenario, and the fact that it will almost certainly take longer than two years to agree a comprehensive FTA, we re-iterate the recommendation made in our report Brexit: the options for trade, that the Government prioritise securing agreement to a transitional trading arrangement as part of negotiations under Article 50, so as to avoid a regulatory ‘cliff-edge’ for businesses.
We recognise that the circumstances surrounding the UK’s withdrawal from the EU will continue to change. We therefore also conclude that the Government needs to maintain and increase its engagement with the services industry throughout negotiations—particularly when the time comes for trade-offs to be made. It is of great importance that the Government should continue to narrow down uncertainty so that the UK’s leading services industries can prepare themselves to survive and flourish under the UK’s new relationship with the EU and the rest of the world.