Brexit: trade in non-financial services Contents

Chapter 9: The future UK-EU trading relationship

Overview: the future of UK services

265.As we have emphasised throughout this report, a great deal is at stake for UK service providers in the forthcoming negotiations. Comprehensive trade in services is intertwined with the movement of goods, persons and capital and this is reflected in the founding principles of the Single Market. Existing EU FTAs with third countries do not provide a like-for-like replacement for existing trade terms. In respect of services, the UK’s future FTA with the EU would need to be the most comprehensive in history.

266.In evidence given to the Brexit: trade in goods inquiry, Lord Bridges of Headley MBE, Parliamentary Under Secretary of State at the Department for Exiting the European Union (DExEU) told the EU External Affairs Sub-Committee that “clear themes” for services trade were becoming apparent to Government: “One is qualifications, which you mentioned; law is another; data, which is critical, is a third”.360 While these themes are important and have been covered in our report, we have also identified many more issues that will need to be included in a FTA to ensure UK businesses can continue to trade as they do today. These are summarised in Table 2.

Table 2: Key priorities for a comprehensive UK-EU FTA for services

Professional Business Services

Digital

Creative

Aviation

Travel

Common themes

Access to talent and flexible movement of service providers

Free flow of data

Effective enforcement of the terms of trade (for all sizes of
business)

Sector specific requirements

Mutual recognition of qualifications.

Mutual recognition of regulatory frameworks. Rights of establishment.

Abolition of roaming charges.

Comprehensive access to Single Market in broadcasting.

Comprehensive access to EU Single Market in aviation, particularly intra-EU services

Access for non-UK EU students to UK universities at current rates.

Protection for Intellectual Property rights

Access to EU-US ‘Open Skies’ agreement.

Provisions on emergency, elective and long term health services.

‘No deal’ scenario -trading under WTO rules

Restricted trade.

Restricted trade

Very restricted trade for international broadcasting & reduced protection for intellectual property.

Very restricted trade for short-haul intra-EU services. Fall back on pre-existing bilateral air services agreements.

Restricted trade.

267.Losing access to the Single Market in any of these areas, or failure to secure a FTA at all (a ‘no deal’ scenario), could risk significant damage to the UK’s services 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 these sectors may mitigate some negative consequences, businesses could be forced either to re-structure or relocate to continue to operate in the way that they do today. WTO rules also would not provide for the flexible and seamless movement of persons, nor would they ensure the free flow of data. Rules on market access differ between EU Member States—increasing the regulatory complexity for UK firms. Given these negative consequences, and the strong likelihood that agreeing a comprehensive FTA will take longer than the two years allowed under Article 50, we re-iterate our recommendation that the Government prioritise securing agreement to a transitional trading arrangement as part of the negotiations under Article 50, so as to avoid a regulatory ‘cliff-edge’ for businesses.

268.The rest of this chapter addresses the remaining issues that witnesses told us would need to be resolved within forthcoming negotiations to make a success of future UK-EU trade in non-financial services.

Engagement between Government and industry

269.Importantly, most witnesses to this inquiry felt that the Government was making efforts to engage with UK services businesses on Brexit-related issues. This was both at the level of individual organisations and, as expressed by Ms Dekkers, within “industry group[s]”.361 Mr Mortimer highlighted “extensive engagement”362 with the Government departments responsible for the health sector. Ms Jones described dialogue with DExEU as “limited but increasing”.363 Mr Janson agreed, noting: “We are constantly talking with DCMS, which is our sponsoring department … there is just a hope that the concerns get fed through to the Brexit department and are taken on board”.364

270.While we welcome the Government’s current level of engagement across different services sectors, Mr Laurans said industry in general sought “reassurance that the points [they] are putting across are being taken on board”.365 Communication must also be two-way as the negotiations evolve so that, in the words of Mr Evans, the Government continues to “narrow down the uncertainty as far as possible”, and so that industry can “know some of the potential options that are on the table … and prepare itself”.366

271.We recognise that the favoured trade framework for many witnesses to this inquiry was EEA membership and that the Government has since made clear that it will not pursue this option. Professor Sir Ian Diamond made the following plea: “We are not saying, ‘We just want it to be the same. Please go away’. We are saying that we need to engage with this in a constructive way to get something that is good for the UK in every way.”367

The Great Repeal Bill, mutual recognition and regulatory equivalence

272.Following the UK’s decision to leave the EU, the Government announced its intention to introduce a ‘Great Repeal Bill’, which will be key to forthcoming trade negotiations. In the words of the Government’s White Paper, The United Kingdom’s exit from and new partnership with the EU, the Great Repeal Bill will:

“Convert the ‘acquis’—the body of existing EU law—into domestic law. This means that wherever practical and appropriate, the same rules and laws will apply on the day after we leave the EU as they did before.”368

273.In general, witnesses supported the principle of avoiding divergence between UK and EU laws. EY said: “Regulatory complexity not only increases costs to our business but increases the risk of non-compliance which can damage stakeholder confidence in auditors.”369 The ICAEW, the accounting standards and training body, said the UK’s international “reputation for proportionate regulatory structures, transparency and good governance” should “not be compromised as we leave the EU”. Instead, the Government should “seek to align the regulatory framework for the professional and business services sector with the existing EU framework”.370 As for aviation, Mr Pearce, from IATA, said: “An international air transport network needs to be harmonised and any patchwork or disruption can be quite damaging to it.”371 Similar views were expressed by witnesses from the digital and creative sectors.372

274.While the Great Repeal Bill may ensure that UK legislation is broadly in line with the EU acquis at the point of Brexit in 2019, it cannot legislate for mutual recognition. Mutual recognition requires States to agree to recognise each other’s regulations, standards and qualifications. This would require a reciprocal agreement between the UK and the EU, either as part of a future FTA or as a separate bilateral agreement. An example of this, highlighted in Chapter 5 of this report, was how the UK would need to secure an adequacy decision from the European Commission (recognising that the UK had adequate data protection standards) in addition to implementing the General Data Protection Regulation, in order to ensure the continued free flow of data between the UK and EU Member States after Brexit.

275.Dr Norman argued that the Great Repeal Bill would make continued mutual recognition more likely. With respect to professional qualifications, he said the Bill would bring “into our law a framework of recognition which maintains a portion of the, as it were, bi-laterality or exchange involved” in any FTA. He continued: “Therefore, it raises the bar on states that wish to demur from those arrangements and discriminate against British nationals.”373

276.In relation to regulatory equivalence, the Great Repeal Bill would not prevent divergence after the UK leaves the EU. Witnesses from the digital sector were particularly concerned about the many legislative proposals currently under negotiation as part of the Digital Single Market Strategy, some of which may be agreed after the UK has left the EU. Remaining in line with EU law would require mechanisms for ensuring the continuing transposition of relevant EU legislation into domestic legislation. It would also require the UK to track the case law of the CJEU. Nothing the Government has said publicly so far suggests that it would be willing to contemplate such an approach.

Dispute resolution under a future UK-EU FTA

277.Separately, as part of negotiations, the UK and the EU will have to decide how the rules governing their trade in services (and mutual recognition of regulatory standards) should be policed. Throughout the inquiry, witnesses raised concerns about the dispute resolution mechanisms that would be available to businesses and the Government either under a FTA or under WTO rules. Disputes between EU-based businesses are handled by the Commission, national courts and the CJEU. The Government’s 2014 Review of the Balance of Competences found that even inside the Single Market, UK businesses faced unjustified non-tariff barriers to trade, and pressed for greater integration and liberalisation of the services market.374 Outside the Single Market, these challenges are likely to be more pronounced, particularly for SMEs, for which costly and protracted legal proceedings are often prohibitive from the outset.

278.The Government’s White Paper said it would “seek to agree a new approach to interpretation and dispute resolution with the EU”, which “respect[s] UK sovereignty, protect[s] the role of our courts and maximise[s] legal certainty”. While the White Paper lists examples of dispute resolution mechanisms in EU FTAs with Canada and South Korea, it also states that the UK “should not be constrained by precedent”.375

279.Our previous report concluded that a more robust mechanism for handling disputes than was normally found in FTAs would be required to police a future UK-EU trading relationship. While we heard suggestions for creating a UK-EU court, we recognised that this would not sit comfortably with the CJEU’s position as the primary court within the EU.376

The link between the movement of services and people

280.Industry will also need to be consulted on changes to the movement of persons after Brexit. The WTO’s classification of the four modes of supply for trading services includes two modes requiring movement, either of the consumer (for example, in tourism), or of the service provider (as in many professional business services). More broadly, the consensus among our witnesses was that the short and long-term movement of EU citizens to the UK had helped to fill skills gaps and had driven growth in services, particularly in the digital sector. We heard that restrictions on the movement of EU citizens into the UK for work were likely to reduce economic output and growth.

281.Mr Hancock fundamentally disagreed: “Trade in services is not about moving people to and fro, largely, but about delivering services into another market”. He believed that “digital services are largely done by somebody sitting at a computer in one country delivering services into another”. He pointed out that the UK had “significant trade in services with other parts of the world, too, where we have a controlled migration policy”, suggesting that introducing a similar policy for the EU would not stop services trade. He concluded: “I am not sure that it is credible to align trade in services and no controls at all on free movement of people.”377

282.Ministers told us that the UK had been, and would remain, an attractive base for talent and service businesses. Dr Norman said: “If you look at many services sectors where you have an increasingly globally mobile population and you ask them where they would most like to be, many of them will say Menlo Park but many will say London … Bristol, Manchester and other parts of this country, or Edinburgh.”378 Mr Hancock told us that the UK had the opportunity to design a new immigration system, “looking globally for top talent where hitherto the immigration system has been completely free with 27 countries and tight with others”.379

283.We note that the link between trade and movement of persons also extends to the movement of low-skilled service providers. Professor Barnard told us that mode 4 was “largely dysfunctional because, although it is intended to cover low-skilled through to high-skilled movement, in fact all the instances are of high-skilled and very high-skilled migration”.380 She said the “only thing” she could find on the “Government’s website about mode 4 of GATS was in respect of diplomats and those entering into the private households of diplomats”.381 In developing a new immigration policy, therefore, the Government will need to consider not just how to attract the top talent but also how to facilitate the movement of low-skilled workers.

284.Dr Norman said changes to the principle of free movement would be “part of an overall negotiation”. Asked about the possibility that the EU might insist on the principle of the free movement of persons as a price for Single Market access, Dr Norman recognised that negotiations would be “a two-way street”, but argued that the UK ran “very large financial and other business professional services markets out of the UK which other countries have a great interest in sending their people to, as we have a great interest in sending our people to them”.382

285.The issues relating to the future movement of people between the EU and the UK after Brexit have been addressed in more detail in a separate report by this Committee, Brexit: UK-EU movement of people.383

Conclusions

286.To protect the UK’s status as a global leader of trade in services, the Government will need to secure the most comprehensive FTA that has ever been agreed with the EU. Such an agreement should maintain and build on the UK’s many strengths in services trade. This will be a lengthy and complex process, but not impossible.

287.Losing access to the Single Market in any of these areas, or failure to secure a FTA at all (a ‘no deal’ scenario), would risk significant damage to the UK’s services sectors. While the UK’s global standing in services may mitigate some of the negative consequences, in some cases (for example aviation and broadcasting), businesses may be required to restructure or re-locate their operations to the EU27. Moreover, WTO rules would not provide for the flexible and seamless movement of persons, nor would they ensure the free flow of data. Rules on market access may differ between EU Member States, increasing regulatory complexity for UK firms.

288.Given these negative consequences, and the fact that it will almost certainly take longer than two years to agree a comprehensive FTA addressing the many complex issues raised in this report, we re-iterate the recommendation made in our report on Brexit: the options for trade, that the Government should prioritise the securing of a transitional trading arrangement with the EU as part of the negotiations under Article 50. Failure to do so could leave UK businesses vulnerable and facing a regulatory ‘cliff-edge’.

289.We recognise the Government’s current high level of engagement across the services sectors represented by witnesses to this inquiry. It is imperative that the Government not only listens to these views but uses them to inform its negotiating position with the EU. This structured two-way dialogue must be formalised and maintained throughout the lifecycle of negotiations, especially when trade-offs need to be made. We urge the Government to use the communication channels it has established to continue to narrow down uncertainty for services sectors and enable them to prepare for Brexit.

290.We note that the Government’s planned Great Repeal Bill is intended to reduce uncertainty for UK businesses, by clarifying what rules will apply the day after the UK leaves the EU. But the Bill will not, on its own, secure either the mutual recognition of UK and EU standards, or the level of equivalence required to ensure continued trade in services. In sectors where the UK opts to seek equivalence, the Government should consider how relevant changes in EU law will be transposed into UK law after 2019 and how to ensure changes in UK law do not jeopardise that equivalence.

291.We welcome the Government’s recognition that an effective dispute resolution mechanism will form part of its negotiations with the EU. We urge the Government to consult service providers fully, in particular SMEs, for which costly and protracted legal proceedings are often prohibitive, and to bring forward initial proposals at the earliest opportunity.

292.The Government has, we believe, under-estimated the reliance of the services sector on the free movement of persons. Moreover, there is a risk that the EU will take the view that comprehensive access to the Single Market in services is dependent upon some degree of movement of persons. The Government, in forthcoming immigration legislation, must ensure that it retains sufficient room for manoeuvre to facilitate a negotiated agreement on this key issue.





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