Brexit: trade in non-financial services Contents

Summary of conclusions and recommendations

UK trade in non-financial services

1.Services are a competitive, profitable and growing part of the UK’s trade. This is only partly reflected in the statistics on the UK’s trade in services. The data in the Pink Book only capture some of the ways in which services can be traded and probably underestimate the importance of services trade for the UK. (Paragraph 33)

2.As with goods and financial services, the EU remains a critical trading partner for the UK’s trade in non-financial services. Trade with the EU in professional business services, digital and creative services generated a surplus of £9.8 billion for the UK’s trade balance in 2015. This was offset by large deficits in the UK’s trade in tourism and, to a lesser extent, transportation services with the EU (£11.4 billion and £1 billion respectively). (Paragraph 34)

3.Nonetheless, the total volume of UK exports to the EU of non-financial services (£62.9 billion) is growing, and is much higher than the volume of exports of financial services (£26 billion). More jobs are also linked to trade and investment in these sectors. (Paragraph 35)

4.In preparing its negotiating strategy, the Government will need to take account of many factors, such as the value of the sectors’ exports, the number of jobs that depend on them, whether the sectors are growing or declining, and, their strategic importance to the UK economy and the Government’s longer-term trade and industrial strategies, together with a range of cross-sectoral issues. (Paragraph 36)

5.The Government therefore needs more accurate and detailed statistical information on trade in non-financial services than is currently available, particularly in relation to trade in modes 3 (establishing a commercial presence abroad) and 4 (the temporary movement of service providers across borders). Entering negotiations without such data could risk long-term, unintended consequences for the UK economy. (Paragraph 37)

Frameworks for trading non-financial services

6.Although the EU Single Market in services is significantly less integrated than that in goods, it remains, even in its imperfect form, the most integrated market for trade in services in the world, and it continues to integrate further. (Paragraph 78)

7.In the absence of Single Market membership, it will be much harder to liberalise trade in services than trade in goods. This is because trade in services often involves the movement of persons and either the harmonisation or mutual recognition of regulatory frameworks regarding how services should be supplied. The EU does not have harmonised trade policy in relation to trade in services with third countries outside the Single Market, meaning that UK businesses could face differing non-tariff barriers between Member States, which will be difficult to identify and quantify. (Paragraph 79)

8.The UK’s starting-point in negotiations with the EU on a FTA is unprecedented and unique, in that, even though the Single Market in services is incomplete, the rules and regulations in the UK and EU will be, at the point of departure, completely harmonised. On the other hand, existing FTAs have not led to great liberalisation in trade in services. Rather, they tend to reduce the difference that exists between countries’ formal restrictions to trade listed at the WTO and the actual trade policies they apply (which tend to be more liberal). Even terms similar to those agreed under the most ambitious FTAs agreed by the EU, such as CETA, would represent a deterioration of trading conditions for UK businesses. This would be the case both for sectors in which a harmonised Single Market framework exists, and also for sectors that are reliant on the EU acquis for the elimination of non-tariff barriers to trade, such as the mutual recognition of professional qualifications, free movement of persons, and the free flow of data. In short, the UK will require the most comprehensive FTA in services ever agreed with the EU. (Paragraph 80)

9.A deal which did not provide market access for all services sectors, or no deal at all, would result in the UK trading services with the EU on the basis of WTO rules, which would provide less favourable trading conditions than membership of the Single Market or a FTA. WTO terms would require the UK and the EU to comply with the ‘Most Favoured Nation’ principle: the UK would not be able to trade on more preferential terms with the EU, unless it applied those same terms to all other WTO member countries (and vice versa). (Paragraph 81)

10.A dispute resolution mechanism will undoubtedly be a feature of the UK’s future trading relationship with the EU, implying an inherent trade-off between liberalising trade and the exercise of sovereignty. Under either a FTA or WTO rules there will be a fundamental change to the way in which trading terms are presently enforced for the UK. The Government needs to engage with service providers and clarify the dispute resolution mechanism it will seek in a FTA. It will also need to consider how individuals and businesses who were formerly able to appeal to domestic courts, and ultimately the Court of Justice of the European Union (CJEU), would be able to petition the Government to act on their behalf under a FTA or WTO trading rules scenario. (Paragraph 82)

Professional business services

11.Professional business services (PBS) comprise a wide variety of regulated and un-regulated professional services, encompassing some of the UK’s most successful exports globally and to the EU. The UK generates a large surplus in trade in PBS with the EU (£6.1 billion in 2015). It is now up to the Government to protect and maintain the UK’s strengths in business services in a deep and comprehensive UK-EU FTA. (Paragraph 119)

12.The Government should ensure that any UK-EU FTA includes provisions on the mutual recognition of professional qualifications and also of regulatory structures. Failure to achieve such mutual recognition would, according to the Professional and Business Services Council, result in “absolute” barriers to trade for the most highly regulated professions. (Paragraph 120)

13.In addition to securing market access for UK service providers to provide services temporarily in the EU, the Government should also seek to include provisions on the rights of UK businesses to establish themselves in the EU (and vice versa). While the extent to which such provisions have been provided under existing EU FTAs with third countries is unclear, it will be vital for the UK, given the significance of services trade via mode 3. (Paragraph 121)

14.Issues relating to cross-border movement of persons delivering PBS will need to be addressed in UK-EU FTA negotiations. The free movement of persons has facilitated trade in PBS between the UK and the EU in two clear ways. Firstly, it has enabled firms to service clients and contracts at short notice and to assist partner firms in other Member States. Secondly, the free movement of persons has also enabled firms to recruit from a larger labour market and fill skills gaps. The Government should give full weight to these benefits, and the consequences of changing migration rules for PBS, both in negotiations and in the preparation of immigration legislation. (Paragraph 122)

15.Under a ‘no deal’ scenario, regulated PBS firms (such as legal and accounting firms) would face increased (and in some cases absolute) barriers to trading with the EU. Unregulated PBS, like management consulting, would be able to continue trading with the EU, although even they could be indirectly affected. (Paragraph 123)

16.In such a scenario, it is likely that PBS firms, in particular those in the legal sector, would either relocate to the EU, or move resources to partner firms within the EU, in order to continue to trade on preferential terms. Both outcomes could have a negative effect on the UK’s trade balance, tax revenues and employment. (Paragraph 124)

17.The Trade in Services Agreement (TiSA) provides an opportunity to update the global terms of trade for many services. But we note that negotiations on TiSA have stalled, and that the EU’s position has been to pursue terms in TiSA negotiations that are less favourable than those in CETA. (Paragraph 125)

Digital services

18.Digital services are a growing and successful part of the UK economy. The UK leads the EU in the provision of digital services, and the EU is a critical export market. The rapid growth in digital services in the UK has been fuelled by input from non-UK migrants, in particular EU nationals, moving to the UK to fill high-skilled jobs. The likelihood of future growth and innovation in the sector means that digital services should play an important part in the forthcoming negotiations. The Government should aim to maintain the UK’s strengths in this area in a future UK-EU FTA. (Paragraph 158)

19.Preserving the free flow of data across borders is seen by industry as critical to the future of UK digital services. An ‘adequacy decision’ by the European Commission, recognising that the UK had adequate data protection standards (as well as reciprocal arrangements), would be needed to preserve this flow of data. We note concerns that certain provisions of the Investigatory Powers Act 2016, relating to the collection and storage of personal data by security services, could stand in the way of the Commission granting such a decision. We also note the Court of Justice of the European Union’s (CJEU) decision to deem the EU-US Safe Harbour agreement invalid. (Paragraph 159)

20.A key benefit for UK consumers provided by the EU is the forthcoming abolition of roaming charges. This will be put at risk by Brexit, unless specific provisions are included in a UK-EU FTA extending the cap on wholesale roaming charges to UK Mobile Network Operators (MNOs). We note that there are no such provisions in existing FTAs, and that the number of UK citizens travelling to other EU Member States may dis-incentivise EU-based MNOs to extend the cap to UK MNOs. Post-Brexit, the Government and regulators should also take steps to prevent UK MNOs increasing retail charges for roaming services for UK consumers. (Paragraph 160)

21.The Government should seek mechanisms whereby it can continue to formally influence and engage with the Commission and the EU27 in the development of the Digital Single Market (DSM) after Brexit. The DSM is currently under review, and there is a risk that the EU may introduce provisions that could increase the non-tariff barriers faced by UK firms. This highlights the general need for any UK-EU FTA to include provisions on transposing relevant future changes in EU law into UK law, and for the UK to ensure that changes in domestic law do not jeopardise regulatory equivalence. (Paragraph 161)

22.In the absence of a UK-EU FTA, we heard grave concerns from the digital services sector about trading under WTO rules, relating in particular to the state-led nature of the dispute resolution mechanism and the challenges fast-moving technology poses to a global membership organisation. Businesses would face huge difficulties in adapting to trade with the EU and the rest of the world under WTO rules. (Paragraph 162)

23.We also note that, if the trading environment for UK-based digital businesses were to deteriorate significantly following Brexit, digital platforms and start-ups might choose to relocate or redirect parts of their activities to other EU countries. (Paragraph 163)

Creative services

24.The UK is a global hub for creative services. The success of the UK’s creative services industry is bolstered by innovation in digital services and by a general business environment in which companies from different parts of the creative sector ‘cluster’ in the UK. Brexit presents different risks and opportunities to different types of creative services, and it is important that the Government agrees a comprehensive UK-EU FTA that sustains the UK’s global hub status. (Paragraph 197)

25.Creative industries will need a comprehensive agreement on the protection of intellectual property rights. For example, in fashion, the continued protection of Unregistered Community Designs will be important to ensure that fashion designers are still protected when showing their designs for the first time in the UK. Without such protections, the viability of events like London Fashion Week could be called into question, posing a direct threat to jobs in the UK and, more broadly, to the standing of the UK’s fashion industry. (Paragraph 198)

26.Without appropriate agreements to maintain access to the Single Market, we note that UK broadcasters would be unable to broadcast services to the EU. This would affect almost 60% of channels licensed by Ofcom. (Paragraph 199)

27.The EU has excluded provisions on audiovisual media services from all FTAs, except the EU-South Korea FTA and the CARIFORUM-EU EPA. A UK-EU FTA would need to go even further than these agreements, in order to maintain the level of EU market access sought by UK broadcasters. (Paragraph 200)

28.A scenario where the UK left the EU without an agreement would be damaging for the UK’s creative services. Audiovisual media services are excluded from the EU’s schedule of commitments at the WTO, and neither the Transfrontier Television Convention nor co-production treaties are viable alternatives for trade. Protections for intellectual property rights afforded by the WTO’s TRIPS agreement are considerably less than those currently enjoyed by UK businesses and citizens. (Paragraph 201)

Air services

29.The UK is a global leader in air services. This position has been cemented in recent years by the creation of the European Common Aviation Area (ECAA) and the Single Market in air services. Under this framework, the most liberal air services trade in the world has emerged, benefiting European consumers and businesses alike. The UK’s leading position and shared interests with the EU in this sector provide leverage for the Government to negotiate a good deal for the UK’s air services after Brexit. (Paragraph 234)

30.Firstly, the Government urgently needs to clarify whether it intends future UK trade in air services with the EU to be conducted on the basis of membership of the ECAA, or on the basis of a separate comprehensive bilateral air services agreement. In the former case, it would be important for the UK to retain voting rights in EU agencies, such as EASA and SESAR (which is not the case for existing non-EU ECAA members), and to have access to existing Open Skies agreements. (Paragraph 235)

31.A bilateral air services agreement, if it were to maintain the level of market access currently enjoyed by UK airlines, would need to provide rights for UK airlines to fly non-stop between EU Member States, and to fly domestically within EU Member States. The UK is likely to have leverage in negotiations, given the size of its aviation sector, but we note that there is no precedent for the inclusion of the right to fly domestically within an EU Member State in a comprehensive bilateral air services agreement. (Paragraph 236)

32.The Government also urgently needs to clarify the UK’s position post-Brexit with regard to countries with which the EU currently has an Open Skies agreement, including the United States. Failing that, the Government should rapidly explore the potential of agreeing new bilateral air services agreements with major markets (such as the US) before the UK leaves the EU in 2019, or set in place a transitional arrangement. (Paragraph 237)

33.There is no adequate ‘fall-back’ position for aviation services in the event that no agreement is reached with the EU. Air services are excluded from the WTO, and the pre-existing bilateral air services agreements between the UK and individual EU Member States may not be valid, given the EU’s extended competence in this area. It follows that, in order to avoid significant damage to the UK aviation sector, either a UK-EU bilateral air services agreement must be agreed before the UK leaves the EU in 2019, or a transitional arrangement must be adopted, to allow continuing UK participation in the Single Market for aviation pending conclusion of a comprehensive agreement. (Paragraph 238)

34.Faced with the real risk that the UK may not achieve either of these objectives by 2019, airlines are considering registering part of their operations in other EU Member States. This will probably require them, after 2019, to comply with requirements that they be effectively controlled by shareholders from an EU Member State. In other words, they could cease to be UK airlines. (Paragraph 239)

35.The airlines that gave evidence to this inquiry argued forcefully that the aviation sector should be prioritised, and that negotiations on a comprehensive bilateral aviation services agreement should be kept separate from the wider negotiations on withdrawal and the future UK-EU trading relationship. We note that a distinct bilateral deal in this area may be in the mutual interests of the UK and EU. However, negotiations on aviation services will still be just one element within a wide-ranging and immensely complex negotiation. (Paragraph 240)

Tourism, education and health-related travel services

36.Of the categories of services under consideration in this inquiry, travel is the only one in which the UK has a large trade deficit with the EU. This is attributable to the fact that many more UK citizens travel to the EU for business and recreational purposes than the reverse. It follows that UK tourism is economically very important to some EU Member States, as well as being socially important to the UK. (Paragraph 262)

37.EU students travelling to the UK to study make a significant contribution to the UK economy, both by means of fees and by injecting money into towns and cities across the UK. These fees help universities to cross-subsidise courses that may not otherwise be viable. The Government should bear in mind the possible negative effect of increasing fees for EU students on trade in education services after Brexit. We note that determining the status of EU students going forward will form part of the Government’s development of a new immigration policy in coming months. (Paragraph 263)

38.Without provisions in a FTA, trade in education and health-related travel services between the UK and the EU will be restricted after Brexit. This is largely because publicly provided services are excluded from the GATS at the WTO—although this issue is the subject of ongoing debate. (Paragraph 264)

The future UK-EU trading relationship

39.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. (Paragraph 286)

40.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. (Paragraph 287)

41.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’. (Paragraph 288)

42.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. (Paragraph 289)

43.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. (Paragraph 290)

44.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. (Paragraph 291)

45.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. (Paragraph 292)

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