Chapter 2: Frameworks for trade in professional and business services
The EU’s Single Market for services
23.The free movement of services is one of the ‘four freedoms’ provided for under the Treaty of Rome of 1957 and subsequent EU treaties. In practice, though, the EU internal market for services is less developed than that for goods. Although the provision of services is facilitated through the free movement of people and the freedom of establishment, the previous Government, in its Balance of Competences report on trade in services, described free movement of services as having been in the post-war years “the poor cousin to the other freedoms”.33 It was only in 2006 that the Services Directive sought to liberalise the EU’s services markets, by identifying and prohibiting certain restrictions on the freedom of establishment and on the freedom to temporarily provide and receive services.34 The Services Directive was a compromise, reached after difficult and protracted negotiations, and liberalisation of the EU internal market in services remains a work in progress, with significant national reservations in many Member States.
24.Nonetheless, EU law has played an important role in removing certain barriers to access to some regulated professions. For example, the Mutual Recognition of Professional Qualifications Directive enables certain professionals to have their professional titles automatically recognised across the EU, and provides a pathway for the recognition of other qualifications.35
World Trade Organization (WTO) framework
25.Cross-border services trade is currently regulated at an international level by the WTO General Agreement on Trade in Services (GATS), to which all WTO members are party, including the UK. The WTO GATS is guided by four basic obligations binding its members:
- Most favoured nation treatment: all trading partners should be treated equally without discrimination. If, however, two or more countries enter into a comprehensive trade agreement, they are entitled to grant each other more favourable treatment without engaging this principle;
- National treatment: foreign service providers should not be discriminated against in favour of national ones;
- Transparency: all rules and regulations that apply to service providers should be in the public domain; and
- National regulations must be objective and reasonable.36
26.GATS members may impose limitations on the degree of market access granted to foreign service providers, which are listed in their schedules of commitments under the GATS. In practice, however, it is often the case that a country’s GATS schedules are more restrictive than its actual legislation on market access by foreign service suppliers: this policy space enables governments to adjust levels of liberalisation based on their trade and economic policy objectives.
27.The WTO GATS details four modes of supplying services; these are summarised in Box 1. This report focuses in particular on barriers to modes one, three and four.
Box 1: WTO GATS Modes of Supply
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1.Cross-border supply: services flows from the territory of one member into the territory of another member (e.g. banking or architectural services transmitted via telecommunications or mail); 2.Consumption abroad: situations where a service consumer (e.g. tourist or patient) moves into another member’s territory to obtain a service; 3.Commercial presence: a service supplier of one member establishes a territorial presence, including through ownership or lease of premises, in another member’s territory to provide a service (e.g. domestic subsidiaries of foreign insurance companies or hotel chains); and 4.Presence of natural persons: persons of one member entering the territory of another member to supply a service (e.g. accountants, doctors or teachers). The Annex on Movement of Natural Persons specifies, however, that members remain free to operate measures regarding citizenship, residence or access to the employment market on a permanent basis. |
Source: World Trade Organization, ‘The General Agreement on Trade in Services (GATS): objectives, coverage and disciplines’: https://www.wto.org/english/tratop_e/serv_e/gatsqa_e.htm [accessed 7 September 2020]
28.The WTO GATS, which came into force in 1995, was described by the PBSC as “out of date today”.37 Negotiations on a new WTO agreement—the Trade in Services Agreement (TiSA)—which would have accounted for 80% of world trade in services,38 stalled in 2016.
Free trade agreements (FTAs)
29.Some comprehensive FTAs seek to liberalise trade in services by providing a degree of preferential market access. Witnesses impressed on us that FTAs operate differently for goods and services. Sam Lowe noted that FTAs on trade in goods generally addressed tariffs, agreements on trade in services addressed “regulation, very often local regulation and qualifications”, and were therefore “much more convoluted and complex”.39 As the PBSC put it:
“Traditionally, services provisions in FTAs have not provided a similar degree of liberalisation compared with goods trade. This is reflective of the fact that barriers to services trade are often more complicated and exist behind the border as part of the domestic regulatory environment.”40
30.As a result, few FTAs go much beyond the existing WTO framework for trade in services. Drawing on the example of the EU-Canada Comprehensive Economic and Trade Agreement (CETA), Simon Davis, President, Law Society of England and Wales, warned that “the European Commission itself has acknowledged that CETA’s provisions on services generally ‘merely reflect the current state of openness applied (but not guaranteed) to all World Trade Organization members’.”41
31.Sam Lowe therefore warned that “a good free trade agreement at the end of this year is preferable to not having one, but it is not going to save the services sector. It is not that different from trading without one, except in a few specific areas.”42 The UK Trade Policy Observatory (UKTPO) agreed, stating that the benefits of an FTA for businesses “arise mainly from a reduction in the uncertainty around the market conditions that domestic businesses could face when exporting services”.43
Most favoured nation clauses
32.FTAs can also include so-called ‘Most Favoured Nation’ clauses. Sam Lowe identified these as “provisions in a trade agreement that if, in future, the other partner country offers greater access to its market in a trade agreement with another country, we get that too”.44 He said that there was a live question as to whether the ‘Most Favoured Nation’ clauses on services and investment in the EU’s trade deals with Canada, South Korea, Japan, the Caribbean Forum, Vietnam and Mexico would mean that if the EU granted “more ambitious services provisions to the UK, it will automatically also have to offer them to Japan, for example”. He added, though that there were “quite a lot of caveats to the provision”.45
Status of professional and business services in the negotiations
33.Nick Owen’s “overriding concern” for the continuing UK-EU negotiations was that professional and business services were “generally the invisible sector”.46 Dr Dimitrios Syrrakos, Senior Research Associate, Manchester Metropolitan University, agreed, noting that despite the early focus of the negotiations being on trade in goods, “roughly twice as many people” were employed in professional and business services as in manufacturing.47
Business preparedness
34.We received evidence that many large international firms took steps to mitigate the potential effects of Brexit in advance of the previous so-called ‘no deal’ deadlines in 2019. Shanker Singham described how larger firms had been setting up or strengthening operations in EU Member States in order to continue trading at the end of the transition period.48
35.Sally Jones raised concerns, however, about SMEs that have “an international presence but not so much resource to handle it” as they are “the most likely to run into problems.”49 The lack of clarity about the future UK-EU relationship so close to the end of the transition period leaves SMEs with little time to prepare for changes which may have an impact on their business. Moreover, throughout 2020 the focus of many professional and business services companies has been on navigating the impact of the COVID-19 crisis and operating while meeting social distancing requirements. As the Recruitment and Employment Confederation (REC) put it, “The COVID-19 crisis has left our members with very little bandwidth for other matters, many have simply had to focus all their efforts on staying in business.”50
36.There is therefore a real concern in the sector about ambiguity over the future UK-EU relationship. Andrew Forth, Head of Policy and Public Affairs, Royal Institute of British Architects (RIBA), said that RIBA had asked their members “about what preparations they have been making, and the overwhelming response was that they were not quite sure what they were supposed to be preparing for”.51 techUK added that “to convince senior management to expend resources on preparation, country managers and Brexit planners need official guidance to back up their requests for funding”.52
37.The Federation of Small Businesses did, on the other hand, highlight that members had expressed “tremendous interest” in reaching out to new markets at the end of the transition period, particularly the United States, Germany, France, Ireland, Canada and Australia.53
Consequences of ‘no deal’
38.If no agreement is concluded by the end of the transition period on 31 December 2020, the UK will trade with the EU on the basis of WTO rules. As we concluded in our report, Brexit: trade in non-financial services:
“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 an 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).”54
39.FTAs that include services provisions are mostly focussed on addressing regulatory barriers to trade. Therefore, the effects of a ‘no-deal’ scenario on trade in services are not as clear-cut as they are for trade in goods. However, witnesses impressed on us that the absence of a UK-EU FTA would create additional barriers to trade in professional and business services. The atmosphere around a ‘no deal’ scenario could also have an effect on services trade, as Farzana Baduel, Chief Executive Officer, Curzon PR, described:
“On the optics, if the UK leaves without a deal, we are concerned that there may be a global perception of the UK not having sufficient co-operation with the EU, and therefore a perception that the UK is no longer a landing pad for brands to come to the UK first, establish themselves as a lead market, and springboard into EU markets.”55
33 HM Government, Review of the Balance of Competences between the United Kingdom and the European Union—The Single Market: Free Movement of Services (2014), para 1.3: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/332668/bis-14-987-free-movement-of-services-balance-of-competencies-report.pdf [accessed 22 September 2020]
34 Directive 2006/123/EC of the European Parliament and of the Council of 12 December 2006 on services in the internal market, OJ L 376/36, 12 December 2006
35 Directive 2005/36/EC of the European Parliament and of the Council of 7 September 2005 on the recognition of professional qualifications, OJ L 255/22, 7 September 2005
36 World Trade Organization, ‘The General Agreement on Trade in Services (GATS): objectives, coverage and disciplines’: https://www.wto.org/english/tratop_e/serv_e/gatsqa_e.htm [accessed 7 September 2020]
44 The specific use of the term ‘most favoured nation’ described here should not be confused with the general WTO ‘most favoured nation’ principle, which provides that WTO members cannot discriminate between other WTO trading partners, unless they enter into a free trade agreement or customs union.
54 European Union Committee, Brexit: trade in non-financial services, (18th Report, Session 2016–17, HL Paper 135) para 81