How ‘invisible’ trade in the services sector will be hit
The Brexit headlines have, perhaps understandably, been dominated for years by the visible consequences of leaving the EU: the prospect of border chaos and major tariffs on some high-profile goods exports such as cars and fish.
But the question of the impact of this eleventh-hour agreement trade agreement with the UK’s “invisible” trade – our services exports – is now coming into much greater focus too.
The Labour leader, Keir Starmer, highlighted the issue in the Commons on Wednesday when he pointed
out that the scant protection for UK services exports in the deal as a “gaping hole”.
That view was echoed by the former prime minister, Theresa May, who said she was “disappointed” by the meagre services elements of the deal.
Boris Johnson has swung between accepting this charge and denying it; he initially conceded that the financial services elements of the deal do “not go as far as we would like”, but in a BBC interview on Wednesday he had radically changed his tune and claimed that “there are already immense barriers to UK services – there is no internal market for services in the EU”.
This argument from the prime minister suggests that the failure to secure any major liberalisation of services trade in the deal is of little consequence and keeps us roughly where we are at the moment.
Is there any truth in that? Are the concerns about the impact of Brexit on services exaggerated?
The short answer is no. Trade experts agree that the single market – which is designed to remove all regulatory barriers to trade within the European Union – is much more developed in goods than in services, but they reject the claim of the prime minister that there is no single market in services at all in the EU.
And UK services firms certainly seem to have been benefiting from it in recent decades.
Official data shows that in 2019 the UK exported services with a value of £124bn to the EU. That same year Britain exported £170bn of goods to the EU.
But the relative value of services exports to the EU in our exports mix has been rising rapidly. At the turn of the millennium UK services exports to the EU accounted for 25 per cent of total exports. Last year they were worth 42 per cent of the total.
Trade analysts accept that the services elements of the UK-EU deal are in line with what has secured by Canada and Japan in their recent free trade deals with the EU in recent years. But they stress that the access of UK services firms to their European customers will be falling, not rising.
“This access is a far cry from access to the single market,” says Mr Riddell.
Sally Jones, Mr Riddell’s colleague at EY, told an Institute for Government podcast this week that, while there had been a surprisingly decent level of access for UK lawyers in the deal, “the dark clouds are bigger than I was expecting”.
She pointed to a host of new impediments, resulting from the deal, for “businesses services” firms such as auditors, accountants and management consultants.
The UK negotiating team’s request for a continuation of the general recognition of UK professional qualifications was apparently rejected.
The new impediments on free movement – with work visas now required - will also make it difficult for UK firms to send workers to do jobs on the Continent relative to now.
“Unfortunately, you are going to have to look at the rules for every specific member state you want to provide services in to determine whether you need a visa or not,” says Ms Jones.
There are also new impediments on artists and musicians when it comes to plying their trade in the EU.
UK-based financial services firms such as banks and asset managers are major exporters of services to the EU. Under the new arrangement they have lost their “passport”, which enabled them to serve corporate and financial customers across the EU as of right.
The EU has granted temporary rights for City firms to continue doing so from 1 January, but this is likely to end in a lopsided “equivalence” regime, which can effectively be withdrawn by EU regulators at short notice.
All these impediments – local licencing rules, new regulatory requirement, travel visas etc – are what are known as “non-tariff barriers”.
The prime minister bizarrely claimed on Christmas Eve that the deal he had secured would eliminate these. Trade experts said at that time that this was a false claim – and having studied its detail they have certainly not changed their minds.
What will be the cumulative economic effect of all this new services trading friction?
The modelling done in recent years on the likely impact of a basic free trade deal with the EU gives us some decent pointers.
Work by researchers at the UK in a Changing Europe think tank in 2019 pointed to a hit to UK income per capita of around 2.5 per cent from a free trade deal relative to staying in the single market.
In reaching this conclusion they assumed that moving to free trade deal would increase non-tariff barriers and instantly push up trade costs for services firms by around 7 per cent. Further, they assumed the UK would miss out on a future 11 per cent decline in these costs due to falling services trade barriers within the single market over the coming years.
The government’s own economists used broadly similar figures in their own 2018 Whitehall modelling study, pencilling in a 4-14 per cent increase in non-tariff barriers on service firms’ exports costs. For financial firms they pencilled in additional cost of up to 22 per cent from the loss of the single market passport.
The average estimate of the long-term hit to UK GDP from a free trade deal relative to staying in the EU from the many studies that have been done is around 4 per cent.
It’s not clear precisely how much of this loss would be attributable to lower services trade between the UK and EU, as opposed to goods, but it would be a considerable chunk given the high and growing share of services in Britain’s exports to the EU.
The 2018 UK government study attributed all the negative impact of the free trade deal relative to staying in the EU to new non-tariff barriers. This, of course, includes the non-tariff barriers affecting goods exporters.
Yet the division between goods and services is becoming increasingly blurred as exporting manufacturers now earn a growing share of their profits from the linked services they provide.
Even more depressingly, analysts say that there’s not much in this agreement to build on for UK services exporters.
“It’s difficult to see how easements and facilitations could be made in the context of this particular deal,” says Ms Jones of EY. “Services has a long way to go and a hard road to tread before it gets to anything like the level of market access it had before.”