Brexit: Four options for the UK’s services industry

The UK services industry makes up 80% of the UK economy, with the financial services sector alone estimated to contribute around £130 billion to the UK economy annually. And while the EU sells more goods to the UK than we export back, the UK exports more services to the EU – creating a ‘trade surplus’. The EU single market doesn’t just cover trade in goods. It also allows the UK to sell services (financial, advertising, IT, etc) in the EU without having to set up in other countries. There are really only four options for the future UK-EU relationship which offer the best deal on trade in services:

Option 1: EEA membership

EEA members enjoy the highest access to the EU’s services market (after EU members).

The European Economic Area (EEA) establishes a free trade area for the four freedoms – goods, capital, persons and services. EEA members have access to the EU’s services market and passporting rights, allowing companies in EEA member states to provide services in EU member states. EEA members don’t have to worry about regulatory equivalence as they are legally obliged to accept EU rules and regulations. However, EEA membership also requires acceptance of the EU’s other three freedoms – including freedom of movement.

Option 2: Free trade agreement

Free trade agreements can achieve significant liberalisation in services trade…

A free trade agreement (FTA) offers scope for liberalisation in services. The EU-South Korea FTA, for instance, covering over 100 services sectors, has been described as one of the EU’s most ambitious FTAs in terms of sectoral coverage. However, the scope and extent of market access commitments varies between different FTAs and even comprehensive agreements may fall short on some sectors: the proposed trade deal between the EU and Canada does not cover audio-visual, air transport and financial services.

Similarly, concluding a set of ‘Swiss-style’ bilateral agreements with the EU offers the potential for greater access to the EU services market, but this option is not comprehensive. Switzerland’s bilateral agreements cover only some sectors, such as some types of insurance and public procurement, while excluding important sectors such as financial services. Swiss firms therefore need to set up subsidiary operations in an EU member state in order to be able to access the EU services market in those sectors.

Option 3: Customs Union

None of the EU’s existing customs union arrangements cover services…

The EU’S current customs union arrangements pertain only to trade in goods, not services. None of the EU’s existing three customs union agreements – with Turkey, Andorra and San Marino – contain provisions on trade in services. Members of a customs union thus do not have any preferential access to the EU’s services market.

Option 4: WTO

WTO terms do little to encourage trade in services

The ‘hard Brexit’ option would involve falling back on World Trade Organization (WTO) rules to govern UK-EU trade. Trade in services would be governed by the WTO’s 1995 General Agreement on Trade in Services (GATS) – a very limited form of integration. Under WTO rules, the financial sector may lose ‘passporting', by which UK firms can do business in the rest of the EU without having to go through the lengthy and costly process of acquire authorisation from each individual member state.

Many countries consider the WTO commitments as insufficient in addressing barriers to trade in services. Efforts are being made to build on this basic framework to lift more barriers on trade in services – but these negotiations are ongoing and obstacles to the successful completion of the agreement remain.

Warnings over the potential ramifications of Brexit are emerging from the City of London and other services sectors. They are concerned that under some Brexit scenarios the trade in services could be damaged, particularly if UK companies lose the right to sell services directly to the EU. If the Government wants to secure 'passporting rights' and regulatory equivalence, it will likely mean compromising on other areas such as the ability to control migration. This is just one of the trade-offs which the Government must balance when deciding its negotiating position. As raised in yesterday’s House of Commons debate, Government also needs to provide clarity about its position and objectives for the upcoming negotiations to order to reduce the uncertainty faced by the UK services sector.