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May and Corbyn will neglect services sector at our peril

by David Hannay | 07.05.2019

David Hannay is a member of the House of Lords and former UK ambassador to the EU and UN.

Following the negotiations between the government and the Labour party over Brexit is like watching paint dry. Such indications as have emerged from the negotiations relate more to expectation management than to reality, while some are simply ranging shots in the blame game we can expect to ensue if and when the process ends in failure.

Somewhere in that cloud of obfuscation lie the future prospects for that jewel in the Brexiters’ crown: an independent trade policy for post-Brexit Britain. Clearly any kind of customs union with the EU, whether temporary or permanent, precludes the UK conducting an independent trade policy – that is what a customs union means.

But could there be a customs union limited to trade in goods alone, while the UK retained the right to negotiate on its own over trade in services? In theory that is a possibility. But would it in practice make sense and would it be beneficial to this country? There are more question marks than answers.

For one thing, the UK currently runs a substantial surplus in its trade in services with the rest of the world. That means that in almost every non-EU “third” country with whom we would be aiming to negotiate better access for our service industries we already have a surplus, often a massive one. Is it really likely that such countries would cut a deal with us when we could not offer them what they really want: better access to our market for goods, and in particular for agricultural products? Also bear in mind that the UK’s market for services is already one of the most open in the world.

Just pose that question in the case of the US, the largest third country economy with whom the government aspires to negotiate an agreement, and one with which we do indeed run a surplus in trade in services. Is a mercantilist US administration, led by a president who thinks that bilateral trade deficits must be reversed come hell or high water, likely to give us what we want in circumstances when we cannot give him what he wants?

And then there is our trade in services with the EU, also in surplus and shamefully neglected in the Political Declaration the government agreed last November – the document which outlines of our future trade relationship with our largest market. How will those negotiations be affected if we start negotiating preferential deals on services with some of their main competitors? Negatively, no doubt.

All this assumes – and it is a pretty bold assumption – that it will be simple and straightforward to differentiate between trade in goods and trade in services. In this era of complex international supply chains, in which elements of trade in services are inextricably linked to trade in goods, that will not be the case. More likely having quite different trade policy regimes for the two categories will simply lead to more friction in trade in both, instead of the frictionless trade we currently have with the rest of the EU.

These service industries represent 80% of our economy, a proportion more likely to rise in the future than to fall. So they do matter. It is hard to avoid the conclusion that service sector leaders have not done a very good job of impressing this on the government; and that the government has done an even worse job so far in supporting services in our post-Brexit priorities.

It was a sobering experience to listen to a panel of representatives of the tech, financial, broadcasting and legal services at the Institute for Government on Thursday admitting that no alternative future arrangements in their sectors would be as good as, let alone better than, what they have already as members of the EU. That simple fact suggests the simple solution of staying put.

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Edited by Luke Lythgoe