The folly of sidelining UK services trade

Guy de Jonquières, former World Trade Editor at the Financial Times, is a co-founder of the UK Trade Forum and associate at LSE IDEAS.

Services industries, from banking and medicine to leisure centres and video games, account for about 80 per cent of economic activity in Britain and an even higher proportion of employment. They generate a healthy trade surplus, helping to offset the country’s large deficit on manufactures and agriculture. And they were the only sector of the economy to emerge from the financial crisis larger than when it erupted.

Just the sort of businesses, you might think, that Britain should be doing everything to nurture and promote after Brexit. Yet when the government set out proposals for future relations with the European Union in its Chequers White Paper this month, services drew the short straw.

For manufacturing and agriculture, the government wants to preserve most of the access to the single market that Britain enjoys as a member of the EU today. But it seeks no similar privileges for services, offering only vague promises and a few crumbs of comfort.

Why such unequal treatment? One reason is that removing barriers to trade in goods – at any rate tariffs – is much simpler than dealing with those affecting services. That is why the EU single market for services remains incomplete and why the World Trade Organisation has made very little progress in liberalising global services trade.

Another reason is Ireland: keeping goods flowing freely between Britain and the EU reduces the risk of a hard border there. Third, the government may think that the City of London, Britain’s services producer par excellence, is so big and powerful that business will continue to flock to it after Brexit, making reduced access to the single market less important for City institutions.

This reasoning may not survive the harsh light of Brussels negotiations. The European Commission doubts it is realistic to distinguish goods and services, when more of the value of complex manufactured products such as aircraft engines and cars is in design, marketing and after-sales support than in screwing bits of metal together.

Moreover, while big City institutions might be able to survive outside the EU, poorer access to the EU single market could be a serious blow to companies exporting a wide range of other services, from information technology to medical testing, security systems and new media.

And, of course, the UK proposals face the fundamental EU objection that they amount to cherry-picking. because they fail to comply with the indivisibility of the four freedoms – free movement of goods, services, capital and people – underpinning the single market.

There is another, less obvious, disadvantage to the UK in seeking different treatment for goods and services: it will make it even harder to negotiate trade deals with third countries after Brexit.

Most trade policy experts think Britain’s status as a supplicant means it will struggle to secure good deals, especially from large economies such as the US, China and India. It is likely to struggle even more if its trade arrangements with the EU prevent its offering lower barriers to goods imports from the rest of the world.

For the US, securing better access for agricultural exports is the top priority. Limiting the scope of trade negotiations to services would reduce the incentive for developing countries like China and India to do deals, because they are not big services exporters.

The sheer complexity of liberalising trade in services involves chipping away at a vast array of often politically highly sensitive barriers. That is why no country anywhere has ever managed to conclude trade deals in which services were the only item on the negotiating table.

Unless Liam Fox, the International Trade Secretary, and his team of mostly untested trade negotiators succeed in cracking those conundrums, the arrangements proposed in the white paper mean that they are likely to spend a lot of time after Brexit knocking at closed doors around the world.

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Edited by Quentin Peel