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Brexit: Trade in Non-financial Services (EUC Report) - Motion to Take Note

Part of the debate – in the House of Lords at 8:36 pm on 18th December 2017.

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Photo of Lord Whitty Lord Whitty Chair, EU Internal Market Sub-Committee, Chair, EU Internal Market Sub-Committee 8:36 pm, 18th December 2017

My Lords, I commend to your Lordships this report by Sub-Committee G. I thank the members of the sub-committee—many of them have put their names down to speak today—for their important contributions, and I also thank the staff of the committee and our specialist adviser, Dr Ingo Borchert.

I want to make three preliminary points. The first concerns the elapsing of time. The inquiry was conducted between October 2016 and January 2017, over a year ago, and our report was published on 22 March, which was still before the Government triggered Article 50. Much water has therefore passed under the bridge since publication. Regrettably, much of that water is almost as murky today as it was then in terms of the kind of free trade agreement that the Government are really after and how services fit in with that approach. The negotiations have had their ups and downs, and the Government have produced a number of future partnership papers on the UK’s relationship with the EU, but regrettably, up until today, no response to our report has been forthcoming from the Government.

It was delayed at first by the general election and subsequently by the Government’s insistence that they cannot provide us with a response until all their position papers have been published. I had a gracious response from the noble Lord’s predecessor but that was some months ago. I take this opportunity to express my disappointment at this and to emphasise the Government’s responsibility to engage with such reports and the findings of Select Committees. Therefore, I look forward to the Minister giving his detailed response later this evening.

My second preliminary point concerns the vital importance of these key services. As we know, the UK is very much a service-driven economy, and in these services the EU is an important trading partner. We export in aggregate to the EU and worldwide more than does the financial services sector and two-thirds the amount of the goods sector, and we have a surplus in most of the areas covered by the report. We emphasise the complexity of trade in services, which admittedly is largely unaffected by tariffs but can be substantially restricted by non-tariff barriers.

Our report tries to examine what a bold and ambitious free trade agreement between the UK and the EU would look like and what it would need to include to represent a good deal for these non-financial services. We also look at the implications of trading in services under WTO rules—the so-called no-deal scenario.

My third preliminary point was the inadequacy of the statistics on these services. I was quite keen to spell this out but, interesting though it is, in view of the lateness of the hour I will instead refer noble Lords to chapter 2 of the report, which addresses that complexity.

As I said, trade in services does not generally attract tariffs, but trade is very much restricted by various forms of non-tariff barriers, some cultural but, in the main, resulting from divergent regulatory systems. Within the EU, the single market in services has not developed nearly as completely as the single market in goods. Nevertheless, significant progress has been made in developing common regulatory frameworks and structures and often specific consumer protection provisions for the various sectors, such as those in aviation, transport and travel, audio-visual and broadcasting, and telecommunications. In many of these areas the frameworks are overseen by EU agencies, such as the European Air Safety Agency. In most of these agencies, of which there are 34 in total, the EU has historically been a very influential member as well as a major beneficiary.

There are also some general provisions in EU regulations and directives that facilitate trade in services, such as the mutual recognition of qualifications, various intellectual property provisions, provisions on the free flow of data, and general data protection and consumer protection. There are also programmes that facilitate university students’ teaching and research. In many of these sectors, there is the free movement of often highly skilled labour.

It has to be said that at the point we received written and oral evidence, almost all representatives of the services we covered were relatively satisfied with the present or prospective EU situation affecting their sectors and the degree of influence and reflection of their interests they felt they had in these European institutions. Most were keen for the EU single market to move rapidly in the services sector and were encouraging the Commission and member states to move faster. They were particularly keen on developing a real single digital market.

At that time, most sectors were also confident that a separate bespoke sectoral agreement might need to be made in their areas to preserve the benefits of the single market. They saw a mutual UK-EU benefit in continuing the existing relationships. I will come back to the issue of separate sectoral agreements. Of course, this could have been agreed if we had moved towards the option of rejoining EFTA and the EEA, but that had already been ruled out by the Government; hence we did not consider it in detail but focused on a comprehensive free trade agreement.

I will make a few specific comments on some of the main exporting sectors, beginning with the professional business services, such as legal, accountancy, medical, engineering, business consultancy services and so on. These represent the UK’s largest services exports, generating a £30 billion global surplus and a £6 billion EU surplus. To support this sector, a free trade agreement would need to include provisions on the mutual recognition of professional qualifications and regulatory structures. It will also be important for UK businesses to retain the right to establish themselves in the EU, and of course vice versa, and to move staff easily across borders to service European clients and contracts at short notice. For these sectors, a no-deal scenario would result in increased, and in some cases absolute, barriers to trade with the EU. That would be particularly so for regulated businesses such as legal and accounting firms. In such a scenario we conclude that businesses would be likely to have to relocate or move substantial resources to the EU, incorporating separately, which would impact the UK’s trade balance, tax revenues and employment.

Digital services represent an important and growing sector of UK trade, which created jobs at almost three times the rate of the rest of the UK economy in the first half of this decade. To maintain the UK’s leading position in this field, a lot of our witnesses highlighted data transfers and access to skills as their most pressing concerns. Some adequacy decision from the Commission on the UK’s data protection standard would be needed to maintain the flow of data between the EU and the UK under a free trade agreement and it would be important to ensure that future changes in domestic law do not jeopardise regulatory equivalence in this field. On the other hand, a no-deal scenario would represent a regulatory cliff-edge for UK digital businesses and many may choose to relocate or redirect part of their activities to the EU.

The UK is also a world leader in creative services from music to fashion and design, representing a global hub in which companies from different parts of the creative sector cluster in the UK. To sustain that status, a comprehensive free trade agreement would be needed to ensure protection of intellectual property rights, market access and the mutual recognition of broadcasting licences, for example. Again, the contrast between a free trade agreement and a no-deal option was stark. Alternative conventions and treaties do not account for technological developments such as on-demand services, and so are not really viable options for trade. Audio-visual media services are also excluded from the EU’s schedule of commitments at the WTO, meaning that EU member states would be free to impose discriminatory provisions on the UK in the event of there being no deal.

We also considered aviation services. Witnesses told us that the strength of the UK’s aviation sector and shared interests with the EU offer important leverage for the Government to negotiate a good deal for UK air services after Brexit, either through continued membership of ECAA and EASA, the safety agency, or a bilateral air services agreement with the EU. Our report recommends that the Government should urgently clarify which of those two options they will seek. As air services are excluded from the WTO provisions and the validity of pre-existing bilateral agreements is frankly uncertain, there is no viable fallback position under a no-deal scenario for aviation. We also emphasised the importance of clarifying the UK’s position with regard to EU-third country aviation agreements and of securing transitional arrangements if the UK has in the event to negotiate new bilateral agreements with these markets.

Last month, we held a follow-up session with witnesses from the aviation sector. They were still confident that the UK and the EU would be able to strike a deal on air services due to the sector’s fundamental importance to both parties and restated the view that this should be negotiated and agreed separately from any wider UK-EU free trade agreement. Incidentally, we intend to hold similar follow-up sessions with other service sectors.

Chapter 8 of our report looked at the UK trade in travel services and tourism, highlighting the importance of UK tourism to some EU member states as well as its social importance to families and businesses in the UK. Incidentally, tourism is the one sector in our analysis where we are in substantial trade deficit with the EU, largely because of the balance of tourist journeys. UK visitors unaccountably prefer the Med compared with EU tourists to British climes for most of the year. Again, our own tourism industry is doing reasonably well. As we have seen from the tourists around here, we are still dependent on EU tourists freely coming to London and other parts of Britain to spend their money and appreciate our culture, business and economy.

Throughout our inquiry, our witnesses told us that the UK is a global leader in these services and that the Government had already engaged extensively with the sectors to inform their position in negotiations with the EU. We applaud that on behalf of the Government. However, it has not been clear, either then or since, quite how the Government would respond to the points raised with them by the sectors. We start from a position of harmonisation, which ought to help us provide the foundation for an ambitious partnership for future UK-EU trade services. However, it is clear that to protect our service sectors the UK’s future partnership will need not only to be ambitious, but to deliver the most competitive services free trade agreement the EU has ever agreed. Reduced EU market access or failure to secure a free trade agreement at all would risk significant changes to the sectors, which would face increased regulatory complexity and some businesses would need to restructure or relocate their operations.

The Government also need to recognise the alarm raised by many of these businesses at the abandonment of the free movement of people. A relatively high number of EU nationals work in all these sectors, from the brightest and best in tech and professional sectors to the mobile labour in some areas of tourism. Put delicately, this dimension needs to be taken on board as the Government move away from freedom of movement to new forms of migration controls. Our report also calls on the Government to prioritise agreement of transitional trade arrangements to avoid a regulatory cliff edge and to reduce uncertainty. I hope that such an agreement on transition is now in sight.

It seems that the Government’s negotiations now face a dilemma, which was clearly spelled out in the news bulletins this very morning. All these sectors want to continue and to develop the kind of regulatory trading structures they currently have access to, with minimal change to trading arrangements, standards, the regulatory framework, and technical and regulatory agencies. They want bespoke chapters or separate deals in any free trade agreement to achieve that. But while David Davis may advocate Canada plus plus plus, neither CETA—the Canadian agreement—nor the South Korean and Japanese deals, which are very extensive deals with the EU, cover anything like bespoke provisions on which we can build. Of course, Michel Barnier says that we cannot cherry pick or have bespoke deals. There is not only no template; we do not have a mutuality of approach.

In preparation for this debate, I flicked through the 450 pages, excluding annexes, of the Canada agreement. While there are some particular provisions on services, such as telecommunications, and some general issues, such as intellectual property, are covered, there is very little on services and it is very thin. However, as I have said and as I have no doubt the Minister will emphasise, we start from near regulatory equivalence with industries that largely want to keep it that way.

I am about to conclude. Most of the points we made in the report, almost a year ago, remain valid. Real trade talks are about to begin in earnest. The Government need to take on board those points from us and from these dynamic sectors, as well as those from more obvious and traditional voices approaching the Government from the City, the manufacturing sectors and areas such as agriculture. It is vital that these key growth service sectors, replete with innovation and creativity, are not sacrificed in the inevitable trade-offs with other issues that will arise once the complex trade negotiations begin. I hope this morning’s Cabinet Brexit committee will at last have addressed some of these issues and be clearer on the outlined free trade agreement that we are trying to achieve. I look forward to whatever the Minister may be able to tell us about those developments and his comments on the report. I beg to move.