My Lords, I begin by recording how much I enjoyed serving under the chairmanship of the noble Lord, Lord Whitty, of the sub-committee of the European Union Select Committee which produced this report—some while ago, as he pointed out. I should also disclose an interest in that I am president of the Institute of Export and International Trade and a member of the advisory group on Brexit matters to the CEO of the EEF.
All recognise the significance of services to the British economy: more than 70% of output and more than 40% of exports. The EU is collectively our largest market for services exports, with the US our second largest. There are a number of sectors, but three dominate: financial services, which we are not focused on this evening; professional business services; and tourism, those three accounting for two-thirds of all our services exports. The statistics probably underestimate the importance of services exports because many engineering manufacturing exports include a lot of services revenue. Furthermore, the trend everywhere is in favour of services. Services rise as a percentage of economic output almost everywhere, and there is as much opportunity to gain value through trade in services as there is in goods; that is, the arguments about comparative advantage that date back to Smith and Ricardo apply just as much in services as in goods sectors. What is more, the digital revolution will steadily increase the proportion of services output which is tradeable. There is, therefore, a lot to go for.
Sometimes, we tell ourselves that the UK has a special comparative advantage in services. It is true in that we are the second or third largest services exporter globally and have the highest percentage of services as a proportion of exports of almost any of our competitors. However, we should take care about this argument. First, the high percentage of services in our exports is due in part to the weakness of goods exports. Secondly, it is also distorted by the great importance of financial services, whose net exports account for 3% of GNP alone. Thirdly, the gap with Germany is in any case closing or almost closed. Fourthly, Asia will, over time, grow its services exports. In short, this is not just a matter of getting open markets and then we are up, up and away; no, we will have to work at it hard. Nevertheless, the future is good and probably better than for goods exports. Therefore, this is an important strategic theme for us as we chart our new course.
I want to make three brief points and then pose a couple of questions to my noble friend the Minister. The first concerns trade with the EU. As the noble Lord, Lord Whitty, has mentioned, we start with regulatory alignment, more or less, on day one. There are any number of commentators who would like to see us deviate from this as soon as we reasonably can. We hear phrases like, “We don’t want to move from being a member state to a vassal state” or, earlier, “This is our big opportunity to complete the Thatcher revolution”. It was a standard complaint of many sectors of British industry that we were shackled by bureaucracy that came from Brussels, gold-plated then by the UK Government and punctiliously enforced by a bureaucracy here which caused unnecessary cost to consumers and, in any case, created an unfair competitive advantage to other EU members who were not playing by the same rules. However, the dream that we can get away from regulatory alignment to any significant extent is, I am afraid, just a dream. It is not based on reality either as an accurate description of the past or as a vision of the future. It is not surprising that we now see industry after industry arguing for the importance of maintaining regulatory alignment in sector after sector with the EU. Why? Because the market there is critical and the regulations there are not going to change at the request and behest of the British. We will certainly have less influence—not none maybe, but certainly less than in the past.
Secondly, the Government’s ambition for a bespoke deal—Canada-plus-plus-plus, as it is often described—is broadly the right one. It is often noted by sceptical remainers that the Canadian deal has little in the way of services. It does not cover aviation; it does not cover broadcasting; it tackles overt discrimination against foreign ownership, but it does not tackle domestic regulation; and it has virtually nothing about regulatory convergence of any significance. I cannot say that I have skimmed all 450 pages in the way that the noble Lord, Lord Whitty, has, but it is clear that there is not much about services in the Canadian deal—hence the importance of the plus-plus-plus. Today’s news that both the Institute for Government and the Institute for Public Policy Research have produced ideas on how this might all work is very welcome, and I hope that the Government will take their ideas seriously.
I also recommend that we pay more attention to the EU-Japan deal. That started when I was the Minister for Trade and Investment. I remember how sceptical we all were at the time that much progress would be made, given the difficulty of the Japanese domestic market environment. In fact, it seems to have gone rather rapidly, and substantial progress has been made. There is still some way to go, of course, not least as this is a mixed competence deal which will require unanimity among the member states and will therefore be vulnerable to the Walloon effect. Nevertheless, it has clear potential. It covers business services, financial services, especially insurance, telecommunications, transport, distribution and courier services and it proposes the establishment of a regulatory co-operative committee which will methodically look through the different non-tariff barriers that exist on both sides and propose solutions. I believe that we should watch this carefully, because at the end of the day Japan is more important than Canada and this is the harbinger of future Asian deals, with China, with ASEAN and with India. New deals will be more and more about non-tariff barriers, about regulatory dialogue and about services: this is important to us.
Thirdly, in general we need to be realistic. Britain will largely be a rule taker in these discussions. In the case of the US, for example, TTIP is now stalled at best, and the mandate was a compromise, but we should be under no illusion that the UK alone will find it easier to deal with the US, particularly in areas that are of particular importance to us. Financial services is one obvious area—pharmaceuticals is another —where the US regulatory environment is particularly impenetrable. The truth is that neither the US nor the EU is likely to be up for any substantial regulatory change to meet our needs. We will largely be a rule taker vis-à-vis the world heavyweights: the US, the EU, Japan and, who knows, in times to come China.
That is why developments in the last couple of weeks give me the first inkling of optimism that we are heading down a sensible path. I thought phase 1 was a good deal. I make no comment on the budget settlement, of course, but I think the settlement on citizens’ rights in both directions is both good in itself and helpful to services industries. The Irish settlement, which involves “regulatory alignment” between the north and the south in order to keep the border as invisible as possible, provoked the inevitable backlash and the result is a parallel commitment to, to use the phrase, “the constitutional and economic integrity of the UK”. That is also good. It is clear what both those commitments amount to in terms of continued regulatory alignment between Britain and the EU.
As we move to the second phase, I therefore briefly ask my noble friend two questions. First, can he clarify this point? Assuming we leave the EU legally in March 2019 and that we have agreed a transition period by then, what will the UK’s status be in respect of existing EU-third country agreements at that point? If it is envisaged that the transition agreement will mean that these agreements are still in effect for the UK, does that have to be negotiated not just with the EU but with the third-party country as well?
Finally, we do not talk much about trade with Africa. It is not a substantial growth opportunity of magnitude at the moment, but it offers substantial growth over the coming decades. It is also a big development imperative, important in its own right and in geopolitical terms as well. I welcomed the announcement of the appointment of a trade commissioner for Africa, but I was disappointed that no reference was made in the advertisement or in the brief to development as part of the package. Trade is critical to development; development is critical to trade; and I would have wanted to see a reference to a development responsibility in the role of the trade commissioner for Africa.