Trade in services after Brexit – what’s on or off the table?

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This guest blog examines how trade in services will be affected after the UK has left the European Union.  As with all guest blogs, what follows are the views of the author, not those of SPICe or indeed the Scottish Parliament.

On 4 June 4 2019, US President Trump discussed a possible UK-US trade agreement, mentioning that the National Health Service would be “on the table” in the negotiations. Later, he said that he no longer saw “it being on the table” as the NHS was “something that [he] would not consider part of trade.” Later that day, Liam Fox, the UK Trade Secretary, noted that “[a]nything, of course, is technically on the table” but “governments retain the right to regulate public services.”

These comments invite a discussion on international trade in services: that is, the provision of services across borders. Trade in services can take many forms: a doctor travelling abroad to visit a patient, French clients holding accounts with the local branch of a Spanish bank, Italian subscribers watching US-based streaming, UK tourists visiting Ireland.

What rules facilitate or hinder these trade flows, now and after Brexit?

International trade in services

In the UK, the service industry is stronger than manufacturing. Services amount to roughly 80% of  UK Gross Domestic Product, and to 83% of UK jobs. Most services are provided and consumed internally, but the UK is also the second biggest exporter of services worldwide, and exports more than it imports. In 2017, it had a services trade surplus of £83 billion with non-EU countries and £28 billion with the EU, the biggest importer of UK services (43%).

The UK’s service industry benefits in the EU Single Market from common rules and free movement of workers, services and capital. In addition, the UK’s excellence in services combines well with other EU members states’ industrial capacity. It was noted that

“…German manufacturers selling goods to China often use UK-based firms for financial and legal services. Export of services are now equivalent to around 13 per cent of UK GDP, compared with 8 per cent in Germany and just 4 per cent in the US.”

Obstacles to trade in goods can be cross-border measures like tariffs and quotas. In contrast, services are not subject to tariffs – hence a customs union with the EU would not benefit directly the UK’s service industries. The major hurdle to international trade in services outside the EU is the need to comply with foreign regulations. States often negotiate high levels of liberalisation of trade in goods, but liberalisation of trade in services is harder to obtain:

“Services trade negotiations are different from goods trade negotiations because services trade barriers are all about regulations, and these are much more complex than tariffs to negotiate.”

Trade in services within and outside the EU

In the EU Single Market, service providers must be able to cross borders without facing discrimination. If the UK leaves the EU Single Market, the provision of UK services in the EU (and vice versa) might face obstacles.

UK providers have no general right to provide their services or establish a branch in another country outside the EU Single Market. In the importing market, there can be regulatory restrictions or plainly discriminatory barriers against foreign service providers. Professionals in regulated sectors might be prevented from working abroad, unless local rules recognise their qualifications as satisfactory. For instance, bar accreditation granted to local lawyers does not automatically extend to foreign ones. In a nutshell:

“The UK’s services access to Europe (the freedom to sell services remotely, to host EU clients, to establish offices in EU countries and to travel to the EU for work) snaps back from the best in the world to the incredibly limited access the EU offers countries it’s never done a deal with…”

Outside the EU, the law of the World Trade Organisation (WTO) governs trade in services. WTO states (all 164 of them, including all major economies) have committed to opening their markets to foreign services and service providers. However, these commitments are piecemeal and change by country, service sector and type of service. For instance

  • France has no obligation to let foreign doctors practice on its territory, unless it decides to set annual quotas.
  • Lithuania must allow foreign medical companies to establish a commercial presence on its territory, if their personnel can speak Lithuanian.
  • Only Austria and Sweden have opened their market to foreign investigators and investigating companies.
  • Belgium cannot impose restrictions on the provision of online photographic services by foreign operators, whilst Austria can restrict it at will.
  • Poland subjects the possibility that foreign journalists work to the requirement that the editor-in-chief be Polish.

In short, it is impossible to summarise the web of reciprocal WTO concessions on services. In trade negotiations, countries rarely agree to dismantle their own rules on regulated professions. This is because states generally do not want to give up their freedom to regulate in return for an estimated commercial advantage for their own domestic service industry. The resulting scenario is of a modest opening across the board. On average, countries are more willing to open their market to online services (e.g., customer assistance, video-editing). Trade in services requiring the provider’s physical presence (e.g., doctors or teachers), instead, is inevitably hindered by immigration rules, which states rarely agree to loosen up.

In addition, in the field of public procurement (the purchasing of services for the public administration), countries retain the right to favour local over foreign contractors, unless they have entered a separate set of obligations, contained in the General Procurement Agreement treaty (on which more details are found in these two posts). In this respect, President Trump and Liam Fox’s remarks on the NHS being “off the table” are correct, at least in the sense that states can normally exclude foreign suppliers from governmental contracts – unless they promise not to do so in specific trade agreements.

The EU Single Market guarantees freedom of circulation to services and service-providers, even in the field of public procurement. Outside the EU, instead, liberalisation in trade in services happens rarely because the steps to achieve it (de-regulation and alignment of standards between countries) entail political costs that are perceived to be higher than the economic gains.

Trade in services in Free Trade Agreements and the roll-over of EU treaties

Normally, countries in Free Trade Agreements (FTAs) exchange trade favours they do not wish to extend to others. Tariff-free bilateral trade in goods is a popular FTA feature, as it normally yields measurable advantages to both participating economies. For the reasons described above, increased liberalisation of trade in services is hard to achieve even in FTAs.

There are examples of discrete concessions in FTAs:

  • In the agreement between the EU and Canada, Canada opened certain sectors (e.g., maritime transportation and uranium investment) and facilitated the recognition of the qualifications of EU professionals like lawyers, accountants and engineers.
  • The EU-Japan agreement contain rules on the temporary entry of professionals and their families, easing the circulation of service-providers (independent and contract-service suppliers) between the two parties.

FTAs are not very effective in opening the market of the participating countries to foreign services, but, at least, they ensure that access currently granted to foreign services will be maintained in the future. By concluding FTAs, the countries often forfeit the power to pass restrictive measures going forward, thus providing long-term regulatory certainty to foreign operators.

After Brexit, the UK will no longer benefit from the FTAs concluded by the EU with third countries. The UK must negotiate new trade deals with these countries if it wants to replicate the trade advantages it currently derives from them. While the UK has managed to replicate the arrangements on trade in goods that the EU has with certain third states (including Norway, Israel, Chile and Switzerland), the new “roll-over” arrangements are mostly silent on services. As noted, trade in services thrive between countries that align their rules. When EU law no longer applies to the UK, these third countries will not assume that UK law will be sufficiently aligned to theirs, and thus cannot promise now widespread access to UK services and service providers.

This is why, to prevent the pitfalls of losing the benefits under the EU-Korea FTA, a UK law firm operating in Seoul decided to re-register as a branch of its Australian office. In so doing, it secured a licence under the Korea-Australia FTA. In fact, it appears that the still undisclosed FTA between UK and Korea will contain a chapter on legal services. If confirmed, this would be the first step of UK’s strategy of carrying over the current arrangements regarding trade in services into a post-Brexit age.

Filippo Fontanelli, SPICe Academic Fellow, University of Edinburgh