News published yesterday that the UK and EU are close to reaching a tentative deal on services and data sharing has brought a new focus on the Brexit negotiations.
While both the UK Government and Michel Barnier have dismissed the reports, the British Irish Chamber welcomes what it views as a long overdue focus on the Services sector and the impact Brexit will have on it. Since the publication of our Big Principles paper nearly a year ago, we have been advocating for a comprehensive deal to be agreed between the UK and EU on this area. Services are vital to both the UK and Irish economies and account for a significant portion of our bilateral trade. Figures released by the CSO yesterday show that last year Services accounted for nearly 55% of trade between the UK and Ireland with Ireland enjoying a trade surplus of nearly €10 billion in this area.
The complexities surrounding how services are traded internationally has meant that the impact of Brexit on this trade has been discussed far less than the corresponding impact on the trade in goods. While barriers to this trade may not result in the erection of physical borders and the introduction of tariffs, it could present significant difficulties around market access and the right to trade cross-border. In our engagements with businesses, we have found a much weaker understanding of the consequences of Brexit for the services industry, an issue on which we have been working with our Services Sub-Group and which we will be actively trying to address over the coming months.
To date, the conversation has been dominated by the lucrative Financial Services sector that contributes nearly £120 billion to the UK economy and relies on the EU for nearly half of its exports. The potential loss of passporting rights for this sector has led to its participants, including in the Chamber’s own Financial and Professional Services Committee, coming together and advocating for a deal that will not unduly damage this pan-European, highly integrated sector. While the sector has accepted that passporting rights are unlikely to be maintained, its call for a more advanced equivalence model than what is currently offered by the EU to other third countries is a sensible approach given the breadth and depth of activities carried out by London FS firms for EU clients and vice versa. The European Parliament, has also previously called for an overhaul of the EU’s equivalence system and Brexit provides the ideal impetus to make this happen. Yesterday’s news reports that a new equivalence model may be introduced including a longer notice period before market access could be withdrawn and greater consultation on proposed new regulations would be a positive approach on this issue.
However, services trade between the UK and the EU goes much further than financial services. We have seen already the EU’s concerns over how goods related services would be treated in any future customs based arrangement between the UK and EU. The Chamber’s Director General John McGrane, has long warned of the difficulties that may be faced by companies who not only sell a good from the UK into Ireland, but also the service that comes with that good. For example, an Irish business might buy its photocopier from a UK supplier and the purchase also includes a service contract to address any operating issues that might arise with the photocopier. In a post-Brexit world, the Irish business will still be able to buy the photocopier (once it meets EU standards), however the ability for the UK supplier to provide the service contract is less clear. This situation becomes even more complex in highly regulated sectors such as engineering and accounting where recognition of qualifications could also become a potential barrier to this trade. The Chamber would advise extreme caution against any presumption that the Common Travel Area (CTA) will address these issues.
Mode 4, that is the ability of a person from one country to travel to another to deliver a service, is by far the least developed method of service delivery throughout the world and according to the WTO, less than 5% of worldwide services are traded in this manner. However, the “four freedoms” of the EU provides for full mode 4 delivery of services between Member States to the benefit of all. In fact the free movement of persons principle under the EU provides for more than mode 4, for example EU free movement of persons encompasses the right to work permanently and establish, whereas mode 4 commitments in FTAs and under WTO law only cover the temporary movement of persons to provide services only and not a right of entry into another country’s labour market. The development of a single market for services along with provisions for the four modes of supply has resulted in services providing a higher than average GDP contribution in EU economies. It is for this reason that enhanced mode 4 provisions along with continuing recognition of qualifications and other arrangements that are key to ensuring the movement of service suppliers, should be vital foundation stones in any future trade deal on services.
This is just one of the issues that our service providers might face should we see a disorderly Brexit come to pass. With high-level negotiations set to resume in the coming weeks, businesses will want to see progress achieved on the “final 5%” of the Withdrawal deal, namely the Irish border backstop. Not doing so will result in the worst outcome for all sides, a “no-deal” Brexit. The past months have seen both the UK and EU step-up their “no-deal” preparations; the UK has published 106 technical notices for businesses and consumers while the EU has published 76 and is set to hold a number of “no-deal” planning seminars on the areas of citizens’ rights, aviation, ground transport, customs, border controls and financial services. Both sides maintain that this is not the desired outcome, but now must work at pace to ensure it does not become the unintended result.
The British Irish Chamber is encouraged by Secretary of State Raab’s optimism that there will be a deal by the end of the month. However, what we now need to see is progress in the negotiations that provides credence to these claims. A deal this month would provide businesses with the certainty that they need and will allow both sides focus fully on the future relationship and what it will look like for all areas, including services. It is now time for these commitments to be delivered on so that businesses can be assured of a comprehensive trading future between these islands.