The fate of Britain’s services sector after Brexit is being eclipsed by rows over the movement of physical goods. David Slater says there could be a hidden fillip for this vital sector.
Is Britain asking the right questions in setting its future trade relations? This week’s heated debate on what kind of customs arrangement we want after Brexit is vital, yes, but it’s also one-sided. By addressing only border controls and how to achieve frictionless trade in goods, we risk ignoring a huge wedge of companies which together generate a £92 billion trade surplus – our services sector.
These industries face big challenges as the UK leaves the EU. The City is rightly worried about access to markets while law firms and professional services firms such as KPMG are keen not to lose mutual recognition of qualifications and licencing. Universities want to continue research collaboration while broadcasters fret that ‘country of origin’ rules will force a relocation to the Continent. The list goes on.
Yet I’m also optimistic for our services sector for one important reason: outside the EU the UK has a better chance to cut services-based free trade deals with the rest of the world and give a leg up to the all-important sector. I don’t say this because of any ideological bias towards the UK as an independent nation setting its own trade agenda. I say it because outside the EU, the UK can sidestep some structural issues that have frustrated free trade in services (both within the EU and outside) for decades.
Imagine the case of, say, a German business that wants to enter the Spanish market: it would need to understand different contract law in Spain, consumer protection standards and financial regulations. It would most likely have to establish a unit in Spain.
One reason for the lack of harmonisation is Europe’s patchwork of legal codes and the predominance of civil law systems. While the UK, Ireland and Cyprus use common law, the 25 other members use civil law. Yet many companies prefer to contract under common law since its precedent-based rulings offer more certainty and give courts less discretion to interpret the law in ways that are inconsistent with previous judgements. It is no coincidence so many businesses, with no apparent interest in the UK, choose to contract under British common law and arbitrate cases in British courts.
Such complexities perhaps explains why intra-EU trade in services amounted to just 844 billion euros in 2016, a quarter of the 3.1 trillion euros of trade in goods, despite the fact that services account for 74% of economic output inside the EU.
In contrast to the EU’s legal complexity, the UK’s opportunity lies in simplicity. As a single jurisdiction operating under common law (the hybrid model of Scots law aside), it would find it far easier to harmonise standards with a trading partner than the EU might – particularly economies such as the US, Canada and India, which also use common law. Even better, Britain’s respected legal system could provide a lot of the legal infrastructure needed to establish the dispute-resolution mechanisms needed in many trade deals.
If Britain’s trading partners do become more distant after Brexit, then greater trade in services will help negate what is known as the gravity model of international trade – the idea that the nearer you are to trading partners, the more you tend to do. But distance starts to matters less when the item being traded is a packet of data, be that an FX transaction, a telephone call, a software download or an e-commerce transaction. What will count more is the UK’s respected data protection regime and the fact that counterparties to a deal can operate in one language and at a convenient time. The UK’s advantages of language, law and longitude again come to the fore.
Though Germany exports more to other EU members than the UK, to countries outside the bloc the UK sells more than any other EU member – 22% of the total in fact. These more distant markets are faster growing and the proportion of demand for services rather than ‘stuff’ is rising. Technologies such as 3D printing will only accelerate that trend.
This is the big picture for our designers, engineers and coders: they may not have asked for Brexit nor for the UK to leave the Single Market and Customs Union. Nevertheless that is the current reality. In such situations it is important to identify every possible advantage. The improved chances that UK companies might access meaningful services-based trade deals beyond the EU is just one silver lining.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK. You can register for the email subscription list of this column and expert views from our Brexit leaders.