Brexit: Trading Services – better late than never

Cross-party talks between the Government and the Labour Party continue this week, although there are no clear signs of a breakthrough at the time of writing. Issues making the headlines include discussions on the permanence or otherwise of a customs agreement with the EU, the extent to which any such agreement should (and indeed could) apply beyond goods, and whether the deal should be subject to a second referendum.

As we've raised in previous blogs, the importance of trade in services to the UK economy has been largely overlooked to date, as has its role in the future relationship the UK will have with the EU after Brexit. Much of the focus so far has been on trade in goods, not least because the way goods are checked and regulated directly impacts upon the sensitive negotiations around the Irish border.

This lack of focus is surprising though, given the UK is the world’s second largest exporter of services, with a trade surplus in services of £113bn, compared with a net trade deficit in goods of £137bn. If the UK were to only pursue a customs union with the EU , then it’s important to recognise that this would not apply to trade in services and thus cover significantly less than half of the UK’s trade with the EU.

There are signs appearing, however, that the discussion on trade in services is picking up: on 25 April, the House of Common’s select committee on International Trade held an evidence session on the importance of trade in services to the UK economy. You can watch the full evidence session here.

A significant sector facing significant complexity

I spoke with George Riddell, one of our trade specialists in Deloitte’s Brexit Insights Team, after he had been invited to give evidence to the committee. His view was that it was hard to understate how important services are to the UK economy, accounting for over 80% of the UK’s economy and employing over 16 million people. George made the case that putting trade in services at the heart of any talks about the UK’s future economic relationship with the EU was crucial, especially in a no deal scenario.

“In the event of a no-deal Brexit, or services not being a negotiated part of a deal, many of the barriers faced by UK companies looking to export their services into the EU would still be governed at the individual Member State level, with huge variation between EU countries. It’s often hard to discuss the barriers that UK businesses face when exporting their services because trade barriers can take many different forms - from restrictions on people moving across borders to deliver projects, through to specific requirements when establishing a commercial presence overseas. And regulated sectors like financial services, chemical products or life sciences face additional requirements like obtaining necessary licenses or qualifications to provide their services.”

In addition to the complexity inherent to trade in services, George points out that services are a vital component of international trade in physical products. Research, financing, sourcing, assembly, advertising, transport, installation, maintenance and recycling of goods are all necessary components of a product being made and traded. These embedded elements, which are provided as services, often determine the competitiveness of UK products.

Finally, George reminded us that the way we trade services is fundamentally changing with new technological developments. “Faxes then emails largely replaced letters, speeding up how information, services and knowledge crisscross the planet. More recently streaming services are changing how consumers view different forms of media, and we’re only at the beginning of the process as to what AI and blockchain could do. These changes are complicated by the nature of the regulatory environment in which services operate - from data protection to rules governing e-commerce.”

All in all, UK services companies need to be ready to manage multiple sources of disruption and uncertainty to succeed in the long-term.

What can be done to prepare?

Companies that trade services will see their landscape change as a result of Brexit, both for trade with the EU and with countries like Norway and Switzerland. The UK has negotiated continuity agreements with the EFTA countries, but regrettably they contain far lower levels of market access for services than the UK currently enjoys.

If you trade services you need to prepare for those changes now, and use the time that the Brexit extension until 31 October 2019 provides to:

1. Conduct a services trade continuity and market access review to understand your exposure into the EU and through the rolling over of the EU’s existing trade agreements for the UK
2. Understand what rules and regulations could change if you are planning to establish a commercial presence in the EU27 after Brexit
3. Determine which of your employees will be regularly travelling into the EU to provide services which require a professional qualification, and understand whether there will be continued recognition of those qualifications. This should be an essential part of your people Brexit planning around settled status and other immigration elements.
4. Continue to monitor developments regarding trade in services in a no-deal scenario, and whether they are included within any additional trade agreements being rolled over by the UK

If you trade services from the EU into the UK, you may also be impacted. Whilst the UK has so far taken a pragmatic view with regard to movement of people, market access and regulation, this could change in the near term as negotiations with the EU and individual Member States progress, so the same preparation steps are advised.

Vibrant services trade is vital to the health of the UK economy, and provides important commercial input into EU businesses – many of whom would not welcome disruption or barriers. Whilst there are signs that the UK Parliament is waking up to this, individual Member States have been slower to take unilateral decisions where they can. As negotiations slowly continue, there is still much self-help that services businesses should take forward themselves.