Negotiating sensible agreements on services trade with the EU, WTO and third countries may not be as difficult as many are suggesting. There are a number of options negotiators can pursue which would go beyond the existing arrangements and further liberalise services trade to Britain’s economic advantage.
First, the issue of “passporting” will need to be settled during the Brexit negotiations. Firms in the City rely on these to conduct business in other member states across Europe while having most of their staff and operations in London.
There are a number of workable alternatives that would allow all parts of the financial sector in the UK to carry on providing services without interruption. As has been argued recently, an extended equivalence model would preserve market access for third countries that operate under an equally robust regulatory framework as the EU. This should be straightforward for the UK as its regulatory regime is based on EU rules and all EU laws will be brought onto the UK books under the Great Repeal Bill.
Alternatively, the UK could completely overhaul its financial regulation, stripping back overly prescriptive EU rules, and build a more nimble and focused regulatory regime. This would put the UK at the forefront of best practice on financial regulation, increasing the attractiveness of doing business in the City.
Second, the UK should aim to sign the forthcoming Trade in Services Agreement (TiSA), currently being negotiated between the EU and a number of other key WTO members. Participating countries in TiSA account for some 70 per cent of total world trade in services.
If Brexit is not complete when TiSA is open for signature, this should not be a problem for either London or Brussels. The UK is a WTO member in its own right and the EU’s services schedules are already specific to member states.
For example, there are a number of restrictions and carve outs for certain EU member states which, unlike the UK, are not willing to open up certain service sectors to foreign competition. Moreover, Customs Union-related restrictions for goods do not apply for trade in services.
Third, the UK should settle its position in relation to the development of a new Capital Markets Union (CMU). The CMU project aims to reduce fragmentation in financial markets, diversify financing services, strengthen cross-border capital flows, and improve access to finance for business.
Britain had previously led the way on these negotiations and there is no reason why the UK should not agree to become part of the CMU once complete. The project is largely about the removal of regulatory barriers, rather than an attempt to promote further integration among member states under a single market supervisor.
Fourth, the UK should study the free trade agreements (FTAs) the EU has already agreed with third countries that include trade in services provisions. The UK can then replace these FTAs with its own agreements, liberalising further if desired.
An early candidate should be the recently signed EU-Canada Comprehensive Economic and Trade Agreement (CETA). CETA is a high quality agreement that uses a superior “negative list” approach to services liberalisation and includes significant provisions on domestic regulation, mutual recognition and electronic commerce, and chapters on telecommunications and financial services.
Finally, Brexit negotiators are well advised to take CETA as the natural starting point for services arrangements with the EU. CETA gives Canadian service suppliers the best market access the EU has ever conceded in an FTA and in most sectors Canadian suppliers “will be on an equal footing with EU service providers.”
Since Brussels has been willing to open services markets to Canada, without the conditions of free movement and EU budget contributions it previously demanded of Norway and Switzerland, the UK should be able to negotiate a high-quality services agreement with the EU, including reciprocal passporting arrangements if the UK government wanted to keep them.
The reality is that the UK has many realistic options outside the Single Market, and both the UK and EU have much to gain from negotiating a sensible agreement on services.