Services: the Brexit elephant in the room

A new study highlights the potential economic fallout of restrictions to free movement of services

Services make up nearly three-quarters of the UK’s economic output and about 70%  of the EU’s economic activity

Services make up nearly three-quarters of the UK’s economic output and about 70% of the EU’s economic activity

 

The potential disruption to trade in services from Brexit could pose a far greater threat to the UK and EU economies than restrictions around the movement of goods, according to new research from the Dublin-based Institute for International and European Affairs (IIEA).

The study, entitled The Elephant in the Room, argues that while much of the debate around the implications of Brexit has centred on the the free movement of goods, there has been comparatively little focus on the issue of services, which make up nearly three-quarters of the UK’s economic output and about 70 per cent of the EU’s economic activity,

“The services sector is hugely significant at global level, at European Union level, and especially for the UK with its colossal financial sector,” said the report’s author University College Dublin law professor Gavin Barrett.

While the financial services sector is certainly significant for the UK, what is not commonly realised, according to Prof Barrett, is that the vast majority of services exported by the UK are non-financial.

“72 per cent of the services exported by the UK are not financial services, but are mostly made up of other areas such as telecommunications, broadcasting, tourism, aviation as well as professional services such as accountancy and law.”

His study suggests the EU has the most integrated international services market in the world, and that the free movement of services is, in many cases, linked to other freedoms, such as the free movement of people.

Three scenarios

Prof Barrett’s paper sets out three possible Brexit scenarios, and assesses the impact on services of each.

If the UK agrees a Norway-style deal with Brussels and becomes part of the European Economic Area, it could maintain access to the single European market in services, and thereby limit the potential fallout. However, this would require the UK to sign up to the free movement of people, which is likely to prove a sticking point given it was a major factor in the Brexit referendum.

Under a conventional free trade agreement, EU-UK trade would be far less free, he argues, noting that such agreements rarely, if ever, extend to the services sector.

“If a free trade agreement is the best that can be done, then to be of use in the services field it will need to be more radical and broader than any agreement ever seen before,” Prof Barrett said. “It is not clear that the will exists – on the EU side, and, far more remarkably, on the UK side – to reach an ambitious arrangement extending generally to services.”

Significantly worse

Under the worst-case scenario of the a no-deal Brexit, where the UK exits the EU on World Trade Organisation (WTO) terms, trading services would be significantly worse.

“Trading on these terms is nonetheless capable of being done – trade in services with the US [the UK’s biggest trading partner for services] is, after all, governed by WTO rules. But freedom to trade would vary depending on the service sector involved.”