Brexit Britain faces services squeeze with Canada-style deal

London and Brussels agree: for an idea of where Britain’s post-Brexit relations with the EU are heading, look to Canada.

As soon as the UK wound up its divorce talks last Friday, Michel Barnier, the EU’s chief negotiator, said Britain’s demands to break with the bloc’s single market and customs union left no option other than a deal modelled on the 2016 goods trade-focused accord with Canada.

David Davis, Mr Barnier’s opposite number, told the BBC at the weekend that Britain was aiming at “Canada plus plus plus”, an agreement that would go much further in grafting on other sectors, notably services.

But Brussels insists that the UK faces a binary choice between participating in the single market, as Norway does, or a Canada-style deal.

The focus by both sides on the Canada accord highlights a particular problem for Britain: the limited benefits for a services-based economy of a treaty that almost entirely deals with goods.

Services account for 70 per cent of British output, and, more relevantly, 40 per cent of its exports.

And while there are limits to how well the EU services market functions — it lags well behind the bloc’s single market for goods — executives and economists say that British business would still feel the pain from leaving.

“Even if we are critical, it [the single market for services] is one of the EU’s biggest achievements,” says Arnaldo Abruzzini, chief executive of Eurochambres, the Association of European Chambers of Commerce and Industry. “There is no free-trade agreement that gives access in this same way.”

According to an internal European Commission document on Brexit, the Canada deal’s provisions on services merely reflect the “current state of openness applied (but not guaranteed) to all World Trade Organization members” — and does not cover sectors such as aviation or broadcasting.

The deal’s services chapter amounts to “no new access for Canada, in a word: nada”, says Hosuk Lee-Makiyama, director of the European Centre for International Political Economy, a think-tank.

The Canada agreement tackles overt discrimination against foreign ownership, but it does little to deal with lower-level barriers such as country-specific regulations.

“It essentially provides guarantees that the EU won’t impose restrictions that it doesn’t intend to impose anyway,” he says. “It is rules about rules — a guarantee of what WTO members already have.”

But services — principally financial services, other business services and tourism — are vital to UK trade, respectively accounting for £27bn, £24bn and £15bn of exports in 2016.

While the rest of the services sector runs a deficit with the EU, financial services, which represent 30 per cent of all services exports, contributed £23bn to Britain’s balance of payments.

The City of London’s contribution helps Britain notch up a £14bn services surplus with the EU, contrasting with the UK’s goods trade deficit with the bloc.

But trade experts argue that the EU’s record so far suggests that any free-trade agreement will offer the UK only very limited help as it adjusts to life outside the single market

Mr Makiyama says the EU has never changed its single-market regulations as a result of signing a free-trade agreement, which he argues shows both the bloc’s reluctance to accept the rules of other jurisdictions and the extremely limited significance of services provisions in trade deals.

Mr Davis says that the UK is an exceptional case, since at present its rules and regulations are, unlike Canada, in perfect harmony with the EU.

He contends that the UK and the EU face the same challenge, which will lead them to incorporate services and other sectors into the Canada model: how to “manage divergence so it doesn’t undercut the access to the market in the future”.

Some economists also note the shortcomings of the EU services market.

“Compared to trade in goods it is much less developed. You have many barriers,” says Aida Caldera, a senior economist with the OECD. “Some of the requirements amount to minimum tariffs to offer certain professional services.”

Moreover, a number of business services, such as certain types of consultancy work, are not regulated by the EU, and so UK-based companies will continue to be free to provide them post Brexit.

But Ms Caldera notes that the EU requires regulatory compliance in many other business sectors, such as information and communications technology, transport, legal and accounting and tax advice.

Financial services, the jewel in Britain’s export crown, are particularly sensitive. “Equivalence provisions” in EU legislation give foreign-domiciled companies the right to market their services to clients in the bloc only if Brussels judges their domestic rules to be sufficiently rigorous.

Such access rights can be revoked at any time and depend on countries hewing closely to EU standards, reducing the scope of any post-Brexit regulatory divergence.

In areas where such access provisions are not available, there is no alternative for companies other than explicit compliance with EU rules and regulations in exchange for market access, which can be very difficult for overseas companies subject to another jurisdiction’s rules.

There is one final factor in the calculations about services: people. Services ranging from management consultancy to architecture often depend on on-site staff, making free movement of professionals a vital component in any services deal that Britain wants to strike with the EU.

Additional reporting by Chris Giles