Brexit's impact on services

Trade in services has not received enough attention in the Brexit debate. But if Theresa May follows through on plans for the UK to leave the single market, UK services exports to the EU-27 will likely fall, in the case of financial services by more than half, and related jobs and tax revenues will suffer.

When it has entered the British discussion, concerns about potential lost market access for services after Brexit have been quickly batted aside on the pretext that “the EU single market in services doesn’t exist anyway”. That such a meme has been allowed to grow into an unquestioned truth is indicative of a public discussion increasingly divorced from the realities on the ground. While the EU’s single market in services is certainly under-developed relative to its single market in goods, the EU has still managed to liberalise services trade across a continent to a far greater extent than any other grouping of countries. Indeed, in some areas – for example, the mutual recognition of professional qualifications – the EU has managed to liberalise further than the US has within its own borders.

That the EU has only been able to go so far on services liberalisation, despite replicating many of the national regulatory, democratic and supervisory structures found at the supranational level, suggests that the liberalisation of services trade is inherently difficult. This makes sense when you consider that, unlike goods, services provision is difficult to test at the border, and often requires trust in the regulatory and enforcement regimes of other countries in the knowledge that if something were to go wrong, the political fallout can bring down governments (just look at the financial crisis, for example).

Thus, if the UK is to extricate itself from the shared governance structures of the EU and leave the single market, as is its stated aim, there is only so much that can be achieved on post-Brexit services liberalisation.

In a new Centre for European Reform policy brief I argue that while the UK and EU certainly can go further on services liberalisation than previous EU agreements in a few specific areas, new barriers to direct services exports from the UK to EU are inevitable if the UK leaves the single market. This will mean that British companies wanting to continue selling their EU-27 customers will increasingly need to do so from offices located in an EU-27 member-state.

The impact of this shift would vary by sector. Financial services would be the hardest hit, but business services would be less affected due to the nature of the sector, where the necessity of face-to-face contact means that many British companies selling across the EU already do so out of national offices.

I find that were the UK to trade services with the EU on similar terms to those afforded by a free trade agreement after leaving the EU, British financial services exports to the EU-27 (minus insurance and pensions) would be around 60 per cent lower. The export of insurance and pension services would be 19 per cent lower, while exports of business services could be ten per cent lower.

My findings suggest that the long-run implication for the UK of leaving the single market is one of a relative reduction in services exports to the EU, a shift in investment as firms move operations to within the 27, and knock on negative implications for jobs and domestic tax take.

Sam Lowe is a senior research fellow at the Centre for European Reform.