Brexit and services: How deep can the UK-EU relationship go?

Policy brief
06 December 2018

Even if the UK entered into an ambitious and comprehensive free trade agreement with the EU, leaving the single market would mean new restrictions on British services exports.

  • In the Brexit debate, trade in services has played second fiddle to trade in goods and manufacturing supply chains. Yet, if the UK is to leave the single market, British services exporters will face substantial new constraints on their ability to export to the EU.
  • While the EU’s single market for services is incomplete, it has liberalised services trade to a far greater extent than any comparable free-trade or regional agreement. In some sectors, trade in services between member-states is freer than between the federal states of the US.
  • Outside the single market, international services firms selling into a foreign market largely do so from offices based in the country they are ‘exporting’ to. But UK services trade with the rest of the EU, at least in some sectors, is far more reliant on cross-border supply from the UK’s territory into the other 27. Whereas 67 per cent of UK financial services (excluding insurance) supplied to the EU are exported cross-border, the same is true for only 28 per cent of those sold to the rest of the world.
  • There is scope for a future trade deal to be relatively ambitious in some areas, such as ease of establishment, recognition of qualifications and the temporary movement of people. But cross-border services trade – from the UK into the EU – will face new restrictions.
  • Leaving the single market would lead to a change in the composition of UK services trade with the EU. Fewer services would be provided cross-border, and there would be a relative increase in the proportion being provided via the establishment of a commercial presence within the EU-27. This will inevitably lead to some well paid jobs ‘moving’ out of the UK to the EU-27, with knock-on consequences for secondary employment in the domestic UK supply chain and British tax receipts.
  • A large shift in the composition of UK services exports would have consequences for the UK’s trade balance. If the composition of UK services supplied to the EU matched those to the rest of the world, we estimate that financial services exports to the EU (minus insurance and pensions) would be around 60 per cent lower. The export of insurance and pension services would be 19 per cent lower. Business services (including law, accountancy and professional services) exports would be ten per cent lower.

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Comments

Has there been any research on what any new arrangements will cost SMEs in the service industry? From what I’ve read, professional fees will have to increase, along with admin costs. I sell services to many countries across the world, mainly B2B but not exclusively so. As the services sector is such a big % of GDP I’m dismayed the future arrangements are so sketchy. I just want to know how much it will cost me to do ‘business as usual’ and if it’s still viable.