Senior cabinet minister appear to consider British services exports a reasonable sacrifice for the price of achieving Brexit, writes Andy Tarrant
The prime minister claims that it is the national interest that drives her Brexit negotiating position. A considered analysis suggests instead that the true impetus is balancing the internal politics of her coalition government. This has structured the sub-optimal economic choices embodied in the Chequers agreement. The essence of her plan is that the United Kingdom will stay inside the customs union and the single market for goods while excluding itself from the latter for services – the latter being a much bigger contributor to UK prosperity.
The political advantages sought by Theresa May are three-fold. First, remaining in the goods market might potentially permit the UK to strike a deal with the European Union which avoids having to make Northern Ireland more ‘Europeanised’ than the rest of the UK, which is anathema to May’s partners in the Democratic Unionist party. Second, if the EU were prepared to drop its attachment to the four freedoms and strike a goods deal, it would prevent the massive customs blockage and physical disruption which would ensue; an outcome that those promised both cake and its eating were not told was part of the recipe. Third, iconic manufacturing brands still located in the UK, and often located in leave voting areas will not be providing a nightly newsround litany of their own exit from the UK; a far from ideal background to the next general election from the Conservative party perspective.
Preserving manufacturing is of course utterly sensible. However, if economic common sense were the driving logic, then what is being recognised for British manufacturing exports is even more true for British services exports. The report published by the Institute for Global Change includes research conducted for the report by the National Institute for Economic Research. NIESR finds that in the event of a no-deal Brexit, the hit to UK gross domestic product due to a fall in services exports is twice as large as the hit due to the fall in manufacturing exports. NIESR also estimates that if a deal based on Chequers were agreed with the EU instead, there would be only a marginal improvement in overall economic outcomes. This would in large part because of the damage that would still be inflicted to services exports.
NIESR estimate that leaving the EU will reduce UK services exports to the EU by 65 per cent. As the EU is by far the UK’s largest market for services exports, the effects on growth, jobs and tax revenues are significant. The EU (together with European Free Trade Area) accounted for 43 per cent of Britain’s services exports in 2016 and is worth more than £110bn to the British economy. The impact on a service provider of being outside the single market can be worse than the effect on a manufacturer. For a manufacturer, it means products being slowed, onerous checks being applied to verify compliance with EU rules and in some cases, exports being made more expensive due to tariffs. All these things make trade much more difficult, but not legally impossible. For some important types of services, however, the day the UK is outside the single market, UK providers will be prohibited from trading into the EU.
At this point protecting UK services exports is not considered necessary for the survival of the government coalition. How can we explain this?
A significant part of the explanation appears to be that government members of parliament and many Brexit supporters sincerely believe two key things about international trade that are entirely false. The first is that the EU is anti-trade and therefore must be highly restrictive to trade in services. The second is that the rest of the world must be less restrictive than the EU and the only reason that UK service providers cannot access these markets is that we are not free to conduct our own trade agreements. The truth of the matter, set out in the Institute’s report, is that the EU’s single market is the most open cross-border services market in the world for those countries within its bounds. The other truth is that the rest of the world does not extensively open its services market. Even the Brexiteer-lauded ‘Canada’-style arrangement would see the vast majority of UK services exports shut out. The only good thing one can say about these beliefs about services trade is that they are so flagrantly in conflict with reality that there may be some scope to change the minds of at least some who currently subscribe to them.
Another, more disreputable explanation, of which those in senior cabinet positions are certainly guilty, is that British services exports are considered a reasonable sacrifice as the price of achieving Brexit. The sacrifice is considered acceptable because it allows the true prize – keeping the Conservative party together – to be obtained. May hopes harder Brexiteers can be persuaded by the apparent compromise of setting services ‘free’ to form the core of deals with the rest of the world and that ‘Remainers’ will accept the mitigated harm of goods remaining in. She also hopes that the EU, tantalised by the prospect of a major trading partner promising to keep frictionless trade in goods, where the EU has comparative advantage, while simultaneously ending its own comparative advantage in services, will suppress its other single market principles. It is certainly an unprecedented way of negotiating an international trade deal; the equivalent of asking to have sanctions applied to yourself. As far as trade with the rest of the world is concerned, the government clearly considers it simply too bad that there will not be much interest and businesses will close, jobs will be lost and tax revenues will take a substantial hit.
The government’s approach to UK services exports to the EU is a form of triage: the amputation of the important services limb in order to preserve goods. This ordering of preferences is not logical from an economic perspective. And if economic health were a primary motivation, as all sides of the Brexit debate continue to claim it is, then most people presented with amputation as a solution for what is, at the end of the day, essentially an aesthetic enhancement, would reconsider.
Dr Andy Tarrant is an independent public policy adviser
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