The Prime Minister’s Mansion House speech stated the Government’s ambition to conclude a groundbreaking UK-EU services and investment agreement as part of a deep and comprehensive future economic relationship.
This position paper sets out the mutual interest in such a deal, before addressing three areas where the UK and EU will need to conclude unprecedented provisions to deliver this shared objective.
The UK-EU services economy
Services are a dynamic and important part of the UK and EU economies. Encompassing sectors as diverse as accounting, architecture, logistics and tourism, serviles made up 79 per cent of total UK Gross Value Added (GVA) and 73 per cent of EU27 GVA in 2017 – contributing 29.2 million jobs in the UK and 136.3 million in the rest of the EU in 2017.
UK-EU services trade is a significant contributor to this economic activity. In 2017, the EU27 made up 39 per cent of UK services exports and 49 per cent of UK services imports. European firms and institutions also draw on the UK’s deep capital markets. Foreign Direct lnvestment (FDI) with the UK accounted for 11.5 per cent of total EU27 assets and 7.5 per cent of total EU27 liabilities.
A new UK-EU partnership on services and investment
The Prime Minister has made clear that existing models are not appropriate for our new relationship. The EU-Canada agreement (CETA) broke new ground on services. But compared with what exists between Britain and the EU today, a CETA-style deal would represent a significant and unnecessary restriction on our access to each other’s markets.
The UK recognises that we cannot retain all the benefits of EU membership without the associated responsibilities – and we accept the EU’s position on the indivisibility of the four freedoms.
We should also acknowledge these negotiations have a unique starting point, where on day one both parties will have the same laws and rules. And, just as CETA represented a step forward for services trade agreements, the future UK-EU services partnership will represent the new ‘best in class’. Our proposed agreement reflects these facts, and will limit the number of barriers that could prevent UK firms from trading with the EU27 – and vice versa.
Breaking new ground with an unprecedented services agreement
An unprecedented deal on services and investment is in the interest of both the UK and the EU27.
First, trade barriers inhibit economic activity. Competition improves resource allocation across firms and sectors, boosting productivity and bringing benefits to businesses and consumers. This is why the UK and EU have championed services trade liberalisation at the WTO through the Trade in Services Agreement (TiSA) proposals.
Second, the UK and EU27 are close trading partners. The UK is the fifth largest economy in the worldas, and a market of considerable importance for many businesses and jobs across the continent. ln 2017, the UK was the destination for 21 per cent of EU services exports and 20 per cent of EU services imports were from the UK – making the UK their second largest trading partner for services after the United States.
Third, an ambitious deal on services and investment is necessary if we are to deliver our objectives elsewhere in the future economic relationship. Services are essential for the production of goods, their sale, distribution and delivery, and their operation and repair. ln the EU, services inputs in products accounted for around 40 per cent of the added value in manufacturing exportsin 2011. As our economies modernise and grow, the link between goods and services is becoming ever more important.
HMG welcomes the Council’s commitment “to have as close as possible a partnership with the UK in the future, and believes our shared ambition can be delivered through a deep and comprehensive FTA. The agreement will need to have broad sectoral coverage, include commitments on cross-border services provision, the right of establishment and professional mobility, and set out provisions on ancillary issues, like domestic regulation.
To avoid the imposition of new barriers, sustain regulatory cooperation, and ensure the UK and the EU remain at the forefront of driving global standards, the future UK-EU partnership will draw on the rules governing intra-EEA trade, as well as recent developments in international agreement on services. Specifically, our agreement should aim to break new ground in three areas: scope, the rules governing the introduction of trade barriers, and professional qualifications.
An agreement of unprecedented scope
The UK is seeking a services and investment agreement of unprecedented scope – one that reflects our unique starting point, and avoids the imposition of unnecessary restrictions on market access. New trade barriers would disrupt supply chains, for both goods and services providers, and represent a retrograde step in European trade.
The General Agreement on Trade in Services (GATS) requires services FTAs to cover all modes of service supply, and substantially all sectors. ln practice, however, even ‘best in class’ agreements contain hundreds of carve outs (referred to as ‘reservations’) that undermine coverage, create uncertainty about future trading arrangements, and introduce legal complexity for providers trying to determine the extent to which an overseas market is open. Reservations in CETA, for example, place significant restrictions on the provision of legal services, and grant all Member States the right to introduce new restrictions on the provision of air transport services.
To deliver our shared objectives, the UK-EU agreement will need to build on best in class FTAs. Chapters covering cross-cutting measures will apply widely to sub-sectors, and be supplemented with specific provisions in parts of the services economy where additional cooperation is warranted. At a minimum, the agreement should include specific measures on auditors, accountants, lawyers, and financial services.
The UK-EU negotiation will start with the aim not having any reservations which characterise typical FTAs. Whilst recognising that market access in some areas is intrinsically linked to the Single Market, reservations shall be negotiated under the principle of full reciprocity, and only agreed on the basis of necessity and proportionality.
Minimising the introduction of new barriers to services trade
For the sectors within scope, the agreement will include clear provisions on market access and a prohibition against discrimination on the basis of nationality, residency or place of establishment.
But on their own, market access and national treatment commitments will not be sufficient to achieve the desired level of services and investment liberalisation. The UK will also propose well-defined rules on the introduction of unwarranted barriers, such as licencing regimes or restrictions on corporate form, which can act as de facto barriers to market access. These provisions – not previously included in a typical FTA – will reflect the unique starting point of the UK-EU negotiations.
The UK proposes rules governing the right of establishment for all sectors of the economy. The agreement will prohibit certain barriers, for example an obligation that firms to take out insurance from a provider or body established in that territory. Others will be permitted only if they are aimed at achieving a reasonable domestic public policy objective and are deemed to be proportionate. On the cross-border provision of services, the agreement will also include a prohibition on formal requirements for providers unless these requirements are reasonable, necessary, and proportionate.
The agreement will prohibit discrimination between UK and EU investors for sectors that fall within scope. There will need to be a degree of regulatory harmonisation to prevent the emergence of non-discriminatory barriers that restrict market access. This would be consistent with maintaining the flexibility needed for future third country arrangements. The agreement would maintain the free movement of capital and no restrictions on payments.
Regulatory cooperation will give cross-border service providers much-needed certainty about their future operating environment, and the requirements and restrictions they may be bound by when trading. The UK proposes to remain an observer on the ‘notifications procedure’ that member states use to inform each other of new rules which could impact trade. In return, the UK will notify the EU27 about the introduction of new measures which could impact services trade, and initiate a consultation period in advance of these provisions coming into force. Such arrangements would represent an improvement on equivalent measures in best in class services FTAs – and would supplement our overarching governance mechanisms, which will maximise certainty for business and individuals.
In terms of sector-specific commitments, HMG proposes ambitious provisions on legal services which build on best in class FTAs, such as the EU-South Korea agreement and CETA. The UK is the destination for 14.5 per cent of total EU legal services exports, with exports to the UK valued at over €1.1 billion in 2016. To support future trade flows, the agreement will facilitate joint practice and establishment between UK and EU/EEA lawyers in the EU, the right to practise in host state and EU law (rather than just home state and international law), the right to represent clients before EU courts and institutions, and related EU legal professional privilege for communications between lawyers and their clients.
The UK is the destination for 22 per cent of German exports in accounting and audit services, as well as 18 per cent of Dutch exports and 17 per cent for Italy. The UK-EU agreement will sustain future trade in this sector by ensuring that company accounting standards, the regulation of audits of listed companies and arrangements for approving and registering audit firms are regarded as equivalent, and that arrangements for regulatory cooperation are regarded as adequate. The EU has existing processes for recognising the equivalence and adequacy of third country audit regimes.
The Council’s guidelines include a commitment to retaining ‘host state’ rules for services providers. Given the mutual interest in open services markets, both parties should seek as far as possible to ensure new host state rules are necessary and proportionate.
A continued system for the recognition of professional qualifications
Much of services trade is intrinsically linked to mobility. Some providers rely on the ability of their consumers to physically cross a border (e.g. tourism) while others need to visit their overseas clients on a ‘fly-in-fly-out’ basis (e.g. legal services). In some sectors, where providers are not subjected to licensing regimes or other non-discriminatory barriers, mobility is the principal barrier to services trade (e.g. consultancy).
Provisions on professional mobility will promote certainty, clarity, simplicity and speed for visa-free short-term travel across all sectors. However arrangements will only truly work for businesses and the self-employed if there is a supplementary agreement on qualifications recognition for regulated professions. Since 1997, over 142,OOO professionals from the European Economic Area (EEA) have had their qualification recognised in the UK, and over 27,000 UK professionals have done the same in the EU.
The UK supports the vision expressed in the EU Council guidelines that ambitious provisions on mobility should include related areas such as recognition of professional qualifications. HMG proposes a comprehensive, predictable and timely system for the continued mutual recognition of professional qualifications between the UK and the EU. This will be broad in scope and cover all regulated professions, including the medical professions, lawyers, and statutory auditors, as well as other licenses and certificates.
There will be clear rules for the recognition of professional qualifications and proportionate compensatory measures will only be applied where there is a significant difference between a UK and EU Member State qualification or training. Recognition of a qualification shall grant the applicant the same practice rights as conferred on a national of the host state.
Professionals providing services on a temporary or occasional basis, as well as lawyers providing services under their ‘home title’ either on a temporary or permanent basis, will have the right to have their qualifications recognised without transferring into the regulatory framework of the host state profession. In light of the EU Council guidelines on the provision on services under ‘host state rules’, both parties will seek a creative solution to facilitate temporary service provision by regulated professionals.
HMG proposes to remain an ongoing participant in the Internal Market Information (IMI) system, a platform for exchanging information between regulators. In the context of qualifications, IMI enables competent authorities to share information regarding disciplinary action or criminal activities relating to professionals. Whilst unprecedented, third-party participation in the IMI is expressly permitted.
HMG is seeking a deep and comprehensive agreement on services that is beneficial to both the rest of the EU and the UK. The agreement should recognise the unique starting point of regulatory harmonisation and minimal level of existing barriers to services trade. lt should cover a broad range of sectors, including those that are currently regulated at an EU level. And it should also reflect our joint commitment to driving growth and jobs through open and liberalised trade.
With the agreement of the EU27, we have the opportunity to conclude a new, ‘best in class’ services agreement to the benefit of consumers and service providers across the European economy.