Originally posted on Business Post 14 December 2020.
As the Brexit clock ticks down, and bizarre discussions about sausages and the like fill the airwaves, you would be forgiven for thinking that Britain is still a nation of shopkeepers. It is not, nor has it been for some considerable time.
According to a 2019 briefing provided by the House of Commons library, Britain has enjoyed a trade surplus in services every year since 1981. Over the same period, it ran a trade deficit in goods every year.
The services sector covers a wide range of activities. There's the obvious stuff, like legal, accountancy and financial services, along with the important but perhaps less prominent service sectors such as higher education, construction, transport and tourism.
The money earned from every tourist that visits Britain counts as an export of services. All these activities account for some 80 per cent of Britain’s economic output. Pre-pandemic, the EU was also Britain's largest export market for services.
The main reason perhaps that services have not achieved such prominence in the Brexit debate is that the EU's approach to trade in services is not nearly as cohesive as its approach to trade in goods.
The EU has a common policy of customs controls and inspections applying to goods coming in from outside its borders, no matter which member country is the destination. This is not true for services, where future restrictions on service provision will be much more based on the local law and practice of the destination country.
The lack of a common approach across EU member countries does not mean that there won’t be barriers to trade in services as there will be for trade in goods.
Many of the automatic entitlements critical to successful cross-border trade in services will be deleted or removed altogether for British businesses after the transition period ends.
This dilution of entitlement is a certainty, irrespective of the status of current negotiations. Currently, any British service provider has an automatic right to establish an office in any EU country. That automatic right will be gone after January 1, 2021.
Restrictions on freedom of movement of people will reduce the availability of qualified workers for the British services industry. It will be a particular challenge for that sector to hire lower-skilled and thus lower-waged employees, because restrictions on entry to work in Britain being applied to all EU nationals (except Irish nationals) are tied to a salary expectation of £25,600.
More qualified British workers may find it difficult to establish their credentials in EU markets, because their rights to automatic mutual recognition of qualifications and accreditation will be eroded.
When the EU protections and entitlements are removed, EU member countries can find any number of ways to make life difficult for British service exporters should they so wish.
The no-deal transitional measures for transport and aviation published last week by the European Commission are relieving measures for a six-month period in 2021. The very need for them is a stark illustration of what could happen when recognition within the EU of licences, permits and authorisations of British carriers cease.
They are intended, in the Commission’s words, to avoid “serious disruptions including in respect of public order”.
All of this, of course, presumes that EU businesses won't want to avail of British established services next year and beyond. That is unlikely to be the case. Britain runs a trade surplus in services because British industry is good at services. Deal or no deal, that fact is not going to change. The problem in the longer run for British industry may not be about demand for services, but rather about its capacity to supply them.
Businesses operating in countries such as the US and Canada, where the labour market is choked from visa restrictions on immigrants, must wonder at the British willingness to take itself out of a pool of skilled workers.
Future skills shortages may not just be confined to the trade in services, but will spill over into trade in goods, because increasingly it is difficult to separate the two. Trade in modern commodities brings with it a tail of services to enhance the product, from guarantees and warranties, to R&D and design know-how, to logistics and fulfilment.
Europe will be a poorer place because of restricted access to British services. Ireland is among both the top ten export markets and the top ten import markets for British trade in services. Unlike the imminent damage to the trade in goods due to customs and standards requirements, the impact of the fall-off in the trade in services is likely to be more drawn out.
As the Brexit negotiation pantomime draws to a conclusion, the story up to now has been one of trade. But the legacy will be felt most within the services sector.
Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland