While there has been much speculation as to the cost of the UK leaving the Customs Union and European Single Market, little thought has been put into the cost associated with remaining in the Customs Union or Single Market in lost opportunities to sign trade deals with other countries. This paper looks at the opportunity costs, and what could be achieved if the UK were able to sign a deal for a Prosperity Zone including like-minded countries, coalesced around the fundamental ideas of open trade, competition on the merits and property rights protection.
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Much work has been done on the cost of not having “access to the single market” even though the terms “access” and “single market” are not particularly meaningful. Proposals are now being discussed which suggest that the UK should pay for access to the single market in financial services. The notion of paying for access is anathema to free trade principles of course, but there is another reason why this proposal is problematic and that relates to the UK’s interest in services liberalisation with other markets.
Little has been said about the potential cost to the UK economy of remaining within the European Economic Area (EEA) or otherwise retaining single market membership through an associate membership. The reason why there is a cost associated with EEA membership is that if the UK remains within the EEA, and therefore subject to the laws and regulations governing the single market (EEA Regulation) then it will be unable to negotiate agreements on services with other countries. The reason for this is that every services negotiation is an agreement on domestic regulation, and agreements on domestic regulation require trading partners to be able to put their own domestic regulation on the table for negotiation. If the UK is bound by EEA Regulation, then it will not be able to negotiate its own domestic regulation.
Although it may be technically possible to negotiate the very basic market access and national treatment measures in services with other countries from within the EEA, it is not possible to negotiate on the issue that is the most important in any services negotiation which is on domestic regulatory issues because the UK would be bound by EEA Regulation and therefore would be unable to negotiate.
No country would negotiate on services in this context. Thus all the gains from deeper services liberalisation for an economy with 80% services exports would be lost. The UK exports about £230bn of which about £50bn is financial services.
Interestingly business services exports by themselves amount to £70bn (greater than financial services exports). The UK imports £138bn in services of which £9bn is financial services. Clearly the UK is a country which is therefore much afflicted by barriers to its services exports in markets all over the world, and financial services is only one part of the UK’s overall services offering (about 25%).
Without the UK as a key demandeur for services liberalisation, the global record on services liberalisation has been very, very weak. The WTO services agreement positive schedule is full of exemptions and limitations on the market access and national treatment requirements. By way of example, there are 28 financial services exemptions to MFN disciplines among the countries that have made any commitments in financial services at all (which is only around 30 of all the members—counting the EU as one).
The record in free trade agreements is similarly weak. In financial services, regional trade agreements have a number of reservations across all modes of supply except where the agreement is between two countries that genuinely do not compete in the provision of financial services so commitments given are not actually evidence of a real commitment to open trade. At the multilateral level improvements to the GATS are so thin that a group of countries have a launched a plurilateral agreement, the Trade in Services Agreement (TiSA). But this agreement is at its Domestic regulation is in many ways the final frontier of international trade. [Continue reading]
About the Legatum Institute Special Trade Commission
The Legatum Institute Special Trade Commission (STC) was created in the wake of the British vote to leave the European Union. At this critical historical juncture, the STC aims to present a roadmap for the many trade negotiations which the UK will need to undertake now. It seeks to re-focus the public discussion on Brexit to a positive conversation on opportunities, rather than challenges, while presenting empirical evidence of the dangers of not following an expansive trade negotiating path. The STC draws upon the talent of experienced former trade negotiators from the US, Canada, Mexico, Australia, New Zealand, and Singapore, among other nations. In the coming few months, the STC will host a number of public briefings that offer advice to key stakeholders on EU negotiations.