EU Referendum

Brexit: services without a smile


One doesn't have to look very far, or deeply, to acquaint oneself with the mindset of the average "Ultra" – if there is such a thing. But the noise level coming from those who would have us abandon the EU without a deal - also rejoicing in the title "hard Brexiteers" – is so high that it is hard to avoid knowing something of their demeanour.

Nonetheless, those who are able to peep behind the premium paywall of the Telegraph will find that the Ambrose Evans Pritchard has written an article so mad that it serves as a summary of virtually every "Ultra" trope currently in circulation.

Ambrose has always tended to the view that the EU is a German fiefdom. So it comes as no surprise that he waxes indignant about the Germans wanting "full access" to Britain's market for goods where they have a £44 billion surplus, while refusing reciprocal access to services on the normal basis of "mutual recognition". Then, he splutters that they "demand that Britain remains in the full regulatory and legal structure of the EU just to secure this dog's dinner".

This, though, is just his starter for ten, in a whole list of complaints, but just to deconstruct this helps identify where the thinking has gone so tragically off the rails.

The crucial element here is the somewhat artificial divide between trade in goods and services. For sure, services represent an important part of the UK economy, more so than the EU as a whole. Eurostat figures put the EU contribution to GDP at 74 percent, and 73 percent of the labour force, compared with 80.4 percent of UK GDP and 83.5 percent of the labour force.

Interestingly the EU is the largest services exporter in the world (€1884.3 billion in 2016, including intra EU-28, with a strong surplus of €133 billion). This does much to contribute to offsetting the EU's goods deficit, and more so with the UK. It is the largest services exporter among the EU-28, at €189.2 billion, representing 22.4 percent of total EU-28 services exports.

Within the EU, the EU-27 take 58.2 percent of UK services exports and, in 2016, the EU-27 exported €92.8 billion services to the UK compared with €110.2 billion UK services exports to the EU-27. Understandably, therefore, services feature highly in Brexit calculations with the ability to trade featuring prominently amongst concerns.

But where it starts to go wrong is in the exaggerated focus on financial services, where a raft of emerging legislation, introduced in the wake of the 2008 financial crisis, is creating serious difficulty.

Here, it is entirely misplaced for Ambrose to grouch about the refusing reciprocal access to "services" as a generic, when he actually appears to be most concerned about financial services, and then claim that the normal basis for such access is "mutual recognition".

In this sector particularly, where enforcement systems and the structures and capabilities of the regulators are an essential part of the package, there is probably nowhere in the world that trades in financial services strictly on the basis of "mutual recognition". Not even the gnomes of Zurich are afforded such a privilege, having to set up operations in EU Member States in order to trade freely.

In fact, the sector tends to work on the basis of "equivalence", where third countries wishing to trade with the EU have to demonstrate that regulation of their businesses achieve an equivalent level of protection to those in the EU.

But this is not the same as demonstrating that a teddy bear is child-safe. The "equivalence" extends to the sum total of the parts - the legal code, supervision, enforcement, and the judicial and penal system. Unsurprisingly, settling on a modus vivendi, by which parties can freely trade, cannot be entirely the same that that used for trading in goods – as United States enterprises have found to their costs.

But it is wholly wrong to assert - or imply, even if only by default – that financial services constitute the full extent of our EU trade. ONS statistics actually put this trade at less than a third of the total volume. A huge contribution is made by the transport sector and travel, while telecommunications, IT, construction and intellectual property are a significant part of the mix. But almost matching financial services is the category "technical, trade-related and other business services".

This range here is phenomenal, and can include anything from architectural and engineering services, waste treatment pollution control, agricultural and mining services, leasing services, the distribution of water, steam, gas and other petroleum products and the supply of air-conditioning, placement of personnel, security, photographic services, publishing and real estate.

The huge variety of enterprises immediately points to the problems of encountered in domestic regulation, which multiply when it comes to the regulation of trade. Depending on the sectors, though, the regulation may or may not be fully integrated into the Single Market acquis.

Recently, for instance, I have been devoting much time to the examination of aviation safety regulation. And complex though this might be, almost the entire range is "EEA relevant" – i.e., part of the Single Market. In that area of enterprise, there is no distinction between trade in goods and trade in services.

Another interesting issue is that much of the trade in services is related to goods. According to this source, in 2011, 37.1 percent of the value of UK total exports of goods was "goods-related services". This figure rises to 39.9 percent for the EU-28.

It has long been known that the Ford Motor Company, comprises Ford Credit Europe, a registered bank which employs around 1,800 staff in 15 European countries. Through financing car sales, it is said to make more profit per car than its parent company earns from making them.

With vehicles increasingly reliant on electronic systems, manufacturers also earn substantial sums from diagnostic software licensed to independent garages and service operations, charging many thousands for quarterly fees and updates. This is classed as revenue from services, rather than the sale of goods.

In my evaluation of the effects of Brexit on passenger lifts, I noted that one major lift company made as only 36 percent of its revenue from new installations and 16 percent from modernisation projects. The largest single contributor to its earnings (48 percent) is routine maintenance, only a small part of which comprised the sale of parts.

Taking into account the service element of the installations, it's actually fair to say that lift manufacturing companies are primarily services. Yet the industry is fully regulated within the framework of the Single Market.

Within that framework, of course, "mutual recognition" does not apply to third countries. It applies only to Member States in the absence of a harmonised standard. Third country suppliers, seeking to service EU markets where there is no harmonised standard, must obey local ordinances. Inevitably, this disadvantages companies which are trading from outside the Single Market. But that will be an inevitable consequence of leaving the EU.

Necessarily, this will relate as much to the trade in goods as it does services, with added difficulties where professional qualifications are involved. An architectural practice trading on the continent and using British partners, will need the government to secure recognition of qualifications. Again, within the Single Market, mutual recognition applies. That is not certain when we leave.

The essential issue though, is that there is no neat division between goods and services. They are mixed together in real life and in regulatory systems. There is no specific single market in goods, distinct from a single market in services. The mix varies from sector to sector.

However, it isn't only Ambrose who is getting himself confused about the differences – or lack of them. There is an extraordinarily silly piece in Brexit Central by Victoria Hewson, an IEA refugee from the Legatum Institute.

She writes glibly of a "goods only" model of the Single Market which, she asserts, "seems to be gaining [in] popularity". Certainly, there is some talk of this in respect of Mrs May's fabled White Paper on our relationship with the EU. But, in fact, the proposition is a chimera. It exists only in the feeble minds of think-tank wonks and other lesser species, who have yet to learn anything of how trade is regulated.

Hewson, like Ambrose, share a desire to rid ourselves of much of the regulation, of which they understand so little, failing - as they do - to appreciate that the regulatory system in international trade is the facilitator rather than the barrier.

If businesses provide airport services to international airlines at Heathrow and elsewhere in the UK, within the EU they will fall under EU law. Outside, they fall back on UK law, but in both instances the content will be the same, mandated by the ICAO via its Annex 14. And without conformity with such regulation, the businesses would be unable to function.

Nothing of this, though, will stop an enormous amount of nonsense being talked. That is what so many people do when they fail to understand the basics.