Britain is right not to give way to bullying Brussels on services

The war of words has continued in Britain’s ongoing battle to define the terms of a new free trade deal with Brussels.

The Chancellor of the Exchequer, Sajid Javid, made his case today. In an article in City A.M. he stated his hope that the UK could strike a deal with the EU ensuring long-term “equivalence” in services. This would mean the EU and the UK both promising to maintain each other’s high standards in services, and recognising each other’s regulatory authorities, while allowing Britain to diverge from some EU regulations.

No sooner were his words hot off the press than Michel Barnier, the EU’s chief negotiator, slapped him down. Barnier told the EU Parliament in Strasbourg:  “There will not be general open-ended or ongoing equivalence negotiations on financial services.” He said: “We will keep control of these tools and we will retain the free hand to take our own decisions.”

Under the current character of basic equivalence arrangements, the EU is able to unilaterally revoke agreements in services, scrapping trade with as little as 30 days’ notice. The British government, however, wants to maintain mutual recognition without the ever-present fear of having the rug pulled out from under the UK’s services by an EU seeking to wield equivalence as a crude form of geopolitical leverage. They are advocating for an agreed, long-term process for managing future disagreements on regulation in order to prevent the EU from having an automatic veto on Britain’s ability to diverge.

One need not delve into the baroque details of possible forms of divergence and equivalence to see that there are clear reasons why Britain and the EU should come to an arrangement on services. When it comes down to it, the truth is that trade arrangements are devised by governments with negotiable interests – they are not rigidly fixed, immutable laws that are applied without creative variation.

Any arrangement between Britain and Brussels needs to take account of the economic weight which Britain brings to the table in services. Business related to the EU accounts for about a fifth of all financial activity in the City of London, which in turn dominates the clearing of Euro-denominated derivatives. It is no use comparing such an important partnership – both geopolitically and economically – to the terms of trade with Canada and Japan. They are quite clearly not of the same order.

While goods is an area in which the UK remains a net importer of EU manufactures, this is reversed in services, where the UK’s export surplus is significant and continuing to grow. The latest report from the Office for National Statistics (ONS), released on 22 January 2020, showed that the UK exported £33 billion worth of services to EU countries in the third quarter of 2019, compared to £28.8 billion of imports.

Most importantly, it is in services that the value of Britain’s trade with the world outside of the EU is larger than that with the EU 27. The UK exported £49.1 billion of services to non-EU countries in the third quarter of last year. In fact, in 2018 the UK had the highest value of services exports among EU member states.

The point here is not to say that Britain has an overwhelming advantage in trade negotiations, although the government is right to believe they have a strong hand to play. It is to highlight that the UK and the EU both stand to lose from the triumph of integrationist ideology over rational statecraft. Both sides have leverage, and they can either use it responsibly or sabotage a lucrative source of wealth and prosperity for their citizens. Neither side will profit from a zero-sum, beggar thy neighbour approach to international trade.

Both parties also have much to gain from a sensible arrangement which recognises that, while Britain cannot have all the benefits of EU membership, it is still a hugely significant regional and global financial hub. Britain’s services are in a class of their own, and they will continue to be so beyond December 2020. There is a reason why English common law is employed as far afield as the financial markets of the UAE, Hong Kong, and Singapore, as well as being the choice of law for financial contracts for several EU member states which otherwise have civil law systems.

The EU’s approach to services is a microcosm of its attitude to trade more generally – they want to be able to determine the terms of exchange in order to protect their own producers; and they want to obsessively control the ways in which those terms are regulated and policed. This is no starting point for a true, fair, and amicable trading relationship.

Beyond pure power politics, it is unreasonable for the EU to expect that Britain – after regaining sovereign law-making power over its financial industries – would acquiesce to being a passive rule taker. And, other than a desire to make the UK pay for Brexit, there is little reason why the EU should be so zealous in its desire to impose regulations upon an independent third country.

The Chancellor is right not to give way to the bullying of Barnier’s negotiating strategy. If Britain is going to be the open, global, and free trading nation that our government says it wishes to create, then the UK cannot sacrifice one of the crucial payoffs of Brexit – the potential to strike further afield beyond Europe in alternative and expanding global markets. And if Westminster is to take back control of law-making, it cannot then surrender the right to diverge in the regulation of services.

This will not be an easy task and it will require creative solutions to complex problems – but that is why politics, after all, is an art and not an exact science.