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A customs union with the EU could let down British cities by failing to protect their trade in services, a think tank has warned.
A leading trade expert has also accused Westminster and the media of neglecting Britain’s services sector in debate over Britain’s future, and warned it could be a “mistake of historic proportions.”
New figures from the Centre for Cities show cities are particularly dependent on the export of services, making up 77% of the UK total, compared to 52% of goods exports.
It says that any customs arrangement between Britain and the EU would probably “protect trade in goods but overlook trade in services.”
A report released by the think tank today urges the government to focus on ensuring service exports are not “penalised” in a future deal with the EU.
Andrew Carter, Centre for Cities chief executive, said: “A goods-only customs arrangement would leave services, which comprise the majority of Britain’s exports to the EU, facing trade barriers.
“This scenario could limit the economic prosperity of many of Britain’s cities and the millions of people living and working in them.”
The think tank’s warning shines a light on the apparent neglect of services in both main parties’ policies on Britain’s future relationship with the EU, and in much of the wider debate over Brexit.
The political focus on British trade in goods is striking and somewhat strange, given it is services that make up around 80% of GDP. That makes Britain far more reliant than most other large economies on the services sector.
Silence on the service economy
A customs union is the key plank of Labour’s Brexit policy, and the government is under pressure to embrace the plan to break the political deadlock and get a Brexit deal through parliament.
But customs unions typically involve dropping charges or checks on other countries’ goods, and the EU’s current customs union arrangements only apply to goods, not services.
“Members of a customs union thus do not have any preferential access to the EU’s services market,” according to the Institute for Government.
The Labour party has said far less about its plans for services, or indeed been asked about them by the media.
Meanwhile the Conservatives have talked up their hopes of “frictionless trade” in goods, but appear to have far fewer ambitions for protecting services.
Whereas the political declaration signed between Britain and the EU highlights plans for a “free trade area, which combines deep regulatory and customs cooperation,” a brief reference to services only mentions an aim to “prevent the introduction of unnecessary regulatory barriers.”
Professor L. Alan Winters, director of the UK Trade Policy Observatory, wrote earlier this month that the weak language suggests the government is reconciled to “regulatory divergence which will significantly hinder trade in services.”
May ‘gave up’ on a Brexit deal for services
Winters says the government “just gave up” on trying to get single market-style access to Europe for services as a trade-off to help secure another negotiating aim – a hoped-for end to free movement of EU citizens into Britain.
He said the EU would not let Britain “cherry pick” all of the benefits of EU membership, and services was a key area where Britain gave way.
He explained: “Concern to avoid a physical border in Ireland and to avoid Dover seizing up if UK-EU trade were subject to border formalities elevated frictionless trade in goods to pole position.
“Mrs May was not going to give up on immigration, so the UK government just gave up on single market type trade in services. It was that simple.”
He says the political neglect of services is also rooted in a lack of public understanding of the service economy, and even a lack of sympathy as the huge financial services industry was at the heart of the 2008-9 crisis.
“It was just easier to explain international trade in terms of iconic goods (cars, food) rather than abstract services which often seem merely to exist in the ether,” he added.
He concluded: “There was no conscious debate, no serious analysis of services policy and little effective lobbying. Given the lack of data on services trade it is difficult to be sure, but I fear that we will come to view this neglect of the UK’s key sectors as a mistake of historic proportions.”