Can British service companies really flourish after Brexit?

One of the great curiosities – and tragedies – of the debate on Brexit is that the trade aspects have focused almost entirely on movements of goods, including agricultural products, livestock and the like, rather than the services sector. Yet manufacturing, agriculture, mining and other “physical” activities make up only about 15 to 20 per cent of British economic activity (and the Irish aspects a tiny part of that total). The other 80 per cent is in services. And yet the trade with Europe in services receives only a fraction of the attention that areas such as car manufacture or pharmaceuticals or the Irish backstop have had (though they of course deserve the media coverage).

The cabinet minister Michael Gove displayed a remarkable degree of insouciance in his radio interview on the BBC Today programme yesterday. He implied that there was no single market for services in the EU, which I only partially correct. It is certainly incomplete, but there are great swathes of it that are vital to UK interests.

The key to the product is the reciprocal recognition of professional qualifications, of standards, of rules, of the development of common pan-EU rulebooks and administrative/regulatory authorities; and the opening up of service sector activity to free and fair competition, so that government procurement of services, for example, is open to companies across the EU on a “level playing field”.

The single market in services, such as it is, has enabled every kind of service-sector activity and export from the UK to the rest of the EU. From financial services in the City and Canary Wharf, through to architectural design, industrial and commercial design, legal and arbitration services, shipping, consultancies, telecoms, software development, advertising, film and TV, AI... The whole gamut of British expertise has at least been assisted by the access the UK has to the large customer base in the EU – individuals, public sector and corporates. Tourism and aviation are other important examples that need harmonious working arrangements cross-border.

The single market was in fact a British idea, precisely because of the relative economic advantage enjoyed by the UK in the service sector – the Germans were good at making cars, the British better at banking.

It was signed off in 1986 and with much of the work done by the target date of 1992. Qualified majority voting, a dilution of the old national veto, was approved by Margaret Thatcher and other EU leaders as the only practical way to get the single market project done.

This is what may be jeopardised by Brexit. Of course there was a City of London before the UK joined the EU, and many services companies will manage well enough. Others though will find fresh obstacles. Lawyers, for example, have been quietly acquiring legal qualifications in Dublin so that they can then practise across the EU. Banks have been moving some operations and staff across the Channel.

As ever with Brexit, the penalty is also an opportunity, or so Mr Gove argues. He argues that when the UK can make its own laws and frame its own regulations, the City and other sectors will become even more flexible and competitive. You could, say, envisage a lighter touch on financial regulation, or, if you will, stricter rules on banks’ capital adequacy – reserves – in the UK compared to the EU. Either way they would be different to those applied the EU-based banks. But those very advantages, if such they are, might then restrict the access UK institutions have to European consumers, so defeating he object of the exercise. On the other hand, they might be able to win new custom from outside the EU.

Much, then, depends on the future economic relationship with the EU. On the best case scenario the EU and UK would simply agree to mutually recognise and respect one another’s rules, and business could continue more or less as it is today. Yet the EU might resent the British attempting to “undercut” them, and could create new barriers to access for services firms; or else add a financial penalty, equivalent to a tariff; or else simply demand that UK firms comply with a copy of EU rules, “or else”. Some areas may be covered by international (ie global) rules, but that might not be sufficient to sustain them, post-Brexit.

So Mr Gove could be right, that companies will “flourish” after Brexit. If he is wrong, though, it is as well to realise that the UK services sector, and particularly the City, supplies a hugely disproportionate share of HM Treasury’s tax revenues and of our export earnings. Not all services are internationally traded, of course – hairdressing or dry cleaning say. But many are, many provide high-paid professional work, many depend on EU staff’s expertise, and many run integrated pan-European operations. Lose them, and, in the short term at least the nation would be the poorer, and less able to pay its way in the world and support high-quality public services. Services are traditionally much harder to negotiate as part of trade deals than finished manufactures, minerals and farm commodities.

For the US, financial services are regulated on a state-by-state basis, making a breakthrough deal there on banking, investments, trading and insurance far harder to land.

Mr Gove may believe that the talents of British business will find ways to evolve and absorb the shocks and create fresh opportunities and explore new markets; others are more pessimistic.