Services in an EU-UK FTA: what’s on the horizon?

Services are important to the British economy. Notwithstanding the difficulties in measuring them, they represent nearly 80% of GDP and are clearly one of its most successful exports with a substantial proportion going to the EU. Currently, they are traded as part of the EU’s Single Market. However, the European Council’s Guidelines on the framework for the future EU-UK relationship make clear that post-Brexit trade in services will be based on an entirely different footing. Taking account of the UK’s stated red lines, they outline that the current framework will be replaced by “a balanced, ambitious and wide-ranging free trade agreement (FTA)”. They would provide market access and establishment rights for service providers but not “a common regulatory, supervisory, enforcement and judiciary framework”. There will be negotiations, of course, but what would it mean if the Guidelines were to form the basis of the future relationship?

Whilst there are few specifics, it is clear there would be significant implications for  cross-border trade in services. Firstly, the “Single Market” in services (really a legal patchwork) protects British and other European service providers from many of the possible hindrances to trade in services. For certain sectors, there are mutual recognition regimes. The most famous (if misunderstood) example is “passporting” for various financial services, but there are others, such as mutual recognition for various professional qualifications (e.g. legal and architectural). Often, mutual recognition has been made possible through some minimum level of harmonisation of standards, which develops trust. As a baseline, Article 56 TFEU and the Services Directive impose regulatory disciplines on Member States in relation to many services, such as by prohibiting discriminatory, unnecessary or disproportionate restrictions on trade as well as certain categories of  restrictions. Although not comprehensive, EU law can catch a broad range of potential barriers to market access and provides a breadth and depth of protection that is yet to be replicated in any FTA. For example, the EU’s most celebrated FTA, the Comprehensive Economic Trade Agreement with Canada (“CETA”), is primarily concerned with safeguarding market access against quantitative restrictions.

So it is very significant that the Guidelines dismiss a common regulatory framework (although specifically raising the prospect of mutual recognition of professional qualifications). They do state that a future EU-UK FTA would contain a framework for voluntary regulatory cooperation (which may or may not, as CETA does, include a more general framework for mutual recognition). That said, a procedure to facilitate future regulatory alignment would clearly fail to reproduce the existing trading environment.

Secondly, one of the reasons why current arrangements have been comparatively effective at dismantling barriers to trade is the primacy of EU law and the shared oversight of the Court of Justice of the European Union to ensure consistency. The Guidelines, however, suggest future enforcement of an EU-UK FTA would be based upon state-to-state dispute resolution, as is normal for FTAs. From a business perspective, this is distinctly inferior to being able to assert rights directly. Although most service sectors will be affected by the move to an FTA-style arrangement, it is where there is now a high degree of regulatory alignment that service providers will feel it the most. This includes financial and insurance services that have benefitted from passporting rights together with regulated professions, such as law, medicine and pharmacy, which have been able to rely on mutual recognition under EU law. To protect cross-border trade in services, a future EU-UK FTA would need to maintain high levels of regulatory alignment, whether by continued UK acceptance of the relevant acquis or new mechanisms for “managed divergence”. The Guidelines suggest that neither is on the horizon but there may be enough time for that to change. A close eye will need to be kept on this evolving situation. 

Written by Luigi Pedreschi, PhD candidate at the European University Institute in Florence.

Edited by the Linklaters Trade Practice. The views and opinions expressed here are the personal opinions of the author(s) and do not necessarily represent the views and opinions of Linklaters.