Clegg – Lost access to the Single Market in services could cost the UK economy £36 billion a year

A new report lays bare the potential cost to the UK economy of the Prime Minister’s decision to pull Britain out of the Single Market. If access to the market in services is restricted, the ‘upside’ scenario is a 1.4% gross loss in GDP (or £25 billion a year), while the downside is a 2% gross loss in GDP (or £36 billion a year).

The research, The economic impact on services from the UK losing Single Market access, was written by the respected, independent think-tank, the Centre for Economics and Business Research (Cebr), commissioned by the Open Britain campaign.

The study shows the potential impact of having a trade deal that covers goods but not services. Given the Government’s choice to leave the Single Market and Customs Union and to impose ‘red lines’ over ending the freedom of movement and ending the jurisdiction of the European Court of Justice this is a very real scenario.

The key findings of the report are:

  • Leaving the Single Market in services could lead to a loss in of between 1.4% and 2% of GDP, or between £25 and 36 billion a year.

  • Little or no preferential access to the Single Market in services would have a particularly negative impact on financial services, IT and telecoms and transport – all of which will register export losses of 15% or more.

  • The service sector where the Single Market has the biggest impact in absolute terms is financial services, which would account for about a third of the losses.

  • Unless these losses are offset through new trade relationships, there could be a decline of between 9.5% and 14% in the UK’s total service exports, which would be an annual reduction of between £21 and £30.5 billion in UK exports.

  • Restrictions in labour mobility and insisting on complete regulatory autonomy could result in losing access to parts of the Single Market in services. Reaching an agreement on access may require certain compromises to be made on “red-line” issues.  

Launching the new research, Nick Clegg, leading supporter of the Open Britain campaign, said:

“This report exposes what is at risk if Theresa May fails to deliver on her promise to deliver a trade deal with the exact same benefits as membership of the Single Market.

“Lost access to the Single Market in services could cost the UK economy between £25 and £36 billion a year.

“Truly free trade is not just tariff free; it reduces rules and red tape, something that is particularly important for services, which make up 80% of our economy.

“Only being within the Single Market and Customs Union gives Britain full, unfettered trade access to all sectors in our biggest export market.

“Instead of pretending that we can have all the benefits outside of the Single Market as in it, Ministers must start dealing in reality rather than rhetoric.

“They could start by answering three basic questions. Do they accept that free trade means more than just abolishing tariffs? Will they admit that they cannot have frictionless access to the Single Market in services without abiding directly or indirectly to ECJ rulings? And, if it becomes apparent that there will be substantial damage to the economy from the restrictions on services trade, will they at least explore an alternative relationship, such as an EFTA-style one, with the EU?”

/ends

Notes to editors

The full copy of the report by the Cebr, commissioned by the Open Britain campaign, can be seen here: http://openbrita.in/OOg8MK 

Key Quotes:

The report examines how the economy could suffer with a goods-only Free Trade Agreement, where the UK withdraws from the Single Market in services:

  • “The upside scenario entails a 1.4% loss in GDP versus a 2% loss as part of a downside scenario. This results in an approx. £25-36bn range of GDP losses within the two scenarios.”

  • “Unless these losses are offset through new trade relationships, we could see a 9.5-14% decline in total UK service exports, representing approx. £21-30.5bn in UK export revenue.”

  • “A reduced ability to export services to the European Union will affect the effective volumes sold. These restrictions might come though extra trading frictions and expenses, while in other cases they may just come though regulatory prohibitions.”

The report outlines the sector-specific impact of the UK withdrawing from the Single Market in services:

  • “The service sector where the single market has the biggest impact in absolute terms is financial services. About a third of the losses from single market withdrawal result from lost business in financial services.”

  • Taking a balanced view – factoring in potential offsets - below are the estimated total export revenue losses for the sectors that are likely to be affected. 

 

Export Loss - Heavy (£m)

Export Loss – Mild (£m)

Transport Services

-6,420

-4,013

Travel

-3,524

-1,958

Financial Services

-10,109

-8,846

Intellectual Property

-1,220

-854

Telecoms/IT

-5,217

-2,608

Other services

-4,101

-2,871

Total Loss

-30,591

-21,149

 

  • Below is the estimated contribution to GDP losses from specific sectors if the UK were to withdraw from the Single Market in services. 

 

GDP Impact - Heavy Losses

GDP Impact - Mild Losses

Transport Services

-0.42%

-0.26%

Travel

-0.23%

-0.13%

Financial Services

-0.66%

-0.58%

Intellectual Property

-0.08%

-0.06%

Telecoms/IT

-0.34%

-0.17%

Other services

-0.27%

-0.19%

Total Loss

-2.00%

-1.38%

 

The report shows that a Free Trade Agreement (FTA) offers inferior access to being in the Single Market and that the UK has no comparable trade relationship when it comes to service trade:

  • “The Single Market ensures more total trade access than a typical FTA as it relates to a deeper level of access in services.”

  • “This particular research report is helped by the fact that the current level of actual service access to the EU is in substance unmatched by any other trade relationship the UK currently has access to.”

The report makes clear that the Government’s red line of regulatory autonomy will limit the openness of its future service trade with the EU:

  • “It is also important to emphasize that the barriers to service trade, where these exist, tend to be regulatory. Therefore, a desire to have complete control or effective autonomy over domestic economic regulations is incompatible with the free movement of many regulated services as the countries where these exports are going will not accept the provision of such services subject to different rules.”

  • “The granting of equivalence would also still not provide the same level of access for financial services that the UK presently enjoys. The granting of equivalence may also be revoked if compatibility is not maintained.”

The report explains how restrictions in the movement of labour could result in restrictions to access to the Single Market in services:

  • “The free movement of services can also be seen to directly touch on immigration if people are coming to the UK to offer their services as self-employed individuals or if firms exercise their mobility rights while wanting to carry their workforce over. A regime that practically tries to draw a distinction between labour and services is likely to encounter difficulties in sometimes distinguishing between a service provider and an employee.”

The report argues that if superior access to the Single Market is to be protected “certain trade-offs need to be made on “red-line” issues” on both sides:

  • “Even within a framework that is outside the formal Single Market the UK can still avoid many of these costs by negotiating a deal that keeps it as close as possible to the Single Market. Service access is not just about avoiding WTO terms, but certain trade-offs need to be made on “red-line” issues so that a deep agreement can be struck that covers more than just goods.”

The report says there would be “a gross economic cost” resulting from the UK’s decision to leave the Customs Union:

  • “While a goods free trade agreement between the EU and the UK would cover goods originating from the UK, the UK’s desire to leave the EU Customs Union will also conceptually result in UK exports being subject to rules of origin used to determine the national source of various products, requiring goods to go through customs. Leaving the Customs Union will therefore entail a gross economic cost. The time and resource spent in bringing goods though a customs process adds to cost.”