Brexit: Trade in Non-financial Services (EUC Report)
(6 years, 4 months ago)
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Lord Whitty
That this House takes note of the Report from the European Union Committee Brexit: trade in non-financial services (18th Report, Session 2016-17, HL Paper 135).
Lord Whitty (Lab)
My Lords, I commend to your Lordships this report by Sub-Committee G. I thank the members of the sub-committee—many of them have put their names down to speak today—for their important contributions, and I also thank the staff of the committee and our specialist adviser, Dr Ingo Borchert.
I want to make three preliminary points. The first concerns the elapsing of time. The inquiry was conducted between October 2016 and January 2017, over a year ago, and our report was published on 22 March, which was still before the Government triggered Article 50. Much water has therefore passed under the bridge since publication. Regrettably, much of that water is almost as murky today as it was then in terms of the kind of free trade agreement that the Government are really after and how services fit in with that approach. The negotiations have had their ups and downs, and the Government have produced a number of future partnership papers on the UK’s relationship with the EU, but regrettably, up until today, no response to our report has been forthcoming from the Government.
It was delayed at first by the general election and subsequently by the Government’s insistence that they cannot provide us with a response until all their position papers have been published. I had a gracious response from the noble Lord’s predecessor but that was some months ago. I take this opportunity to express my disappointment at this and to emphasise the Government’s responsibility to engage with such reports and the findings of Select Committees. Therefore, I look forward to the Minister giving his detailed response later this evening.
My second preliminary point concerns the vital importance of these key services. As we know, the UK is very much a service-driven economy, and in these services the EU is an important trading partner. We export in aggregate to the EU and worldwide more than does the financial services sector and two-thirds the amount of the goods sector, and we have a surplus in most of the areas covered by the report. We emphasise the complexity of trade in services, which admittedly is largely unaffected by tariffs but can be substantially restricted by non-tariff barriers.
Our report tries to examine what a bold and ambitious free trade agreement between the UK and the EU would look like and what it would need to include to represent a good deal for these non-financial services. We also look at the implications of trading in services under WTO rules—the so-called no-deal scenario.
My third preliminary point was the inadequacy of the statistics on these services. I was quite keen to spell this out but, interesting though it is, in view of the lateness of the hour I will instead refer noble Lords to chapter 2 of the report, which addresses that complexity.
As I said, trade in services does not generally attract tariffs, but trade is very much restricted by various forms of non-tariff barriers, some cultural but, in the main, resulting from divergent regulatory systems. Within the EU, the single market in services has not developed nearly as completely as the single market in goods. Nevertheless, significant progress has been made in developing common regulatory frameworks and structures and often specific consumer protection provisions for the various sectors, such as those in aviation, transport and travel, audio-visual and broadcasting, and telecommunications. In many of these areas the frameworks are overseen by EU agencies, such as the European Air Safety Agency. In most of these agencies, of which there are 34 in total, the EU has historically been a very influential member as well as a major beneficiary.
There are also some general provisions in EU regulations and directives that facilitate trade in services, such as the mutual recognition of qualifications, various intellectual property provisions, provisions on the free flow of data, and general data protection and consumer protection. There are also programmes that facilitate university students’ teaching and research. In many of these sectors, there is the free movement of often highly skilled labour.
It has to be said that at the point we received written and oral evidence, almost all representatives of the services we covered were relatively satisfied with the present or prospective EU situation affecting their sectors and the degree of influence and reflection of their interests they felt they had in these European institutions. Most were keen for the EU single market to move rapidly in the services sector and were encouraging the Commission and member states to move faster. They were particularly keen on developing a real single digital market.
At that time, most sectors were also confident that a separate bespoke sectoral agreement might need to be made in their areas to preserve the benefits of the single market. They saw a mutual UK-EU benefit in continuing the existing relationships. I will come back to the issue of separate sectoral agreements. Of course, this could have been agreed if we had moved towards the option of rejoining EFTA and the EEA, but that had already been ruled out by the Government; hence we did not consider it in detail but focused on a comprehensive free trade agreement.
I will make a few specific comments on some of the main exporting sectors, beginning with the professional business services, such as legal, accountancy, medical, engineering, business consultancy services and so on. These represent the UK’s largest services exports, generating a £30 billion global surplus and a £6 billion EU surplus. To support this sector, a free trade agreement would need to include provisions on the mutual recognition of professional qualifications and regulatory structures. It will also be important for UK businesses to retain the right to establish themselves in the EU, and of course vice versa, and to move staff easily across borders to service European clients and contracts at short notice. For these sectors, a no-deal scenario would result in increased, and in some cases absolute, barriers to trade with the EU. That would be particularly so for regulated businesses such as legal and accounting firms. In such a scenario we conclude that businesses would be likely to have to relocate or move substantial resources to the EU, incorporating separately, which would impact the UK’s trade balance, tax revenues and employment.
Digital services represent an important and growing sector of UK trade, which created jobs at almost three times the rate of the rest of the UK economy in the first half of this decade. To maintain the UK’s leading position in this field, a lot of our witnesses highlighted data transfers and access to skills as their most pressing concerns. Some adequacy decision from the Commission on the UK’s data protection standard would be needed to maintain the flow of data between the EU and the UK under a free trade agreement and it would be important to ensure that future changes in domestic law do not jeopardise regulatory equivalence in this field. On the other hand, a no-deal scenario would represent a regulatory cliff-edge for UK digital businesses and many may choose to relocate or redirect part of their activities to the EU.
The UK is also a world leader in creative services from music to fashion and design, representing a global hub in which companies from different parts of the creative sector cluster in the UK. To sustain that status, a comprehensive free trade agreement would be needed to ensure protection of intellectual property rights, market access and the mutual recognition of broadcasting licences, for example. Again, the contrast between a free trade agreement and a no-deal option was stark. Alternative conventions and treaties do not account for technological developments such as on-demand services, and so are not really viable options for trade. Audio-visual media services are also excluded from the EU’s schedule of commitments at the WTO, meaning that EU member states would be free to impose discriminatory provisions on the UK in the event of there being no deal.
We also considered aviation services. Witnesses told us that the strength of the UK’s aviation sector and shared interests with the EU offer important leverage for the Government to negotiate a good deal for UK air services after Brexit, either through continued membership of ECAA and EASA, the safety agency, or a bilateral air services agreement with the EU. Our report recommends that the Government should urgently clarify which of those two options they will seek. As air services are excluded from the WTO provisions and the validity of pre-existing bilateral agreements is frankly uncertain, there is no viable fallback position under a no-deal scenario for aviation. We also emphasised the importance of clarifying the UK’s position with regard to EU-third country aviation agreements and of securing transitional arrangements if the UK has in the event to negotiate new bilateral agreements with these markets.
Last month, we held a follow-up session with witnesses from the aviation sector. They were still confident that the UK and the EU would be able to strike a deal on air services due to the sector’s fundamental importance to both parties and restated the view that this should be negotiated and agreed separately from any wider UK-EU free trade agreement. Incidentally, we intend to hold similar follow-up sessions with other service sectors.
Chapter 8 of our report looked at the UK trade in travel services and tourism, highlighting the importance of UK tourism to some EU member states as well as its social importance to families and businesses in the UK. Incidentally, tourism is the one sector in our analysis where we are in substantial trade deficit with the EU, largely because of the balance of tourist journeys. UK visitors unaccountably prefer the Med compared with EU tourists to British climes for most of the year. Again, our own tourism industry is doing reasonably well. As we have seen from the tourists around here, we are still dependent on EU tourists freely coming to London and other parts of Britain to spend their money and appreciate our culture, business and economy.
Throughout our inquiry, our witnesses told us that the UK is a global leader in these services and that the Government had already engaged extensively with the sectors to inform their position in negotiations with the EU. We applaud that on behalf of the Government. However, it has not been clear, either then or since, quite how the Government would respond to the points raised with them by the sectors. We start from a position of harmonisation, which ought to help us provide the foundation for an ambitious partnership for future UK-EU trade services. However, it is clear that to protect our service sectors the UK’s future partnership will need not only to be ambitious, but to deliver the most competitive services free trade agreement the EU has ever agreed. Reduced EU market access or failure to secure a free trade agreement at all would risk significant changes to the sectors, which would face increased regulatory complexity and some businesses would need to restructure or relocate their operations.
The Government also need to recognise the alarm raised by many of these businesses at the abandonment of the free movement of people. A relatively high number of EU nationals work in all these sectors, from the brightest and best in tech and professional sectors to the mobile labour in some areas of tourism. Put delicately, this dimension needs to be taken on board as the Government move away from freedom of movement to new forms of migration controls. Our report also calls on the Government to prioritise agreement of transitional trade arrangements to avoid a regulatory cliff edge and to reduce uncertainty. I hope that such an agreement on transition is now in sight.
It seems that the Government’s negotiations now face a dilemma, which was clearly spelled out in the news bulletins this very morning. All these sectors want to continue and to develop the kind of regulatory trading structures they currently have access to, with minimal change to trading arrangements, standards, the regulatory framework, and technical and regulatory agencies. They want bespoke chapters or separate deals in any free trade agreement to achieve that. But while David Davis may advocate Canada plus-plus- plus, neither CETA—the Canadian agreement—nor the South Korean and Japanese deals, which are very extensive deals with the EU, cover anything like bespoke provisions on which we can build. Of course, Michel Barnier says that we cannot cherry pick or have bespoke deals. There is not only no template; we do not have a mutuality of approach.
In preparation for this debate, I flicked through the 450 pages, excluding annexes, of the Canada agreement. While there are some particular provisions on services, such as telecommunications, and some general issues, such as intellectual property, are covered, there is very little on services and it is very thin. However, as I have said and as I have no doubt the Minister will emphasise, we start from near regulatory equivalence with industries that largely want to keep it that way.
I am about to conclude. Most of the points we made in the report, almost a year ago, remain valid. Real trade talks are about to begin in earnest. The Government need to take on board those points from us and from these dynamic sectors, as well as those from more obvious and traditional voices approaching the Government from the City, the manufacturing sectors and areas such as agriculture. It is vital that these key growth service sectors, replete with innovation and creativity, are not sacrificed in the inevitable trade-offs with other issues that will arise once the complex trade negotiations begin. I hope this morning’s Cabinet Brexit committee will at last have addressed some of these issues and be clearer on the outline free trade agreement that we are trying to achieve. I look forward to whatever the Minister may be able to tell us about those developments and his comments on the report. I beg to move.
Lord Green of Hurstpierpoint (Con)
My Lords, I begin by recording how much I enjoyed serving under the chairmanship of the noble Lord, Lord Whitty, of the sub-committee of the European Union Select Committee which produced this report—some while ago, as he pointed out. I should also disclose an interest in that I am president of the Institute of Export and International Trade and a member of the advisory group on Brexit matters to the CEO of the EEF.
All recognise the significance of services to the British economy: more than 70% of output and more than 40% of exports. The EU is collectively our largest market for services exports, with the US our second largest. There are a number of sectors, but three dominate: financial services, which we are not focused on this evening; professional business services; and tourism, those three accounting for two-thirds of all our services exports. The statistics probably underestimate the importance of services exports because many engineering manufacturing exports include a lot of services revenue. Furthermore, the trend everywhere is in favour of services. Services rise as a percentage of economic output almost everywhere, and there is as much opportunity to gain value through trade in services as there is in goods; that is, the arguments about comparative advantage that date back to Smith and Ricardo apply just as much in services as in goods sectors. What is more, the digital revolution will steadily increase the proportion of services output which is tradeable. There is, therefore, a lot to go for.
Sometimes, we tell ourselves that the UK has a special comparative advantage in services. It is true in that we are the second or third largest services exporter globally and have the highest percentage of services as a proportion of exports of almost any of our competitors. However, we should take care about this argument. First, the high percentage of services in our exports is due in part to the weakness of goods exports. Secondly, it is also distorted by the great importance of financial services, whose net exports account for 3% of GNP alone. Thirdly, the gap with Germany is in any case closing or almost closed. Fourthly, Asia will, over time, grow its services exports. In short, this is not just a matter of getting open markets and then we are up, up and away; no, we will have to work at it hard. Nevertheless, the future is good and probably better than for goods exports. Therefore, this is an important strategic theme for us as we chart our new course.
I want to make three brief points and then pose a couple of questions to my noble friend the Minister. The first concerns trade with the EU. As the noble Lord, Lord Whitty, has mentioned, we start with regulatory alignment, more or less, on day one. There are any number of commentators who would like to see us deviate from this as soon as we reasonably can. We hear phrases like, “We don’t want to move from being a member state to a vassal state” or, earlier, “This is our big opportunity to complete the Thatcher revolution”. It was a standard complaint of many sectors of British industry that we were shackled by bureaucracy that came from Brussels, gold-plated then by the UK Government and punctiliously enforced by a bureaucracy here which caused unnecessary cost to consumers and, in any case, created an unfair competitive advantage to other EU members who were not playing by the same rules. However, the dream that we can get away from regulatory alignment to any significant extent is, I am afraid, just a dream. It is not based on reality either as an accurate description of the past or as a vision of the future. It is not surprising that we now see industry after industry arguing for the importance of maintaining regulatory alignment in sector after sector with the EU. Why? Because the market there is critical and the regulations there are not going to change at the request and behest of the British. We will certainly have less influence—not none maybe, but certainly less than in the past.
Secondly, the Government’s ambition for a bespoke deal—Canada-plus-plus-plus, as it is often described—is broadly the right one. It is often noted by sceptical remainers that the Canadian deal has little in the way of services. It does not cover aviation; it does not cover broadcasting; it tackles overt discrimination against foreign ownership, but it does not tackle domestic regulation; and it has virtually nothing about regulatory convergence of any significance. I cannot say that I have skimmed all 450 pages in the way that the noble Lord, Lord Whitty, has, but it is clear that there is not much about services in the Canadian deal—hence the importance of the plus-plus-plus. Today’s news that both the Institute for Government and the Institute for Public Policy Research have produced ideas on how this might all work is very welcome, and I hope that the Government will take their ideas seriously.
I also recommend that we pay more attention to the EU-Japan deal. That started when I was the Minister for Trade and Investment. I remember how sceptical we all were at the time that much progress would be made, given the difficulty of the Japanese domestic market environment. In fact, it seems to have gone rather rapidly, and substantial progress has been made. There is still some way to go, of course, not least as this is a mixed competence deal which will require unanimity among the member states and will therefore be vulnerable to the Walloon effect. Nevertheless, it has clear potential. It covers business services, financial services, especially insurance, telecommunications, transport, distribution and courier services and it proposes the establishment of a regulatory co-operative committee which will methodically look through the different non-tariff barriers that exist on both sides and propose solutions. I believe that we should watch this carefully, because at the end of the day Japan is more important than Canada and this is the harbinger of future Asian deals, with China, with ASEAN and with India. New deals will be more and more about non-tariff barriers, about regulatory dialogue and about services: this is important to us.
Thirdly, in general we need to be realistic. Britain will largely be a rule taker in these discussions. In the case of the US, for example, TTIP is now stalled at best, and the mandate was a compromise, but we should be under no illusion that the UK alone will find it easier to deal with the US, particularly in areas that are of particular importance to us. Financial services is one obvious area—pharmaceuticals is another —where the US regulatory environment is particularly impenetrable. The truth is that neither the US nor the EU is likely to be up for any substantial regulatory change to meet our needs. We will largely be a rule taker vis-à-vis the world heavyweights: the US, the EU, Japan and, who knows, in times to come China.
That is why developments in the last couple of weeks give me the first inkling of optimism that we are heading down a sensible path. I thought phase 1 was a good deal. I make no comment on the budget settlement, of course, but I think the settlement on citizens’ rights in both directions is both good in itself and helpful to services industries. The Irish settlement, which involves “regulatory alignment” between the north and the south in order to keep the border as invisible as possible, provoked the inevitable backlash and the result is a parallel commitment to, to use the phrase, “the constitutional and economic integrity of the UK”. That is also good. It is clear what both those commitments amount to in terms of continued regulatory alignment between Britain and the EU.
As we move to the second phase, I therefore briefly ask my noble friend two questions. First, can he clarify this point? Assuming we leave the EU legally in March 2019 and that we have agreed a transition period by then, what will the UK’s status be in respect of existing EU-third country agreements at that point? If it is envisaged that the transition agreement will mean that these agreements are still in effect for the UK, does that have to be negotiated not just with the EU but with the third-party country as well?
Finally, we do not talk much about trade with Africa. It is not a substantial growth opportunity of magnitude at the moment, but it offers substantial growth over the coming decades. It is also a big development imperative, important in its own right and in geopolitical terms as well. I welcomed the announcement of the appointment of a trade commissioner for Africa, but I was disappointed that no reference was made in the advertisement or in the brief to development as part of the package. Trade is critical to development; development is critical to trade; and I would have wanted to see a reference to a development responsibility in the role of the trade commissioner for Africa.
Baroness Donaghy (Lab)
My Lords, the report was published in March this year, before the general election and before the first phase of the negotiations. There has been a slight change in government language. The overblown title—the great repeal Bill—is no more, to the relief of most of us. Our report established the case that it will almost certainly take longer than two years to agree a comprehensive free trade agreement, and we urged the Government to prioritise the securing of a transitional trading arrangement with the EU in order to avoid the regulatory cliff edge. At the time, the adoption of a transition period was seen to be politically sensitive, but now we have an implementation period of two years. In addition, the Minister the noble Baroness, Lady Fairhead, has acknowledged:
“Services are an essential element of the economies of the UK and the EU, so we will be seeking an ambitious free trade agreement between the UK and the EU which will be of greater scope and ambition than any preceding agreement, because we realise how important it is”.—[Official Report, 5/12/17; col. 1042.]
It is good news that the Government have accepted this aspect of our report.
In my contribution, I will touch on the importance of accurate data and robust dispute resolution procedures, and ask about the possible impact on higher education. The report points to the unreliability of current statistics, which make it difficult to give an accurate assessment of the value of the services trade. The data in the Office for National Statistics Pink Book capture some of the ways in which services can be traded and, as has been said, probably underestimate the importance of services trade for the UK. The Minister of State for DCMS, Matt Hancock, who gave evidence to the committee, said that problems with the data did,
“not really matter much because we know from hard data … that Britain is really quite good at this digital stuff”.
The committee took the view that the accuracy of the data really did matter to illuminate the flow of talent and the implications for immigration policy, both vital to the UK’s future success in this area.
I was intending to outline the four modes of supply defined by the World Trade Organization, two of which are contained in the Pink Book—modes 3 and 4 are not—but time does not allow. But academics estimate that mode 3 is roughly twice as big as the other modes combined. As our report says:
“The lack of data on trade via mode 4 is also problematic, and is linked to wider concerns about immigration”.
The committee concluded:
“The Government therefore needs more accurate and detailed statistical information on trade in non-financial services than is currently available … Entering negotiations without such data could risk long-term, unintended consequences for the UK economy”.
Will the Minister indicate in what ways the Government are collecting more accurate and detailed statistics?
Many witnesses expressed concern that divergence between EU and UK laws would increase cost and complexity and might even endanger stakeholder confidence. Access to talent and flexible movement of services providers, the free flow of data, mutual recognition of qualifications, and effective enforcement were all cited as fundamental to non-financial services. Whether or not there is regulatory divergence in the future, witnesses were concerned that businesses should have access to dispute resolution mechanisms, either under a free trade agreement or under World Trade Organization rules. As has already been said, the WTO does not even cover some of the areas of service trade. Is the Minister able to outline the key principles that the Government will adopt for future dispute resolution, which will not be prohibitively expensive or complex for business, particularly SMEs? On 5 December, the noble Baroness, Lady Fairhead, outlined the plan for a new independent UK Trade Remedies Authority. Do the Government have an idea of how this Trade Remedies Authority will interact with any future international dispute resolution procedures?
I turn to higher education, where I spent most of my working life. I welcome the fact that the Prime Minister recognised the importance of universities in her Statement today. The report says that trade statistics,
“include students … however short their stay, because they remain formally residents of their country of origin”.
We were told that EU students make up 5.5% of the UK higher education student population, and that at some universities it was 25%. Some courses would not be viable without these students. Non-UK EU students paid fees of £600 million in 2014-15, accounting for as much as 8% of all university income. Spending by the same students in the wider UK economy accounted for £3.7 billion and supported over 34,000 jobs.
Universities UK pointed to the “principle of non-discrimination” for all EU students and wanted those arrangements to continue after the UK leaves the EU. Our report outlines,
“the possible negative effect of increasing fees for EU students on trade in education services”,
after we leave the EU. The Government’s development of a new immigration policy will have to determine the future status of EU students. The University and College Union is also concerned that the further marketisation of universities could lead to education being included in future trade agreements. At present, education is exempt. What assurances can the Minister give to the higher education sector on these matters?
Although political events may have overtaken our report to an extent, the fundamentals of our recommendations for the future remain the same. I thank the noble Lord, Lord Whitty, for steering us through this inquiry so ably and for making an important contribution today. Who knows, we might even get a response from the Government one day.
Lord German (LD)
My Lords, I too add my thanks and say how much I have enjoyed serving under the chairmanship of the noble Lord, Lord Whitty, on this report. I thank him for his perseverance in bringing it to your Lordships’ House today. I took the opportunity of going into the Printed Paper Office just before the debate began, on the off chance that I might find the Government’s response to the report before us, but I regret to say that no such response was on the table. It is therefore incumbent on the Minister tonight to give us some very detailed answers to the questions raised by the report. I notice that he is smiling, so I look forward to those responses later.
As the noble Lord, Lord Green, said, we are in the area of Canada-plus-plus-plus. I do not think there is any definition of how many pluses you can have, although I wonder how many pluses on the end would make up the equivalent of the single market. That is the direction in which I sense the sector, and this report, drives us. At the moment, we know virtually nothing of the Government’s position and what they want to see for the country. We have no overall comprehensive impact assessment; we therefore have no knowledge of the potential impact on jobs, the economy or society as a whole. This report provides some of the evidence that we need to make that judgment.
WTO rules are not altogether helpful to the service industries, which tells me that in the upcoming negotiations the UK will, as a minimum, require a comprehensive free trade agreement. Even then, it will not be as good a deal as the one we currently have inside the EU. I believe that services will be the trickiest part of the negotiations. Some 80% of the UK economy is service-based, yet less than one-third of all the free trade agreements signed by the EU with third countries have a services component, and generally those components are not adequate and suitable for the UK’s needs.
We need a transition period, as pointed out in the earlier Brexit and trade report from our committee. That will be essential to complete this work. Service sector exports in both financial and non-financial businesses have been growing and the three key non-financial sectors—business services, digital, and creative—provide a positive trade balance for the UK. All three are growing, and in all three our exports outstrip our imports.
However, the uncertainty created by the Government’s inability to express their desired outcome position is particularly acute for the services sectors because it is here that reputational risk—the reputation of the UK as a provider—places a disproportionate burden on this valuable part of our economy more than any other. It is the UK’s outward-facing, bold, and innovative qualities as a nation which spur the growth of these sectors. Continuing uncertainty taints that image.
This report lays out clearly the challenges that face the Government in ensuring that this very significant part of our economy continues to flourish. Mutual recognition of qualifications, rights of establishment, the free flow of data and intellectual property protection are just a few of the crucial issues where detailed agreement will be essential to maintain the UK interest, and in these sectors the free movement of workers and service providers is critical. All would be fine if we remained in the single market. However, in the interim, I would like to outline some of the challenges that the Government face by using one of the key service sectors, and I make no apologies for choosing the music sector. It has lobbied all noble Lords on the committee, but it has also been very vigorous since the referendum in putting its case forward.
The revenues of the recorded music industry were, for example, higher than the combined revenues of the top 50 fastest-growing UK tech companies in 2014. The UK music industry generates £2.5 billion in exports annually. Music tours around Europe are a very important part of that long-term income. The music industry needs the freedom to trade and to break into and develop new markets. I know that noble Lords are familiar with the size of touring music events—it is rather like watching the credits at the end of a film as the names roll on and on. These are people who you may not be familiar with and whose names are unrecognised: riggers, electricians, sound engineers, digital engineers, painters, make-up, wardrobe, stage managers, visual effect teams, merchandisers and many more. The skilled engineers in the teams have accreditation which is recognised throughout the EU, so any change to that regime would affect the ability of UK tour operations companies to work with the speed and agility that permits night-to-night concerts in different major locations across Europe. Any restriction on movement across Europe could also result in temporary customs documents being needed. That would mean detailing every piece of equipment and merchandise, which would lead to delays at borders and increases in costs and time. Non-EU nationals performing or working on a tour would have to provide themselves with temporary work permits, as they do in France now if they come from a third country.
Copyright and intellectual property issues enable creators such as composers, songwriters and lyricists to derive a financial return for their work. Ten per cent of those who work in the UK music industry hold another EU country’s passport. The need to source a skilled workforce is critical to the success of the industry, so frictionless movement of talent is essential.
In passing, I must say how sad I am at the departure of the European Youth Orchestra to Italy from its UK headquarters in London, where it has been since its foundation in 1976. The orchestra has about 120 players every year, aged between 17 and 24. It now appears unlikely that British players will be eligible in future years.
That is just one example from one sector, but it outlines the most difficult of the issues that are before us. These are the issues that I started with—the challenges that the Government must satisfy. The committee’s report points that out. There is a powerful link between trade in services and the cross-border movement of persons. Intellectual property requires protection. Without agreement and safeguards this vital part of our economy will be under threat. This cannot be just about the survival of the services sector; surely it must also be about its ability to flourish.
In the absence of the Government’s document responding to this report, what is their view on the free movement of workers across borders, on protecting intellectual property, on the mutual recognition of qualifications and deviation from those regulations, and on maintaining the free flow of data? Tonight is the Government’s chance to indicate how they will deal with these issues and provide the confidence that we all need to ensure that the UK’s service industries can grow and flourish.
Lord Aberdare (CB)
My Lords, it is a great pleasure to follow four colleagues from the EU Internal Market Sub-Committee, and I share their great appreciation of the able chairmanship of the noble Lord, Lord Whitty. I hope I shall be shorter than I anticipated, since the noble Lord, Lord German, has made a number of the points I planned to make myself.
The inquiry looked at five categories of non-financial services. I will focus on aspects of two: digital and creative services, which are both sectors where the UK has considerable strengths and generates a significant surplus. Both are vital to our continuing success after Brexit. They foster innovation, enhance competitiveness, increase productivity and contribute to well-being and quality of life. They also share other characteristics: they depend on access to the best and brightest talent and skills available and they currently suffer from significant skills shortages.
They rely heavily on talented people from overseas, especially from the EU, and not just at the highest skill levels, such as recognised musical virtuosos, but at more modest levels such as orchestral musicians and even front-of-house staff. I hope that the Minister can confirm that the new immigration system after Brexit will be designed to ensure that the pipelines for such essential talent remain fully open. The doubling of the number of exceptional talent visas announced last month was a welcome start—but only a start. It does not cover, for example, freelancers in the digital and creative sectors.
Digital services depend heavily on the free flow of data, which is increasingly seen as a fifth freedom for the EU. The general data protection regulation comes into force next May to govern the transfer of personal data, among other initiatives to create a Europe-wide data market. The UK needs to ensure continued free flow of data to and from EU states after Brexit, so I welcome the Government’s commitment to putting the necessary infrastructure in place via the Data Protection Bill. Even so, it is my understanding that we will still need to obtain a so-called adequacy decision from the Commission, based on a full review of the UK’s domestic data regime to determine how the UK’s data protection landscape matches the requirements of EU law. What preparations are the Government making for obtaining such a decision and what are their expectations about the process for doing so and how long it will take? What transitional arrangements will be put in place in the meantime so that data flows can continue uninterrupted?
Perhaps the Minister could also comment on two other issues relating to digital services. First, mobile telephone roaming charges were abolished across the EU in June 2017. Can he assure us that there will be no return to roaming charges between the UK and other EU member states after we leave the EU? Secondly, the EU is pursuing an ambitious and wide-ranging strategy to create a digital single market. The UK has been strongly supportive of this and has been seen as one of its greatest likely beneficiaries. But there is some concern in the tech sector that, after we leave the EU, the strategy could be used to erect non-tariff barriers against UK businesses providing digital services in the EU. Can the Minister tell us how the Government will seek to ensure that the proposed UK-EU free trade agreement preserves the benefits of the digital single market for the UK, even after we are no longer involved in its future development? Can he confirm that we will remain in alignment with the EU regulatory framework for digital services during the transition period in order to provide legal and commercial certainty for businesses providing them?
I now move to the creative sector, and specifically to broadcasting and music. The sub-committee had a highly illuminating visit to members of the Commercial Broadcasters Association in Chiswick, including Discovery Networks Europe. From its UK hub, Discovery Networks broadcasts a wide range of channels to 135 different countries across Europe and beyond, in a variety of languages. It brings valuable jobs, investment, income, skills and technology to the UK. Its business model is predicated on the EU country of origin principle, whereby a single licence from the relevant UK regulatory body, Ofcom, enables it to broadcast throughout the EU. It can also access or bring into the UK the skills and expertise that it needs; it is not much good broadcasting to Latvia, say, if you do not have people with an understanding of the Latvian language and culture. Ideally, a future UK-EU trade deal would preserve these features, but at the very least broadcasters need assurance of a transitional arrangement enabling them to continue operating essentially as now for long enough to make necessary changes to their business model—which for some might involve moving part or all of their operations outside the UK. What advice can the Minister offer broadcasters as they plan their businesses for the future?
One of my own passions is music, especially classical music. As we have heard from the noble Lord, Lord German, this is another sector in which the UK is a global leader, and it, too, needs reassurance that its freedom to trade internationally will not be constrained after Brexit. As we heard from the noble Lord, touring is an important feature of the music sector for orchestras; for major UK acts such as Coldplay, Adele, the Rolling Stones and Paul McCartney, all of whom were among the top 10 grossing music tours of 2016; and for individual musicians and small ensembles. I will not repeat many of the comments that the noble Lord made, with which I agree, but will add two more questions for the Minister. First, what assurance can he give that orchestras and other musical organisations will continue to be able to tour in Europe without prohibitive extra costs and bureaucracy? Secondly, when does he anticipate that sufficient information about likely transitional arrangements will be available for music bodies so that they can plan their future touring programmes with confidence, bearing in mind that the planning cycle for orchestras is two to three years ahead, and for opera three to four years?
I have mentioned only a few specific issues within two of the services sectors covered in our report. There are many others, such as visa-free travel, often at very short notice; intellectual property and copyright protection; continuing access to or replacement of EU funding schemes; and ensuring that UK audio-visual productions remain recognised as European works. Our report highlighted that:
“To protect the UK’s status as a global leader of trade in services, the Government will need to secure the most comprehensive FTA that has ever been agreed with the EU”.
So my final question to the Minister is: what can he tell us about the Government’s approach to achieving such a ground-breaking services deal in a way that gives confidence and certainty to UK non-financial services providers so that they and we can capitalise fully on their exceptional strength and potential in international markets both within and beyond the EU?
Baroness Noakes (Con)
My Lords, I, too, am a member of the EU Sub-Committee on the Internal Market, and I pay tribute to the noble Lord, Lord Whitty, for his excellent chairmanship. Brexiteers may well be part of the majority who voted to leave the EU but, as noble Lords are aware, in Parliament, and in particular your Lordships’ House, it is a different matter. It was therefore no surprise to find that I was not in the mainstream of views within EU Sub-Committee B. Put another way, EU Sub-Committee B is well endowed with those whose sympathies are for remain, and I believe that this colours the sub-committee’s findings.
I certainly do not accuse my fellow committee members of bias in the report, but there is a pervasive worldview that Brexit is a negative thing and that keeping things much as they are is a desirable outcome from the Brexit negotiations. This desire to avoid change indeed reflected many of the views of those who gave evidence to us—but, as is customary, many of the people who gave evidence to the sub-committee were taken largely from trade bodies, and they are the very people who have a lot invested in the status quo. It would have been really surprising if those bodies had argued for anything radically different.
I shall refer to the question of statistics relating to trade and services, which has already been referred to. It is true, as the report points out, that there are problems with current statistical data. The report’s conclusion at paragraph 37 is:
“The Government therefore needs more accurate and detailed statistical information … than is currently available … Entering negotiations without such data could risk long-term, unintended consequences for the UK economy”.
In a narrow sense, these are plausible conclusions. Who can doubt that decisions should be made on the basis of the best information? But is it actually necessary? We have managed for a long time to be a successful service economy without perfect data. What long-term unintended consequences for the UK economy could arise if we do not have perfect data? The report finds a negative, but does not explain how or why.
More importantly, this view—that we need to know precisely what has been going on in the service sector in order to avoid unintended policy consequences—ignores one vital element of the UK economy and the service sector in particular: adaptability. Over the centuries, the UK became and remained a great trading nation because of two things: we successfully adapted to changing economic circumstances and we constantly sought new opportunities. In the last 500 or 600 years, the UK has repeatedly reinvented itself in trading terms, moving from an economy based on agriculture through the industrial revolutions and the creation and dismantling of the empire. More recently, we have witnessed the evolution of a service economy and the establishment of our pre-eminence as a centre for financial services.
Innovation and adaptation are hallmarks of the UK as a trading nation. That is why we must not be afraid of the consequences of change, intended or otherwise. We need to go into negotiations with Europe about the future trading relationship between us mindful of the strength of the current shape of the economy but not hidebound by needing to preserve it for all time.
If we look at wider forces at work, one thing we can be sure about is that doing business in the UK, Europe and globally will change. Disruption is pervasive. In particular, the scale, scope and economic impact of technology are accelerating. We have been saying this for some time but it remains true. Artificial intelligence and robotics are already with us and are changing both how we live our lives and how enterprises create value. We are only now starting to glimpse what the future may yet hold for us. Secondly, the world is becoming more interconnected. In the past, trade was built on physical trade routes, but information does not have that constraint. Data and communications advances mean that traditional trading connections have been surpassed by complex global webs.
None of this means that it is not important to seek a comprehensive trade agreement, in particular to cover services. In that, I concur with the central finding of the report. Equally, the avoidance of a cliff edge via an implementation or transition period is sensible—this featured in the early report dealing with the options for trade post Brexit. These are non-controversial findings and are indeed core elements of the Government’s policy. But my gloss on that—and my advice to the Government—is to ensure that they do not focus on setting in concrete the current trading arrangements. Far more important is flexibility to accommodate shifts in trading patterns, particularly those outside the EU. I do not know what those shifts will be but I am sure that they will happen.
I end with a compliment to the Government which is buried in the report. When the sub-committee started to examine Brexit last year, there were many doubts within the sub-committee about the depth of the Government’s engagement with the services sectors. That is no longer the case. At paragraph 289, the report states that the sub-committee recognises,
“the Government’s current high level of engagement across the services sectors”.
It is followed up by something along the lines of “the Government should keep it up” or do some more, but the essential message is a good one: the Government are doing the right thing.
Lord Liddle (Lab)
My Lords, I add my thanks to my noble friend Lord Whitty for ably chairing our deliberations. It was one of the most interesting experiences that I have been involved with on a Select Committee, as I shall explain.
The first thing that struck me was how the sector of non-financial services is absolutely vital to Britain’s future. It is a growing sector with great diversity, but it all trades essentially, for the most part, on our key strengths in the knowledge economy. It provides fulfilling jobs for people, often working in non-hierarchical companies, and it is a crucial part of our future as a strong economy and thriving society. I would say to the noble Baroness, Lady Noakes, that I would not describe the people whom we met in that sector as status quo people; they are the great disruptors and innovators in our economy today. Unlike the innovators and entrepreneurs of a century or more ago, they do not have the competitive advantage secured by the barrel of a gun in an empire. They have to do it on their own—and that is something that we should respect.
Secondly, the experience challenged the conventional wisdom that I had, having always thought of myself as someone who knew something about Europe. The received wisdom in Whitehall was always that the single market was a great success in goods but very deficient in services. Actually, it taught me that the single market was actually very important in services, and the four freedoms of the Treaty of Rome were essential to the success of the sector.
Thirdly, this is the sector where the Government have given the least thought of any to a strategy for securing its future. In trading goods, you can see where the Prime Minister wants to go; it is a model of regulatory convergence, in return for which we get tariff-free trade. I think that she will find it a lot more difficult than she imagines, but that is a plausible model. Also, in financial services, the buzzword is regulatory equivalence. In this sector, it will be much more difficult because it is so varied. Those trade negotiations are not going to be conducted by the nice Michel Barnier, who has been extremely gentlemanly with the British over the past 12 months. They will be conducted by DG Trade. I have worked in the cabinet of the Trade Commissioner and I know what they are like. They are hard men and women, who are tough mercantilists at heart.
The problem with the sector is that our bargaining position is extremely weak. Why is that? Because, if you look at the EU 27’s export of all services to the UK, it amounts to about 0.8% of EU 27 GDP. But when you look at Britain’s exports of services to the rest of Europe, it amounts to a massive 4.7% of GDP. So who is the demandeur? We are the demandeur, and we do not have many cards in our hand. Of that figure, just over one-quarter—about 30%—is financial services, so non-financial services are extremely important.
Those who think that the WTO offers a happy prospect of this sector had better think again. I looked up the paper which went to the European Parliament on this. It states:
“The liberalisation of services under the GATS is subject to a hugely complex set of ‘reservations’, whereby the member states can continue with restrictions on market access for specified services. Since the EU’s own competence in the field of services is incomplete”—
it is not all at EU level—
“this has had the result that at the WTO the ‘reservations’ by the EU and its member states are a hybrid of EU-level reservations and bilateral member state reservations”.
That is why a trade agreement on services will take years to negotiate. You are not just dealing with the Commission, tough as it is, but you also have to deal with blockages in member states and any agreement has to be ratified by the Parliaments in all member states as a result. We are not talking about two years: it will probably be five or seven, so the Government had better grow up.
This sector faces real problems. I think that the only answer is the single market. People say that you cannot have the single market because it involves free movement. I have a huge pile of evidence from our committee’s deliberations which shows that free movement is not a trade-off with the economy; in this sector, free movement is the heart of their business model and competitive advantage. If we say that we are going to stop free movement for political, non-economic reasons we are damaging one of the most successful parts of the British economy. I hope that the Conservative Party will explain to people why that is in the national interest.
The Lord Bishop of Leeds
My Lords, I am no expert on the technical elements of trade in non-financial services, so have listened to speeches with both interest and admiration. Most of the points I wanted to make have already been made, so, given the time constraints, I will make a single point that lies behind the detail of the report—the reason why the frictionless movement of talent matters. I invite the Minister to note what I say, but not necessarily respond to it tonight.
The services under debate all deal with people and, in many cases, with people who do not simply produce things or look for a healthy balance sheet at the expense of everything else. They have to do with creativity, culture and connectivity in its widest sense. The benefits as well as the costs of cultural services are sometimes hard to quantify in cash or purely economic terms. My point here is simply to ensure that the particular—perhaps peculiar—nature of some of these services is recognised. The digital economy is a means to a cultural end: connecting people and services, shaping communication and culture, moulding world views as well as behaviours, both individual and social. Creative industries such as broadcasting go beyond the manufacture of things that can be traded in order to satisfy consumer need or desire: they do something to the pool we swim in as human beings, creating and shaping cultural and societal norms as well as language.
I guess this is what concerns me in every debate about Brexit, and I state it again here simply in order to keep it on the record: the thriving of our economy is crucial to the well-being of our people and our culture, but the economy is not the end; it is the means to an end, which is human flourishing and the common good. If we forget this, we become merely utilitarian and materialist. It might sound arcane to some, but the services addressed in this report have to do with values, languages, the meeting of people, cross-cultural communication, the arts, exposure to the unfamiliar, and access to that which is alien and strange. They are, therefore, important for shaping how we see the world, ourselves and human meaning. Perhaps more than other industries and services, they influence future generations in ways that others do not.
Edmund Burke stressed the importance of intergenerational justice in a way that transcends the immediate challenges of today’s economic demands. In the current edition of the New Statesman, Adrian Pabst notes how Burke’s,
“emphasis on covenantal ties between generations can help us think through the growing economic injustice between young and old today”.
He goes on to write:
“Society is not a contract of individuals. It is a partnership between the living, the dead and those yet to be born ... Human beings are not atomised agents maximising their utility. And they are not anonymous carriers of historical laws”.
The creative services build culture. I hope that the concerns expressed in the report concerning the risks to them will be heeded, or, at the very least—pace the noble Baroness, Lady Noakes—that the potential benefits to these services in a changing and challenging technological environment will be identified more clearly as negotiations continue.
Lord Inglewood (Con)
My Lords, these days it seems almost unbelievable that until a couple of years or so ago, driving forward the European Union’s single market was perhaps the Conservative Party’s flagship European policy, and had been so for a quarter of a century. This important report by the committee of the noble Lord, Lord Whitty, shows why and how it generated wealth and prosperity for this country, which has helped to pay its bills. For 10 years of that time I served on the European Parliament’s Legal Affairs Committee, as my noble friend the Minister knows, where I played a small role in building that market. It was pernickety, painstaking and often frustrating work. The single market in goods was the most obvious, the single market in financial services perhaps the most high profile, and the single market in services may be the most elusive and the one with most potential. Our country benefits from each of them, and because the single market in services has been scandalously long in gestation, as has been pointed out, if we were to leave the single market now without re-engaging on continuing equivalent terms, we shall be snatching defeat from the jaws of victory.
One of the lessons I learned from that time is the realisation that to have frictionless trade, it is essential to eliminate non-tariff barriers which ingenious protectionist Administrations will be looking to impose while paying lip service to free and fair trade. In this regard lies the importance of the role of the European Commission and competition law, and of the European Court of Justice in policing that market in the interests of fair play. In this context I emphasise the importance of the principle of direct applicability of law, which gives the small man as much as the rich corporation the benefits of the market. Enforcement of rights is as important as the existence of the right itself, since justice delayed is justice denied, and there is no real right if it is too costly or difficult to enforce.
To establish a working single market you need agreement on, participation in and confidence in a structure that it seems to me has to have three essential components: an arrangement for making rules; the rules and a way that they can evolve; and enforcement. If you move away from this tripartite structure, you go on a journey which inevitably goes from rule maker to rule taker. The more exceptionalism we demand and seek, the less in control we shall be and the less benefit will result for us.
As has been mentioned, it is sometimes said that we can pick up what we may lose from leaving the single market by trading elsewhere in the world. However, I have never found any hard evidence to support that; rather, I agree with the noble Lord, Lord O’Neill of Gatley, who knows much more about these things than I do, who, in a recent article in the New Statesman, points out that trade with the European Union and trade outside the European Union are complementary and not alternatives. I think that that was the point that my noble friend Lady Noakes was making. In this area certainly, we can clearly do better. As the Government themselves have pointed out, both Germany and France are currently more successful in trading with China than we are.
As politicians, we have to be especially alert to the siren song that businessmen will conduct business at the behest of ministerial utterance. For a number of years I chaired a north of England manufacturing company, and the board took its decisions on the basis of what it considered commercial merit—and if there was some government support or, better still, money, that was a bonus.
In the contemporary world of networks we see how the hub structure works across national boundaries, and in the “not impact statements” made available to parliamentarians, we read that five of the top 15 global legal firms are based in London. Spokes radiate from the hub and subsidiary nodes develop, while if power deserts the hub, they may and do turn into the network’s focus. Similarly, in another area with which I have some familiarity and which has been touched on already, the United Kingdom, and in particular London, is the main European centre for broadcasters, be they English-speaking or not. Already, now that they are looking at uncertainty, some are leaving, principally for Amsterdam, and many others are making plans.
We need to be clear about the oft-quoted proposition that leaving the single market will bring a bonfire of regulations which will turn the United Kingdom into an occidental version of an Asian tiger. Every new Government I can ever remember have promised to slash red tape, but I have never seen it happen. We must remember, first, that a significant number of rules owe their origin to non-EU international agreements. Moreover, the UK Government themselves have often over the years used European Union decision-making to introduce regulation they want to see, as that is a way that is more convenient and discreet. The Prime Minister has ruled out getting rid of a lot of European legislation, so if the present Prime Minister will not do that, I can hardly see the leader of the Opposition taking a radical view and going further. Finally, as has been mentioned, this country seems to like regulation. You only have to look at the gold-plating that has gone on—and let us not forget that Jobsworth is an Englishman.
The more we want to diverge from the single market, the less access we shall be accorded as our counterparties in the negotiations will consider that we will be trying to dump, either socially or economically, our products and services on them. We can speculate as much as we like over what the real options are, but of course it is not simply a matter of what we would like; at least as important is what the other member states would want for themselves. One thing, though, is certain: the more we “take back control” over trade with the European Union, the more we give it away. They are two sides of the same coin.
Lord Davies of Stamford (Lab)
My Lords, I congratulate my noble friend Lord Whitty and his colleagues on an excellent report. I believe, or certainly hope, that it will be a foundational document in the weeks and months to come as the Government prepare their negotiating case and as business decides how best to present its own case to government and to the European Commission.
A message comes out quite clearly from this report, shining out brilliantly from just about every page. It is very simple: it would be an absolute disaster for this country to leave the European Union. That is a fact. I realise that the noble Baroness who spoke earlier on, who announced that she was a Eurosceptic—she has that reputation in this House—was anxious to discount that obvious message of the report. She hit upon the most extraordinary way of doing it, by arguing that the reason why the report reflected this fear about the results of Brexit and concern about the results of Brexit for this industry was that a lot of evidence was taken from trade associations, which always like the status quo and do not like change. The absolute opposite is the case. Trade associations love government-induced change. It gives them enormous importance and a double role: they have to explain to their membership how things work and what the change exactly is, and most of all they have to defend their membership vis-à-vis the Government. That gives them a prominence and an importance, both in their own sector and possibly even more widely outside the sector, which they would not otherwise have—and for once their members are delighted to pay their annual subscription. So the noble Baroness got that one completely the wrong way round.
This is an important sector of industry, not least because it is very labour-intensive; it creates an awful lot of employment. People think that services create employment which is not highly remunerated, which is the case in tourism. However, there are certainly a large number of areas—prominent in this country—in the non-financial services sector that pay their people extremely well by international standards. One thinks of technology, media, accountancy, legal services, and consultancies of different kinds, such as management consultancy, and so forth. These are really big payers, and the economic importance of having these firms in this country is very great. Because of the technology and know-how involved in these firms, they are a considerable national asset that we should be trying to preserve and nurture—whereas I fear we are doing exactly the opposite.
I want to take one example. I believe that the technology consulting services company Accenture currently employs more than 300,000 people. Ten years ago it employed fewer than 30,000. That shows how employment has been created in the sector. Lord knows there are sectors where employment is falling, so it is very important that we have sectors such as this one which generate considerable employment. There are also spin-offs from big, successful companies such as Accenture. A lot of new businesses and small boutiques have grown out of Accenture or have been set up by people who started their career there, so it is a very dynamic and positive process and we do not want to bring that to an end.
The most important thing in the success of these labour-intensive companies is the quality of the manpower and womanpower that they possess—the talents, abilities and experience of their employees. That is absolutely key. To prove that, you have only to look at the balance sheet of a successful consultancy company and compare it with its market value if it is a listed company or if it is the subject of an acquisition when someone is paying the market value for it. Noble Lords will find that almost invariably the market value is a very considerable multiple of the balance sheet net worth of the company. That is not to say that such companies do not have any assets; they do, although they are mostly intangibles such as licences or patents of some kind or, most importantly, capitalised intellectual property such as software. Nevertheless, the value of the company will vastly exceed its net worth, and that good will reflects the value of the people who work there and their accumulated expertise.
Therefore, we are dealing with extremely sophisticated people who generate a great deal of value and want to employ only the brightest and the best. If you try to prevent them from doing that, they will move somewhere else where they can employ the brightest and the best. This illustrates the importance of freedom of movement. The Government’s wish to destroy freedom of movement, the price for which is keeping us out of the single market, is extremely dangerous.
I am delighted that the Prime Minister has apparently negotiated a satisfactory deal for the residents from other EU countries who currently work here, but she has not filled in the details of the regime that will apply to them. Will they have a personal right to live here indefinitely, even if they change their job or have no job and become unemployed? Will they be able to take time off to work elsewhere? Will they be able to undertake contracts that require them to spend a majority of months in a year outside the country on various assignments?
All those questions need to be answered, but an even more important question that needs to be answered is: what will be the regime for potential new recruits to British-based technology or other consultancy companies? It is vital that that is answered because individuals will not come here unless they have a promising regime under which they can live and work. For example, they will not come to work in this country if they would not be allowed to change their job here. This is a sector in which people change their jobs very frequently. If a good opportunity arises in another company, they want to be able to move. They do not want to be in the classic position of someone with a work permit who cannot change their job. They do not want to be unemployed for a while and have to leave the country. If people are unemployed in that sector, it is not usually because they are actually unemployed—that is, they are looking for a job but cannot get one or, for example, they have been fired. It is usually because they have a non-compete clause in their contract and they change their job and are then put on gardening leave for three, six or 12 months. What will the regime be for such EU citizens in this country going forward? It is very important that we get all these details rights.
I must say that I was not at all reassured when I heard the other day from the noble Lord, Lord Callanan—who is summing up this evening—that the Home Office is in the middle of drafting regulations for registration of this kind. I have yet to meet anybody in the Home Office who has any understanding of, let alone experience of, business; nor have I met anybody there with an understanding of economics. So I shall hold my breath until I see the regulations that are currently being drafted. However, it is extremely important that they are drafted in such a way that they do not have provisions for and protections against some obscure potential difficulty, and lots of phrases that lawyers like and so forth. At the end of the day, real risks and obstacles are created for people coming here and for British-based firms recruiting the best people, whom they need to survive in the future.
Baroness Randerson (LD)
My Lords, I start by thanking the noble Lord, Lord Whitty, for his leadership on this committee and by making the point that it is certainly not his fault that I end every Thursday morning feeling depressed and dejected. That is due to the nature of the evidence we get, week after week after week, from those who are practitioners in the different sectors of our economy.
The EU committees have together done what the Government have apparently failed to do, which is to assemble a vast body of evidence on the impact of Brexit. If you look at all the committee reports so far, they make pretty grim reading on the complexity and impact of Brexit on business. The overwhelming view of those who came to speak to us was that they want things to continue as close as possible to what we have already. That, of course, fatally undermines the Tory Brexit vision.
This report has been completed and written for so long that it is now a historical document. All we can do is note the lack of a government response to it so far and conclude, I fear, that that is because the Government have no answers to the difficult questions we asked. I look to the Minister to fill that gap this evening.
We have heard an awful lot about the might of the City of London and the financial impact Brexit will have on it, and rightly so because financial services are very important and a huge driver of our economy. However, in total, the volume of non-financial services trade is almost three times the size of the financial services trade. What worries me above all is that most of the options being pursued by the Government—from a clean-break WTO-terms departure to the bespoke model so beloved by our Prime Minister—is that they leave our service industries high and dry.
Only today, the Institute for Government produced a challenging report in which it emphasises the complexity of departure, especially in relation to the service industries. It makes the point that, even with a transition phase, it will be very difficult indeed to fit the timescale. Our evidence virtually unanimously called for the UK to stay in the single market, but as the Institute for Government says, with the acceptance of the single market comes obligations—for example, oversight by EU institutions, which would be a considerable problem for the Government.
The issue that makes the services sector particularly vulnerable if we do not achieve single market status is not so much the tariffs but the problem of non-tariff barriers, such as needing 27 different licences instead of one or the complexity of which country your qualifications will be accepted in and so on.
It is important to remember that the EU is the most integrated services regime in the world. We have a trading surplus with the EU in high-growth service industries. The service sector includes the fastest-growing sectors of our economy, and we sell 40% of our services to the EU. The problem that the service sector poses for militant Brexiteers is the free movement of people that inevitably and intrinsically goes along with so many service industries.
I want to take a number of the service industries and look at their impact. Tourism is one service sector where we have a deficit in trade, which will probably continue because we are not going to stop wanting to go to warmer places abroad. But that does not mean that tourism in Britain is unimportant. Quite the opposite is true. It is of great benefit in some of the more distant parts of the country. But the significance of our tourism sector is that it is a source of much of our soft power in the world. That is probably a diminishing asset, but we need to cherish the soft power that we have left.
I will take that link and look at other sectors within services and examine the soft power that they yield. My noble friend Lord German has already referred to the cultural influence of the music industry, which is a huge source of soft power. In broadcasting, without appropriate agreements to maintain access to the single market, UK broadcasters would be unable to broadcast services to the EU and that would affect almost 60% of Ofcom-licensed broadcasters.
Digital services are a real cutting-edge technology. To emphasise our leadership in this: the UK has 0.9% of the global population; we produce 3.9% of global GDP; but 11.5% of global, cross-border data flows come from Britain and 75% of UK cross-border data flows are with the EU. That includes a whole range of different sectors. Witnesses told us:
“In this digital age data flows cannot be separated from trade flows”.
The key point is that it does not really matter where companies are based; what matters are the skills available and the right regulatory regime. They will leave the UK if we no longer have the set-up that they need. They need free movement of skilled labour, and they also need to be able to rely on EU talent to offset our own skills shortage.
Soft power is also reflected in the importance of education services, with nearly 125,000 EU students enrolled in UK universities. That is 8% of total university income coming from the fees of EU students. Contrary to what has been said, this is not a sector of people who are stuck in their ways, nor is it a sector of people who assume that things should continue as they are. Our witnesses represented a sector that is disruptive and embracing change. It is at the cutting edge of all of the newest technologies. These people are the brightest and best in this country, and they say that we should stay in the single market.
Lord Wei (Con)
My Lords, I thank the noble Lord, Lord Whitty, for tabling this debate. I, too, am a member of the sub-committee that produced this report. I pay tribute to our chairman and my colleagues for the work that has gone into it. I refer Members to my register of interests.
I welcome this report and the logical way it analyses the largest services sectors to get a more granular understanding of the issues involved. There is always a danger that you miss out details using this approach, both in the emerging but promising sectors and services not yet large enough to feature on our radar as well as in the nuance of day-to-day operations, but the report has identified the major risks and understandably argues for a need for a smooth handover period to avoid a cliff edge into WTO rules.
I am heartened that the report notes that we are the second-largest exporter of services in the world—a fact that cannot be attributed only to our membership of the EU—and by how the question of tariff barriers is less a factor here because, in many cases, service business are not majorly affected by them. As a nation with much of our growth and trading future tied to services, it is important that we take pride in the fact that we are a world leader in this area and have confidence that, whatever the outcome of the current negotiations, we will thrive because customers still want to consume British-produced content, from Harry Potter to Premier League matches, and tap into our expertise, from advanced manufacturing to professional services. In many cases, those delivering these services have established ways to overcome barriers, whether through licensing arrangements or local partnerships abroad, or by receiving third-party investment to help bring their offer into other markets globally.
The danger, of course, lies in non-tariff barriers and whether, in a post-Brexit world, Britain’s service providers could be de facto shut out of markets due to the non-recognition of our standards and the qualifications of the professionals who provide them. This is indeed a risk that needs to be monitored, particularly with the threat of protectionism rising globally. It should be noted, however, that progress in this area has been slow even within the EU, and as such it is not new.
One might argue that, with the prospect of flexibility to negotiate FTAs, we might be able to include non-tariff barriers in the deals we create with other countries, particularly those with little to lose from removing such barriers but much to gain from helping us source talent and services where we have shortages in internal capacity, such as healthcare and education. Indeed, in many industries our best bet may yet be to be first mover and stay cutting edge, rather than to rely too much on even FTAs or current arrangements to protect businesses. I say this because, whether the enforcement of such FTAs were to be under the WTO or arrangements similar to what we have now with the EU, it tends sadly to be only the larger organisations that can make use of the protections in place when abuses occur, and securing rulings can take a long time.
That brings me to my final point, where I agree with my noble friend Lady Noakes and depart from the implicit assumption of the report that “business as usual” is preferable in all circumstances, that there should be no rocking of the boat with a transition period and that we should stay as close as possible to the single market and customs union arrangement we have today. We need to remember what Brexit was about for many who voted for it—a cry from the low paid, the small and those who do not always feel that the centre cares about them, for whom “business as usual” has not worked. For many in this camp, the status quo is worth challenging and the cost of losses incurred during a shift, even the disruption, is worth it if Britain can gain flexibility and sovereignty to forge a different path.
I believe that we will have failed if we achieve just a smooth handover, or even if we negotiate new agreements under the WTO and/or with Europe, if we do not create new opportunities for small and medium-sized businesses and those who feel left behind to play a bigger role. This question was of course beyond the scope of the report, but I believe there is much that can be done in the coming months to look at what can be done, whether around unilaterally lowering tariffs to enable our markets to be exposed to more affordable goods to in turn trigger innovations and greater productivity in related British services, or to explicitly link service market opportunities to outbound goods export opportunities in FTA negotiations. For example, imagine supercharging trade in agricultural products between the UK and China using the recent rail link to Barking and how that could in turn impact our agtech and certification service exports.
Given our trade deficit in goods, it is going to be imperative massively to grow our non-financial services trade with the rest of the world. It will take more than “business as usual” to achieve this. We will need a bold and imaginative global services promotion strategy, linked into our future FTA negotiations, to supercharge our future services export growth. I would be interested to hear my noble friend the Minister’s views on the Government’s approach to services promotion post Brexit. This report highlights opportunities for us to minimise disruption to services during Brexit, but I believe that we can go much further so that, post Brexit, we can secure our lead as the best service-providing nation in the world.
Lord Berkeley (Lab)
My Lords, I, too, welcome this report. It sets out a number of options and consequences for the non-financial services industries and gives a great deal more information than was contained in the 58 sector reports that I went to see last week. The security around that reading room was a bit of a joke. I sent two emails to try to get an appointment and did not get a reply, so I turned up. They said, “Well, I suppose you can come”, but they then confiscated my mobile, so I had to rely on my photographic memory. But, frankly, there is nothing in them apart from a load of statistics, which are quite interesting but say nothing about the consequences of different options for Brexit—hard, soft or whatever.
So perhaps I can help noble Lords with a set of figures which I have received from MDS Transmodal on the value of trade in non-financial services; in fact, just-in-time deliveries, which are the most important ones between the UK and various member states. The total was $282 billion in 2016, which is quite a lot of valuable trade going backwards and forwards. As it is just-in-time, these people do not want cargoes to be held up at the frontiers. The most interesting breakdown of the figures is the $3.6 billion of trade between the Irish Republic and the United Kingdom. A lot of people welcomed the Prime Minister’s fudge last week of saying that the single market will still apply to the Republic of Ireland, that Northern Ireland will be a kind of halfway house with no frontier, and that there will be no frontier across the sea between Northern Ireland and the rest of the UK. Somebody needs to explain—perhaps the Minister can do that tonight—how that will work, because $3.6 billion of trade is not to be sniffed at.
The other member state with which we do the largest amount of trade is the Netherlands, at $4.5 billion, followed by Germany, Spain and France. Some $30 billion of all that is temperature controlled. If there were delays at the frontiers, as I am sure there will be—the head of customs has said that it will take five years to introduce a computerised system which might minimise delay—one must surmise that some companies such as the major motor manufacturers will say, “Well, we’ve had enough of this”. Some parts go three or four times between the UK and other member states. How many jobs would be at risk? If we were to take half the trade as being at risk and divide it by, let us say, £50,000 per year for a job, we would end up with a figure of about 25,000 jobs being at risk in the UK and probably a similar number across other member states. I can see why business sees no good reason for wanting change. Why throw all this away? As chairman of the Rail Freight Group I had a meeting with people around Mr Barnier’s transport team in September, and maybe because he saw the inability of the UK Government to know what they want and to negotiate it, he advised the whole industry very strongly to plan for the cliff edge—it might not happen but it could happen. I think that that is a good piece of advice.
Several noble Lords have talked about the free movement of people. I remind the House that in many other member states there is no free movement of people unless you have the right papers. I have friends in Belgium who have British passports and before they are allowed to stay in Belgium and have a residence permit they have to justify to the local authorities that they have enough money to live on and some suitable accommodation. When I asked what would happen if you cannot persuade the authorities of this, my friend said, “I would be put on the next train out of Belgium”. Quite simple. There is no reason why we could not do the same thing here if we wanted to, but there is this obsession with not having identity cards, which I believe is a wonderful excuse for saying we cannot have free movement of people. We could perfectly well control it by everybody having ID cards and that would sort the problem out.
I come to my last point. My noble friend Lord Whitty, in introducing this excellent report, mentioned the problem with air services if we do not get agreement, because of the inability of UK registered airlines to operate on the continent. A similar thing would apply to the European railway agency, which is just as important for the railway sector. To have the same standards across Europe reduces costs of operation and manufacture dramatically. Of course, it relies on experts to deal with this who know what they are talking about, with professional qualifications that are reciprocally recognised. It is not bureaucracy. Everybody talks about European bureaucracy, but we have bureaucracy here—in fact, the European Commission in many ways is more efficient than our Government, I think. The US and Japan all have their own bureaucracy and it is all to do with, “Do you like what we have or do you not like what we have?”.
We will have a big worry in the future because people in the Commission have told me that they want no cherry picking, that they will fight cherry picking to the bitter end. I do not know what is going to happen with the negotiations, but if there is no cherry picking and we go down the route that we seem to be going on at the moment, I see a cliff edge looming. It is time that the Government listened to industry. Industry gave a lot of evidence to this report a year ago and nothing seems to have happened since then, except that they are getting more and more worried. It is time that the Government put their minds at rest.
Lord Purvis of Tweed (LD)
My Lords, it seems as if we are mid-point in a two-year transition period before the Government respond to this committee’s report. We still await clarity in many respects and there has been unanimity across the House this evening asking for clarification. We have very high expectations of the poor Minister, who has to respond to this debate and provide all the answers. I will do my little bit simply to add to that burden in my few moments.
The fact that the Cabinet, 18 months on from the referendum, is only now discussing the UK’s desires for its future relationship with the EU perhaps explains why the committee of the noble Lord, Lord Whitty, has struggled to get a clear government response—the Government do not have one. They have not had one since the referendum and we do not know when they will have one. The thread throughout the report still holds true and many of the points, issues and questions all raised very clearly in this report all still hold water, even as, as the noble Lord, Lord Whitty, said, the water has been moving quickly over the last year. Like the noble Lord, Lord Liddle, I take the point of the noble Baroness, Lady Noakes. When I read the report for the second time—I read it when it was first published but I had to refresh, because it has been so long since then—it did not strike me that the evidence provided to the committee was that of traditional vested interests wanting the status quo. The noble Lord, Lord Liddle, referred to that. For example, the very clear request from the Broadband Stakeholders Group that Ofcom remain part of the body of European regulators for electronic communications was not a vested interest asking for the status quo; it was asking for UK influence in a decision-making body affecting one of the most critical sectors of the UK economy to continue. That was a very reasonable request, which the whole industry would be behind and which I hope the Government will act upon.
My noble friend Lord German gave clear and tangible examples of how these issues are affecting the music industry and the performing arts. When I was listening to his speech with regard to the uncertainty of the future, I thought of the old electronic rock band, Orchestral Manoeuvres in the Dark. But it is not an amusing situation when, as he pointed out, we have already lost the youth orchestra—we have already lost influence in a key element. This is the reality which is seeping in now.
The Government have made their choice—and it is their choice—that the UK leaves the single market for services, a sector which, as we have heard, affects the economy perhaps more than any other single sector. Therefore, it is right that we scrutinise this. As the noble Lord, Lord Green, said, the UK is more dependent on services, especially non-financial, than perhaps any other country in the world. We export more in absolute terms than any other economy other than the US. We do so, as my noble friend Lady Randerson said, with and as a member of the largest single bloc—the integrated market of the EU—but the Government have chosen that we leave it in its entirety. As the report says, this was not necessarily going to be the position of the Government at the outset of the committee’s inquiry in 2016 but the Government have made it their position. Therefore, it is incumbent on the Government to give a clear explanation of what that position will lead to. I think it is fair to ask.
I have been in this House for four years. As I read the Official Report of the debate on 5 December, with the noble Baroness, Lady Fairhead, in her new role, I noted that she is the fifth Minister covering international trade in my four years here. She brings great experience to her role, of course, and in the circumstances that experience will be necessary, but I am sure that experience tells her, as it does many others, that those hard Brexiteers who continue to suggest that there will be better opportunities for trade in services with the EU after we come out, as a third country, and then ask to rejoin many of the parts of that, are deluding themselves and deceiving the public, and that deception carries on. This report is a calm and clear explanation of the complexities and the realities. Nothing from the Government in the past year has suggested that those realities are being addressed and the complexities tackled.
The EU does not have harmonised trade policy in relation to trade in services with third countries outside the single market, meaning that UK businesses will most likely face differing non-tariff barriers between member states, which will lead to additional cost and inhibit growth. The noble Lord, Lord Wei, says that we have an opportunity but the White Paper did not give any clarity on what the opportunities are, nor how the new approach from the Government will allow us to take advantage of them. Being out is doubly problematic for the UK because in many elements of trade in services, particularly digital services, the UK leads the EU. This is the very platform that we are leading, which those such as the noble Lord, Lord Wei, and others are saying that we would wish to replicate in the future to give us opportunities. The Government’s position leaves the economy in an absurd situation, where we are choosing to leave the integrated market, which we lead and which is so important to the most important single element of our economy, and then we will seek to negotiate a relationship back with that market but will have no say in how it is managed. As the report says, at its very best this will be worse than what we have now.
If the Leader of the House’s appeal to us this afternoon to wave our Order Papers in acclamation of the fact that the Prime Minister has got us to stage 2 in the talks with the EU—but only because she has acquiesced to everything it asked for in stage 1—is anything to go by, the Government will seek credit for us securing any agreement at all. However, as the report suggests, our economy is dependent upon much more than simply political assertion.
Quite frankly the global situation for trade, as the noble Lord, Lord Liddle, said, is not necessarily conducive to us going into a new comprehensive agreement. If you had wanted to read the communiqué of the last ministerial committee of the WTO in Buenos Aires last week, you would struggle because there was none. No agreement was reached. I was in Buenos Aires last week to meet with Commonwealth Trade Ministers in my capacity as co-chairing, along with the Trade Minister from Nigeria, the Trade out of Poverty All- Party Group inquiry on trade and poverty in the Commonwealth. It was a depressing time to be in Buenos Aires because there was no major agreement or communiqué. There was no agreement on e-commerce, which had been tabled, and the US and China are both taking a country-first nationalist approach. There is no sign that it will be any more conducive when the UK tries to be at the WTO’s MC12, by which time we will be out of the powerful EU bloc and have no voice in its future—nor will we have an FTA with the EU signed.
Where does this leave us, ultimately? It leaves us with the reality that, whether it is the Africa continental free trade agreement, the Mercosur development or the emerging Pacific alliance, the focus now is all on securing EU agreements. That means we will have a second-order relationship. The noble Lord, Lord Green, referred to last week’s Japanese agreement. We will be in the regrettable situation where, at the time that that Japanese agreement with the EU is ratified, we will have left it but will still have to comply with the terms and conditions of that agreement—and be constrained in making any further agreement.
I entirely endorse the point of the noble Lord, Lord Green, that the new Trade Minister for Africa has no remit for trade and development, which is a retrograde step. I hope there is time to change that. If the solution from the Government, through the Department for International Trade and the new trade commissioners, is to provide no more clarity then we will still have to ask our questions. The noble Baroness, Lady Noakes, says that we need not be afraid to venture into the dark but, humbly, we simply ask for light and to have clarity. I hope that the Minister will be able to provide that in his summing up.
Baroness Hayter of Kentish Town (Lab)
I, too, thank my noble friend Lord Whitty and his colleagues for their excellent report, for his introduction and for getting this debate immediately following the EU’s decision that trade talks can now start. Like others, I pay tribute to the sector for its 4 million jobs, its £6 billion trade surplus with the EU, and its contribution to our economy, to many other industries and to the way that much of the world does business.
As we have heard, our economy depends on services, which are likely to comprise the majority of our exports by 2021. Those will mostly be non-financial ones such as information technology, telecoms, broadcasting, fashion—I am pleased to say—tourism, education, accountancy and law. Despite that, there is no response to the report. This is somewhat surprising given the Minister’s assertion in a Written Answer to me that the Government,
“are fully focused on making the UK’s exit from the EU, and our new trading relationship with the world, a success”,
by minimising,
“the regulatory barriers for … services between the UK and the EU”.
It is hard to think how the Government could achieve this, given the paucity of data and despite their claim to have been undertaking vigorous and extensive analysis to inform our understanding of how EU exit will affect the UK.
The truth is that those so-called sectoral analyses are neither evidence-based nor forward-looking, as my noble friend Lord Berkeley also found on his trip down to Parliament Street. I saw the one on postal services. I will not disclose what it says but I can tell the House that it had far less in it than what Royal Mail had already told me. As with many of the other reports, the interests of consumers in this sector were ignored. There appear to have been no meetings with consumer bodies, while on legal services the department met only the trade bodies and not the regulators that protect the public and consumer interests.
So the Government are aiming for new trade deals with no thought about the wider public or consumer interest and with scant attention to evidence. Indeed, when I heard that Mr Trump had banned the American public health agency from using various words including “evidence-based”, I wondered whether he was referring to our Government, whose whole approach is in stark contrast to that of the EU, where a 30-page European Parliament paper details the effect of Brexit on services. As my noble friend Lady Donaghy said, good data is vital if we want to know where we are going.
We now face a momentous decision about what sort of trading nation—indeed, what sort of society—we want after March 2019. Is it to be some freewheeling, buccaneering economy rewarding the richest and the devil take the hindmost, free of consumer, environmental, safety and worker protection? Some seem to think so. The Sun reported:
“Ministers want to scrap EU laws which limit the working week to 48 hours”,
and might even put at risk the paid holidays we all enjoy.
Following Mr Rees-Mogg’s call for regulatory divergence to be a red line, the Foreign Secretary now envisages a deal giving Britain the power to ditch EU laws—code for lower standards. It is unclear whether Mr Johnson recognises that, in order to trade with the US, we would have to abide by its rules, as the noble Lord, Lord Green, indicated, over which we would have no say—a true vassal state—or whether he is simply seeking to undermine the Prime Minister.
Do we want that deregulated economy or do we want a consensual, profit-sharing, more equitable nation, preserving the environment, ensuring protection for consumers and treating workers with respect? The EU 27 fear that it might be the former, with lower standards ending a level playing field. Apart from their suspicion that that is our vision, there is distrust of the Brexit Secretary. He was even named in a resolution in which the European Parliament, which has to endorse the withdrawal deal, noted that,
“comments ... like those by David Davis calling the outcome of phase one of the negotiations a mere ‘statement of intent’, risk to undermine the good faith that has been built during the negotiations”.
That is a serious criticism of our main negotiator.
Aside from the report before us today, there appears to be no analysis of the mechanism, let alone the cost, of leaving the internal market, despite the warnings from the sector of failure to protect its interests. Most urgently, the sector calls for a rapid agreement on transition on the same terms as now. We on this side are clear that the priority must be a transition within the single market and a customs union, abiding by the common rules of both. This is what industry wants and our economy needs while we negotiate a longer-term relationship. It is also what the EU expects. Its guidelines for moving forward focus on the transition period with the UK in the single market and customs union, maintaining the four freedoms and the jurisdiction of the ECJ. The sooner the Government accept that the better, and the happier our importers and exporters will be. And the sooner the Government accept that an ambitious trade policy and regulatory divergence are mutually incompatible, the easier it will be for them to start serious talks.
I turn to some specific sectors. The UK, as we know, is the largest legal services market in Europe. The market is worth £30 billion and employs more than a third of a million people. The Law Society and Bar Council have spelled out their worries about Brexit, while the Legal Services Consumer Panel, on behalf of clients, has raised the problem that, with no agreement, consumers would not be able to be represented by UK lawyers in EU courts and could lose the protection of confidentiality with their lawyers. Furthermore, civil, family and commercial judgments are currently enforced throughout the EU, allowing consumers to sue or defend themselves in their home courts. With family disputes, the mutual recognition of divorce, maintenance and adoption orders is vital in protecting children and family rights. So a rapid settlement is needed—or else, from April 2019, a child might be taken out of this country with existing court orders suddenly failing to be recognised elsewhere. For these reasons, and that of mutual recognition of lawyers’ qualifications, audience and practice rights, a no-deal scenario would be a major setback for legal services and for their clients.
A particular issue arises with insolvency. At the moment, the regime gives confidence to investors about their ability to recoup money, through the mutual recognition of appointments, so that liquidators can rapidly freeze or capture assets across the EU which are due to creditors here or in another EU country.
Then there are the creative industries. We heard about a much broader approach from the right reverend Prelate the Bishop of Leeds. I will not go through what he said or tackle that issue, but I welcome and endorse the importance of what he said. As we heard from the noble Lords, Lord Aberdare and Lord German, the music industry generated export revenues of £2.5 billion in 2016. In that industry, tours are vital for building fan bases and revenue. Loss of freedom of movement would be hugely detrimental to this sector. The Government must recognise the specific needs of musicians and seek an early answer to the threat of visas being required for EU performances, and must ensure that the EU’s high-level protection for copyright works is maintained post Brexit.
Architecture and its 80,000 people contribute £5 billion a year to the economy and £500 million-worth of exports. A bad Brexit could cut EU exports by a third. The industry relies on international talent, mutual recognition of qualifications and non-tariff barriers. What comfort can the Minister offer it?
The Government do not appear to have the faintest idea of what they want for the service sector. David Davis told Andrew Marr that he wanted a Canada-plus-plus-plus—CETA hardly touches on services—but then he also said that he would not be negotiating sectoral deals. It is hard to know what he means. Furthermore, given that many sectors are dependent on EU agencies, as we have heard, run by boards comprising only EU members, what are the Government trying to achieve regarding UK participation post Brexit?
The service sector depends on the EU regulatory framework, particularly mutual recognition of qualifications and intellectual property, and the free flow of data. Will the Government commit to retaining regulatory alignment and ensure mutual recognition of professional qualifications, which is so crucial to our architects, lawyers, engineers and accountants? These sectors, as we have heard, are highly dependent on talent and the freedom to recruit skilled practitioners. How do the Government propose to safeguard these?
In addition to the new EU Committee’s report, Deal or No Deal, my noble friend Lord Whitty’s report has warned of the crippling impact no deal could have on services. What is the Government’s assessment of the impact on services of no deal, which would restrict the movement of people and forbid trade with the EU on a preferential basis? Finally, will the Government undertake to refuse any agreement whereby Gibraltar’s inclusion in the transitional arrangements is subject to a veto by Spain? Indeed, will the Minister acknowledge the key role that services play in the economy of Gibraltar and undertake to uphold any regime that protects them?
It is shameful that the Government have not responded to the report. As my noble friend Lord Liddle noted, the Government have given least thought to this sector in even contemplating the way in which they want to move forward. So I hope that the Minister will now spell out the future that the Government envisage for our vital service sector post Brexit, suggest to his colleagues that we need a White Paper on their approach and commit the Government to do whatever it takes, even if unacceptable to Mr Rees-Mogg and Boris Johnson, to safeguard the future of these industries.
The Minister of State, Department for Exiting the European Union (Lord Callanan) (Con)
My Lords, it is a privilege to respond to the debate today on the Select Committee’s report, Brexit: Trade in Non-financial Services. I am conscious of the late hour so while I will endeavour to respond to as many as possible of the points that have been made, if I miss one or two then I will look at the record and will be happy to write to noble Lords to respond to them.
I put on record my appreciation of the work of the EU Internal Market Sub-Committee, chaired so excellently by the noble Lord, Lord Whitty, who provided an excellent introduction to our debate today. Indeed, I thank all noble Lords for their excellent contributions; I think everyone spoke extremely well. Obviously I do not agree with every point that has been made, but nevertheless I think it has generally been an extremely constructive debate. The committee’s expertise and strength of analysis is clearly demonstrated in the report.
First, I shall deal with a point that has rightly been raised by the noble Lord, Lord Whitty, and other noble Lords. I recognise the frustration that the Government have not yet provided a response to the report. The Brexit negotiations are the most important negotiations that our country faces, and reaching a new partnership with the EU is in the interests of both sides. As such, the timing of any information that we publish is carefully considered to support the UK’s negotiators in securing the best possible outcome, a point that my predecessor mentioned in her letter to the noble Lord, Lord Whitty, on 26 October this year. However, I assure noble Lords that a response to the committee is now in full preparation, and we will fully reflect policy developments and the progress of the negotiations in that. I expect to be able to publish it early in the new year.
Lord Callanan
The new year. Many of the points raised by this report about our future partnership with the EU and the future of the non-financial services sector relate directly to the second phase of negotiations, which I am delighted to say we will be beginning soon. As such, I hope noble Lords will understand that I will not be able to go into great detail on some areas at this stage.
Through the negotiations we will pursue a bold and ambitious free trade agreement with the EU to ensure the freest possible trade in services, and to support the continued success of the UK’s professional and business services. Since the publication of the committee’s report we have made good progress in the first phase of negotiations, as demonstrated by Friday’s announcement that sufficient progress has been made. A key element of any future partnership will be how the UK and EU continue to trade services, a sector where the UK is a global success story. However, we cannot be complacent about this, a point well made by my noble friend Lady Noakes, who rightly drew our attention the challenges that the future flexible adaptation of services will provide to this country—opportunities that are available outside the EU.
Services are one of the fastest-growing components of the global economy and accounted for 79% of the UK economy in 2016. In his excellent speech, my noble friend Lord Wei was right to draw our attention to the need to focus on the future prospects and how we can develop and expand the sector. Both the UK and EU member states benefit from our close trading relationship. The UK exported about £63 billion-worth of non-financial services, and about £27 billion-worth of financial services to the EU in 2016—I am mindful of the scepticism that noble Lords have expressed about statistics, but those are the latest that I have.
However, it should also be noted that the UK exported significantly more in both non-financial and financial services to countries outside the EU. UK services exports to countries outside the EU grew at a faster rate than service exports to EU member states over the period 1999 to 2016.
Let me now address some of the issues covered in today’s debate. On the subject raised by many noble Lords—but in particular by the noble Lord, Lord Liddle—freedom of movement, yes, of course it is the policy of my party, as exemplified in our manifesto at the general election, that we will end freedom of movement when we leave the EU. That is the policy of the Conservative Party. What he forgot to mention was that it is also the policy of his party to end freedom of movement—or at least it was last week; perhaps this week it has a new policy, but that was the policy. At least the Liberal Democrats have the benefit of consistency, although they got only 7% of the vote as a benefit of that consistency at the general election. Both the major parties committed to ending freedom of movement. Pointing out that it was the policy of my party is of course correct, but the noble Lord might have had the good grace to acknowledge that it is also the policy of his party.
The noble Baroness, Lady Hayter, asked me about consumer organisations. Two Ministers, Robin Walker and Margot James, recently held a round table with consumer groups. I am due to meet various consumer groups in the new year. In April, in evidence at the EU Justice Sub-Committee, another consumer group, Which?, said that it had very good contact with government throughout the process. We will of course have further meetings with those groups.
In response to my noble friend Lord Green, we will seek to ensure continuity, including as we move into any agreed implementation period. The way in which we maintain our international agreements during any implementation period will of course depend on the terms agreed with our EU partners.
The noble Lord, Lord Aberdare, asked about alignment. Of course, we start from a unique position, with the same rules and regulations, as the Prime Minister set out in her speech in Florence. We are committed to making the UK the best place in the world to do business, and this will mean fostering a high-quality, sensible, predictable regulatory environment. We are listening to businesses and want to minimise the regulatory and market-access barriers for both goods and services.
The noble Baroness, Lady Donaghy, asked how we are collecting more accurate statistics. We are working to best use current services data to inform our approach in future trade negotiations, and to explore new types of data. She also asked about the Trade Bill. The Trade Bill, introduced on 7 November, will ensure that the UK has the necessary legal powers and structures in place to enable us to operate a fully functioning trade policy on day one of our exit from the EU. The Bill will also establish an independent body, the Trade Remedies Authority, to conduct trade remedies investigations, providing a safety net for domestic industries against unfair and injurious trade practices or surges in imports consistent with our legal obligations in the World Trade Organization. The noble Baroness will also be aware that in the summer, we published a paper on enforcement and dispute resolution procedures. Given the absence of time, I shall not go through all the details of that.
I turn to the subject of professional business services, which a number of noble Lords mentioned. We agree with the committee’s recommendation that we must be mindful of the significance of professional and business services. The sector is the single largest exporter across all sectors of the economy, with 26% of services exports to the EU in 2016, a point well made by the noble Lord, Lord Whitty, in his introduction. The Government understand the concerns of the sector, including access to talent, being able to move people across borders to provide services, the importance of cross-border data flows and the mutual recognition of qualifications, on which I shall say more shortly. We also recognise the importance of access to talent and the fly-in, fly-out business model for the professional and business services sector. The Government will create a fair and sustainable immigration system that works for the whole of the UK.
To respond to the point made by the noble Baroness, Lady Randerson, and the noble Lords, Lord German, Lord Davies and Lord Whitty, the UK will remain an open and tolerant country that recognises the valuable contribution that migrants make to our society; it welcomes those with skills and expertise to make our nation better still.
The Government understand the report’s concerns regarding the challenges facing some parts of the sector, including the current provisions that support legal services trade. We also recognise the importance of rights of establishment to services sectors. The World Trade Organization estimates that around 55% to 60% of services trade relates to establishment overseas. The committee’s report noted how the trade in services agreement, or TiSA, provides an opportunity to update the global terms of trade for many services. The negotiations on TiSA are currently on hold; however, the UK continues to be committed to an ambitious agreement.
A number of noble Lords raised digital services, particularly the noble Lords, Lord German and Lord Aberdare. We are committed to ensuring that the UK is the global leader in starting and growing a digital business, trialling new technology or undertaking advanced research. On 1 March, the Government published the UK digital strategy, which has put in place the conditions to ensure that the UK’s digital sectors can remain world leading, alongside ensuring that the benefits of digital are felt across the whole of our country. The ability to collect, share and process data is crucial for many sectors, from financial services to tech and energy companies. The noble Baroness, Lady Randerson, was right to highlight the successes of that sector.
Data transfers are also crucial for our ability to co-operate across borders on law enforcement and security issues. On 24 August, we published a paper entitled, The Exchange and Protection of Personal Data. This set out how we want to ensure the continued protection and exchange of personal data between the EU and the UK, in light of the UK’s withdrawal from, and new partnership with, the EU. In addition, as part of the Government’s commitment to ensure that the UK’s digital sectors remain world leading, the Data Protection Bill was introduced on 13 September. The Bill is intended to create a new data protection framework fit for the digital age, which incorporates the provisions of the EU’s general data protection regulation into our domestic law. The Bill will ensure that the UK is prepared for the future after we have left the EU.
In response to the point of the noble Lord, Lord Aberdare, the Government agree with the report regarding the need to engage with the digital single market. To date, the UK has been a leader in the emerging digital single market, arguing for an open and flexible market with a regulatory framework that reflects the dynamic nature of the digital economy. The committee’s report highlighted the importance of data flows. We recognise the importance of the free flow of non-personal data initiative, and resisting the introduction of unjustified data localisation requirements by other member states.
The noble Lord, Lord Aberdare, drew our attention to mobile roaming. Of course, he is correct that roaming surcharges for travel within the European Economic Area were abolished in June. Of course, in the course of Brexit negotiations, we will seek the best possible deal that delivers for UK consumers and businesses in this sector.
A number of noble Lords raised the issue of creative services, particularly the noble Lords, Lord German and Lord Aberdare, who drew our attention to the successes of the music industry. They are, of course, right. The creative sector is one of the UK economy’s greatest success stories, and is growing by 8.9% a year, making it the second fastest growing industrial sector. The high-quality content and talent produced and developed is both recognised and respected across the world. The committee’s report recognises the broadcasting sector. The UK is the EU’s biggest broadcasting hub, hosting a large number of international broadcasting companies, a point well made by my noble friend Lord Inglewood. As the committee has observed, the EU regulatory framework underpins the business model of many international broadcasters currently located in the UK, as the noble Lord, Lord Aberdare, reminded the House.
We agree with the report that continued strong protection for intellectual property is important. It helps to protect individuality and support innovation in the creative sectors. The noble Lord, Lord German, asked about intellectual property. Globally, the UK has a competitive edge in protecting and enforcing intellectual property rights. We are discussing options with users to ensure that the UK’s intellectual property regime, including protection of unregistered designs, will continue to properly support innovation and the UK’s creative industries. The report also mentioned the limitations of TRIPS. As part of its WTO membership, the UK has committed to meet certain minimum standards of intellectual property protections set out in the TRIPS agreement. I am pleased to say that, in many cases, existing UK law—either domestic or EU-derived—goes beyond these standards. We do not expect that situation to change as a result of leaving the EU.
The noble Lord, Lord Whitty, asked me about air services. As a former Aviation Minister, this is an issue close to my heart. Aviation is a critical network industry that underpins the functioning of the economy and international trade. The UK has the largest aviation network in Europe and our airports service is the third largest aviation network in the world. It is in the interests of both sides to maintain closely integrated aviation markets. The Government are seeking the best possible relationship with the EU in the field of air services and are looking at all the options to deliver that. The precise form of the UK’s future air services relationship, including with EASA and SESAR, will be a matter for the negotiations. The committee’s report mentions bilateral air service agreements. Air services between the UK and a number of countries outside the EU—notably the US—are currently determined by EU-negotiated agreements. The Government will be seeking new, bilateral, arrangements with those countries as a matter of priority. The target is to ensure that market access levels are preserved and to have identified arrangements for this before we leave the EU.
We also acknowledge in the report that ownership and control rules may have implications for both UK and non-UK airlines. The UK is, and will remain, an excellent base to do business, to establish headquarters or to found a business, including in our world-renowned aviation sector. It would not be appropriate for me to comment on the contingency plans of individual airlines. The report correctly highlights that there is no WTO provision regarding aviation services. This is a fundamental consideration when it comes to negotiating our future relationship with the EU. EU member states benefit from liberal market access. We have a common interest in getting the best possible outcome.
A number of noble Lords mentioned tourism, education and health-related travel services. The noble Baroness, Lady Donaghy, in particular, talked about education. The Government recognise the social and economic benefits of a healthy tourism sector. The UK and the EU have a common interest in securing a mutually beneficial agreement on tourism in future. The noble Baroness asked about EU students. We highly value the contribution of EU and international students, researchers and academic staff. We have listened to the concerns of the higher education sector and taken action to provide greater certainty for it.
We have already committed to underwrite successful bids for Erasmus+ which are submitted while the UK is still a member state, even if they are not approved until after we leave and/or payments continue beyond the point of exit. Home fee status is also secure for the duration of students’ courses. Bids for higher education study periods submitted before the exit date will include mobility in the 2018-19 and 2019-20 academic years. We have also confirmed that research councils will continue to fund postgraduate students from the EU whose courses start in 2017-18.
The report mentions trade in education and health-related travel services. The reciprocal rights that will apply following the UK’s exit are subject to the wider negotiation on our future relationship with the EU. We support existing processes of voluntary co-operation in higher education, such as the Bologna process, which contribute to improving skills and employability in increasingly competitive global environments.
I will say a word about the mutual recognition of qualifications, which was raised by the noble Lords, Lord Whitty, Lord German and Lord Berkeley, and the noble Baronesses, Lady Donaghy and Lady Hayter. They all raised the importance of the mutual recognition of qualifications, which has also been the subject of negotiations on the withdrawal agreement. The Prime Minister has been clear that she wants EU nationals in the UK and UK nationals in the EU to be able to continue their lives broadly as now. That is why we have agreed the continued recognition of qualifications where recognition decisions were received or where recognition procedures were ongoing before the withdrawal date. This will cover qualifications recognised under the mutual recognition of professional qualifications directive, lawyers practising under host title and approved statutory auditors.
We are committed to getting the best possible deal for the United Kingdom in negotiations; that includes for the non-financial services sectors. We will continue to update Parliament on the negotiations for our departure from the European Union. Again, I would like to reassure noble Lords that we are working to formally publish our response to the committee’s report as soon as possible, and that will be early in the new year.
I am grateful to all noble Lords for their contributions over the course of this wide-ranging and informative debate. I am sure that the House will continue to play a valuable role in the work of the Government and contribute towards securing a deal that works for everyone.
Lord Whitty
My Lords, in view of the hour and the state of my throat, I will be relatively brief. I thank the Minister for his response. In default of a previously written report, he has covered a lot of ground. I am not entirely clear why the department could not have written that down before. Nevertheless, I am grateful for it and look forward to a more detailed reply in the new year which fits his remarks in the general positioning of the Government following the conclusion of the withdrawal arrangements and the discussions that have now taken place at the highest level on the Government’s approach to Brexit.
There are two key points about this report. I thank all noble Lords who have participated in the debate—both the members of the committee and the newcomers. I was particularly grateful to see the noble Lord, Lord Green, join us. I will certainly take his point and will read the Japanese agreement in more detail than I have done hitherto. Those noble Lords who are outsiders will have noted, from the rather clever sequencing of speeches, with the noble Baroness, Lady Noakes, being followed by my noble friend Lord Liddle, that the committee is not always easy to control or to bring to a consensus. However, broadly we do, and the report reflects our experience of that, whatever our preconceptions.
The two key things are these. These sectors—this wide range of sectors—are very important to this country. I think that many of us did not realise quite how large or how important they are, and they require special attention in relation to trade discussions. Hitherto, we had the suspicion that their leverage had been somewhat less than that of traditional sectors such as manufacturing and the City. It is therefore important that their voice is heard.
Their voice was, by and large, pretty unanimous. It was not that they wanted the status quo, but they were keen on the single market and wanted to move more rapidly than the EU was moving towards something like the single market. However, we know that that is not the Government’s preferred option; we are talking about the structure of a free trade agreement. All of us, whatever our previous preferences, are focused on what the nature of that agreement now is.
What we need more from the Government than we had tonight is an indication of how the esoteric elements of these various industries will fit in with their approach to negotiating that free trade agreement. If the Minister is able to give us at least an indication of that without betraying all the cards in the negotiations early in the new year, I am sure that all of us would be most grateful—as, more importantly, would be all those sectors. There is a lot of uncertainty and concern, and these sectors are all people based. They serve people and employ people, and their assets are not fixed but are intellectual and people-based assets, which means they are highly mobile. The success that the UK has hitherto had in these sectors is a fragile but very important thing, and we need to preserve it.
I hope that the approach of the Government in the trade negotiations does not ignore these sectors and that in fact there is a brave new world out there. I have as yet to be totally convinced that the Government have reached that point, but we will continue to monitor it, and I am sure that the Government will provide us with some further information.