London’s trade in services must be prioritised in Brexit negotiations

By Tony Halmos

Now that Article 50 has been triggered, both sides in the Brexit talks have laid out their starting positions – and a general election has been called to give the government a mandate for delivering Brexit – it is time to take stock of what London needs most and make sure that all its efforts are steered in a united way to achieve this.

The talks will certainly not be easy, even if, as the Prime Minister argues, an election win for her will provide more flexibility to negotiate a good deal. But what London needs above all else is a wide-ranging, effective trade deal, not just covering goods, but also services. With manufacturing barely 10 per cent of London’s economy, it is full access to the European market for London’s service industries that will drive the city’s future economic success. Talk of ‘no deal, being better than a bad deal’ is all very well as an attempt to sound tough before the negotiations start, but it cuts little or no ice in Brussels or EU capitals.

Photo credit: kloniwotski

Photo credit: kloniwotski

Having to follow World Trade Organisation rules on tariffs on goods would be damaging enough for the UK as a whole. Trade with our largest market in cars, agricultural products, pharmaceuticals, engineering products and more would all be hit, and London would be harmed too. What really matters for London is services trade and regulation – and economically sensible immigration rules.

Given the government has ruled out membership of both the single market and the customs union, what does a comprehensive – and realistic – Brexit deal actually look like for London?

First, allowing trade in services to continue to thrive is key, and much more important than the exact size of the exit payment which the UK will have to make to the EU. Of course, there will be tough bargaining about this figure, as there should be, but it is essential that the UK seeks to do a deal on the payment as soon as it can, so as to get to the core of what matters in good time. The future of London’s economy will not be affected by whether the agreed multi-year exit payment adds up to £25 billion or £50 million. In contrast, to disrupt the initial work scoping the trade in services, and to risk a poor deal or no deal at all, would be the height of folly.

Second, London needs the trade deal – which will hopefully be fleshed out in the first two years, while the exit talks are proceeding in parallel – to focus on services and regulation, especially financial services but for other sectors too, and not just address the trade in goods. It is essential, too, that there are transitional arrangements, or an ‘implementation period’, if Brexit is to work smoothly.

This will not be easy. The single market is one of the world’s few comprehensive trade deals that fully covers services and regulation as well as goods. The WTO overall does not really cover services. London will need a bespoke deal that provides new mechanisms for setting the rules on services trade and for ensuring that the relevant regulations are mutually compatible.

The politics of achieving this will be fraught, both in London and across Europe, even with the UK government holding a renewed mandate to negotiate. The Prime Minister has ruled out the UK remaining in the single market. Assuming this position stands after the general election, the EU 27 will be loath to concede anything which looks the same as the single market.

Meanwhile, the government will be under pressure from the ‘hard’ Brexiteers to end any international involvement in fixing regulations – whether for goods or services – although, hopefully, the outcome of the election will reduce the effective impact of this pressure. London must stick to its guns and argue this case forcefully. It is at the core of a successful Brexit deal for the capital, and it needs both to make this clear and provide all the united support it can for this outcome.

Third, post-Brexit, London needs a flexible immigration system from the EU which, while recognising that complete free movement within the EU is at an end, allows it to continue to access both the highly skilled workforce and the much-needed staff in areas such as hospitality and the creative industries. Of course, this will be for the UK itself to settle, but for London it is an essential part of the overall arrangements for Brexit. In addition, it is to be hoped that the new government will remove foreign students from the immigration numbers, although it appears that Theresa May is very reluctant to do so, despite the protestations of some of her senior ministers. Such students are international visitors and a valuable export, not part of the migration debate, and the UK should copy most other major countries and make this change.

Taking this route, while it provides no guarantees, gives the best path for London to continue as a thriving and successful world city.

Tony Halmos is the Director of the Commission on London, and a Visiting Professor at the Policy Institute at King’s.

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