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28 Dec 2020

Policies

Relationship with the EU

The UK is a services economy. The sector makes up around 80% of the economy and the EU is its largest export market. However, under the Trade and Cooperation Agreement (TCA), services trade between the UK and the EU will be more difficult from 1 January 2021.

This may appear surprising given the deal includes a number of general provisions to support cross border services trade. For example, it includes commitments on local presence which bans the parties from demanding that a local subsidiary is established before services can be provided in any particular state.

It also includes a most-favoured nation statement which means that if the UK or the EU agree more favourable terms with another country in the future, these terms will also be automatically be extended to UK-EU trade.

In practice, the benefit of these agreements is significantly restricted because they are subject to a large number of exceptions that vary both by service type and country. For example, short term business travel is permitted under the deal but only subject to a number of general restrictions.

Independent professionals will need to hold a degree and had have six years experience to be able to take advantage of the agreement on short term business trips and there are further restrictions at the member state level.

For instance, UK service providers operating in Austria will be unable to stay for longer than six months in any twelve month period, or for the length of their contract, if that is longer than six months. The equivalent time cut off in Czech Republic is 12 months (or for the length of their contract if that is longer).

Beyond business trips, there are also restrictions on whether UK services providers can service EU clients.

For example, UK providers of insurance advisory services will need to undertake an economic needs test which is usually understood as a barrier to cross border trade to work in Denmark unless the contract requires a stay of less than three months.

But no such restrictions exist if they want to work for a customer in France. The UK has not listed the same restrictions on EU providers serving customers in the UK

There are also notable absences from the agreement for services. One of the most significant is the mutual recognition of professional qualifications.

Whilst a member of the single market, qualifications in areas such as legal services, architecture and engineering gained in the UK by both UK nationals and EU citizens were recognised across the single market with very little additional regulatory oversight, sometimes automatically.

The UK negotiating mandate went further than is typical of FTAs in this area setting out a ‘pathway’ aimed at greater continuation of existing approaches to cross border recognition of qualifications. This was not agreed in the deal.

From the 1 January, UK nationals planning to service clients in the EU, and EU citizens holding UK qualifications, will typically need to have these qualifications recognised on a state by state basis in the EU.

This adds considerable additional barriers to cross border service provision because the rules on such recognition vary by state and sector.

The TCA provides a future framework for mutual recognition of professional qualifications through a Partnership Council on a case by case basis although this will not be in place by 1 January.

In the case of legal services, for example, lawyers holding UK qualifications that have not been recognised by 1 January would need to be resident in the Czech Republic in order to advise on UK law but in Austria, they could not be resident and instead would need to provide legal advice cross border form the UK.

Audiovisual services which are an area of strength for the UK are excluded from the TCA, in common with other EU free trade agreements.

In contrast, the TCA does make provisions to support both data transfers and digital trade. With regards to data, currently the UK is able to access the free flow of information across the single market.

This will cease on the 1 January without a data adequacy decision from the European Commission in which it determines whether to recognise the UK’s data protection mechanism as equivalent to the EU. Such a decision has not been made to date and is not formally part of the TCA.

There had been concerns that the UK could face considerable data disruption in commercial and law enforcement areas without such a decision.

Reflecting the more positive bilateral relationship facilitated through the agreement of a deal, these concerns have been allayed, at least temporarily, by the agreement of a bridge period of six months from 1 January 2021 to finalise data adequacy decisions.

This will also provide firms with more time to plan how to comply with any regulatory changes in this area.

The TCA also goes further than the EU has in its existing free trade agreements in facilitating cross border digital trade by, for example, not stipulating requirements about where data is stored or processed.

Despite the important details on data and digital trade, the TCA fundamentally changes the ways in which the UK’s services sector will be able to export into the EU from the 1 January. The sector will need to adapt rapidly to a country by country, service by service patchwork of market access requirements.

Navigating this new landscape at short notice will lead to additional costs and paperwork requirements for UK firms at a time when the Covid-19 pandemic makes taking on additional planning more challenging.

The implications are likely to be felt within the UK economy more generally because business services, including areas like legal, accountancy and engineering represent the largest form of UK service exports from the UK to the EU.

The TCA means that, even though a deal has been agreed, the future of this export market remains uncertain.

By Professor Sarah Hall, senior fellow of UK in a Changing Europe. 

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