How Britain's Economic Future Still Depends On Brussels

Britain has a services-based economy: 80% of our output and employment is in services. Professional services, finance, travel, telecoms/computing are all key areas, as is degree to which retail sales are online. This is clearly an advantage for a set of islands when it comes to exports, because services don't need to be shipped. But services may be subject to other trade barriers, such as licensing requirements when offered in other countries, as well as unfair trade practices by local competitors and suppliers. Rules and how well they're enforced are important issues. About half our trade is with the EU, because it's closer than the rest of the world. The EU is also a market of 448m people, 412m of whom are internet users, with 288m online shoppers. That makes enforcement of the EU's new Digital Markets and Digital Services Acts all the more critical, regardless of the fact that the UK no longer sits at the regulatory table.

Scale of UK services exports to the EU

While we generally import more than we export, that overall trade deficit being £33bn in 2023. That's the result of a deficit of £187bn in goods imported over exports, offset by a surplus of £153bn in exported services (including services that overseas customers bought here in the UK, as well as services performed by UK firms working abroad). 

Brexit has obviously made the EU market less accessible for UK firms, so the loss of the free movement in goods, services, people and capital makes earlier comparisons unreliable. But based on trade data for 2022: 

• the EU accounts for 36% of Britain's total services exports;
• we have a trade surplus in services with 14 EU countries and a deficit of trade in services with 13 countries, our closest neighbour being the largest surplus (Ireland at £14 billion) and Spain the largest services deficit (£11 billion); 
• our single largest type of exported service was £55bn worth of “other business services”, being legal, accounting, advertising, research and development, architectural, engineering and other professional and technical services, representing 38% of all UK service exports to the EU. 
• exports of financial, travel and telecoms/computing/data services are also very significant.  

The Importance of Digital Platforms

You can see from the nature of our most successful services exports that their marketing and supply depends on digital platforms and related services, including search engines, cloud/hosting, app stores, browsers, e-commerce marketplaces and messaging services. 

While most of the services exported by British businesses will be supplied electronically to EU businesses of varying sizes, the online consumer markets are obviously also very important. In the retail sector, over a third of British business is now online, making the UK the third largest country in terms of the share of retail that is e-commerce, after the US and China. By contrast, about 15.4% of retail sales across all EU countries occur online. In absolute terms, however, the UK only has a domestic market of 66m internet users, while the EU has 412m (92%) of its population using the internet, 70% of whom (288m) buy stuff online. 

At that scale it becomes very important that the EU's digital markets are well regulated, and that businesses and their customers are shielded from unfair competition and trade practices.

How Does the EU Ensure Fair Digital Markets?

The Digital Markets Act (DMA) builds on existing competition law by rooting out unfair practices of very large digital platform operators (“gatekeepers”) when providing services that other businesses use to reach their own customers online. Alphabet, Amazon, Apple, ByteDance, Meta and Microsoft have all been designated as gatekeepers, since they effectively act as private rule-makers who could potentially create ‘bottlenecks’ and ‘choke points’ that limit access, unfairly exploit personal and business data for their own purposes and/or impose unfair conditions on market participants. All face exploratory investigations under the DMA by the European Commission in connection with search services, app stores, browsers and messaging services, to see if they might be luring away customers from other businesses who use those platform services. 

The EU's Digital Services Act (DSA), on the other hand, protects EU-based users of online communication, e-commerce, hosting and search services, by exempting intermediary service providers (“ISPs”) from certain liability for performing certain duties. There are extra requirements for ISPs with at least 45m average monthly active EU users (known as ‘very large online’ (or 'VLO') platforms and search engines). Even UK providers may be caught, where it has an entity based in the EU or has a 'substantial connection' with the EU (i.e. a significant number of users as a proportion of the EU population or by targeting its activities at one or more EU countries). Services such as Bing, Google Search, Facebook, Instagram, Snapchat, TikTok, YouTube, X/Twitter, AliExpress and LinkedIn already face exploratory investigations under the DSA. Basically, the European Commission wants to know how these businesses: 

• mitigate the risks of creating and spreading information using generative AI and risks to electoral processes; 
• block illegal content; 
• protect users' fundamental rights; 
• avoid promoting gender-based violence; 
• protect children; 
• protect users' mental well-being; 
• protect users' personal data; 
• protect consumers; and 
• avoid the infringement of copyright and other intellectual property rights.

How Do British Businesses Benefit From the DMA and DSA?

British businesses will not want to spend heavily to acquire and deal with customers via gatekeepers' services, only to see the gatekeepers take those customers on directly. That's where the DMA comes in. It should not matter that a foreign business is among those who suffer any violation, since that will also affect EU businesses and customers that the DMA is primarily designed to benefit. 

More widely, British businesses trading online the EU customers should also be reassured that the DSA regime is designed to ensure those customers are treated well and fairly in the intermediary environments. Otherwise, they risk losing both the channels through which they attract and deal with EU customers and/or the EU customers who are unwilling to engage with those channels. Equally, businesses will want to know that they are taking on genuine customers and dealing with reputable service providers online, rather than risking exposure to fraud and intellectual property rights infringement via their EU sales and marketing channels.

Either way, it's clear that Britain's service exporters are highly dependent on the EU trade bloc and its regulatory regime, regardless of Brexit.

Whether they can expect the same protection at home is another matter...

Mis-selling Brexit

The British Parliament has finally had the chance to scrutinise the new UK-Japan trade deal that has been trumpeted for so long by Brexidiot Truss. Unsurprisingly, two committees found that the difference between the new deal and the terms available to the UK under the EU-Japan deal are not as extensive as the Secretary of State for International Trade had claimed. An opposition MP found that the government's own figures show the UK will be worse off than under EU terms.

The House of Commons International Trade Committee, did find some extra items on digital services and data (precedent-setting for future agreements) and financial services (including a ban on the need to store financial data in the host country).

The House of Lords International Agreements Sub-Committee pointed out that "exaggerating the gains ... courts unjustified scepticism about what is a respectable ... agreement". 

UK-Japan deal also depends on a trade agreement between the UK and the EU because, for example, "to secure existing trilateral trade flows between the EU, UK and Japan, the UK and EU would need to extend cumulation to Japan through their own trade agreement". 

The Committees want more effective scrutiny of future free trade agreements that are not based on existing EU arrangements, which are likely to be more controversial. 

Meanwhile, Emily Thornberry revealed the results of Opposition efforts to get to the bottom of the economic value of the UK-Japan deal relative to the UK's terms under the EU- Japan deal:

Yesterday in the House, I confronted Liz Truss with her own Department’s report on the question she’s repeatedly refused to answer: what’s the difference, in pounds and pence, between her Japan deal and the EU-Japan deal it replaces? She didn’t look happy. pic.twitter.com/PKuiYYlNnI

— Emily Thornberry (@EmilyThornberry) November 26, 2020

 

A European View of Brexit: Three Sources of Opportunities

Ironically, I was asked to give a European view of Brexit for an online conference this morning. I say, ironically, because it was in my role as an Irish lawyer for an Irish law firm, yet speaking from London as someone who's also qualified as an English solicitor and who left Sydney in 1994 as a 29 year old barrister. I guess that makes me one of Theresa May’s ‘citizens of nowhere’. At any rate, here's a summary of my view - which I tried to couch in terms of opportunities from a European standpoint.

How to view Brexit

I see Brexit as a set of international sanctions self-imposed by voters for emotional reasons - whether perceived 'lack of sovereignty', feeling 'left behind by globalisation', xenophobia or nostalgia. The hard facts never mattered. Trading rights to fish in UK waters to EU countries may have 'sent a shudder' through the House of Commons from a symbolic, nationalistic standpoint but fishing is the UK's smallest industry, employing 24,000 people and exporting 80% of its catch to the EU to help feed 400m people, as opposed to the UK's 65m.

And the hard reality is that the UK helped build the EU trade bloc, including advocating its expansion to 28 members; and contributing significantly to many of its rules, like EU financial services regulation and, ironically, anti-money laundering regulation. So I have little sympathy with the idea that Britain could legitimately expect the EU suddenly to change how it does deals with third countries just because Britain used to be a member state.

Opportunities?

Brexit may be a mess of the UK's own making, but every mess provides an opportunity for someone to clean up.

Looking for opportunities in this context is a bit like the final scene in "The Life of Brian". A lot of terrible things happen in that scene, including mass-suicide out of 'solidarity' with the poor unfortunates being crucified. But it's important to remember that the scene ends with everyone singing “Always look on the bright side of life”.  

To continue the idea that Brexit is a set of self-imposed sanctions, the opportunities really boil down to 'sanction-busting' – finding workarounds for the many problems Brexit creates. Aside from the potential for speculators and other 'disaster capitalists' to make money, there are three sources for these opportunities:

Any form of Brexit means ‘no deal’ for services: 

The end of Brexit transition period in December means the end of free movement of services from the UK into the EU (and the free movement of the labour needed to deliver them), as well as the end of mutual recognition of professional qualifications, licences and various types of certificates (e.g. veterinary, eIDAS identity certificates and so on).

That's a significant problem because services account for 80% of the UK economy, 80% of UK jobs and a third of UK exports, 40% of which go to EEA countries. 

This means UK firms need to set up EEA hubs, which will bring know-how, jobs and tax revenues to their new home countries. Ireland has a great opportunity here, being the only principally English speaking, common law country left in the EEA with a visa-free Common Travel Area for British and Irish workers. That's why I got my own practising certificate in Ireland and added a consultancy with an Irish law firm, since my UK practising certificate and legal qualifications won't be recognised in the EU after Brexit transition ends.

The perceived mishandling of Covid19 by the UK government compared to others (not to mention a trend toward xenophobic policy measures and right wing culture) might also feed into people’s sense of where is best to live, as could a trend toward remote-working as opposed to treating cities like London as essential hubs.

Britain is a consultant/client state:

Successive British governments have been relaxed about the sale of British businesses to foreign buyers, to the point where there aren’t really many major British-owned businesses anymore, and there seem likely be even fewer in future. 

In fact, Britain has evolved not only into an 80% service economy but also a consultant state - a sort of UK Consulting PLC. It majors in financial services, international dispute resolution, artificial intelligence, computing, construction, engineering and lots of other services (not to mention tax avoidance and money laundering) without actually owning the factories, output, buildings or in many cases even the land on which they're built. 

At the same time the British government apparently sees the job of serving its own citizens as something to be outsourced to private service providers. So the government operates like a procurement platform, paying service providers vast sums of tax money to deliver public services in remarkably autonomous fashion, while extracting taxes from the service providers' public sector income (as a kind of referral commission), as well as the taxes on the revenue from UK Consulting PLC. 

Needless to say, there are all sorts of opportunities for EU/UK service providers to import and export services using local UK/EU entities and locally qualified personnel, subject to dual qualifications and nationality/visas for those who need to move between.

Friction at the borders

There will be problems and delays at the UK borders, regardless of any deal or no deal. So Ireland, for example, is busy figuring out how to get its goods in and out by increased ferry services to and from the EU, and is planning how to open up markets beyond the UK. 

On both sides of the borders, customers who import from the EU into the UK or vice versa want to avoid 'customs risk'. That means the exporting suppliers must have a local entity/office in the EU/UK that takes on the responsibility and the liability for ensuring goods are delivered to importers. 

In each case, both European and British businesses can assist each other in embracing these challenges as opportunities, even if the ultimate result is a transfer of British business activity to the EU and a British economy that is smaller and produces less than if Britain had remained a member of the trade bloc.

You see, I told you there'd be opportunities!