Britain’s exports of financial services to the EU could fall by almost 60 per cent as a result of leaving the single market, marking a “sea change” in the services sector that drives the UK economy, according to new research by the Centre for European Reform.
The think-tank sought to assess the impact of new trading barriers on the key areas of services where Britain currently has a comparative advantage — finance, insurance, law and accountancy.
It estimates, in a paper published on Tuesday, that exports of financial services, minus insurance and pensions, would drop from their level of £23.6bn in 2013 to £9.8bn — a decline of 59 per cent — if Brexit led to the UK and EU trading services under the provisions of a free trade agreement, rather than as a member of the single market.
Exports of insurance and pensions services would fall up to 19 per cent and those of regulated business services — including law, accountancy and consultancy — by up to 10 per cent.
“Economic activity that now takes place in the UK will relocate — with knock-on effects for investment, jobs and tax revenues,” said Sam Lowe, the paper’s author.
His estimates reflect an assumption that the composition of UK services exports to the EU would gradually shift in profile to that of the UK’s current trade in services with the rest of the world.
Mr Lowe said that at present, cross-border sales made up a large proportion of the UK’s services exports to the EU. In trade with the rest of the world, however, the UK generally supplied services through incorporation. “If you want to serve a particular market, you set up there.”
Although Brexit advocates “have a tendency to say the single market in financial services does not exist”, the EU is in fact “the most comprehensive example of multi-country services liberalisation in the world,” the report said. In contrast, free trade agreements that the EU has reached with the rest of the world hold little advantage over trade on WTO rules.
Even if the EU wanted to strike a sweetheart deal with the UK on services, it would not be able to without a fundamental change in its approach to other third countries, the CER said.
Mr Lowe said that outside the single market, the only thing that could significantly reduce the damage to financial services would be a “huge expansion” of the equivalence regime— under which countries recognise each others’ regulations.
“It doesn’t seem likely that’s on the table at the moment,” he said.