Without financial services there’s really no deal at all

 

Howard Shore, Founder, Puma Brandenburg Ltd & Shore Capital Group Ltd

News that the Prime Minister is mounting a diplomatic mission to appeal to business leaders in the European Union’s member states is to be welcomed, but it should have come much sooner.

The Government’s first attempt at wooing European business leaders, in the wake of the referendum, did not go well. The high-handed message, “you need us more than we need you”, cut little ice.

We should instead constructively explain a simple truth to business leaders across the EU: in order to finance the purchase of their goods and services, we need to be able to sell our goods and services into the EU. If they don’t give us free access, then we shouldn’t reciprocate.

Services are the key. The EU’s services industry is not a significant fiscal contributor for member states compared to the UK. But services account for the majority of Britain’s economy and the City of London alone paid £72bn of tax in 2016.

Ministers will have succeeded in this latest effort if business leaders in member states convince their governments that we can easily apply regulatory standards that make it difficult for them to sell their goods in the UK if they frustrate the sale of our services in their countries.

                

Similarly, the EU’s general exclusion of services from their trade deals is arbitrary. Just because their recent trade deals don’t generally include services, does not mean that they should be excluded from the one about to be negotiated with the UK, a departing member state.

Ireland has $1bn (£720m) of beef to worry about; France $1.2bn in beverages; Italy has $1.7bn in clothing and footwear; and Germany, beyond the often-cited $20.8bn in automobiles, exports approximately $19.7bn of machinery and electronic equipment to Britain.

The point of a negotiation is to arrive at a mutually beneficial and fair outcome for both sides. In excluding services, the EU is effectively telling Britain that its world-leading services do not qualify.

Britain could, in turn, retaliate. Without this, Britain could easily target member states’ imports in sectors where we buy substantially more of their goods than they do of ours. The first phase of negotiations was the UK’s pledge to continue payments to the EU, but it should only hold if British businesses can gain fair access to EU markets on equivalent terms.

 

 

 

 

 

 

"The point of a negotiation is to arrive at a mutually beneficial and fair outcome for both sides. In excluding services, the EU is effectively telling Britain that its world-leading services do not qualify."

Looking at the most recent 2015 UN Comtrade data, analysed by the Legatum Institute, there are substantial trade surpluses that could come into focus if there is a tit-for-tat trade war. Ireland has $1bn (£720m) of beef to worry about; France $1.2bn in beverages; Italy has $1.7bn in clothing and footwear; and Germany, beyond the often-cited $20.8bn in automobiles, exports approximately $19.7bn of machinery and electronic equipment to Britain.

Applying common external tariffs to EU imports in 2019 could have stark effects for member states and while WTO reversion is the default legal position, the situation could in reality be much worse. Britain could easily apply a range of non-tariff barriers to EU imports.

Look at the US government’s 300pc tariff on Bombardier C-Series jets on the grounds that the aircraft were being sold for less than their cost of production.

What if Britain told German car manufacturers that, because they manipulated diesel emissions tests, a new environmental levy would be placed on German automobiles? What if we said to French champagne producers that their late stage sugar additives, which increase calories, were no longer acceptable, citing anti-obesity concerns?

Trade wars hurt everyone, as recognised by Xavier Bertrand, the president of France’s Hauts-de-France region: “We shouldn’t seek to punish the British.”

Bertrand’s region is home to France’s largest passenger and fishing ports and its third largest cargo centre. In France, as undoubtedly is the case across the EU, businesses don’t want to derail economic recoveries that will cost jobs and fuel destabilising populist politics.

Punishing the UK for leaving the EU, not least to dissuade other member states from following suit, is reductive. Only Sweden and Denmark are in a comparable position to Britain as they are not members of the eurozone and they pay more into the EU than they receive in fiscal transfers from it. Regardless of how unhappy they may be, Eastern European members would not wish to leave because they are, by some margin, net beneficiaries of the EU fiscal transfer.

The simplest solution would be to continue the status quo of mutual free access to each other’s markets, which would be to the EU’s advantage. And while we would leave the single market and customs union, that does not mean we could not contribute towards their upkeep in return for fair access.

Only because of dogmatic political short-sightedness would you make things worse.

While politicians bicker, businesses across the EU will be making it clear to their national governments and the European Commission that we want to keep trading with each other.

 

 

 

 

 

 

 

 

 

 

 

 

"While politicians bicker, businesses across the EU will be making it clear to their national governments and the European Commission that we want to keep trading with each other."