Financial services are the key stumbling blocks
EIGHTEEN months since the referendum in June 2016, the UK and the European Union (EU) are only now ready for challenging trade negotiations.
Phase one of the negotiations has finally been signed off, but EU leaders have declared that official trade negotiations will only begin in March.
Several leaders maintain that they don’t know what the UK wants and that negotiators on both sides require some 12 weeks to prepare.
British Prime Minister Theresa May’s stance has been for Britain to leave the EU’s single market and customs union.
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Such a move would be problematic, however, because of the border between EU member Ireland and Northern Ireland, which is part of the United Kingdom.
Dutch Prime Minister Mark Rutte warned on Friday that the economic consequences of such a policy would be “huge”.
Leaving the single market would place the UK’s financial sector – which would lose its ability to operate automatically across the bloc – at a “considerable disadvantage”, he said.
There have been considerable emotion within the British Parliament and concerns in the EU, so trade facts need to be considered closely.
Thanks to a December House of Commons briefing paper, business people and others in the UK, EU and also trading partners in North America, Singapore, the rest of Asia and elsewhere, can assess the risks and possible opportunities.
In 2016, the UK exported £555 billion (S$997 billion) in goods and services and imported £595 billion, resulting in a trade deficit of £41 billion, the paper estimated.
This is equal to 2.1 per cent of gross domestic product (GDP). Exports of goods were £302 billion, while imports were £438 billion in 2016, resulting in a deficit of £136 billion, a whopping 6.9 per cent of GDP.
Although the UK recorded a large goods trade deficit in 2016, a surplus was recorded in the trade in services. UK exports of services were £253 billion in 2016, while imports were £158 billion, resulting in a services surplus of £95 billion.
This amounted to as much as 4.8 per cent of GDP. The services sectors in the UK economy are highly significant, following a decline in the manufacturing sector over the years to only around 15 per cent of GDP.
The Office for National Statistics estimates that services accounted for 79 per cent of the economy in 2013 and economists believe that the proportion is around the same level currently.
Services include banking, insurance, fund management, tourism, law, architecture, creative industries and management, and these sectors are large employers, especially in London.
The services trade surplus is significant, as Brexitiers are stressing that the EU needs Britain more than the Britain needs the EU. They base their view on the UK importing far more goods from the EU than it exports there.
They agree that the EU was UK’s largest trading partner in 2016, accounting for 43 per cent of UK exports of goods and services.
But the UK imported as much as 53 per cent from the Union. The UK had a trade deficit with 18 of the 27 EU member states in 2016, a surplus with four others and was broadly in balance with the remaining five, states the House of Commons paper.
The UK’s largest EU trade surplus was with Ireland (£6 billion) while its largest deficit was with Germany (£26 billion).
Since the balance of goods trade has been in the EU’s favour, the trade deficit in manufactured goods, cars and other products was £96 billion.
On the other hand, the balance of services trade has been well in favour of the UK, resulting in a surplus with the EU of £16 billion in 2016.
David Davis, Brexit Secretary, said in a BBC interview that he wants a trade deal with the EU similar to “Canada plus, plus, plus”.
But Canada’s trade deal is in goods, whereas Britain is highly dependent on a formidable services deal.
This includes so called “passporting” rights, allowing bankers and other financial industry executives to sell their services in the EU. Indications from EU negotiators and leaders, however, are that such an outcome will be difficult to achieve.
Brexitiers contend that the UK can walk away from a deal with the EU, if the offer doesn’t meet expectations.
They are basing their optimism on the UK’s 2016 trade surplus with non-EU countries. For these nations a deficit in goods of £39 billion was offset by a surplus in services of £78 billion.
The UK’s largest trade surplus was with the US, and was worth £33 billion. The UK’s largest trade deficit, outside the EU was with China (£25.4 billion).
The UK exported £100 billion of goods and services to the US, 18 per cent of all UK exports. This was slightly more than twice exports to Germany, the UK’s second largest export market.
Seven of the UK’s top 10 export markets in 2016 were EU member states – the remaining three were the US, China and Switzerland.
Germany was the UK’s largest source of imports in 2016, with imports totalling £75 billion, 13 per cent of all UK imports.
The US was the second largest source of imports at £66 billion (11 per cent of all imports) and the Netherlands third at £42 billion (7 per cent of all imports).
Seven of the UK’s top 10 import markets were in the EU in 2016 – the remaining three were the US, China and Norway.
Are you concerned about your own negotiations? Comments are below.
(This article was first published in The Business Times, Singapore.)
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