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Why the UK would negotiate better services FTAs by itself

The UK has considerable comparative advantages when negotiating services trade agreements. As a member of the EU they have been ignored. After Brexit, they could be put to use


Concluding better services FTAs then the Commission, as previous chapters have shown, is setting a rather low bar. As has been shown in Chapter 33, the Commission has concluded a fair number of service trade agreements, but most are with small economies, which take only 2.4 per cent of all UK services exports. It has largely overlooked the Commonwealth where the prospects for UK services exporters would seem most promising.

In earlier chapters, we sought to understand this failure, and noted the inherent difficulties that arise when negotiations are conducted with prospective partner countries on behalf of 28 member countries. The Commission negotiators themselves might well have difficulty making sense of the still diverse regulatory/legal systems, business practices and educational credentials of 28 member countries. Even if they do, the prospective partner might then find it difficult to recognize what constitutes an attractive offer, or an acceptable compromise.

Negotiating on its own, and for itself, the UK would not face these problems, since, for a variety of historical reasons, it enjoys a number of significant comparative advantages which are described below. They make the mutual recognition of professional qualifications and rules, of regulatory systems, of tax regimes, of accounting and legal practices easier than it is in any other EU country. In all probability, most prospective partners have a greater familiarity with the educational qualifications of British service providers than those of any other member country. This makes it easier for them to recognize them as acceptably equivalent and compatible with their own.

The first advantage might easily be taken for granted.

1. A world language and a true Single Market

First, the UK would be negotiating a simple, familiar bilateral format in its own Single Market, and using the world language of trade, business and diplomacy which happens to be, in many of the most attractive markets for UK services exports, either the first or the second language. Indeed, the English language itself may well be a marketable asset.

Chapter 48 - table 1

2. The extra-EU exports of UK services are larger than any other member

As a result, it probably already knows more about marketing services in the rest of the world, about where and what are the UK’s best prospects, and about the obstacles that impede the growth of services trade, than the Directorates-General of Trade in the Commission, or any other member country, could have acquired.

The annual report of Lloyd’s the insurance market provides an example since it has negotiated licences to operate in 75 jurisdictions including China, India, Japan and the United States, none of which the EU has yet been able to conclude an agreement with.

In all probability therefore, UK negotiations to improve services trade would adopt a more intelligent and informed strategy than that of the EU over the past 42 years.

 

 

3. The global ties of UK educational institutions

 

Chapter 48 - table 2The UK has, for many years, been the favoured European destination for students from around the world seeking to acquire higher educational and professional qualifications. They may do so either by coming to the UK to study or by registering in a UK university extension or extra-mural programme.

Internal students: Large numbers of students from other continents study for degrees in the UK, more than in any other EU Chapter 48 - table 3country.[1] They come from all over the world. The table shows the 20 countries, from which the largest numbers of students come. Nine of them are fellow EU members, the other eleven are countries with which, as luck would have it, the EU has never negotiated a trade agreement.

Extramural students: UK universities and colleges have run extramural programmes for generations. These enable students all over the world to study for their degrees and diplomas in local institutions with the help of local teachers, but to curricula, to standards, and with lecturers and examiners from their registered university in the UK.

In 2014, there were 636,675 students around the world registered with a UK university. Their distribution by their country of origin and by their UK university is given in the map and the table below.[2]

There does not appear to be any similar body of external students in other EU countries, though DAAD, the German Academic Exchange Service, estimated that there were 23,400 such students registered at German universities in 2013-14, with some 10 per cent of them, 2129, coming from other EU countries.[3] The proportion of students from other EU countries at British universities is about the same, 12 per cent, but the number is of course, larger, 35 times larger, at 75,170. The UK is, therefore, far and away the favoured distance learning headquarters in the EU, both for EU students and for students around the world.

In 2014, there were in total over one million students (1,053,368) from abroad studying in or through British universities. Students do not negotiate trade agreements, but former students do, and, since these programmes have been running for generations, there must be probably considerable number of graduates in every country to which the UK exports services which would be helpful when negotiating an agreement. Nelson Mandela and Robert Mugabe are among London’s graduates, which like the Inns have cabinet minister alumni aplenty. As a result, in most prospective partner countries,there is likely to be a comparatively high degree of familiarity with British educational institutions and credentials. In trade negotiations, that familiarity is an advantage which no EU trade negotiator, endeavouring to reconcile the qualifications of 28 members with that of the prospective partner could expect to find.

Chapter 48 - map

 

Chapter 48 - table 4

4. The global reach of UK professional bodies

Many UK professional institutions have a similar global reach, especially those which act as training and qualifying associations and entail lifelong membership. In many cases, they have been the model or prototype for sister institutions in other countries. India, for example, has institutes of Civil, Mechanical and Electrical Engineers which perform functions similar to British engineering institutions. The Bar Association and the Law Society of Hong Kong likewise bear a close resemblance to their English counterparts. There are others in Australia, New Zealand and other Commonwealth countries. And the United States has a large number of Inns of Court.

The ties among professionals tend to be stronger than those of any commercial or educational affiliation simply because the socialization is indelible and the membership lifelong. In foreign settings, fellow members are probably the better guides and interpreter to their home societies than any consular service. Professional networks necessarily penetrate every significant institution in a society and at all levels, though we hear more about those at the top. Among the 2261 overseas members of the Inner Temple are His Majesty the King of Bhutan, the Chief Justices of Pakistan and Singapore, two Justices of the present US Supreme Court, the President of the Caribbean Court of Justice, the former Chief Justice of Nigeria , the Governor-General of Barbados and many more.

The table lists some of the better known UK professional associations and gives their total membership and the proportions of overseas members. In some cases their overseas members are themselves organized. The Chartered Institute of Arbitrators, for example, has 37 overseas branches. Judging by its 2014 accounts those in UAE, Singapore, East Asia, Nigeria, Kenya and Australia were the busiest.[4] RIBA has active chapters in the United States, the Gulf States and Hong Kong.[5]

There appear to be few professional bodies with a similar global reach anywhere else in the EU. The French ordres des avocats may be an exception, but continental professions do not have practice-based, practitioner-controlled training and qualification, or of self-regulation, like the British. For the most part they are state-regulated and primarily concerned with protecting the interests of their current members, which may explain why they are less collegial than their British counterparts. However, comprehensive comparative research on the professions which the EU has been seeking to harmonise is lacking.

Chapter 48 - table 5

 

5. The UK is the preferred location in the EU of foreign investors from around the world, and is itself the EU’s largest investor in other parts of the world

The UK has more inward FDI stock than any other member country. For many generations, it was the favoured European destination of American investors, and then was similarly preferred by Japanese investors. It may yet also be the first choice of Indian and Chinese investors. The figure below gives the amounts of FDI stock held by 24 EU countries in 2014.

Chapter 48 - graph 1

There are of course many reasons why foreign investors choose a particular location, but it seems likely that, among other things, they are stating a preference about which member country they prefer to operate in. And of necessity, after operating in the UK they acquire some understanding of, and familiarity with, UK service providers of all kinds.

Outward FDI flows perform the same function. Per capita, the UK remains one of the world’s largest foreign investors. It follows that when the UK opens negotiations for a services agreement, the negotiators of many prospective partner countries are already familiar with UK services; either because some of their own companies operate in the UK or because UK companies operate in their country. Negotiations need not, therefore, start from scratch.

Chapter 48 - graph 2

Conclusions

How the British overlooked their own decisive comparative advantages in services

The evidence presented above suggests that there are a considerable number of managerial and professional people across the globe, who are familiar with British educational and professional and institutions, and have contact with British services either as employees of British companies abroad or of foreign companies in the UK. When, therefore, negotiations about services enter into legal and medical issues, or audit and accounting procedures, or engineering standards, or have to match institutions and qualifications in these and other fields, the British standards and qualifications are likely to be less foreign to the negotiating partner country. Indeed, given the reach of British universities and professions, there is a chance that the negotiators for some partner countries will themselves be graduates of a British university or members of a British professional body.

Familiarity and recognition constitute significant advantages in negotiating service trade agreements, which the European Commission has plainly failed to recognize. When it surrendered the right to negotiate its own trade agreements, the UK was clearly thinking solely of trade in goods and had no regard for the distinctive comparative advantages it was already accumulating in services. It is now time perhaps for them to recognize these advantages, and to consider ways in which they might be best deployed to contribute to the further extension of UK’s services export markets.

Speculation about a radical form of subsidiarity

It seems unlikely that they would ever be able to do so if they remain members of the EU. However, it is worth considering what would be required if they were to do so while still a member, because while speculating in this manner we are better able to see how present structures and practices prevent member countries making the most of their strengths, and thereby also prevent them making their best contribution to the advance of the European Union as a whole.

In this particular case, the ability of the Commission to negotiate effective service trade agreements is holding back the abilities of the Union’s foremost service trade exporter to extend its world markets for those services. The UK because must instead defer to the Commission which in this particular area (negotiating service trade agreements) is demonstrably less than competent.

To enable the British to make the most of their comparative advantages in services, it would first be necessary for the European Court of Justice to be able to adjudicate whether the Commission has made effective use of rights entrusted to it by a member state, and if not, to require that they be returned to the member states. This would bring to an end the Commission’s monopoly of negotiating service trade agreements, and make subsidiarity an active principle of Union government which would enable a member country, or a group of member countries, to be lead negotiators for agreements in which they have particular skills or interest, and, as in this case, significant comparative advantages. This member country, with others of similar skills and interest would, with the full oversight of other members and of the Commission, and on behalf of the Union, might then strike a deal which they would put into force in their own jurisdictions. This would be on the understanding that, when any other members feel they can live with the terms of the agreement, they too can become a party to it. Services trade, in other words, would no longer be governed by rules devised for goods.

Obviously, this requires an EU with very different institutions and mind set than at present; one in which solidarity cannot be used to restrain members from seizing economic opportunities for which their comparative advantages best prepare them; one in which subsidiarity has become a working principle of government,; and one where the Union leaves members free to play to their strengths because it recognizes that even if a few sometimes obtain some temporary economic benefit before others, it is not at the expense of others, and much to the advantage of the Union as a whole.

This speculation was prompted by the British experience, but it is surely not only of relevance to the UK. In the case of services agreements, it seems likely that Luxembourg would also wish to be a lead negotiator, along with the Netherlands, and the other English-speaking member countries Ireland, Cyprus and Malta. Other groups of member countries no doubt have analogous comparative advantages in other settings. The odds are that a joint Spanish and Portuguese team would both devise and pilot better service trade agreements and relationships with Latin America, than could a Commission team that had first to present the reserved rights of 28 countries.

Notes

[1] http://www.uis.unesco.org/Education/Pages/tertiary-education.aspx

[2] https://www.hesa.ac.uk/stats

[3] The closest competitor of the British programs appears to be the similar extension of programs of Australian universities, which in 2013-14 had 111,404 registered students, and perhaps, if they really are a competitor, public and private MOOCs (massive open on line courses) emanating mainly from the United States. https://en.wikipedia.org/wiki/Massive_open_online_course

[4] http://www.ciarb.org/docs/default-source/accounts/trustees-annual-report-and-accounts-2014.pdf

[5] https://www.architecture.com/RIBA/Working%20internationally/InternationalNetwork/ InternationalChapterNetwork.aspx


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