FUTURE UK TRADE AND INVESTMENT POLICY: THECITYUK SUBMISSION
JANUARY 2017
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@TheCityUK www.thecityuk.com TheCityUK is an independent membership body representing the UK-based financial and related professional services industry. This ranges from banking, insurance, asset management, securities and private equity through to legal, accountancy and management advisory services. These sectors as a whole account for 11.8% of the UK’s GVA and financial services account for 11% of UK tax receipts. They employ some 2.2 million people, more than two thirds of whom work outside of London. TheCityUK’s membership includes UK-headquartered and inward investor firms. Our work on trade and investment policy is undertaken through the Liberalisation of Trade in Services (LOTIS) Committee and the International Trade and Investment Group (ITIG).
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@TheCityUK www.thecityuk.com CONTENTS
Summary of recommendations Page 4-6
Executive Summary Page 7
An introductory section on trade and investment policy, the new trade narrative and Page 8-11 general implications for uk policy as it has developed
The importance of trade and investment policy to business, citing various specific Page 12-13 business priorities for both the content and conduct of the policy
An overall assessment of the trade and investment policy to date follows, with Page 14-16 recommendations on the post-brexit opportunity to take a fresh and fundamental look at all policy requirements to meet the need to maximise uk’s businesses’ market access to key trading partners at all stages of development in the interests of uk economic growth, wealth-creation and employment
Specific policy issues, with recommendations, cover: Page 18-29 • UK policy within the global rules-based system • investment and investment protection • trade in services and servicification • services trade restrictiveness as a tol for policy • complex supply chains: global value chains (GVCs) and trade in value added (TIVA) as tools for policy
21st century policy issues Page 30-33 • Data and data localisation • Other localistaion barriers to trade (LBTs) • State-owned or state-sponsored enterprises (SOEs) competing in commercial markets
Regulatory coherence Page 34-35
Temporary presence of natural persons (GATS mode 4) Page 36
Development of improved consultation on trade and investment policy Page 37
Communicating trade and investment policy Page 38-39
Conclusion Page 40
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@TheCityUK www.thecityuk.com SUMMARY OF RECOMMENDATIONS 1. Importance of trade and investment policy for business: focus, flexibility, forward looking »» Take this unprecedented opportunity to recalibrate the UK’s trade and investment policy as an effective tool for maximising the UK’s access to key trading partners at all stages of development, in the interests of UK economic growth, wealth-creation and employment.
»» Multilateral approaches are to be preferred where they are achievable.
»» At the same time, a multi-tiered approach will be needed, using sectoral accords, unilateral liberalisation, regional and/or bilateral preferential arrangements, crafted to suit the UK’s requirements as a strongly services-orientated economy.
»» As UK investment policy continues to develop, one point of principle will remain important for safeguarding UK business interests: overseas investments by UK business should continue to enjoy the best protection available.
»» An updated UK investment protection policy will need to focus on an approach that covers not only pre- and post-establishment questions in third country markets but also the regime that the UK will be ready to apply to third country foreign direct investment (FDI) into the UK market.
»» Historically, third country FDI into the UK has come largely from OECD countries. But the rise of the BRICS, notably China and India as exporters of capital means that the UK will need to develop an investment regime that will take account of a wider spread of sources of inbound FDI. 2. Trade in services and ‘servicification ‘: reflect the vital role of services to the UK economy
»» UK trade and investment policy must cater for all features of services and servicification in a coherent and holistic way, allowing for flow facilitation across the entire range of goods and services being traded.
»» There needs to be improved statistics on trade and investment in services, in terms of both classification and categories of services covered by statistical data, and of disaggregation of services statistics by GATS Modes of supply.
»» STRI measurements offer strong comparative data for use by UK policymakers when negotiating with trading partners. UK trade and investment policy must reap the benefits of such data, both in seeking liberalisation from other partners and in ensuring that the UK offers as liberal a profile as possible in trade and investment negotiations.
»» A full analysis of GVCs and TIVA may well alter the understanding of trade flows constituting the foundation on which UK trade and investment policy is built. The UK needs to have the data necessary for this analysis, and the UK authorities should draw on the OECD and WTO TIVA databases.
»» UK trade and investment policy needs to integrate these aspects much more fully than before, so that it can fully reflect actual patterns in the global marketplace, the UK economy’s role in it, and the 4 scope for the UK to capture hitherto unexploited competitive advantage.
@TheCityUK www.thecityuk.com 3. ‘ 21st Century ‘ issues: new challenges, new responses
»» The UK needs to oppose forced localisation in relation to data, including by examining whether it may be actionable under the WTO TRIMs Agreement and whether trade and investment agreements can be made an instrument for agreeing shared approaches to increasing on-line security of data.
»» In pressing trade partners for open and trade-compatible data regimes, the UK must ensure that its own position is consistent, clear and compatible with the freedom of data-movement and data- processing that international commerce requires.
»» The UK needs to guard against Localisation Barriers to Trade (LBTs) as a new form of protectionism and recognise them as being a growing threat to global value chains in both goods and services, imposing costs and bearing down on the UK’s ability to compete in other markets.
»» UK trade and investment policy towards LBTs needs to be based on detailed analysis of their incidence, so that they can be tackled at multilateral, plurilateral and bilateral level or as breaches of the WTO TRIMs Agreement.
»» In its bilateral trade and investment agreements, and in plurilateral and multilateral agreements, the UK should be on its guard to ensure that there is an agreed set of disciplines to monitor and guide the behaviour and governance of SOEs. 4. Regulatory coherence: a vital element of any new approach
»» The UK should use the opportunity of Brexit to promote actively the application of international standards.
»» The UK should also intensify its monitoring of rules in third countries, particularly emerging markets.
»» Post-Brexit, the UK should promote the development and use of international guidelines for good regulatory practice.
»» The need for regulatory coherence in financial services will arise in different ways in the UK’s relationships with a range of trading partners. The form it should take will likewise vary. At all events, if trade in financial services is to be further developed, regulatory issues have to be addressed at every opportunity.
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@TheCityUK www.thecityuk.com 5. Temporary presence of natural persons (GATS Mode 4): securing access to global talent
»» TheCityUK supports vigorous attempts to secure commitments from trading partners under GATS Mode 4. This remains an important objective, which should continue to be pursued.
6. Development of improved consultation on trade and investment policy: communication, partnership, informed decision-taking
»» A coherent – possibly mandatory – system for consultation on UK trade and investment policy should be developed.
»» In UK policy formation, trade and investment policy will need to be better understood, articulated and integrated with other UK policies and initiatives. All UK policymakers need to be aware of the bearing of their work on the UK’s competitiveness and on UK trade and investment.
»» The UK government should work together with all stakeholders to enhance informed debate and understanding of trade and investment policy, and its implications for job creation, wealth creation and policy choices.
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@TheCityUK www.thecityuk.com EXECUTIVE SUMMARY
1. Post-Brexit, there will be an unrivalled opportunity to recalibrate and repurpose UK trade and investment policy in the interests of UK jobs and growth, against the background of emerging global trends. This submission to government details TheCityUK’s views on aspects of trade and investment policy that are important to the UK-based financial and related professional services industry, as well as putting these in the context of the interests of the wider economy.
2. Some of these trends reflect long processes of change, particularly in the direction of ever-greater globalisation of world trade. Others, however, are of more recent origin, reflecting 21st century policy changes that have little or no precedent. These have contributed to far greater attention being given to trade and investment policy issues. One thing is clear: it is of unprecedented importance that UK policies connect with and are relevant to growth that is taking place in the rest of the world, whether in developed or emerging markets. This is the consistent theme behind the recommendations in this paper, grouped in six key areas, which are designed to promote that outcome.
3. TheCityUK is a strong believer in the potential opportunities that the UK’s departure from the European Union will offer. One of the most significant of these is the chance, for the first time in decades, to frame UK trade and investment policy afresh. It is a once-in-a-generation opportunity. The elements of trade and investment policy that we consider of greatest strategic importance, are detailed in this paper. We set out 24 specific recommendations grouped within a comprehensive approach that will help the UK to pursue these objectives.
4. We recommend enhanced attention to services trade and investment, the opportunity of a fresh approach to investment and investment protection, and ‘ 21st century ‘ issues including data and data-localisation. We also offer views on practical and operational questions, including the choice of institutional framework for consulting business and other stakeholders, as well as the need for greatly improved business data, particularly on the flows of UK trade and investment in services.
5. Our recommendations do not seek to cover individual markets and market opening priorities. These will be covered in the next stages of our work.
6. The realities of Brexit have led to a significant debate on trade and investment policy, as on other areas of government strategy in a changed world. Much of the commentary has focused on the need, as perceived by many, for the UK to equip itself to replicate the same policies, and pursue the same forms of trade and investment relationships, as the EU has pursued. But while it is true that the key commercial links will generally remain as before, the trade and investment policy options and modalities for managing and enhancing these links can be varied in innovative ways, breaking away from the legacy of past practice.
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@TheCityUK www.thecityuk.com Trade and investment policy and the new trade narrative
7. Trade and investment policies and negotiations have tangible commercial value, and so are vital for business. They are core instruments for giving freer rein to the UK’s competitive advantages in global trade and investment by gaining new markets, opportunities and access. Trade and investment policies have make-or-break qualities based on whether they are effective, are sustainable over the long term, enable business to prosper and contribute to growth and wealth creation. Misdirected policies on the other hand can stunt overseas market opportunities for business and impede competitiveness and domestic structural change. Well applied trade policies are low cost in terms of the benefits they bring as they provide an important means of achieving much needed growth and creating jobs without drawing on public finances.
8. Since 1973, the UK’s trade policy – though not its investment protection policy – has been pooled within the framework of the EU’s Common Commercial Policy (CCP). The CCP dates back to an era before the current trends and potential changes in the balance of power in the global economy. Even the last fifteen years have seen a change from a tri-polar trade policy world to one that is far more multi-polar:
End of Twentieth Century Present
9. For trade policymakers in the UK, the US, the BRICS and others, the move from three dominant economies – Japan having been the one major economy with few or no bilateral agreements – to eight large economies or economic groupings with a large network of actual and potential agreements among them has added to the growing complexities caused by the interplay between multilateral, plurilateral, regional and bilateral agreements. The outcome is a migration of trade and investment policy into the world of game theory, in which all parties must – and do – react to one another.
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@TheCityUK www.thecityuk.com 10. At the same time, the global economic map is changing. Emerging market and developing economies will continue to increase their share of world GDP in the years ahead. According to IMF data, these countries’ share of global GDP will rise to 62% in 2021 from 58% in 2016. Although China is expected to displace the US as the world’s largest economy, the US and EU will both remain important, with each accounting for around 15% of global GDP in 2021.
Largest economies based on share of world GDP RANK 2010 2021 FORECAST CHANGE IN RANK 1 US China +1 2 China US -1 3 India India No change 4 Japan Japan No change 5 Germany Germany No change 6 Russia Russia No change 7 Brazil Indonesia +4 8 France Brazil -1 9 UK UK No change 10 Italy France -2 Source: IMF WEO, October 2016
Source: IMF WEO, October 2016
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@TheCityUK www.thecityuk.com 11. Another metric is the changing prestige of long-standing reserve currencies, particularly given the growing internationalisation of the Chinese Renminbi.
Renminbi Internationalisation, 2010-Present
Source: Standard Chartered Renminbi Globalisation Index (RGI)1 Index Dec 2010=100 11. 12. A third metric is the change in world trade growth. It is too soon to say how permanent this may prove. World trade growth was rapid in the two decades prior to the global financial crisis but has halved subsequently. As a recent OECD Report has noted, “a remarkable two-decade period of rapid globalisation, during which the trade intensity of global GDP increased rapidly, came to an end with the financial crisis. Instead of world trade growing at more than double the rate of global GDP, in the wake of the crisis it has barely exceeded the growth rate of global GDP, slowing sharply from an average of 6½ percent per annum over the two decades to 2008 to 3¼ per cent per annum over 2012- 2015.”2
Note: Trade and GDP measured at market exchange rates in connstant US Dollars Source: OECD (2016) Economic Outlook 99 Database
1 Cited in Chris Brummer: “Renminbi Ascending: How China’s Currency Impacts Global Markets, Foreign Policy, and Transatlantic Financial Regulation” (Atlantic Council Danger of Divergence Report Series 2015) 10 2Cardiac Arrest or Dizzy Spell: Why is world trade so weak and what can policy do about it? (OECD Economic Policy Paper September 2016 No.18)
@TheCityUK www.thecityuk.com 13. These trends all illustrate the extent to which UK trade policy may have suffered a straitjacket effect from being integrated into the EU CCP, given that the CCP dates back to a time when:
•• Europe was smaller, more homogenous and more globally competitive than the EU is now •• global trade may have been on a steadier growth path •• the biggest European economies came higher in global rankings and represented a larger share of global GDP •• the interest of both the UK and the EU was much more in trade in goods than in services •• it was more possible than nowadays to treat a country’s merchandise exports as finished products largely or wholly originating in that country rather than ‘made in everywhere ‘ through global value chains (GVCs) •• the GATT, as predecessor to the WTO, was concerned with trade in goods excluding agriculture, not with services •• trade negotiations mainly took the form of multilateral tariff rounds •• trade between advanced OECD countries took place against a background of fixed exchange rates •• trade was less globalised with less developed complex supply chains and different global corporate structures •• Asian tigers and other new high-growth economies had yet to emerge •• information technology, which now accounts for significant flows of overseas business as virtual exchanges, was in its infancy •• the distinction between forms of trade confined to cross-border transfers and those requiring local direct investment overseas investment was far clearer than today.
14. It would be wrong to overemphasise the straitjacket effects, as trade policy has certainly adapted over the last four decades. But the effects were undoubtedly present, reflecting conditions in a past era before the accumulation of huge global imbalances and other economic disequilibria, when trade and investment policy was more easily isolated as a specialism and did not need to be as fully integrated as now into wider issues of economic governance at national, regional and global level.
15. Brexit will provide an opportunity for the UK to distance itself from such legacy issues and to recalibrate trade and investment policy to take account of certain key questions affecting all trade and investment policymakers:
•• trade in services – in the past this was not trade policy subject-matter, and is still subject to difficulties in formulating evidence-based policies that do not apply to goods such as servicification3, problems in measuring services trade flows, and compiling UK trade and investment statistics •• services trade restrictiveness – there is an increasing recognition of the importance of analysing the degree of restrictiveness of different countries’ barriers to trade in services, so as to develop more reliable methodologies for comparing their effects and their implications both domestically and for trade partners •• complex supply chains in global trade – developments in this area affect both goods and services, and account for the existence of supply chains in which both are tightly interlinked, both in the global economy as a whole and among the UK’s closest trading partners •• trade in value added – GVCs have become a dominant feature of today’s global economy. As OECD research demonstrates4, processes of international fragmentation – driven by technological progress, costs, access to resources and markets, and trade policy reforms – challenge conventional wisdom on recording gross flows of goods and services each and every time they cross borders, and therefore on how trade flows should be evaluated and interpreted •• 21st century issues – new issues that are increasingly seen as affecting global trade and investment, in particular data-movement and data-processing, and forced localisation for example, of data-processing and data-storage.
16. This mix of questions – sometimes collectively called the new trade narrative – has a significant bearing on trade in services in general and in UK-based financial and related professional services in particular. Unless and until the role of services trade and the restrictions on it can be measured and evaluated, both as regards general trade flows and within complex supply chains and value chains, there is a risk of trading interests being misinterpreted, leading to misguided policy decisions being taken. The right approach to these questions is integral to future UK policy-formation for trade and investment.
3 See “Everybody is in Services – The Impact of Servicification in Manufacturing on Trade and Trade Policy” (Swedish National Board of Trade, November 2012) 4 OECD-WTO Database on Trade in Value-Added (OECD and WTO websites) 11
@TheCityUK www.thecityuk.com The importance of trade and investment policy to business
17. The central significance of trade and investment policy is reflected in its importance to TheCityUK’s member businesses. Its success or failure is a factor in the UK’s scope for engagement in the global economy on optimum terms. It is a commonplace view that 90% of global economic growth in the next 10-15 years is expected to be generated outside Europe, and that trade and investment is the conveyor belt that will link the UK to the new global growth centres and be a unique source of productivity gains.
18. Studies support the fact that the UK is well positioned, at least for merchandise trade, and has held its share of global merchandise exports. But other studies point to the need for the UK’s trade and investment policy to be re-orientated towards securing greater gains for UK services exports.
19. The UK’s global ranking in services trade only serves to underline this. The UK is unique in the role and footprint of UK-based financial and related professional services in its international trade. UK financial services exports account for more than half the surplus of all UK net exporting industries. The following chart5 offers a comparison with other major OECD economies:
20. Below these headline figures, the UK’s more detailed position is as follows6:
5 Chart prepared by TheCityUK 12 6 Charts prepared by TheCityUK
@TheCityUK www.thecityuk.com 21. The UK is also the world’s largest net exporter of financial services, with net exports worth $97 billion in 2015, and a world leader in stock of FDI. For all these reasons, it is essential that the UK’s comparative and competitive advantages in UK-based financial and related professional services are fully reflected in UK trade and investment policy objectives. These services are not only important for their globally competitive high-value-added strengths: they also have an enabling role which boosts their value. If greater market access can be secured for them, there will be positive multiplier effects for the other UK sectors that they serve, with added benefits for the UK economy as a whole. It follows that, in TheCityUK’s view, no UK trade or investment agreement should be concluded without these interests being addressed fully and satisfactorily.
22. In TheCityUK’s view, the free play of comparative and competitive advantage, as well as the continued liberalisation of trade in goods and services, are essential to core trade and investment policy objectives, and should be pursued vigorously at the multilateral, plurilateral and bilateral levels. Crucially, countries such as the UK, with open markets, should maintain their progressive role as key drivers of global liberalisation. Businesses in developed and developing markets alike need the potential commercial advantages that market opening can bring in order to continue to compete effectively on a global scale.
23. To gain maximum economic impact, UK trade and investment policy objectives will need to focus on the liberalisation of trade in services, given that the services sector is now the primary contributor to UK economic growth, employment and competitiveness. UK private-sector services businesses already contribute nearly 60% of UK GDP and account for nearly 50% of all UK employment. This rises to around 80% for GDP and employment across all public and private sector services. The UK is also a very significant exporter and importer of services, with around 6% of total world trade in services. Moreover, 44% of all outward FDI by UK businesses and 46% of all FDI coming into the UK is invested into services sectors. With services trade comprising only 25% of UK external trade, there is huge scope for expansion, with the promise of enhanced UK competitiveness and prosperity.
24. From the business perspective, the approach to be taken to global liberalisation is a question of balance. Multilateral liberalisation of the kind favoured in the Doha Development Agenda is to be preferred where it can be achieved: it potentially embraces all members of the WTO, and liberalisation on a basis of Most Favoured Nation (MFN) uniformity is practical and predictable for business. But multilateral liberalisation is unlikely to have the depth that can be achieved in plurilateral negotiations, such as the Trade in Services Agreement (TiSA), or in bilateral accords such as the Transatlantic Trade and Investment Partnership (TTIP). In-depth liberalisation is important for the businesses represented by TheCityUK, as they are in highly regulated sectors for which deep bilateral or plurilateral agreements that include commitments on regulatory questions can be of particular value.
25. Against this background, the UK will need to deploy trade and investment policies that are well calibrated to the interests of advanced, high-value-added services, including UK-based financial and related professional services interests. To be effective for these sectors, the policies will need to cater both for traditional objectives in market access and national treatment. But they will also need to reflect the following:
•• continuing political will to open the UK to international competition as without this the power of the UK’s trade and investment policy stance will inevitably be reduced •• a coherent approach to investment and investment protection for both pre- and post-establishment. This is far more important for trade in services than for merchandise trade, but it also relates to merchandise trade, particularly taking into account the need for satisfactory conditions for FDI affecting both goods and services business in complex supply chains •• a clear approach to regulatory issues, including both prudential regulatory questions and 21st century issues such as data-protection and data transfer on which the UK’s domestic stance needs to be consistent with concessions sought from trading partners.
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@TheCityUK www.thecityuk.com Past trade and investment policy – a general assessment
26. During the UK’s EU membership the EU’s CCP was the EU’s instrument for facing – sometimes well, sometimes less so – the challenges of forty years of unprecedented change in the terms and governance of global trade, as illustrated below:
Global trade over 60 years: tariff levels, trade agreements, GATT/WTO Rounds and RTAs 1947-2007
Sources: RTAs: WTO online databases and Hufbauer-Schott RTA database; tariffs: Clemson and Williamson (2004) up to 1988, then World DataBank (weighted tariffs all products)7
27. In many ways, these global changes have led to a more equitable distribution of wealth across the global economy. Yet huge disparities remain. UK policy will need to acknowledge them, because they are represented, directly or indirectly, in the objectives and aspirations of the UK’s trading partners. One way of illustrating these disparities is the following depiction of the continuing unevenness in the size of financial systems in different markets:
7 With acknowledgements to Richard Baldwin “21st Century Trade and the 21st Century WTO” (Research Institute of Economy Trade & Industry (RIETI) 14 Perspectives from Around the World 014)
@TheCityUK www.thecityuk.com Source: Martin Cihák, Aslı Demirgüç-Kunt, Erik Feyen and Ross Levine “Benchmarking Financial Systems around the World”8, based on the Global Financial Development Database. (Notes: The map is for illustration purposes only. Country sizes are adjusted to reflect the volume of financial sector assets in the jurisdiction, measured in U.S. dollars at the end of 2010).
28. These disparities reflect, at least in part, degrees of market-openness: it seems no accident that the economies shown as hosting the largest financial services sectors are some of the most open economies in the world – the United States, the UK, Germany South Korea and Japan – while others that are disproportionately small are often those that remain more closed, with concomitant limitations on competition. The UK’s trade and investment policy will have to continue to be an instrument for tackling these disparities in relations with the UK’s trading partners.
29. The same disparities will also account for the highly diversified nature of the UK’s future trade and investment policy, in terms of the range of trading partners that the UK must target for trade and investment agreements of all kinds. On the one hand, the policy needs to reach out to the key emerging markets, and invest in relationships with them as partners likely to be central to future global economic growth. On the other, the UK cannot neglect its trading links with developed markets, which still account for the bulk of global wealth and economic power. For some time to come, the UK’s relationships with the most advanced OECD member-countries will remain a cornerstone of its economic success, which is why initiatives such as improvement of the transatlantic relationship (reflected in the TTIP negotiations) are of key importance. Furthermore, such initiatives offer the opportunity on a once-in-a-generation basis to influence and set the frameworks for trade and investment agreements that will follow.
30. Where the UK’s new trade and investment policy offers opportunities for recalibration, these will need to be grasped. Central among these is the phenomenon of GVCs and strategic networks, through which more and more of the world’s economic activity is now organised. Investment policy will also merit reassessment. For the reasons already referred to above, FDI is likely to be of growing importance to the UK and the global economy. The UK attracts more FDI than any other European neighbour, and financial services attracts more FDI than any other sector (see chart below). The UK’s future approach in the investment policy area will therefore have significant implications, given that investment – both inward and outward – plays a significant role in service-delivery.
8 World Bank Policy Research Working Paper No. 6175 (1 August 2012) 15
@TheCityUK www.thecityuk.com Inflow of FDI into the UK
Recommendation i. Take this unprecedented opportunity to recalibrate the UK’s trade and investment policy as an effective tool for maximising the UK’s access to key trading partners at all stages of development, in the interests of UK economic growth, wealth-creation and employment.
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@TheCityUK www.thecityuk.com Specific policy issues UK policy within the global rules-based system
31. The approach to be taken in developing different trade and investment policy initiatives is a question of balance. Multilateral approaches of the kind favoured in the Doha Development Agenda are to be preferred where they are achievable. They have scope for embracing all WTO members, and liberalisation on a basis of Most Favoured Nation (MFN) uniformity is practical and predictable. In economic terms they also represent the most desirable approach, minimising discrimination and maximising opportunities for improved economic efficiency via market expansion and specialisation.
32. There is, however, the obvious problem of making progress on such issues within the WTO framework. While the establishment of the WTO in 1995 gave multilateral liberalisation a permanent institutional base, further progress has been sporadic. In the early days after its creation the WTO had a number of successes: in the services field the Protocols to the GATS covering Financial Services, Movement of Natural Persons, and Basic Telecommunications were notable successes. But the current Doha Development Agenda (DDA) negotiations, launched in 2001, have yet to be concluded, even in the modified form now being canvassed as a basis for the agreement at the WTO Nairobi Ministerial Conference (2015); and the WTO Trade Facilitation Agreement is only now reaching the end of its ratification, after much delay.
33. These difficulties point to theneed for WTO reform to make it easier to reach agreement among the organisation’s members. Any reform will need to safeguard all that is good in the WTO’s performance, notably its Dispute Settlement system – one of the strongest across all international organisations – and its role as the guardian of world trade rules, while also introducing avenues to swifter agreement among its members on courses of action to be taken in the interests of global trade. It is commonly said that the WTO is an organisation guided by its members, backed by only a relatively small secretariat. While this formulation may be attractive to members, it must not become a reason for WTO members to minimise or abdicate their leadership role while simultaneously preventing the secretariat from assuming any part in policy-framing. There is currently a danger that these tendencies could deprive the WTO of its legitimacy. The UK, operating an independent trade and investment policy, will have fresh opportunities to emphasise the need for positive steps to address this challenge and to reopen the way for multilateralism to play its proper part in trade negotiations.
34. Alongside this, liberalisation can also be advanced through sectoral accords, unilateral liberalisation and regional and bilateral preferential arrangements. TheCityUK therefore recommends a multi-tiered approach:
•• multilateral approaches – including the conclusion of the Doha round – would permit various trade-offs and have the potential of ambitious, mutually-beneficial results •• sectoral or regional liberalisation, pursued by coalitions of the willing, can advance liberalisation in other areas, with the proviso that they encompass substantially all trade in the relevant sector or region. They should be duly notified to the WTO and open to other WTO members to opt in. In addition, they should be transparent, minimise any discrimination, and where possible extend benefits to all WTO members by providing most-favoured- nation treatment. And they should be designed with a view to convergence in their provisions, with eventual multilateralisation and integration into the WTO framework as an ultimate objective •• bilateral liberalisation via Free Trade Agreements. FTAs between the UK and selected trading partners will have an important role to play, just as they have had in the EU’s trade policy in which the UK has participated up to now •• the G20 can provide leadership for the next steps in liberalisation. It provided important support for trade and investment during the recent economic crisis by setting its face against recourse to protectionist measures, contributing to availability of trade finance, and advocating further liberalisation. The G20 membership, backed by business input via the B20, can coordinate to repurpose the Doha Development Agenda, while also acting to ensure coherence in their sectoral and regional initiatives.
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@TheCityUK www.thecityuk.com 35. In considering these options UK policymakers should be unhesitatingly innovative. There is no need to be guided in every detail by the EU’s example of, for instance, a series of lengthily negotiated FTAs with individual trading partners if some other model seems better adapted to the UK’s requirements. For instance, under the WTO rules a full bilateral FTA needs to cover “substantially all trade”, which may in turn involve a time consuming negotiation across all goods and services sectors, including agriculture. For the UK, some more novel form of agreement, focusing on regulatory coherence and cooperation, may sometimes be more appropriate, as well as being more quickly attainable.
RecommendationS ii. Multilateral approaches are to be preferred where they are achievable.
iii. At the same time, a multi-tiered approach will be needed, using sectoral accords, unilateral liberalisation and regional and/or bilateral preferential arrangements, crafted to suit the UK’s requirements as a strongly services orientated economy.
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@TheCityUK www.thecityuk.com Investment and investment protection 36. Global capital flows and FDI play a crucial role in establishing businesses, creating jobs in the UK and abroad, as well as in setting up global supply and value chains, and in providing market access. Around half of world trade takes place between affiliates of multinational enterprises that exchange intermediate goods and services. There are close links between trade flows and investment flows, and it is important for both to be unimpeded. The opportunities for foreign investors to invest into the UK and the decisions of UK investors to expand their activities in foreign markets have a direct impact on trade, ways of funding businesses (including SMEs), jobs and global economic growth. Such investments are encouraged by a framework of reciprocal investment guarantees and also by a dispute settlement mechanism through neutral arbitration that allows investors to bring proceedings against a host state that violates these guarantees, if necessary outside the host state’s courts.
37. The UK is one of the largest sources and destinations of FDI in the world measured by stocks and flows. According to the Office for National Statistics, in 2014 UK businesses held £1,015 billion outside the UK, while non- UK businesses held £1,034 billion within the UK. Less well known is the services sectors’ share in total UK FDI. Services accounted for far the largest contribution to both outward (50%) and inward (64%) stocks. This means that UK services firms hold over £500 billion of investments outside the UK. Financial and insurance activities have seen high growth in recent years and accounted for over 40% of inward services investments at the end of 2014. By contrast, UK stocks in manufacturing represent some 6% of outward and 10% of inward investment.
38. Traditionally, trade agreements have given no or rather limited protection for investment, although services investments are protected up to a point under the GATS. WTO members’ undertakings in their GATS Schedules of Commitments already provide for market access and a first layer of protection for investments, by allowing UK businesses to establish abroad (GATS Mode 3). Any denial of market access can be challenged through the WTO or specific FTA dispute settlement mechanisms.
39. But this recourse applies only to services. What is more, dispute resolution mechanisms in the WTO, FTAs or other trade agreements are only state-to-state: this means that, following Brexit, a case can be brought only if a UK business persuades the UK authorities to pursue it. And the scope for a dispute may be limited by the ambit of the GATS Mode 3 commitments given by the particular host country. So the protection offered may be incomplete and partial.
40. For these reasons, UK businesses in both goods and services have always supported the conclusion of bilateral investment treaties (BITs). The UK’s BITs have traditionally provided strong post-establishment protection to investors who might otherwise be unable to bring proceedings against states that breach agreed investment guarantees.
41. All UK BITs have included an investor-state dispute settlement (ISDS) process which allows for legal proceedings before an impartial and neutral arbitral tribunal, in addition to other recourses. For decades this was entirely uncontroversial – proof of which is that a BIT without an ISDS mechanism does not exist. Some BITs require the investor to exhaust all domestic remedies by first seeking redress through the judicial system of the host country. But when that is ineffective or unsuccessful, then neutral arbitration is the only other option. Use of ISDS by UK businesses has increased in the recent years, largely because more countries have taken protectionist measures particularly after the global economic crisis and because FDI flows to developing countries now account for more than half of global FDI flows.
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@TheCityUK www.thecityuk.com 42. Until 2009, when the EU gained broad competence for most aspects of investment under the Treaty of Lisbon, the UK was responsible for its own BITs and regularly updated the UK Model BIT. Most existing UK BITs include the following characteristics:
•• short, simple treaties, with broad-based definitions of investors and investment •• unqualified Most Favoured Nation clause and National Treatment clause (to ensure protection against discrimination in favour of domestic competitors) •• unqualified Fair and Equitable Treatment clause •• broad umbrella clause (bringing all commitments that the host state agreed with a foreign investor under the protective umbrella of the BIT) •• no exceptions for specific sectors •• no filter mechanisms •• broad choice of ISDS mechanisms •• free choice of arbitrators and •• full (adequate, effective and prompt) compensation for direct and indirect expropriation.
43. TheCityUK takes the view9 that UK investors’ interests must be vigorously defended: investor protection should be recognised as important by government authorities and the general public in host countries. It must be left clear and indisputable that sovereign states will always have the right to regulate and to make changes in their rules in the public interest, for social, environmental, or any other public policy purpose they see fit, provided that, where any such measures are introduced, they should be the least trade-restrictive necessary to meet that public policy objective. The EU-US Joint Statement on Public Services of March 201510, to which the UK subscribed, made those points with crystal clarity.
44. We recognise that in the wider international debate on investment protection policy a number of specific areas for change are under discussion:
•• definitions – the text of investment protection chapters in agreements could include clearer definitions of key provisions, but exceptions to the rules should be kept to a minimum, since they often can be a source of diverging interpretation triggering more disputes •• legal concepts – the vast majority of UK BITs refer to fair and equitable treatment of investment, and TheCityUK would strongly support continuing the use of that concept. Other treaties refer to customary international law, but this notion is less well defined, subject to diverse interpretations, and offers a lower level of protection. There has been criticism that, as currently drafted, the rule of fair and equitable treatment might impede host states seeking to introduce non-discriminatory regulation in the public interest. The solution is not to abandon a current concept that is well-tried but rather to negotiate specific language which expressly guarantees that states can continue to regulate for example, to protect health and the environment by fair and impartial measures •• scope – in TheCityUK’s view, investment protection should cover not only the visible part of an investment, but also the activities related to that investment, such as public procurement contracts won by the investor. Reducing the scope of the protection would seriously reduce the value of a BIT •• filter mechanisms, carve-outs and exceptions – where these are introduced for certain sectors or types of activity, for example financial services, they must be properly justified and limited to the maximum extent possible, because they make protection less complete and efficient •• investment review – TheCityUK has hitherto recommended against pre-market access review provisions, such as pre-investment review powers (e.g. the Investment Canada Act or US CFIUS) •• transparency – TheCityUK strongly supports moves towards greater transparency in all investment protection matters, particularly arbitration proceedings. 9 For a full statement of TheCityUK’s views, see TheCityUK’s response to the Commission Consultation on Modalities for Investment Protection and ISDS in TTIP (11 July 2014) 20 10 http://europa.eu/rapid/press-release_STATEMENT-15-4646_en.htm
@TheCityUK www.thecityuk.com RecommendationS iv. As UK investment policy continues to develop, one point of principle will remain important for safeguarding UK business interests: overseas investments by UK business should continue to enjoy the best protection available v. An updated UK investment protection policy will need to focus on an approach that covers not only pre- and post-establishment questions in third country markets but also the regime that the UK will be ready to apply to third country FDI into the UK market. vi. Historically, third country FDI into the UK has come largely from OECD countries. But the rise of the BRICS, notably China and India as exporters of capital, means that UK will need to develop an investment regime that will take account of a wider spread of sources of inbound FDI.
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@TheCityUK www.thecityuk.com Trade in services and servicification 45. Before the conclusion of the GATT Uruguay Round two decades ago, services were not trade policy subject-matter. But services have grown in importance for the GDP of all high-income economies, and the UK is no exception:
Services as part of GDP Growth (Middle Income Countries and high Income Countries)
In middle income countries, services have contributed In high income countries services have contributed just over half of overall growth, with goods- 87% of GDP growth in recent decades producing sectors accounting for the balance
Note: Local services = retail, hotel/restaurant, financial services etc.
46. Services now lie at the heart of UK trade and investment, particularly in the high added-value sectors on which the UK’s future competitiveness depends. This has been an increasingly significant trend, across all country income groups, in recent decades.
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@TheCityUK www.thecityuk.com 47. The robust role of services in global trade is evident from recent trends in global merchandise and commercial services trade by region and selected economies, Asia, Europe and North America over the past decade. Nor is the growing role of services in international trade, and in the UK’s export performance, simply a matter of a change of degree. There has also been a substantive change as the phenomenon of servicification in international business has been increasingly recognised as a feature of global trade in general, and of the trade of advanced economies in particular. The phenomenon arises from the increasing use by manufacturing and agricultural businesses of a growing range of services in areas such as externally procured services inputs, in-house services production, services sold as part of a good, or services sold along with goods. The reasons are often connected with the need to offer a goods/services package within a GVC, opportunities to reduce costs and increase efficiency, or factors such as longer and deeper customer relations and consumer demand. The results have been analysed by the Swedish National Board of Trade in relation to Swedish manufactured goods businesses, in which services play a part at all stages of the production, sales and delivery chain.
PRODUCTION SALES DELIVERY Legal services Printing, publishing Design Maritime transport – freight Accounting, book-keeping etc. Building-cleaning services Inland waterways – freight Taxation services Photographic services Inland waterways – freight Medical services Courier services Air transport – freight/ passenger Computer services Logistic services Road transport – freight/ passenger Research and development Postal services Cargo-handling services Rental/Leasing Telecommunications Storage and warehouse services Advertising Audio-Visual services Freight transport agency service Market research Educational services Feeder services Services incidental to manufacturing Environmental services Energy services Placement of personnel Banking services Maintenance and repair Insurance Security services Health-related services Packaging Hotels and restaurants Travel agency services
Source: Swedish national Board of Trade
48. Important policy implications flow from both the role of services in UK international business and the added phenomenon of servicification. Essentially, both point to the fact that trade is a continuous flow of goods, services, capital, people, data and skills. They also point to the need for policies hitherto framed largely by reference to trade in goods (for example the protection of intellectual property through the World Intellectual Property Organisation and other bodies) to take into account services interests and the servicification component of all trade.
49. Given the importance of trade and investment in services, it is ironic that the statistical data for services trade is patchy and poor. Measuring the extent, pattern and flows of different types of trade and investment will be self- evidently important for UK policy, which will be concerned with removing barriers and promoting freer trade and investment flows aligned to the comparative and competitive advantage of different trade partners. Unless these factors can be established with reasonable certainty, it is hard to set objectives to be achieved in trade and investment negotiations.
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@TheCityUK www.thecityuk.com 50. For instance, there are various ways in which overall flows in UK trade in services can be represented, whether as flows via digital trade or total UK exports or imports. But unless there are also data for the dynamics of change between different modes of supply (cross-border both ways, commercial presence, or temporary presence of natural persons as service-suppliers – the four GATS Modes) the raw data on services flows is very difficult to deploy effectively in policy terms. This is more important for services trade than for goods, as services are subject to various ‘behind the border‘ barriers, depending on how the service is supplied. The data problem seems particularly marked in the area of FDI and trade via foreign affiliates. For services trade, commercial presence (FDI or, in GATS terms, Mode 3 trade) seems to be playing a growing role. But the precise changes underway are unclear, given the present imperfect data. Analysing and understanding the changes are underway in the global economy, it would be useful to understand them better for at least three purposes:
•• getting the right balance between different chapters (e.g. market access, investment protection and regulation) in trade and investment agreements •• targeting particular barriers to business – for example equity caps or other restrictions on FDI in negotiations •• shaping investment protection provisions including ISDS in trade and investment agreements.
51. Financial services provide an example of the problem of assembling a valid evidence-base for investment protection policy. Europe was the largest global source and destination of financial services FDI, measured by flows and stocks in 2011, the latest available year for comparable EU and UK data.
FDI flows and stocks FLOWS (bn), 2011 TOTAL SERVICES FIN SERV BANKING INSUR OTHER EU27 FDI to non-EU 473 256 145 149 -7 3 Of which, UK FDI to non EU 51 38 19 22 -3 0
STOCKS (bn), 2011 TOTAL SERVICES FIN SERV BANKING INSUR OTHER EU27 FDI to non-EU 4898 3088 1849 1704 122 23 Of which, UK FDI to non EU 646 370 279 203 70 6
Source: Eurostat website Note: all figs are net of disinvestment (usually sale or repatriation of an investment), resulting in some negative figures)
Moreover the accompanying Eurostat commentary ( ‘Continued dominance of financial services ‘) notes that “Around three-fifths of inward stocks of services and close to four-fifths of outward stocks of services were held in financial and insurance activities, which themselves grew during 2011.” That said, determining the true origin and destination of outward FDI in financial services from the UK seems far more challenging (see table below). Yet, in policy terms, it is important to know this as accurately as possible, so as to be able to judge what form of investment protection the UK sector may need, for example ISDS in BRIC or developing markets.
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@TheCityUK www.thecityuk.com EU27 (including UK) and UK financial services (FS) international flows (€ bn)
2007 2008 2009 2010 2011 Total 512.7 266.5 328.6 233.2 347.2 EU FS outflows (euros bn) OECD 146.8 86.1 108.0 38.5 50.3 Rest of world 365.9 180.4 220.6 194.7 296.9 of which BRIC 13.9 14.9 21.5 11.2 11.7
EU FS outflows (euros bn) 2007 2008 2009 2010 2010 Total 59..3 5.4 8.4 16.0 19.4 OECD 53.7 10.0 9.7 8.3 8.8 Rest of world 5.6 -4.6 -1.3 7.7 10.7 of which BRIC 0.3 0.4 0.4 0.6 0.6
Source: Eurostat and ONS
52. The figures above are interesting in highlighting two seemingly ambiguous features in the UK position, which may in turn reflect deficiencies in the data as a whole:
•• apparent low UK share of total EU financial services investment outflows – this seems surprising. A more detailed country breakdown is needed to identify the Member State origin of EU outward investment •• apparent OECD bias of UK financial services investment outflows again, it seems surprising that UK outward investment in financial services was skewed towards the OECD until 2010, while total EU outward investment is very heavily skewed towards the world ex-OECD the figures for 2010 and 2011 tell a possibly different story, but over too short a period to infer a change in trend.
53. Services, and their role in UK trade and investment policy, are clearly extremely important for the UK’s commercial future. Yet, while large-scale patterns of services trade appear to be broadly known, their interior detail would require radically new forms of analysis, and the detailed statistics are far less good than they need to be for the formation of reliable policy.
RecommendationS vii. UK trade and investment policy must cater for all features of services and servicification in a coherent and holistic way, allowing for flow facilitation across the entire range of goods and services being traded. viii. There needs to be improved statistics on trade and investment in services, in terms of both classification and categories of services covered by statistical data, and of disaggregation of services statistics by GATS Modes of supply.
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@TheCityUK www.thecityuk.com Services trade restrictiveness as a tool for policy
54. The increasing attention given to services trade flows has led to improved measurement of restrictions on services trade, with the lead being taken by OECD and the World Bank. In all of the sectors of primary interest to TheCityUK the OECD has now produced comparative graphs showing the performance of different markets against the OECD Services Trade Restrictiveness Index (STRI). The following four OECD bar-graphs (covering accountancy, commercial banking, insurance and legal services) illustrate the variations in services openness across all 34 OECD member countries, the Russian Federation, Brazil, China, India, Indonesia and South Africa. The variations concern policy measures that are applied on an MFN basis (preferential treatment entailed in regional trade agreements is left out of account). The index uses a basic binary evaluation (0=totally open, 1=totally closed).
STRI for Accountancy Services by policy area
STRI for Commercial Banking Services by policy area
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@TheCityUK www.thecityuk.com STRI for Insurance Services by policy area
STRI for Legal Services by policy area
55. STRI measurements are important for policymaking. They illustrate not only the variations in the extent of trade restrictiveness for services in markets across the world but also the sharp variations, even among advanced countries, in the extent of trade restrictiveness, particularly in the levels of market access and national treatment for professional services.
RecommendationS ix. STRI measurements offer strong comparative data for use by UK policymakers when negotiating with trading partners. UK trade and investment policy must reap the benefits of such data, both in seeking liberalisation from other partners and in ensuring that the UK offers as liberal a profile as possible in trade and investment negotiations. 27
@TheCityUK www.thecityuk.com Complex supply chains: global value chains (GVCs) and trade in value added (TIVA) as tools for policy
56. The growth of services trade, servicification, and the use of STRI metrics are all reflections of current changes in trading patterns and how they are evaluated. It is essential that UK trade and investment policy should give greater attention to these than before. Globalisation has fundamentally altered the way in which trade is carried on, how production is organised, and the basis of competition in the international economy. The rise of GVCs represents an integral part of that process. More of the world’s economic activity is now based on GVCs and strategic networks, representing an unbundling of production. In the past, “goods were produced in one country and traded across borders. This could be interpreted as the movement of factors (labour, human capital, and financial capital) incorporated into the goods (less so services). In the new GVC world, the movement of factors of production is being replaced by the movement and exchange of skills and tasks. Trade statistics cannot cope with this change and still report trade flows. To understand this new paradigm, input-output relations have to be analysed, and this lies at the heart of the OECD’s TiVA (Trade in Value Added) database.”11 The change that this represents can be illustrated graphically:
Sectoral contribution to total trade, gross and value-added measures (2008)
57. The implications are profound: the innate nature and components of the UK’s trade and investment need to be re- evaluated in terms of how, and how successfully, the UK’s comparative and competitive advantage is being exploited, and how far further gains in value added can be achieved through trade and investment policy. It will not be enough to remain focused upon the removal of barriers to trade of the kind identified decades ago. To do so can only detract from the UK’s ability to face the challenges of a more networked global economy; it follows that a trade and investment policy that implicitly defines market access in terms of lowering barriers in particular export markets, rather than overall, risks marginalising itself in the process.12 58.
11 Peter Draper and Andreas Freytag: “Who Captures the Value in the Global Value Chain? High Level Implications for the World Trade Organization” (ICTSD, WEF July 2014) 12 See Grant Aldonas “Trade Policy in a Global Age” (ICTSD, WEF December 2013) 28
@TheCityUK www.thecityuk.com 58. The UK is not yet equipped to adapt its trade and investment policy for all these purposes. Current evidence suggests that for services, even the basic UK trade statistics do not seem to permit an analysis of trade in terms of the four GATS Modes, in contrast to the US data, which appears much further advanced13. For goods, where GVC analysis may be even more important, the data appears to be patchy and case-by-case, and in need of much more comprehensive collection and analysis. Recent work combining input-output tables with bilateral trade statistics has been developed to trace the value-added of a country’s trade flows. Foreign value added of exports has become a common measure of the participation of a country in GVCs. The evidence suggests that EU Member States exhibit the largest foreign value added, followed by Asia-Pacific, North America, and Latin America.
Foreign Value Added (as a share of gross exports)
Source: Antoni Estevadeordal, Juan Blyde and Katie Suominen: ‘Are global value chains really global? Policies to accelerate countries’ access to international production networks‘14
RecommendationS x. A full analysis of GVCs and TIVA may well alter the understanding of trade flows constituting the foundation on which UK trade and investment policy is built. The UK needs to have the data necessary for this analysis, and the Commission should draw on the OECD and WTO TIVA databases. xi. UK trade and investment policy needs to integrate these aspects much more fully than before, so that it can fully reflect actual patterns in the global marketplace, the UK economy’s role in it, and the scope for the UK to capture hitherto unexploited competitive advantage.
13 See “Recent Trends in US Services Trade 2015 Annual Report” (US International Trade Commission, Publication No. 4526, May 2015) 14 In “Global Value Chains: Development Challenges and Policy Options: Proposals and Analysis” (ICTSD, WEF December 2013) 29
@TheCityUK www.thecityuk.com 21st century policy issues
59. The issues dealt with so far have all concerned changes in the pattern of trade in the global marketplace that trade and investment policy must take into account. But it is also necessary to examine linkages with policy and legislative choices by authorities in different trading partners. These do not arise simply from the evolution of the global market place and have as much – or more – to do with measures by governments. Collectively they tend to be known as 21st century issues, as they all concern relatively recent and contentious policy choices.
Data and data localisation
60. The rise of e-commerce and/or digital trade is the biggest recent change in patterns of global trade. Neither term is any longer useful as an identifier for a particular form of business: all trade has become digital in various ways. It is now a fact that trade necessarily involves international transfers of data, whether for storing customer files using cloud computing, or processing in global hubs, or complying with requirements of regulators in foreign jurisdictions, or even the transmission of basic trade documentation in electronic form.
61. This phenomenon of data-movement as integral to trade has given rise to a specifically 21st century trade governance problem, namely the extent to which governments may impose restrictions on data transfer or data-processing. It has already arisen in the negotiation of FTAs, notably the negotiation of the US-Korea and EU-Korea FTAs, and in anti- terrorist measures taken or proposed by governments in the interests of curbing cyber-terrorism threats. Proportionate protection of individual data subjects, safeguarding their personal data, and measures against cyber-terrorism, are of course important and legitimate public policy objectives. But they must be achieved in a balanced and least trade restrictive way that will allow international commerce to function efficiently in the interests of economic growth and wealth creation.
62. Various governments have introduced measures affecting where data can be stored and analysed. Some of these are neutral in intention, even if trade-restricting or trade-distorting in their effects. Others amount to outright protectionism. OECD studies have shown the extent to which they affect businesses’ ability to adopt the most efficient technologies, influence investment and employment decisions, increase the cost of innovation and lead to missed business opportunities. The policy challenge is therefore to strike a balance between legitimate concerns about privacy and proprietary information on the one hand, and open markets on the other.
63. Data localisation measures have clear effects on international trade: to the extent that they are local content restrictions (LCRs) falling within the WTO Agreement on Trade-Related Investment Measures (TRIMs) they may also be actionable under that Agreement. In addition, they also bear down on GDP in the country concerned. In an analysis of data localisation in Brazil, China, the EU, India, Indonesia, South Korea and Vietnam, the European Centre for International Political Economy (ECIPE)15 has estimated that data localisation results in negative impact in all seven countries analysed, with variations in impact mostly arising from the coverage of the measures and trade’s share in the economy concerned. It is estimated that where coverage was total, the negative impact would, on average, equate to roughly 1% of GDP. Data protection is a policy area in which the UK will need to tackle the challenge of striking the right balance between legitimate concerns about privacy and the practicalities of commerce. This is partly a matter of ensuring that, within the UK government, all areas of policy formation will have a relevant voice so as to ensure that the various interests are reconciled in policies that acknowledge the importance of the issues and their bearing on the UK’s global competitiveness.
15 Matthias Bauer, Hosuk Lee-Makiyama, Erik van der Marel and Bert Verschelde: “The Costs of Data Localisation: Friendly Fire on Economic Recovery (ECIPE 30 Occasional Paper No. 3/2014)
@TheCityUK www.thecityuk.com Estimated GDP impact of data localisation
Source: ECIPE16 RecommendationS xii. The UK needs to oppose forced localisation in relation to data, including by examining whether it may be actionable under the WTO TRIMs Agreement and whether trade and investment agreements can be made an instrument for agreeing shared approaches to increasing online security of data.
xiii. In pressing trade partners for open and trade-compatible data regimes, the UK must ensure that its own position is consistent, clear and compatible with the freedom of data movement and data processing that international commerce requires.
16 ECIPE Occasional Paper No. 3/2014 31
@TheCityUK www.thecityuk.com Other localisation barriers to trade (LBTs) 64. Data localisation – forced data storage and processing or obstacles against data migration – is not the only form of LBT. There are also at least three other types of forced local content requirements (LCRs):
•• classic mandatory LCR percentages for goods or services or incentivised local content •• forced local procurement •• tax, tariff, and price concessions conditioned on local procurement •• import licensing procedures tailored to encourage domestic purchases of certain products •• forced local ownership •• certain lines of business that can be conducted only by domestic firms or that need to have a local shareholder.
65. The OECD defines ocalisationl barriers as measures that favour domestic industry at the expense of foreign competitors17. Government-imposed LBTs are not new, but have mushroomed following the 2008 financial crisis. The OECD noted 135 LCRs between the 2008 financial crisis and 2013, and Global Trade Alert (GTA) found 270 between the 2008 financial crisis and 2014, rising to some 400 by 2016. Such LCRs must be considered as actionable under the WTO TRIMS Agreement, as shown below:
Source: OECD, Global trade Alert
RecommendationS xiv. The UK needs to guard against LBTs as a new form of protectionism and recognise them as a growing threat to global value chains in both goods and services, imposing costs and bearing down on the UK’s ability to compete in other markets.
xv. UK trade and investment policy towards LBTs needs to be based on detailed analysis of their incidence, so that they can be tackled at multilateral, plurilateral and bilateral level or as breaches of the WTO TRIMs Agreement.
17 Stone, S., J. Messent and D. Flaig (2015), “Emerging Policy Issues: Localisation Barriers to Trade”, OECD Trade Policy Papers, No. 180, OECD Publishing, 32 Paris. http://dx.doi.org/10.1787/5js1m6v5qd5j-en
@TheCityUK www.thecityuk.com State-owned and state-sponsored enterprises (SOEs) competing in commercial markets 66. In its relations with trade partners, the UK will need to tackle the growing problem of state-sponsored and state- owned enterprises (SOEs) that compete on non-transparent terms in commercial markets. The UK’s domestic competition policy regime provides strong mechanisms for enforcing fair terms of competition between UK-based enterprises, whether wholly private or with state or para-statal participation. But other trading partners are often less rigorous. Despite progress in the spread of free markets, there is a rise in the deployment of state power in global commerce, with significant economic implications for market-based businesses that compete with state-supported entities in global markets.
67. A particular threat is posed by the growing use of SOEs to tilt the commercial playing field. China, in particular, has created massive state-owned and -controlled national champions that are designed to be competitive on the international stage. These SOEs are instruments of the state, subject to varying degrees of government direction and control, and often protected from competition in their own market. They are motivated not only by economic concerns, but also by government objectives, including technology transfer, access to raw materials, job creation, and geopolitical influence. This state capitalist model is not unique to China, and is also present to varying degrees in other countries, such as Vietnam and Indonesia.
68. The growth of foreign SOE investment represents a new and growing threat to global competition on equitable principles. While the presence of SOEs in the marketplace is not a new phenomenon, the degree of state involvement in economic activity is growing in certain sectors. Some of the most significant ways in which governments benefit their SOEs and distort the global marketplace include:
•• direct subsidies – governments often provide direct subsidies to their SOEs in the form of cash grants and/or capital infusions •• preferential loans and access to finance state policy banks and state-owned commercial banks often make loans based on political directives, rather than creditworthiness or other market-based factors •• tax reductions and exemptions – many SOEs benefit from preferential tax rates and exemptions from both central and/or provincial governments •• preferential access to raw materials and other inputs – governments also support their SOEs and other domestic manufacturers by ensuring them adequate supplies of necessary inputs •• preferential regulatory treatment – this may include exemption from regulatory regimes such as antitrust enforcement, zoning regulations, or disclosure regulations, preferences in government procurement and preferential tax treatment.
69. These practices are capable of undermining the global rules-based system. The remedy – in which the UK needs to be a strong and active participant – is to agree on principles to guide the behaviour and governance of SOEs. This could involve the following features:
•• act in a manner consistent with normal commercial considerations •• not receive preferential legal or regulatory treatment •• adhere to fair pricing practices •• adhere to normal corporate governance standards •• observe a high degree of transparency •• be subject to the same accounting and auditing standards as other businesses.
70. There is plentiful existing policy material with a bearing on these governance questions. One key text is the updated OECD Policy Framework for Investment (PFI) and recently endorsed by OECD Ministers. Another is the Santiago Principles offering guidelines for the operations of Sovereign Wealth Funds (SWFs). Both include material with potential relevance for future disciplines that could govern SOEs’ operations in the marketplace on the basis of transparent and sound governance structures and accountability. RecommendationS xvi. In its bilateral trade and investment agreements, and in plurilateral and multilateral agreements, the UK should be on its guard to ensure that there is an agreed set of disciplines to monitor and guide the behaviour and governance of SOEs. 33
@TheCityUK www.thecityuk.com REGULATORY COHERENCE 71. Regulatory convergence and divergence is a huge and expanding subject, on which the UK, post-Brexit, will have fresh opportunities to be a policy-former and opinion-influencer. It is no accident that the issue has come to the fore in the TTIP negotiations: given that trade and investment between the EU and the US is – in conventional terms of tariffs and traditional non-tariff barriers – substantially liberalised, regulation, particularly duplicative regulation, has become the main hindrance to still freer trade with the US18,to investment, and to the wider evolution of a deeper transatlantic marketplace. But the issue is not confined to TTIP. Its full breadth, as it affects trade, embraces a range of issues of international concern, covering all goods and services. In addition to prudential regulation, these include economic regulation and product standards for goods and services.
72. For TheCityUK, a key issue for UK policy post-Brexit will be cooperation and coherence between jurisdictions in prudential regulation of financial services, and the achievement of some matching disciplines for related professional services. Since the crisis this has been particularly important for financial services. The pre-crisis scenario was very different from the scenario that now affects regulation. It had its origins in post-war institution building for the global economic framework, notably the Bretton Woods institutions. Although these institutions were subject to steady adaptation, some pre-crisis practices showed a strong degree of continuity. In particular, consultative processes between jurisdictions were not excessively demanding and worked reasonably well, with steady market opening and the expansion of trust between regulators. And there was progress away from balkanisation of international capital markets, even if more remained to be done.
73. The crisis and its aftermath have meant radical alterations. Essentially, this was a crisis of developed markets, placing question-marks over the West’s regulatory leadership. For Western regulators, the crisis produced a radically different scenario from before: the realisation that there could be an imminent and profound global crisis spurred strong and highly targeted reactions from global leaders in the G20, G8 and FSB.
74. The move towards stronger regulation was necessary, both in the public interest and in the interest of business. But there were some inevitable side effects. In particular there was a degree of post-crisis reversion to nationally determined regulation. Regulation became more politicised, with political pressures to exert control. It had been introduced as a response to crisis – an essentially reactive agenda, justified as critically important, sometimes without regard to its cumulative impact. There was an imperative to secure the system, with less time than previously for forethought, and less incentive to consult other regulatory authorities on consistency of regulation. This led to some loss of the previous implicit consensus on the balance between regulation and stability, and growth and competitiveness. Institutional questions also arose – typically over how far the balance between national and regional or international regulation could remain as before. Finally, there was some forfeiture of trust between regulators.
75. Overall, post-crisis international regulation can be considered very effective. It has averted melt-down and set rules successfully. But some key challenges remain, typified by, but not confined to, transatlantic regulation. The most important of these, in TheCityUK’s view, is the heightened risk of regulatory divergence, carrying various costs:
•• extraterritoriality and conflicts of law, with compliance costs and uncertainties •• regulatory arbitrage •• damage to the effectiveness and stability of the global financial system •• threats to the ability of leading financial authorities to export regulatory approachesand best practices to rest of the world •• duplicative and inefficient practices for providers and users of capital, undermining growth.
18 See Chris Brummer: “The Danger of Divergence: Transatlantic Financial Reform & the G20 Agenda” (Atlantic Council 2013) 34
@TheCityUK www.thecityuk.com 76. Newly salient regulatory divergences have also highlighted the importance of questions of process and transparency, and how these questions may bear on regulatory cooperation. Chief amongst these are:
•• failures in synchronising implementation of key G20 and Financial Stability Board (FSB) measures, for example the implementation of Basel III •• varying administrative and political rule-making processes in different countries •• associated problems of transparency at different legislative and rule-making stages, with differing types of consultative procedures such as notice and comment.For all these reasons,
77. TheCityUK has been at the forefront of leading transatlantic and international business organisations that have pressed for a step change in dialogues between regulators. The guiding principles for meeting the challenges facing regulators and industry alike now and in the future should include processes of dialogue which:
•• are more disciplined and transparent •• are more timely and accountable •• reach better-coordinated results •• anticipate and solve regulatory problems in advance, rather than examining them after they have arisen – the ex-ante as well as the ex-post approach.
78. For financial services, a critical issue is the extent to which international agreements – whether trade and investment agreements or purpose-built agreements on regulatory coherence – can be made to enshrine procedures for building bridges between different regulatory approaches. This does not mean seeking regulatory harmonisation by creating, in effect, an identity of rules which would involve renouncing policy freedoms that the UK and others would be unlikely to wish to give up. Stopping short of harmonisation, however, there are opportunities for removing unintended regulatory obstacles to financial services flows, particularly where these affect the availability or affordability of core financial services that are vital to business end-users. These obstacles arise, for instance, where global standards are differently applied, where there is a conflict or wide divergence of rules, or where extraterritorial application of rules or demands for diverging forms of compliance may make it impossible for financial services providers to supply their products, or to do so at reasonable cost.
79. There is the further question of the choosing the type of agreement best suited to catering for convergence of financial services regulation, particularly where such regulation springs from the G20, the FSB, the Basel Committee, IOSCO, the International Association of Insurance Supervisors and other international regulatory bodies, and for mutual recognition of regulatory regimes between parties. The end result of failure to address these issues can be the balkanisation of liquidity and capital pools, undermining prospects for economic growth and job creation not just in the financial sector but across the global economy. RecommendationS xvii. The UK should use the opportunity of Brexit to promote actively the application of international standards. xviii. The UK should also intensify its monitoring of rules in third countries, particularly emerging markets. xix. The UK should promote the development and use of international guidelines for good regulatory practice. xx. Post-Brexit, the need for regulatory coherence in financial services will arise in different ways in the UK’s relationships with a range of trading partners. The form it should take will likewise vary. If trade in financial services is to be further developed, regulatory issues have to be addressed at every opportunity. 35
@TheCityUK www.thecityuk.com Temporary presence of natural persons (GATS Mode 4)
80. The question of temporary presence under GATS Mode 4 and analogous provisions in other trade agreements is one of great importance. UK-based financial and related professional services providers are concerned to be able to establish in markets of their choice, freely recruit employees in the UK and elsewhere, and move their business personnel as business requires. TheCityUK underlines these points for the following reasons:
•• effective temporary presence provisions in trade agreements enable UK individuals to be employed in the rest of the world. For senior UK executives and professionals, careers may be enhanced by working for a period in another country. Effective GATS Mode 4 provisions facilitate this •• the UK as a whole gains a range of economic benefits from effective GATS Mode 4 provisions. The main economic benefits for UK-based financial and related professional services are
– international recruitment. UK-based businesses can recruit from a wider pool, enabling them to meet skills needs, provide flexibility during periods of growth, and gain employees with the language skills necessary for an international financial centre – overseas deployment of staff. Staff can be deployed in other markets more easily, helping UK businesses to operate in or expand into other markets by enabling them to draw on existing UK staff – education and training. UK professional training institutions represent a considerable UK business sector. Ef- fective provisions under GATS Mode 4 mean they can recruit staff globally to help deal with critical skill shortages in specialist subjects, and work easily in partnership with other institutions and businesses internationally.
81. TheCityUK is particularly concerned with the status of non-EU intra-corporate transfers (ICTs). But the same arguments apply to contractual service suppliers (CSSs) and independent professionals (IPs). We believe they will remain of general application in connection with the need for UK-based international financial and related professional services providers to be able to establish in markets of their choice, and transfer employees and move business personnel as international business requires.
RecommendationS xxi. TheCityUK supports vigorous attempts to secure commitments from trading partners under GATS Mode 4. This remains an important objective, which should continue to be pursued.
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@TheCityUK www.thecityuk.com Development of improved consultation on trade and investment policy 82. Trade and investment barriers in global markets have become more complex – particularly regulatory barriers in other countries. An independent UK trade and investment policy will allow fresh scope for tackling these in ways attuned to the specific interests of UK business. To ensure that this is done effectively, UK trade negotiators will need to draw on the experience of UK businesses competing in global markets. This needs to be done in the most efficient way possible, drawing on the example of other countries’ practices facilitating consultation. There are various models for this. One of the most advanced is the mandatory inter-agency system developed in the United States. As well as providing for mandatory consultation with interested parties and stakeholders, the US system also makes provision for reading rooms for trusted stakeholder representatives to read non-public texts.19
83. TheCityUK accordingly proposes that a new system of consultation – possibly mandatory – be developed to ensure that UK trade and investment policy is firmly based on consultation with stakeholder interests and answerability to them. A clearer system governing expectations and practice in the UK’s internal consultation processes would represent a vital step towards maximising the UK’s competitive advantage by negotiating market opening trade and investment agreements that play to UK commercial strengths to the maximum possible extent.
RecommendationS xxii. A coherent – possibly mandatory – system for consultation on UK trade and investment policy should be developed.
19 See Chapter 7 “Organization of Trade Policy Functions” at pages 383-397 in Part 1 of “Overview and Compilation of U.S Trade Statues” (Two volumes by the House of Representatives Ways and Means staff describing all of the elements related to US trade and investment law). Part I of 2: https://www.gpo.gov/fdsys/pkg/CPRT-111WPRT63130/pdf/CPRT-111WPRT63130.pdf; Part II of 2: https://www.gpo.gov/fdsys/pkg/CPRT-111WPRT63131/pdf/CPRT-111WPRT63131.pdf 37
@TheCityUK www.thecityuk.com Communicating the value of trade and investment policy
84. Trade and investment policy will be of unprecedented importance for capturing and facilitating all aspects of the UK’s global competitiveness. Yet the policy is often not well understood, both by the UK public and even within different branches of government. It has tended to be an arcane policy specialism, with its own terminology and procedures, and with a degree of separation from many other areas of government activity. Positive steps need to be taken to overcome this situation in the interests of transparency. Trade and investment policy will be intimately linked with other policies and initiatives that will need to be pursued post-Brexit, such as digitisation, financial services regulation, and data protection, to name but a few with outward facing aspects impinging on external trade and investment policy. It will be vital to maximise trade and investment policy coherence in the interests of facilitating flows of business both internally and externally. Policy decisions in many areas may bear down on conditions for trade; and even small policy adjustments can have major effects for good or bad. It follows that effects on trade and investment need to be fully integrated into all areas of UK policy formation, with full impact assessments. In the same way, trade and investment policy officials must also contribute in other policy areas, including for example synergies between trade and sustainability.
85. Trade and investment policy has also become an area of growing public debate, not least in the TTIP context. The value of trade agreements for job creation needs to be explained and underlined. It needs a consistent and ongoing approach as trade and investment policy will be one of the UK’s key instrument for drawing on the growth in the global economy as a whole; and, like other policies, trade and investment policy needs to be based on consent and support. It should to be possible to draw on current initiatives such as the OECD Policy Framework for Investment (PFI), which in its updated version presents a fresh vision for trade and investment policy. It is a noteworthy effort to connect twelve policy areas (investment promotion and facilitation; competition; trade; taxation; corporate governance; finance; infrastructure; developing human resources; policies to promote responsible business conduct and investment in support of green growth; and public governance) while placing emphasis on inclusive development, including responsible value chains, gender issues, and policies to channel investment in areas that promote green growth.
86. In TheCityUK’s view, the sustainability of UK trade and investment policy in environmental terms particularly deserves better, and more coherent, communication. Among many diverse views on global trade and investment, there is a consistent and widely shared theme that trade and investment policy, like all other public policy, must give attention to climate change and sustainability. There is a growing body of findings on the linkages between trade and investment flows and environmental sustainability, and the environmental performance index (EPI) for countries at various income levels. The UK will need to pursue a co-ordinated environmental approach across all its policies. But there is the risk that such an approach will be explained and justified to interested audiences by environmental policymakers who give little attention to the specifics of trade – for example the WTO negotiations towards an Environmental Goods Agreement – leaving trade and investment policy as the isolated object of bitter debate over the right balance to be struck between sound science, the precautionary principle and consumer preference in the narrowly specific areas such as genetically modified organisms (GMOs). The UK, post-Brexit, will have an opportunity toprovide a clearer rationale illustrating trade and investment policy’s contribution to meeting environmental and sustainability objectives in line with wider UK approaches.
87. There are also specific ways in which trade and investment policy can contribute towards tackling climate change. Financial services providers are in a position to fund investment in clean technologies and other means of avoiding environmental degradation. Given that environmental issues can only be tackled on an international basis, appropriately directed trade and investment policies can make a significant contribution towards solutions.
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@TheCityUK www.thecityuk.com RecommendationS xxiii. In UK policy formation, trade and investment policy will need to be better understood, articulated and integrated with other UK policies and initiatives. All UK policymakers need to be aware of the bearing of their work on the UK’s competitiveness and on UK trade and investment. xxiv. The UK government should work together with all stakeholders to enhance informed debate and understanding of trade and investment policy, and its implications for job creation, wealth creation and policy choices.
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@TheCityUK www.thecityuk.com CONCLUSION
88. The realities of Brexit have led to a significant debate on trade and investment policy, as on other areas of government strategy in a changed world. Much of the commentary has focused on the need, as perceived by many, for the UK to equip itself to replicate the same policies, and pursue the same forms of trade and investment relationships, as the EU has pursued. But while it is true that the key commercial links will generally remain as before, the trade and investment policy options and modalities for managing and enhancing these links can be varied in innovative ways, breaking away from the legacy of past practice.
89. Post-Brexit, there will be a once-in-a-generation opportunity to recalibrate and repurpose UK trade and investment policy in in the interests of UK jobs and growth, against the background of emerging global trends. Some of these reflect long processes of change, particularly in the direction of ever-greater globalisation of world trade. Others, however, are of more recent origin, reflecting 21st century policy changes that have little or no precedent. And some are the result of changes within the UK itself, including new trends in society such as the far greater political attention being given to trade and investment policy itself. One thing is clear: it is of unprecedented importance that UK trade and investment policies connect with and are relevant to growth that is taking place in the rest of the world, whether in developed or emerging markets. This is the consistent theme behind the twenty-four recommendations in this paper, which are designed to promote that outcome.
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@TheCityUK www.thecityuk.com