HOUSE OF LORDS European Union Committee 23rd Report of Session 2019–21 Beyond Brexit: trade in services Ordered to be printed 16 March 2021 and published 24 March 2021 Published by the Authority of the House of Lords HL Paper 248 The European Union Committee The European Union Select Committee and its four Sub-Committees are appointed each session to consider EU documents and draft laws; to consider other matters relating to the UK’s relationship with the EU, including the implementation of the UK/EU Withdrawal Agreement, and the Government’s conduct of negotiations on the United Kingdom’s future relationship with the European Union; and to consider matters relating to the negotiation and conclusion of international agreements generally. The four Sub-Committees are as follows: EU Environment Sub-Committee EU Goods Sub-Committee EU Security and Justice Sub-Committee EU Services Sub-Committee Membership The Members of the European Union Select Committee are: Baroness Brown of Cambridge Lord Kerr of Kinlochard Lord Ricketts Baroness Couttie Earl of Kinnoull (Chair) Lord Sharkey Baroness Donaghy Lord Lamont of Lerwick Lord Teverson Lord Faulkner of Worcester Baroness Neville-Rolfe Lord Thomas of Cwmgiedd Lord Goldsmith Lord Oates Baroness Verma Baroness Hamwee Baroness Primarolo Lord Wood of Anfield The Members of the EU Services Sub-Committee, which conducted this inquiry, are: Lord Bruce of Bennachie Lord McNally Lord Thomas of Cwmgiedd Baroness Couttie Baroness Neville-Rolfe Viscount Trenchard Lord Davies of Stamford Baroness Prashar Lord Vaux of Harrowden Baroness Donaghy (Chair) Lord Sharkey Further information Publications, press notices, details of membership, forthcoming meetings and other information is available at http://www.parliament.uk/hleu. General information about the House of Lords and its Committees is available at http://www.parliament.uk/business/lords. Sub-Committee staff The staff of the Sub-Committee are Dee Goddard (Clerk), Jack Mitchell (Policy Analyst), Dominic Walsh (Policy Analyst), and Hadia Garwell (Committee Assistant). Contact details Contact details for individual Sub-Committees are given on the website. General correspondence should be addressed to the Clerk of the European Union Committee, Committee Office, House of Lords, London, SW1A 0PW. Telephone 020 7219 5791. Email [email protected]. Twitter You can follow the Committee on Twitter: @LordsEUCom. CONTENTS Page Summary 3 Chapter 1: UK-EU trade in services 5 Our inquiry 5 UK-EU trade in services 6 Figure 1: UK top five global goods and services exports 7 Chapter 2: Financial services 9 The TCA and the end of the transition period 9 Loss of passporting rights 10 Business preparedness 11 Relocation of financial services activity 11 Framework for cooperation 12 Equivalence 14 Equivalence for UK central counterparties 14 EU reluctance to grant equivalence 15 Limitations of equivalence 16 Future divergence 16 Reforming the equivalence framework 17 Divergence, competitiveness and standards 18 The future regulatory landscape and parliamentary oversight 19 UK influence in setting standards 20 Chapter 3: Professional and business services 21 Professional and business services in the UK 21 Box 1: Services trade and the World Trade Organization (WTO) 22 Professional and business services in the TCA 22 Market access and national reservations 23 Impact of national reservations on different sectors 25 Case study: legal services 26 Mobility 27 Provisions in the TCA 27 Box 2: Types of business visitor 28 Business mobility and COVID-19 30 Local presence and cross-border supply 31 Provisions in the TCA 31 Mutual recognition of professional qualifications 32 Provisions in the TCA 32 Framework for future recognition of qualifications in the TCA 33 Government support 34 Equivalence decisions 35 Divergence and opportunities 36 Governance and engagement 37 Chapter 4: Data and digital trade 39 Data adequacy 39 Importance of data adequacy 40 Long-term picture 41 Digital Trade 41 Digital trade chapter of the TCA 41 Looking forward 42 Chapter 5: Creative industries 44 Creative industries in the UK 44 Mobility for creative professionals 45 Importance of mobility 45 Movement of professionals 46 Movement of goods 47 Potential mitigations 48 Creative Europe 50 Intellectual property 51 Exhaustion 51 Audio-visual sector 51 Managing regulatory divergence 52 Chapter 6: Research and education 54 The UK’s research and education sector 54 Research funding 54 Horizon Europe 54 Domestic research funding 56 Mobility 58 Erasmus+ 58 Turing scheme 59 Other mobility 62 Summary of conclusions and recommendations 63 Appendix 1: List of Members and declarations of interest 68 Appendix 2: List of witnesses 72 Appendix 3: Call for evidence 76 Evidence is published online at https://committees.parliament.uk/work/945/ future-ukeu-relations-trade-in-services/ and available for inspection at the Parliamentary Archives (020 7219 3074). Q in footnotes refers to a question in oral evidence. Beyond BreXIT: trade IN servIces 3 SUMMARY Services are central to the UK’s economy: service industries accounted for 80% of UK economic output in 2019.1 The UK exported £317 billion of services to the EU and imported £217 billion of services from the EU in 2019.2 The UK has consistently run a trade surplus in services; the surplus in global services trade was £83.4 billion in 2018.3 After four and a half years of uncertainty, the UK and EU agreed the EU-UK Trade and Cooperation Agreement (TCA) on 24 December 2020. This was welcomed by the services sector, which would have suffered in a ‘no agreement’ scenario, but significant challenges remain and negotiations on the shape of the UK-EU relationship on trade in services will continue in the years to come. It is in both sides’ mutual interests to ensure there is a positive and cooperative relationship, to ensure that trade continues to flow, and that future challenges can be addressed. In this report, we consider the future UK-EU relationship on trade in services by looking at the key sectors in turn—financial services, professional and business services, data and digital trade, the creative industries, and research and education. We consider the crucial elements in the TCA affecting trade in services between the UK and the EU, as well as the areas where further agreement is required. We took evidence throughout January and February, so this is necessarily a first look and many of the TCA’s mobility provisions have not yet been tested because of COVID-19 mobility restrictions. We are sure that other opportunities and hurdles will come to light over time. Financial services The TCA does not include substantive provisions on financial services, and delays to key decisions about the future relationship, particularly on equivalence, mean that the sector is still in a period of uncertainty. We recognise that the UK and the EU will seek to change their regulatory regimes where it is in either Party’s interest, but call on the Government not to disregard the value of a close UK-EU relationship in financial services. A deep level of regulatory cooperation between the UK and EU will be in the interests of both sides to help manage future divergence. Parliament must consider how best to scrutinise the new powers of the regulators. More broadly, the UK should use its influence on the world stage to promote an outcomes-based approach to equivalence and maintain best practice. Professional and business services Professional and business services form an important part of the UK economy and are closely interlinked with other goods and services sectors. At first glance, the TCA offers substantial trade liberalisation for these services in comparison to World Trade Organisation (WTO) terms, but the proliferation of national reservations to the agreement means that UK service providers face a patchwork of complicated rules that vary by sector and Member State. This fragmentation 1 As Gross Value Added. House of Commons Library, Services industries: key economic indicators, Library Note 02786, 3 March 2021 2 House of Commons Library, Statistics on UK-EU trade, Library Note 7851, 10 November 2020 3 Office for National Statistics, ‘International trade in services, UK 2018’: https://www.ons.gov. uk/businessindustryandtrade/internationaltrade/bulletins/internationaltradeinservices/2018#the- total-uk-trade-in-services-surplus-increased-in-2018 [accessed 8 March 2021] 4 Beyond BreXIT: trade IN servIces is likely to hit small operators the hardest, and the Government should do all it can to support and offer guidance to these businesses. In particular, the lack of mutual recognition of professional qualifications in the TCA could have a serious impact on many sectors, so the Government and regulators should explore all options, including a side agreement to the TCA, to alleviate this issue. Data and digital trade The TCA offers unprecedented cooperation on digital trade compared with other EU FTAs, and it is expected that the EU’s draft data adequacy decision will be confirmed in the coming weeks. Both sides should work together to ensure that these positive developments can be maintained to keep pace with innovation in this sector. Creative industries The UK punches well above its weight in the creative industries: the sector was worth £100 billion in 2019. This sector has been hit hard by the COVID-19 pandemic and its recovery will depend to some extent on getting the relationship with the EU right. We are deeply concerned about the potential impact of mobility provisions in the TCA on the over two million people employed in the creative industries, which could make touring prohibitively bureaucratic and expensive. We call on the Government and EU to work together to remedy this situation before international travel resumes. Research and education The research and education sector welcomes the Government’s decision to associate to the Horizon Europe programme, which will enable UK researchers to continue to participate in cutting-edge collaborative research.