What is the EU single market in services?
- The four fundamental EU freedoms are free movement of goods, free movement of persons free movement of capital and free movement of services.
- Generally, businesses established in one EU state may provide services to businesses or customers in another EU state.
- There are exceptions to this right on limited grounds which must be strictly necessary and justified by the host state
- In some sectors in particular financial services, transport communications and energy there are single EU rules for the grant of authorisations to do business, which allow a business established in one EU state to provide services throughout the EU based on the home state authorisation.
- In most sectors authorisations are not necessary to do business at all but there are common EU rules on VAT, distance sales, the recognition of qualifications, and consumer rights which facilitate providing and receiving services across EU borders;
- EU rights to provide services overall laws rules and practices in the host state which restrict or limit these rights;
- A service provider who believes these rights have been breached may take legal action against the host state or its authorities concerned and may even recover damages against it; is alternatively it may complain to the EU commission which may enforce the breach against the host state or its authorities
What are the barriers to cross-border services?
- Trade in services is not as directly affected by Brexit as trade in goods. There are no customs duties, additional taxes or declarations required when services are provided across the EU UK border.
- The host state rules can create barriers to service providers, who wish to provide a service from the home state to customers in the host state or who wish to establish a presence in the host state.
- Host state barriers may include requirements for non-national service providers to have particular licences and qualifications and comply with local rules, which discriminate against them or are unnecessarily difficult for them to comply with.
- While the EU has tried to reduce and eliminate these so-called “non-tariff barriers” progress has not been as thoroughgoing as is the case with goods.
- For reasons of language, culture and historical difference in regulation, there are many types of services that are not in practice purchased cross-border.
How will any new EU UK agreement compare with the EU single market in services
- The EU has insisted that there can be no access to the EU single market in services without free movement of people (and effectively contributions to the EU budget). The UK has insisted that this would be contrary to what is required by the Brexit vote.
- Therefore, the new relationship agreement in relation to services will not be the same as that with EEA countries such as Norway and Iceland, which are part of the single market in services; instead, it will be a more conventional international agreement on trade in services.
- As with trade in goods, there is an international trade agreement between almost all countries worldwide, the General Agreement on Trade in Services (GATS).
- GATS is what would apply to cross-border trade in services between EU states (including the Republic of Ireland) and the UK if there was no new agreement (future partnership) between the EU and the UK after the end of the transition period on 1 January 2021
- the future partnership agreement between the EU and UK is intended to build on the GATS agreement but to be much more extensive than it.
- The commitments and rules in a new EU UK future relationship agreement on services will be much less precise thoroughgoing and detailed than those provided by European Union treaties and law.
- In almost all circumstances, there will be no right for EU established traders to take legal action against the UK government and UK public sector bodies to enforce breaches of the future relationship agreement in relation to services.
- UK established service providers will not be able to avail of EU treaty rights and laws to provide services into EU states, although in many cases subsidiaries which they establish in an EU state, will usually have this right
- Complaints for breaches of the future relationship agreement in relation to services will be at EU to UK government level; an EU established trader may claim to the EU commission and a UK established trader may complain to the new UK trade remedies body; those authorities may investigate and the Commission or UK Secretary of State may take action or initiate and inter-state process.
- The procedure for interstate trade disputes will be set out in the EU UK future relationship agreement and is likely to provide for arbitration involving an expert panel; if there is no future relationship agreement (no deal) the WTO / GATS dispute resolution arbitration procedure would apply.
- Even if a dispute is upheld the traders will not receive any compensation or other direct remedy. Their states authority will be permitted under the agreement or under GATS to take a counter a corresponding balancing measure against the other state;
- Trade disputes may take some time to conclude. In some cases, states act unilaterally, but the dispute may usually be referred to arbitration. The future relationship agreement may provide some other remedies or faster procedures than the GATS
What is the General Agreement on Trade in Services (GATS)?
- As with the agreement on goods, there is a World Trade Organisation agreement in relation to trade in services. The General Agreement on Trade in Services (GATS) applies between members of the World Trade Organisation. This includes almost all countries in the world including, for example, Russia and China and excluding only a handful of countries, for example, North Korea.
- Almost all WTO members are also parties to other major agreements relating to fair trade, public subsidies, and regulatory standards that seek to reduce barriers to trade and unfair competition. The EU UK future relationship agreements would build on these agreements by expanding on the commitments given and provide a more comprehensive means of enforcement.
- The GATS will be the fallback position in the event that there is no EU UK future partnership agreement covering services. It is also the baseline position on which trade agreements, including any EU UK future partnership, will build.
What commitments do states make in GATS?
- The GATS is much more limited than the corresponding agreement in relation to trade in goods (the GATT). It applies only to services sectors and ways of providing services (modes of supply) that the WTO member state concerned declares in commitments made in their schedules.
- The same general principles that apply in relation to trade in good, namely non-discrimination and the most favoured nation principle apply in relation to services covered by that’s state’s schedules.
- The non-discrimination principle means that a state may not discriminate between businesses established in its own state and those established in any other member state.
- The most-favoured nation principle means that where a benefit is extended to businesses established in one state, it must be extended to businesses established in all states.
- Disputes under the General Agreement on Trade in Services are dealt with on a country to country basis. Individual traders or providers do not generally have rights to compensation or other relief for breach of the rules. At most, one country may be permitted to withdraw trade benefits from the other.
- There are some exceptions in the case of investment disputes and in the area of procurement and state contracts, by which traders may have direct rights against other country’s authorities.
What are Schedules and Modes of Supply in GATS and trade agreements?
- GATS schedules are documents in which each state identifies the service sectors to which it will apply the market access and national treatment obligations of the GATS and any exceptions from those obligations it wishes to maintain. In practice, most states adopt a much more liberal position than those set out in their WTO schedules.
- The schedules classify services into over 160 categories. These define the precise extent of WTO members commitments in relation to services.
- These classifications and the below modes of supply are used in trade agreements worldwide and EU UK future partnership agreement
The modes of supply of services are the ways in which the service may be provided.
- Mode 1:Cross-border; services supplied from businesses established in one state into the territory of the other without either the consumer or producer physically moving between them
- Mode 2:Consumption abroad; consumption abroad of services which are consumed by the resident of another state who moves to the location of the service provider for example an Irish tourist Irish visiting the UK
- Mode 3:Commercial presence; this is a service provided through a subsidiary or branch in the host state
- Mode 4:Presence of persons; this applies when a service provides travels to the host state temporarily to deliver the service.
How would and EU UK future partnership agreement improve on GATS?
- There is an important exception to the GATS principles of non-discrimination and “most favoured nation”. As with goods, it is possible for WTO member states to enter a more favourable agreement, provided it is part of an overall comprehensive agreement liberalising trade in most services. In this case, states may agree to allow more favourable treatment to businesses established in the other party’s state.
- The EU and UK are seeking to enter a more comprehensive and thorough going agreement in relation to services between each other under this exception. At the same time as the Withdrawal Agreement, the EU and UK made a non-binding political declaration regarding the negotiations for a future relationship agreement;
- The EU and UK confirmed in the political declaration that it was their intention to conclude an ambitious comprehensive and balanced arrangement on trade in services well beyond the WTO commitments. which apply between WTO states worldwide.
- The political declaration stated that the agreement should cover a substantial number of sectors and cover all modes of providing services. It should cover professional and business services, telecommunications postal services distribution environmental services financial services transport services and other services.
- The EU and UK declared that they should agree on rules and standards for domestic regulation and licensing in key areas. They should develop appropriate arrangements on those professional qualifications which are necessary for pursuing regulated professions where it was in their mutual interests. They should engage in close cooperation on regulatory and supervisory matters in international regulatory bodies.
- Both the EU and the UK committed to start assessing the equivalence of each other’s financial services framework to allow recognition of each other standards as equivalent in certain areas where recognition is permitted under existing rules by June 2020. This target date was not met.
- The political declaration declared the intention of the EU and UK to maximise alignment and mutual access in relation to digital services, aviation, road, rail and maritime transport and in the energy sectors.
- There would not be free movement of people, but there would be non-discriminatory mobility arrangements between the UK and EU states including Visa free travel for short-term visits Visas for research study training and exchanges and cooperation generally ability.[ ]. There would be provisions for temporary entry and stay for business purposes.
- The declaration specifically acknowledged and confirmed that the Common Travel Area arrangements between Ireland and the United Kingdom would continue to apply.
- Given the geographic proximity and economic interdependence, the declaration confirmed that the future relationship must have open and fair competition rules including robust commitments to ensure a level playing field. These commitments should prevent the distortion of trade and unfair competitive advantages. Each of the EU and the UK should uphold the common high standard now in place, in particular in the areas of state aid, competition, taxation, social, employment and environment standards.
- Both sides agreed to establish a transparent schedule of commitments based on the widest offer made to other states. The contemplated in some areas such as professional and business services the commitments would go well beyond anything offered before.
What are the EU’s and UK’s Negotiation Positions?
- The EU Negotiation Directives and the UK published positions are broadly similar and follow the political declaration. The UK’s published negotiation position seeks a more ambitious agreement on services in several respects on services
- Both positions contemplate a partnership including comprehensive market access and national treatment under the home state rules. Regulatory rules should be efficient, transparent and avoid unnecessary regulation.
- The UK argues that the arrangements on services should be at least as good as those in recent EU agreements such as the Canadian or Japan agreements and also other negotiations where the EU has offered greater liberalisation. The UK has identified instances where particular more favourable treatment has been offered to particular states in relation to market access, non-discriminatory treatment and regulatory rules.
- The agreement should include reciprocal commitments to ensure that authorisations licences qualifications requirements and other permissions needed to provide a service are open to service suppliers on a non-discriminatory basis and are processed in a timely affordable way. The agreement should include best practice commitments on the processes and conditions applicable to authorisations licences, qualifications and other requirements.
- The agreement should provide a pathway for mutual recognition of professional qualifications underpinned by regulatory cooperation. Qualifications requirements should not be an unnecessary barrier to trade in regulated services
- The UK confirmed that it wishes to enter specific more detailed commitments in areas regulated under EU law, in particular financial services telecommunication services audio-visual and road transport. In particular, it seeks that EU and UK providers should be entitled to provide road transport services to and from each other’s territory without restrictions. It recognises that there are no precedents for this arrangement but highlighted that the UK is different to other trade partners because of its physical proximity.
Brexit and services; The big picture
- The whole of the UK is due to leave the EU single market in services at the end of 2020. There are no special arrangements for Northern Ireland in relation to trade in services.
- In some sectors where there are common EU based and EU wide authorisations qualifications and licenses, it may be necessary for EU and UK cross border service providers, to make alternative arrangements in order to continue to provide service in the other’s territory.
- In most sectors the impact on service businesses will be more generalised, applying principally to the regulations in relation to the doing business in the other territory.
EU Market in Service v Trade Agreement on Services
- Basic EU rules provide strong guarantees for service providers in one EU state who provide services to businesses and consumers in other EU states. Equally businesses and consumers have the right to receive services from businesses in other EU states. Businesses may establish a presence in another EU state, such as a branch or subsidiary company in the other EU state which itself provides the services in the host state.
- Rules made by governments and trade bodies that undermine these rights can be invalidated in any court in any member state by any business or trader. In addition, the EU Commission is active in taking action against states to require the removal of barriers to provide services whether written in law or which apply in effect.
- After 2020, the strong rights to provide services and to establish a business presence in another EU state are likely to be replaced by much looser and weaker rules.
- Usually, it will not be possible for a business to take legal action against another state or state body for breach. Instead, at most a trader may complain to its owns state’s trade body, which might then makes a complaint against the other state. The disputes might be the subject of arbitration. One side may seek to take unilateral action. It might be resolved quickly or my take some time, perhaps many years to resolve.
- Even if it is found that there was a breach of the rules there would be no direct rights of compensation or enforcement for businesses affected. At most, the trader’s states may be allowed to take countermeasures and withdraw some of the agreements’ benefits from the offending state.
The Negotiations for Future Partnership
- The EU and UK agreed in the political declaration which accompanied the Withdrawal agreement to seek to negotiate a comprehensive agreement in relation to services, going beyond the most extensive agreements in place at present. Both have made similar commitments in their negotiation positions.
- The EU has indicated in relation to negotiations this year, that the extent and depth of the agreements in relation to services (as in relation to other matters) will depend on the extent to which the UK agrees to commitments on levels playing field rules. These are rules regarding state subsidies, competition, environmental and labour law and regulatory rules.
- Regardless of whether or not there is an agreement on a future partnership agreement between the EU and UK before the end of 2020 (deal or no deal), the present EU rights and arrangements in relation to providing services into and from the UK will change significantly. The most ambitious and wide-ranging deal on services that might come out of the present negotiation will be much less thoroughgoing and effective than the current EU rules.
- If there is a deal, then the important matters of data protection flow, and financial services equivalence recognition are also much more likely to be resolved. These are very significant for some businesses and are mentioned in more detail below.
- A comprehensive agreement on services would require the approval of all EU state parliaments. This is because unlike the position with trade in goods, many aspects of services are not exclusive EU powers. They would therefore also require agreement by the parliaments of all the EU states as well as the EU parliament and Commission. It is widely believed that this is impracticable in the timeframe remaining in early Autumn 2020.
- There is no Northern Ireland Protocol in relation to services. Unlike the position in relation to goods, Northern Ireland will not have any special relationship with the EU in relation to services. The entire United Kingdom will leave the EU single market in services.
- Although there is no Northern Ireland Protocol on services and although there is unlikely to be any comprehensive agreement in relation to services, in many cases the impact of the UK’s exit from the EU on many services sectors is likely to be much less direct, than that in the goods sectors. Most services are not directly regulated in most EU states at all; they do not require a licence or authorisation to do business or a personal licence and qualification for the provider’s employees.
- The EU single market in services is not as developed as that in goods. There are some sectors only where there are EU wide licences, authorisations and qualifications. In other cases where regulation applies, a licence, permit and in some cases insurance is required in the host state, even at present.
What are state aid and level playing field rules?
- State aid rules are designed to prevent unfair competition. They refer to assistance given by governments and governmental bodies to business on a selective basis which may give them an advantage over competitors. They include grants, subsidies and soft loans by state agencies. State aid also includes any other arrangements which may have the same effect. General taxation policy is not subject to state aid rules. However individual tax benefits granted on a selective basis may breach the rules.
- State aid is generally unlawful under the EU treaties where it might affect trade between member states. The EU Commission may take legal action against dates to invalidate unlawful state aid. In many cases ,the challenges are based on arrangements which do not appear the state aid at first sight, but which have the same effect in practice.
- EU rules allows for the possibility of state aid where it can be justified for legitimate policy reasons. Various types of aid may be permissible subject to conditions The grants subsidies and loans advanced by state business support bodies, use these exceptions to the state aid rules. Extensive derogations from standard state aid rules have been permitted to tackle the consequences of the Covid19 crisis. In other cases, states may apply to the EU Commission for permission to grant state aid, where there are other justifiable grounds.
- Level playing field rules are much less precise than state aid rules. They are broad rules found in international trade agreements between states, which seek to prohibit one state, from affording unfair competitive advantages to its businesses, by way of state aid and also tax employment, environmental and regulatory rules and measures. The enforceability and precision of the rules vary from agreement to agreement. Generally breach of the rules allows the other state to withdraw a corresponding benefits of the trade agreement from the offending state..
- Even if there is no agreement between the EU and UK the WTO level playing fields will apply. They allow states to take measures against dumping (under price selling) and unfair subsidies. As in other areas an EU UK trade agreement would build on these rules.
- The Northern Ireland Protocol provides that the EU state aid rules are to apply to Northern Ireland. The EU state aid rules will not apply to Great Britain. Most of the areas covered by other level playing field such as in relation to environmental employment and regulatory standards will apply to the whole of the United Kingdom