Between a rock and a hard place: Trade negotiations post-Brexit and post-election

Future negotiations about service trade liberalisation will present significant difficulties for the UK – whoever is in power

One year after the United Kingdom (UK)’s Brexit referendum, divorce talks with the European Union (EU) have begun. On the first day of negotiations on 19 June, the British Secretary of State for Exiting the European Union, David Davis, and the European Commission’s Chief Negotiator for Brexit, Michel Barnier, agreed that the question of future trading relations will not be up for negotiation until the rights of citizens and the divorce bill are resolved. According to the current timetable, this pushes any potential talks about UK and EU trade back to at least January 2018. Despite this setback for Davis, post-Brexit trade fantasies loom large in the British public discourse about leaving the EU. From prospects for remaining in the single market, to visions of free trade with the world, the current moment of uncertainty is also experienced as one of possibility for change.

Echoing the zeitgeist, the UK electorate expressed its taste for change on the eve of Brexit negotiations. The General Election 2017 ended the Conservative party’s dominant position in the House of Commons. Commentators were quick to point out that anger over austerity and seven years of cuts to public services and excessive belt-tightening had attracted 40% of voters to Jeremy Corbyn’s Labour party. Sensing growing frustration with special-interest capture of the state, Labour had pledged renationalisation of utilities, notably energy, water, rail, and mail, as well as boosts to public spending on health, social care, and education in its manifesto. Encouraged by Labour’s election result, the debate on whether private service delivery or public service delivery heed better overall outcomes has resurged.

If the General Election 2017 has put the topic of public service delivery back on the table of UK politics, the prospect of trade negotiations with the EU and other trading partners post-Brexit has the potential to tilt the political terrain against such initiatives. In global trade politics, trade negotiations have gradually been shifting away from traditional preoccupations with lifting duties and quotas on goods crossing borders. Providing market access for service trade and investment protection have come to be seen as crucial in the context of setting international trade rules that optimise the regulatory environment in which companies operate across national jurisdictions. However, given how service liberalisation in trade agreements is organised, trade deals limit the feasibility of Labour’s domestic agenda on services.

In many of the EU’s ongoing service negotiations, service and investment protection chapters explicitly outlaw roll-backs of previously liberalised services sectors. In other words, the link between domestic policy preferences for private or public service delivery and international policy preferences for ambitious or conservative trade agreements is direct. The recent history of negotiating EU free trade agreements with Canada and the United States, in combination with the strong electoral endorsement of Labour’s manifesto, suggests that domestic political battles over future UK trade deals may well be equally, or even more, intense for the UK government than international negotiations with the world’s trading powers.

Although such an analysis remains speculative for now, I have argued elsewhere that the UK will rejoin an increasingly fragmented and contested global trade regime as what is known as a ‘middle power’. Middle powers are countries that have economic weight and negotiating capacity, however not to the same degree as dominant global trade powers. The idea that middle powers can obtain their preferred outcomes without deep concessions in negotiations with global trade powers, such as the EU, the US and China, or even with other middle powers, such as Australia, Canada, Norway, India, and Brazil, does not have many takers among international trade experts. Similarly, middle powers can at times gain certain concessions in negotiations at the World Trade Organisation (WTO), but given the state of multilateral negotiations, the UK could be a long time waiting for its desired results.

What we know for the time being is that six options appear plausible for the future relationship between the EU and the UK. They are exiting the EU (1) without a deal, (2) with an Article 50 deal only, (3) with a tariff-free trade in goods deal, (4) with a wide-ranging trade deal incorporating goods, services and other areas, (5) remaining in the customs union, and (6) remaining in the single market. All of these scenarios will leave the UK a free hand in negotiating services with third countries because under none of these arrangements would the UK be bound by the EU’s existing or future services commitments.

However, due to the intangible character of services, liberalising services is fundamentally different from liberalising merchandise trade. Crudely defined, a good is anything that you can drop on your foot. A barrier to merchandise trade is a charge levied by government when a good crosses a border, or any regulation that impacts the conditions under which foreign goods enter domestic markets. Services are by definition personal. A service delivery cannot be separated from the people providing and receiving the service. For this reason, service liberalisation efforts in trade negotiations consist of deregulating the domestic laws and rules applicable to people crossing borders to provide or receive a service, for services crossing borders (mostly online) and for economic agents establishing a commercial presence for service delivery abroad. Under WTO rules, countries specify which service sectors they wish to liberalise and which they do not wish to liberalise. Under Free Trade Agreements, countries typically list the service sectors they wish to exclude from broader liberalisation commitments. Any sectors not explicitly listed are automatically liberalised. Once a sector is liberalised multilaterally or bilaterally, governments give up their ability to discriminate between service providers when regulating the sector.

Proponents of international service liberalisation, such as Secretary for International Trade Liam Fox or EU Commissioner for Trade Cecilia Malmström, assume that by increasing competition in services sectors, service liberalisation contributes to efficiency gains in service delivery, and strengthens the service-based economy on which advanced countries today depend on for employment and growth. The underlying economic policy approach was aptly summarised by Liam Fox when he visited Washington, D.C. in June to discuss potential future UK-US trade talks. Addressing the Select USA Investment Summit, Fox said: ‘The more we’re able to liberalise our economies, the more attractive we become for investment, the bigger the trade is likely to be between us … Ultimately we all want to spend money on healthcare, infrastructure and education, but you have to generate the wealth first’.

Placing the need for markets to generate wealth over the need for states to provide universal public services in key areas is what the Labour campaign in the 2017 General Election has sharply contested, with considerable electoral success. Jeremy Corbyn promised in his speech at the 2016 Labour Party Annual Conference in Liverpool that ‘we will … be pressing our own Brexit agenda including the freedom to intervene in our own industries without the obligation to liberalise or privatise our public services.’

The crux is that it is safe to assume that any negotiating partner – whether the EU or other countries, both global powers or other middle powers – will be keen to discuss services liberalisation in trade talks with the UK. Unlike in trade in goods, the UK had a £28 billion trade surplus in services with both EU and non-EU trading partners in 2015. When compared with tariff reductions across the world economy, global service liberalisation has so far advanced sketchily, signalling to trade officials that the biggest gains are to be made in this area. Judging by what Theresa May’s pet phrase, a ‘comprehensive, bold and ambitious free trade agreement’ usually entails in international services negotiations, the UK could potentially be striving for full liberalisation commitments in health services, the explicit inclusion of public services in liberalisation commitments, the introduction of ratchet clauses that would create international legal hurdles for future governments wishing to roll back on existing liberalisation levels, not to mention commitments to enter into a controversial multilateral investment court with the EU, Canada and others.

Yet, there is a well-organised and well-informed constituency of trade unions, non-governmental organisations and social movements in the UK that have a long history of campaigning against what they see as excessive undermining of the state’s ability to regulate corporate power through service and investment liberalisation in international trade agreements. From financial regulation and labour rights, to education and the NHS, non-state actors have been mounting strong resistance against the Comprehensive Economic and Trade Agreement between the EU and Canada, the Transatlantic Trade and Investment Partnership between the EU and the US, the Trade in Services Agreement under negotiation in Geneva, and other agreements. In the past, their resistance has been mainly addressed at the European Commission, because this is where trade policy competence is located in the EU. Given how these social forces have been invigorated by the political kerfuffles of 2016 and 2017, it is reasonable to assume that they will direct their energy to Whitehall, once international trade talks begin in earnest.

In this context, the current hung parliament does not bode well for the ability of any UK Prime Minister to get its way in international services negotiations. In domestic politics, post-Brexit Britain is stuck between a rock and a hard place when it comes to negotiating future trade agreements: if Theresa May’s Conservative Party leads the talks, it will face a Labour Party whose manifesto pledges to put more public services under public ownership would be undermined by service liberalisation commitments. This Labour Party would see its position backed by strong societal pressures from a wide range of non-state actors and social movements sharing its views on the failures of market liberalisation. If Jeremy Corbyn’s Labour Party leads the talks, it will face an international negotiating climate in which expectations that service trade liberalisation will be pushed forward will be overwhelming. Negotiating history teaches us that such pressures can be tough for a middle power to bear. One way or another, post-Brexit trade policy autonomy is set to be a pyrrhic victory for the UK government.