POLITICO: A third way on the customs union

03 July 2017

UK officials talk up a deal that covers trade in goods while also allowing new agreements on services.

[...]a third approach is gaining traction at senior levels in Whitehall, with officials pointing out that it’s possible to have a customs union with the EU that covers trade in goods, while being free to strike new deals further afield in the services sector.

Services — business advice, consultancy, banking, insurance — represents about 80 percent of the U.K. economy. So any Brexit deal that allows the U.K. to improve future trading terms in these areas with partners like the U.S. and the BRICs countries, while remaining wedded to the EU customs union in terms of its goods trade, could be the best of both worlds.

It also has the potential of avoiding an acrimonious political split at the heart of government between those, led by Trade Secretary Liam Fox, who prioritize Britain’s global role after Brexit, and the soft(er) Brexiteers like Chancellor Philip Hammond, who want to minimize economic turbulence — possibly by maintaining customs union arrangements.

There is a problem, though. Historically, it has proved mighty hard to strike free-trade deals that significantly liberalize the trade in services. Tariff barriers are relatively easily knocked down in bilateral trading agreements, but they are not what matters here. In services trade, it’s more about harmonizing rules and regulations — a far tougher thing for countries with different systems to agree on. Influential research by Dr. Monique Ebell at the National Institute of Economic and Social Research last year found that past FTAs around the world have not, to date, led to any significant increase in bilateral services trade. [...]

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