Britain’s service sector will see its exports drop up to 60 per cent after leaving the European single market, even with a free-trade agreement with the EU in place, according to research from a leading think-tank.
A new study from the National Institute of Economic and Social Research, to be published on Wednesday, says that signing a free-trade agreement with the EU will not recoup any loss in services exports, but would reduce the long-term fall in goods exports from between 58-65 per cent to between 35-44 per cent.
Advocates of the UK leaving the single market say that signing FTAs would enable British exporters to access markets in the EU and the rest of the world.
The study was based on the average FTA in existence in rich economies and big emerging markets, while Theresa May, the prime minister, has said Britain is aiming for a unique deal with the EU.
In theory, the falls in exports could be reduced if Britain managed to sign a deep bilateral agreement with the EU, including good coverage of the services sector. But Monique Ebell, the author of the report, said: “The average FTA for services at the moment is not very comprehensive and tends not to do very much.”
In 2014, 40 per cent of Britain’s services trade, and 56 per cent of its goods trade, was with other European Economic Area members, meaning that the overall fall in British exports would be 24 per cent for services and 20-25 per cent for goods.
Britain’s post-Brexit trade arrangements have come sharply into focus over the past few days after the government scrambled to reassure Nissan, which manufactures cars in Sunderland, that its ability to export to Europe would not be affected by leaving the EU.
Most EU cities are a long way from joining the club of top-ranking financial centres
One solution would be to sign an FTA with the EU that pegged import tariffs at zero and aimed to expedite customs and regulatory procedures that add to the costs of cross-border trade.
Ms Ebell said more research was needed to assess which of the many aspects of the single market — including freedom of movement for capital and labour, harmonised regulation and rules against state aid — were instrumental in creating so much trade between EEA economies.
“We need to understand very quickly in a deep way what will matter in an FTA,” she said. “An off-the-shelf agreement based on current practice is not going to be much use.”
Economists have focused on “passporting” — the right for financial services companies to operate throughout the EU under UK supervision — as one issue likely to affect Britain in particular. But services FTAs tend to have weak coverage for financial services, falling well short of the automatic market access afforded by passporting.
The British government has yet definitively to announce whether it wants to remain a member of the single market and the customs union, which sets a common external goods tariff and would sharply constrain Britain’s ability to sign FTAs with non-EU countries.
As well as financial services and car manufacturing, business representatives from a number of industries including the technology sector and pharmaceuticals have argued for deals to protect their ability to trade with the EU.