New trade agreement with EU will have to go further to provide for services, says NIESR

When negotiating a new free trade agreement with the European Union, Britain will have to go further than any other deal that is currently in existence to provide for its services industry, the National institute of Economic and Social Research said.

NIESR also revised up its forecast for UK growth in 2017 by 0.3 percentage point to 1.7% and expects it to improve to 1.9% in 2018. But this marks a slowdown from the 2% reading in 2016. The think thank warned that rising inflation would affect consumer spending.

The world economy is predicted to grow faster in the next couple of years, from 3% in 2016 to 3.1% in 2017 and 3.5% in 2018.

The think tank said that the current European Union trade agreement is more comprehensive and goes further than most free trade deals as it covers non-tariff barriers, which encompass regulations for services, mutual recognition of intellectual property and passporting rights.

The financial services industry has been concerned with passporting rights which allows them to conduct business across the EU through a single license, especially since the Prime Minister Theresa May said that Britain will no longer be a member of the European single market and customs union.

NIESR estimated that once Britain leaves the single market and if it adopts World Trade Organisation rules for a deal with the EU there will be a 59% reduction in UK trade with the bloc, consisting of a 58% reduction in goods and 61% in services.

If the UK negotiates a new free trade agreement with the EU, the NIESR expects a 45% reduction in UK trade consisting of 35% decline in goods, a 61% fall in services.

When compared to Britain gaining free trade agreements with leading emerging economies such as the BRIICS (Brazil, Russia, India, Indonesia, China and South Africa), there will be a 19% gain in trade, consisting of 26% in goods, but none in services. This is similar to a free trade agreement with Anglophone countries - the US, Canada, Australia and New Zealand - with a 12% gain, consisting of 26% in goods and none in services.

For total UK trade, NIESR predicted that leaving the European single market could lead to a long-term reduction between 22-30%, while the increased trade from new trade deals with all the BRIICS nations and Anglophone countries will come to just 2.6% and 2.2%, respectively.

NIESR economists Monique Ebell and James Warren said: “This stark difference mainly reflects the fact that the single market is a very deep and comprehensive trade agreement aimed at reducing non-tariff barriers, while most non-EU free-trade agreements seem to be quite ineffective.

“If the UK is to replace the lost trade from leaving the single market, it will need to negotiate trade deals that are much more effective.”

Ebbel said that she expects after about 15 years the British economy would be just over 2% smaller than if it stayed in the EU and that it would take time for the impact of changing trade deals to be felt.

She stressed that this was “not prediction on the future success, or lack thereof, for trade negotiations, we're just saying that if we conclude free trade agreements that are similar to those in existence now, they probably not going to be as effective”.

She said that it was about non-tariff barriers for goods and services, common standards, and regulatory agreements, the ability to enforce contracts with, for example, the European Court of Justice and the free movement of labour that facilitates trade of both goods and services.

NIESR based their findings on data from 2014, comparing two countries that have no free trade agreement, two countries within the EU and two countries with one in the EU and one out.