London already trades globally as well as within the EU, but many of its growing service sector exports rely on EU regulatory frameworks. International banks can trade across the EU from a London base, professional services firms rely on mutual recognition of qualifications and jurisdiction, UK airlines can fly within Europe and between Europe and the USA by using EU aviation agreements, and EU regulations allow tech firms to share data over borders.
It is in the interests of both the UK and other EU countries to negotiate trade agreements that minimise the impact of regulatory barriers on trade in these service sectors, as well as reducing tariff barriers to trade in goods. These agreements will be complex, but should not be neglected – trade in goods may be hampered by tariffs if it has to fall back on World Trade Organisation (WTO) rules; trade in services could simply stop as a result of regulatory barriers. For many of the services that are most important to London’s economy, there are not even WTO arrangements to fall back on.
And the problem is urgent. If a full trade agreement cannot be negotiated and agreed before March 2019, transitional arrangements will be needed. These should be confirmed as quickly as possible, rather than left till the last minute. If the issue is left unresolved, the danger is that employers will seek to manage the risks associated with a potential ‘hard Brexit’ by moving operations out of London and other UK cities. We suggest that interim membership of the European Free Trade Association is sought: this would enable continuing access to most elements of the single market through the European Economic Area, though this would also require interim continuation of freedom of movement.
• The Government should confirm that regulatory frameworks for services will be prioritised in discussions of future trade relationships with the EU.
• The Government should work with the EU to clarify transitional trade arrangements as soon as possible after the election, with EFTA membership representing one ‘readypackaged’ option.