Only minuses to a Canada plus

  • techUK techUK
    Monday14Jan 2019
    News

    It’s not just a No Deal Brexit that presents risks for tech. A Canada style FTA may also have a big impact on market access.

This week we will finally learn the fate of the Prime Minister’s Withdrawal Agreement.  What happens next is anyone’s guess, but undoubtedly it will include renewed calls for the UK to abandon the Withdrawal Agreement, with its complex backstop solution to the Irish border, in favour of a ‘Canada-style’ Free Trade Agreement (FTA). It sounds a simple solution- an FTA is a deal after all.  But scratch below the surface and it’s clear that a Canada-style deal would simply not work for the UK tech sector, no matter how many ‘+’s’ it included.

First, a quick reminder of what is meant by a Canada-style deal. In 2017, the Comprehensive Economic and Trade Agreement (CETA) between the European Union and Canada came into force. In the words of the EU Commissioner for Trade, Cecilia Malström, CETA is the “gold standard agreement”. It marked the deepest trade deal that the EU had concluded up to that point (the newly ratified EU-Japan Economic Partnership Agreement goes further in some areas). As a result, CETA has often formed the centrepiece of many advocates of a harder Brexit, not least the former Foreign Secretary, Boris Johnson, who called for the UK to pursue a “SuperCanada”. So when we talk about Canada we usually mean a gold standard FTA, perhaps with some additional bells and whistle, including on security cooperation that form the ‘plus’ aspect of ‘Canada Plus’.

The Scale of Trade

One thing worth being clear about is that the biggest difference between the UK and Canada when it comes to our EU relationship is one of sheer scale. In 2016, the total bilateral trade in goods and services between Canada and the EU28 amounted to €94.7 billion. The EU is Canada’s second-biggest trading partner after the USA in goods, amounting to 9.6 per cent of its total in 2016, and Canada in turn accounts for 2 per cent of the EU’s goods trade.

These are substantial amounts of trade, which CETA is set to increase. The European Commission’s impact assessment estimates it will increase bilateral trade by 8 per cent by 2030, and will added between €1.7-2.1 billion, or 0.01 per cent to EU GDP.

However, the trade between the UK and the EU dwarfs these numbers. In 2017, the total bilateral trade in goods and services was £616 billion. The other countries of the EU account for 44 per cent of the UK’s exports and 53 per cent of imports.

For the tech sector, the EU plays a key role as both a source of inputs and as an export destination. Frontier Economics report for techUK, ‘The UK Digital Sectors After Brexit’, found that digital-producing sectors rely on imports of intermediate goods and services in their supply chain to a much greater extent than the economy as a whole – 49 percent compared to 28 per cent. Of these the EU made up 52 per cent of goods inputs and 49 per cent of services inputs.

The scale of trade between the UK and the EU, along with the integration of the EU in UK supply chains represents a wholly different state of affairs than the trade between the EU and Canada. CETA, as an agreement, was not designed to be something to deal with the integration of economies on the scale of the EU and the UK. This is the same with the EU’s other landmark free trade agreements with Japan (€178 billion total trade) or South Korea (€105 billion).

 

The Impacts in Practice

Given the relative scales of trade, CETA is clearly a good deal between Canada and the EU, and one that techUK has called to rolled over into a UK-Canada agreement. However, there are a large number of practical impacts that do not work for such a closely integrated set of economies as the UK and the EU.

 

Services and FTAs

A CETA model, or even a CETA ‘plus’, most crucially fails to deliver for service industries. This is the most important drawback for the tech sector given that services make up 81 per cent of its exports.

Currently the UK has access to the EU’s Single Market for services. While it is not as comprehensive as the Single Market for goods, as Sam Lowe of the Centre for European Reform points out, in some areas it has managed to liberalise services trade between member states greater than some countries have managed within their own borders. Crucially, the regulatory alignment across the Single Market is a central enabler of services trade. This is because you simply can’t check whether a service is of sufficient quality and safety on the border like a physical good so instead need to rely on regulation and behind the border enforcement.

For UK service providers currently trading with the EU, the single regulatory system, under the umbrella of the same enforcement system, greatly eases the process of doing business. Outside it, additional steps would need to be taken to continue the same trade as now. These would vary across different types of businesses but could involve the need to separately register in each member state, additional capital requirements for fintech firms, or potentially the need for locally qualified medical professionals to enable the approval of medtech apps. There would be large downsides for UK services consumers as well. For example, travellers to the EU would once again be subject to roaming charges. CETA does not solve these problems – for example establishing only a framework for the recognition of professional qualifications but leaving these for future negotiations.

For example, on something like Audio and Visual Media Services, to whom tech is a significant supplier, the UK operates a huge number of channels that broadcast across the rest of the EU. In a simple Free Trade Deal this is very unlikely to continue.  It is explicitly carved out of the service elements of CETA.  Even under the Chequer’s proposals from the Prime Minister these kind of operations are under a severe threat, and close alignment is the only realistic option to enable them to continue.

 

Rule Takers, not Rule Makers

One of the trumped benefits of a CETA style deal is that it would avoid the UK being subject any EU laws, with the FTA itself operating as the binding document. However, the reality is that, whatever agreement we have with the EU, many UK tech companies will still find themselves having to comply with many EU laws, over which we will have even less say than under closer models of alignment, such as the Association Agreement model that the Withdrawal Agreement and Political Declaration envisages. In those models there remains a possibility of observer status and greater influence in the enforcement of regulation, but a. basic third country status, as Canada has even under CETA, would rule this out.

 

Data

A key example of this regulatory cooperation issue is data flows. The General Data Protection Regulation (GDPR) has global reach, meaning that any UK company wishing to trade with EU will have to comply.  

Crucially, under a CETA model, the UK would lose any role in include the European Data Protection Board, the body that ensures the consistent application of GDPR. While it would be possible to get a mutual adequacy agreement – Canada has a partial adequacy decision, though it only applies to commercial organisations – this would not facilitate the kind of close relationship the UK’s Information Commissioner’s Office currently has through the EDPB and the UK would no longer be part of the ‘one stop shop’. This is a key principle of GDPR, that reduces the burden for both businesses and data regulators by allowing one regulator to be responsible for EU-wide enforcement for businesses operating cross border. Under CETA, companies operating primarily out of the UK would no longer be able to take advantage of this.

 

Goods

The restrictions that CETA would bring go far beyond just services. For goods, through CETA removes the vast majority of tariffs, it does not include a customs union. Therefore, goods crossing the border are still subject to rules of origin checks as well as checks on safety and compliance. Furthermore, the UK’s participation in the Customs Union brings many other benefits beyond just the applying the same tariffs and avoiding rules of origin. These are crucially in terms of customs facilitation and relief including having a single set of rules on the import, export and transit of goods, called the Union Customs Code. These aligned systems and rules do a great deal to facilitate the ease of trading across borders and would not be available through a CETA model for the UK after Brexit.

 

People

Access to talent remains one of the top priorities for many of techUK members. Here a CETA style deal would fall a long way short of a more bespoke partnership.

When the UK leaves the Single Market it will take control of its own immigration system.  As the Government’s White Paper sets out, this is likely to mean a far stricter system for EU migrants than is currently the case.  FTAs, such as the CETA deal do usually include rules on visas and migration, but this is likely to be subject to fierce, highly political negotiation that is unlikely to give businesses the clarity they need about access to talent.

As important as migration is the mobility of staff.  This is particularly important in the delivery of so-called Mode 4 services, where a contract is delivered from one country to another via the temporary movement of staff.  This is often the case in tech projects, such as services contracts for data centres or hardware.

CETA lists highly restrictive requirements on provisions of these kind of contractual services.  A Specifically a person can move to deliver the contract for a maximum of 12 months, even if the contract runs longer, and must have a graduate level of qualification. If a business needs a member of staff to say longer than they will have to go through the full migration regime of the Member State. For smaller UK tech businesses wishing to compete with businesses from across the EU for contracts, this could lead to a significant competitive disadvantage in the length of contract they are able to offer.

 

Funding

Other important areas for the UK tech sector that pursuing a Canada style agreement would not deliver are around access to the EU’s science and technology programmes, Horizon 2020 and its replacement Horizon Europe, as well as access to the European Investment Fund (EIF). Tech is obviously a research and development heavy industry, and the UK’s excellent higher education ecosystem, combined with its access to the funding and collaboration opportunities that Horizon 2020 brings, has been a key plank of the sector’s success. Third countries are able to participate in some Horizon 2020 funded projects, but this is not universal across all calls and is not akin to full participation. Likewise, though it would be possible to buy shares in the EIF, the total pot that UK venture capital funds would be able to bid for would be far more restricted, as techUK’s Giles Derrington pointed out when giving evidence to the House of Lords EU Financial Affairs Sub-Committee.

 

Speed of change

A final point that should be considered when looking a simple FTA as a solution to Brexit, is that most FTAs are highly static, often only returned to every decade or so (the EU Mexico which is currently being updated originally came into force in 1997), if that. For a rapidly developing industry such as tech it is almost impossible to tell which new innovations may come up against barrier is created in the past that cannot be easily overcome within the context of a static FTA. Some attempts have been made in FTAs to overcome this with catch all non-discrimination clauses, such as language proposed for the Transatlantic Trade and Investment Partnership (TTIP) on non-discrimination against any newly created forms of financial services. However, the EU has so far strongly resisted giving such a carte blanche in trade deals and there is no reason to think a UK/EU deal would be any different.

Ultimately therefore it is reasonable to conclude that, CETA marks a good deal for Canada and the EU, two economies separated by an ocean of which neither is the others largest trading partner. But this is not the situation for the UK and CETA just would not be sufficient for the UK’s tech sector. The Government’s own analysis estimates that a CETA-style trade agreement would lead to a 9 per cent increase in trade costs for services, and lead to a 24 per cent drop in exports to the EU. For tech, this would amount to a drop in exports of telecommunications, computer and information services of just over £2 billion a year. For all the talk of the pluses that can be added on to CETA, the fundamentals do not change that the UK needs a much closer form of relationship with the EU. As the Withdrawal Agreement comes up to vote, it worth pondering that fact.

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