Frameworks for trading services
38.Unlike trade in goods, trade in services is rarely directly affected by tariffs (the duties imposed on goods entering a country), but can be significantly affected by non-tariff barriers. Non-tariff barriers include restrictions on the ability of a service provider to establish itself or operate in a different country, and requirements for service providers to possess certain qualifications before being allowed to provide a service.46 In its report The EU Single Market: The Value of Membership versus Access to the UK, the Institute for Fiscal Studies (IFS) notes that the steady reduction in the use of tariffs has increased the relative importance of non-tariff-barriers, “especially so in services trade … Estimates suggest the costs affecting services trade may be over twice those in goods.”47
39.The UK currently trades services as an EU Member State. Trade with other EU Member States is determined by the rules and principles governing the Single Market, while trade with the rest of the world is predicated upon EU-negotiated FTAs and a shared schedule of commitments at the WTO. These frameworks for trading services are described in further detail below.
The Single Market
40.As well as creating a Single Market for the trade of goods (principally through the creation of the EU’s customs union),48 the EU has worked to eliminate non-tariff barriers to the trade of services in the Single Market.
The EU Treaties
41.The Treaty of Rome, which established the European Economic Community, referenced the creation of a ‘common market’ among its members. Article 26 (2) of the Treaty on the Functioning of the EU (TFEU) defines this ‘common’ or Single Market as:
“An area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties.”49
42.The freedom to provide and receive services, which covers the temporary cross-border provision of services (either in person or, for example, trading digitised content online), is enshrined in Articles 56 and 57 TFEU. Services are defined as those that are provided for remuneration, and include: “(a) activities of an industrial character, (b) activities of a commercial character, (c) activities of craftsmen, [and] (d) activities of the professions”.50
43.Articles 49 and 54 TFEU provide for the freedom of establishment, thereby enabling a self-employed individual in one Member State to establish a business in another Member State, and companies and firms established in one Member State to establish subsidiaries in another Member State (mode 3).
44.The ability to trade services either by having the consumer move to the location of the service provider (mode 2) or vice versa (mode 4) is fundamentally supported by the principle of the free movement of people established under the Citizens’ Directive 2004/38/EC. This provides for the temporary and long-term movement of EU citizens across the EU.51
45.Treaty-based rights and prohibitions form the basis for EU legislation. The Government’s Balance of Competences Review stated that “90% of all services in the EU are covered either by the horizontal Services Directive or by specific pieces of sectoral legislation”.52 EU legislation in this field either harmonises standards and regulations across all Member States, or ensures that Member States mutually accept each other’s rules and standards as being equivalent to their own (the principle of ‘mutual recognition’). The principle of mutual recognition means that individuals or businesses can provide a service in another host Member State, as long as they meet the required standards in their own Member State (also known as the ‘Country of Origin’ approach).53 Legislation can apply horizontally to most services sectors (such as the Services Directive 2006/123/EC), or target rules at specific services sectors (such as the Audiovisual Media Services Directive 2010/13/EU).
46.EU legislation also harmonises rules and standards for other potential non-tariff barriers, for instance state-aid and competition law, consumer protection law, the protection of intellectual property and, more recently, the use and flow of data. While we do not consider these areas of legislation in this report, we recognise their importance to any future trade negotiations.
47.EU law either applies directly to Member States (under Regulations) or through national implementing legislation (such as Directives). It is enforced by national courts (which are required to give supremacy to EU law over conflicting national law), and is ultimately interpreted by the supranational Court of Justice of the European Union (CJEU). Where national courts are unclear as to the meaning of EU law, they can refer the question to be decided to the CJEU for a binding opinion. As Professor Barnard told us:
“If there is a rule that obstructs me as an independent contractor, a consultant, from providing advice of some form—for example, providing teaching services in France—I can go to the French local court and invoke EU law and get my rights enforced. If they are not enforced in France, I can ask the court to make a reference to the Court of Justice.”54
48.Individuals and businesses can also resolve restrictions to trade via the SOLVIT mechanism. This is a light-touch, EU-wide mechanism, which provides a framework for cooperation between the relevant authorities in the Member States concerned, allowing them to find a solution to a problem within a ten-week time period.55
Evaluating the Single Market for trade in services
49.The Government’s Balance of Competences Review on the Single Market in Services concluded that:
“The advantages of EU action outweighed the disadvantages for service providers. Whilst it was recognised that the costs fell on service providers that were not trading in overseas markets, as well as those that are active internationally, economic analysis shows that non-exporting businesses have benefited from liberalisation in domestic service markets, and that any national legislation on services would not have been dissimilar from the current EU regime.”56
50.Nevertheless, it is widely accepted that the Single Market for services is less integrated than that in goods. Dr Armstrong said: “In an ideal world, a perfect single market … trading between Liverpool and London would be the same as between Liverpool and Lisbon.” In such circumstances one would “have the same set of chartered accountants”, but the “fact that we do not … means that these services become more restricted”.57 The Government estimates that only a fifth of services provided in the EU crossed Member States’ borders.58
51.The incomplete nature of the Single Market for services reflects the fact that the regulation of services remains a shared competence between the EU and its Member States. While only the EU can act in areas where it has exclusive competence (for example in setting the Common External Tariff for goods entering the customs union), in areas of shared competence either the EU or Member States can act (although Member States may be prevented from acting where the EU has already done so). The Government’s Balance of Competences Review highlighted that businesses’ main concerns about existing EU legislation were that “considerable amount[s] of discretion [were] left to Member States to decide which restrictions should remain in place and assess their proportionality”, with some businesses feeling “that this power [is] sometimes used for protectionist purposes”.59
52.Whereas the customs union was established in 1958, the key pillars of the Single Market for services were only adopted more recently, such as the Services Directive (2006/123/EC) in 2006. Current EU proposals addressing concerns about the Services Directive, and regarding the Digital Single Market (DSM) Strategy, suggest that the Single Market for services will continue to integrate further over time.60