The deal is done, and its content is advertised differently at both sides of the North Sea. From 10 Downing Street we here nothing but self-appraisal about the amazing deal, as was to be expected. From the rest of the United Kingdom, and especially from England where the majority of the Service Industry is located, the hangover misery becomes louder with each day the captains of industry spend digesting what has happened since the Brexit referendum in 2016.
In Brussels and across Europe, there is a lot of confusion. Not about the deal itself, not even about the economic impact. Simply about one question. Is this what all the fuzz has been all about? Four years of rhetoric and claims. Four long years of negotiations about proposals by the Brits which were rejected by the same Brits, and the outcome is covering just a fraction of the economic interests of the United Kingdom. More importantly, the most significant contributing element of the British economy is not covered: the service industry.
A look at the trade balance of the United Kingdom and the role of the European Union puts it all in perspective. The British economy is a consumption driven economy, for which it imports goods and parts. A significant share of the goods it exports are produced by foreign owned companies. The area where the United Kingdom is able to generate a significant surplus in its trade balance and contributions to its economy is the service industry.
This quickly leads to the question why Boris Johnson and his ‘Make Brexit Great Again’ administration did not do whatever it takes to get a rock-solid agreement with the European Union for the service industry. After all, they had more than 4 years time to do that since the referendum. To understand the answer to this question, we need to take a closer look at the portfolio of services offered by the United Kingdom.
In the service industry, there is a very clear divide between regulated and unregulated services. The unregulated services can for example be consulting or training and also the ever so popular IT services are (mostly) unregulated.
Regulated services include financial services, insurances, travel, employment services, etc. Telecommunications as a service is also highly regulated and so are logistic services to some extent. And that is where the shoe hurts in 10 Downing Street, because the vast majority of the services exported from the United Kingdom to the European Union are regulated services.
Reaching an agreement to deliver regulated services to the European Union will be always based on EU legislation and regulations, and in most cases will only be authorized based on local licenses in the member states. Working out such an agreement is not only very complicated and impossible to achieve in the timeframe in which the British establishment rather preferred to sabotage itself than focus on creating solutions, it also conflicts with the entire set of slogans that made a very slim majority of the Britons vote for Brexit: independence from Brussels and the EU.
The outcome of more than 4 years ‘negotiations’ and a so-called ‘oven ready deal’ is that Boris Johnson et al have simply placed the entire liability and responsibility for the consequences of Brexit at the to-do list of the business owners, small and large. Boris Johnson saying that ‘Businesses must do more to prepare for Brexit’ and ‘Business must develop new business models’ has just about the same value and lack of accountability as ‘Instead fund our NHS’.
There is however a much deeper impact from the lack of agreement for the service industry, and especially the regulated services coming from the United Kingdom which goes far beyond just the lack of authorization and pending cease and desist orders. An impact which the political establishment around Boris Johnson is very much aware of but does not want to accept any kind of responsibility for. It is something like a silent British version of Trump’s ‘Make America Great Again’.
Over the past decades, the United Kingdom has exported expensive labor intense work, including services, to ‘low-cost countries’ and the result of that is that the majority of those labor components are now outsourced to service providers in India, Pakistan but also Rumania and Bulgaria in the European Union. At the same time, the United Kingdom imported ‘cheap labor’ from countries like India and Pakistan, and of course Poland, Rumania, and Bulgaria. In fact, from the perspective of labor and labor costs, no other country has benefited more from the freedom of movement within the European Union as the United Kingdom did.
Just like the economy of the United States is intertwined with the outsourced workforce in Mexico and Asia, and stumbles to deal with a trade policy that should make it great but backfired before it even got fully deployed, the economy of the United Kingdom is fully intertwined with the European Union.
As of January 1st, 2021, the unrestricted access to the single market of the EU comes to a full stop. Period! Slogans, speeches and photo opportunities will not change that this all ends. And that includes regulated services, a whopping 62% of all services exported by the United Kingdom to the European Union, until December 31st, 2020!