Brexit negotiations will need outstanding results to secure an okay deal for digital

SUMMARY:

The Brexit Committee’s white paper on upcoming negotiations with the EU show how hard it is going to be to secure an okay deal for the digital sector.

business-handshakeAlmost a week after the Prime Minister triggered Article 50, signalling the start of the UK’s exit from the European Union, the government’s Brexit Committee has released a White Paper assessing the planned negotiations over the next two years.

The White Paper is inevitably long and complex, but what is clear is that Theresa May and her negotiating team are going to have to achieve outstanding results in order to secure a deal for the digital sector that leaves it in an okay position after Brexit.

And by an okay position, I don’t mean a position similar to one that we are in now – as it is becoming increasingly clear that Britain will be shutting its borders and immigration from member states will likely involve at least some level of bureaucracy. I mean a position that is *almost* as good as the one as we have now, as it relates to trade in digital services.

I would just like to be clear at this point that I’ve tried to keep my political views out of this assessment. Rather, simply by reading the Committee’s take on what it is required for the digital sector to flourish post-Brexit, it’s clear it’s going to be an uphill struggle, particularly when you take into consideration that digital is one hundreds of considerations.

More detail will be provided below, but a summary of the core challenges are as follows:

  • A free trade agreement (FTA) will need to cover both goods AND services, as digital trade falls under the latter. We sell more in services to the EU than we do in goods, but the EU sells more in goods to us than they do services. FTA’s usually are limited in their scope when it comes to services. So there’s a good chance the EU will want to focus on goods, and services will be sidelined.
  • Securing talent from the EU is critically important to the digital sector, which employs 25% of its workforce from member states. Closing the borders and putting in place new work visa systems could not only create bureaucracy for industry, but deter workers from seeing the UK as an attractive place to come and settle (if settling for extended periods is still an option).
  • The UK needs to secure a data flow agreement with the EU before the end of the Brexit negotiations, otherwise we face a cliff edge on the day we leave. However, it’s largely down to the European Commission if it considers the UK to be ‘data adequate’ and that the flow of data isn’t then restricted. It seems the UK wants to include this as part of the FTA agreement, but in reality it’s a one way decision by the EC.

As you can see, these three points are central to how the digital sector operates today. And any negative shift in their operations as a result of the Brexit negotiations shouldn’t be underestimated. If the digital sector is to continue to flourish in the UK, we do actually need the government to have its cake and eat it.

Securing a services-focused FTA

As I have highlighted previously, digital falls under the services side of any FTA that takes place. And whilst the UK has a deficit on trade in goods with the EU27 (£89 billion in 2015), it has a surplus on trade in services (£28 billion in 2015).

And whilst services are typically dictated by WTO rules and tariffs on services are low, there are regulatory concerns to consider. For example:

  • right of establishment (meaning that individuals or companies from one member state must be legally free to deliver services in another member state either temporarily or permanently, while continuing to be regulated by the authorities of their home country); and
  • mutual recognition of professional qualifications (the licensing of professionals by regulatory bodies is subject to the principle of mutual recognition throughout the Single Market).

The Brexit Committee explains today that although the impact of Brexit on the financial services industry has dominated media commentary, exports for services outside this sector (including digital) are much higher.

The White Paper states that the government will aim for the “freest possible trade in services” between the UK and the EU. However, Sir Ivan Rogers, former permanent representative of the UK to the EU, has said that this will have to be the “biggest free trade agreement ever struck”. Rogers warned:

The slight danger for us is that, given the goods surplus for them is so great and the services surplus [for us] is so great, they would pocket the goods agreement and say, “Good; we have tariff-free access; we do not really need to bother about your services”. I would not buy that pig in a poke; I would want a full and comprehensive FTA that covered goods and services.

However, Dr Federico Ortino, The Dickson Poon School of Law, King’s College London, told the Committee that when it comes to services, a good agreement hasn’t been seen in FTAs elsewhere. He said:

Outside the Single Market we have not been able to liberalise trade in services, particularly when it comes to, where it is relevant, non-tariff barriers. Look at even the most ambitious FTAs, such as Canada. What that gives in terms of the commitment in financial services in CETA is very marginal [ … ]

Overall, it is not much different from what you get from the GATS schedule of WTO members.

Access to talent

The Brexit Committee heard evidence from the technology community that it has accepted that “free movement as it currently operates will end”. In other words, there is going to be a new immigration system in place that will require some sort of visa for workers from the EU to come and be employed in Britain.

This will be a top concern for the digital sector, given that 25% of the tech workforce are EU nationals.

It seems that the approach will be to introduce a ‘lighter touch’ immigration system for EU workers. The report out today notes:

On our visits around the country, we have heard numerous requests from businesses for flexibility in a future immigration system to ensure that sectors currently reliant on EU workers do not face a sudden shortage of labour. We also heard evidence from the devolved governments that parts of the UK are dependent on immigration in order for their economies to grow.

Many of the business people we spoke to called for a relatively simple system, avoiding the complexity currently experienced in securing visas for non-EEA workers, highlighting the need for the UK to still be able to attract talent. There was support for a ‘lighter touch’ immigration system for EU workers than for those from outside the EU. The Government would have to work out how it wished to introduce control of who came in and out.

However, this doesn’t come without its problems – namely bureaucracy for the employer (which will have a big impact on smaller companies) and creating an environment that feels welcoming for international workers, which will quite possibly have their right to remain removed in the future. The report states:

One option would be for the UK to develop a system of work permits for EU migrants, requiring employers to apply for authorisation to hire a non-UK national for a specific job. Authorisation would come with conditions attached, with the bulk of the burden of administration and enforcement falling on the employer.

Most work permit systems in high-income countries typically restrict eligibility by factors such as occupation, skill level, or income. Low-skilled worker programmes are also common, although they tend to be more restrictive (often limited to specific types of work) and provide limited routes to permanent settlement or family unification.

Will the UK be attractive to European workers if they know that they have to come alone, for a limited period, and won’t be able to settle for the long term? I’m not convinced. Particularly when the options of Berlin and Paris come with far fewer restrictions.

Data flows

The Committee’s report explains that ensuring data flows between the UK and the EU remain are a “red line” for the technology sector. And the European Commission has the power to decide if the UK’s data protection measures are ‘adequate’ once it leaves the Union. In essence, it’s up to the European Commission if the UK is a safe place to send and receive data from. The report states:

The digital industry is an increasingly important sector to the UK economy and relies on the stability of data flows across UK and EU borders. The Government must seek to maintain uninterrupted UK–EU data flows by securing a data adequacy agreement with the EU before the end of the Article 50 negotiations.

diginomica has covered this in great detail previously. If we don’t secure the right to data flows with the EU, it could be disastrous for the technology sector. As the report outlines:

There would be implications if the UK did not have a data adequacy decision. There are risks that businesses in all sectors of the UK economy would not be able to rely upon international data flows between the UK and the EU. The UK’s competitiveness would diminish and may affect the attractiveness of the UK as a destination for investment.

While some large, international firms may be able to adapt—there are alternatives but they involve considerable burdens on business—but it is less likely to be unworkable to SMEs, and this would have repercussions in areas such as Fintech.

A free trade agreement between the UK and the EU should secure ability to move data across borders. The UK has strength in services and, generally, services are not covered well by FTAs. There is a risk that data protection authorities in Member States may not consider the economic aspects of the UK not getting a data adequacy agreement. There would also be a risk of a legal challenge from privacy advocates who do not like UK legislation on privacy. US and EU have different approaches to privacy, and managing this can create complexity.

The only snag? FTAs don’t usually cover data flows. Tricky.

My take

We are now beginning to realise the difficulties the digital sector will face in ensuring access to talent and trade with the UK’s largest trading partner – protecting its future success. This is going to be an uphill struggle.

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