Official Report 778KB pdf
Under our next agenda item, we continue to take evidence in the second phase of our inquiry in relation to our review of the European Union-UK trade and co-operation agreement. The second phase focuses on trade in services.
We are joined online by Peter Holmes, who is an emeritus fellow of the University of Sussex and a member of its UK trade policy observatory; Emily Fry, who is a senior economist at the Resolution Foundation; and David Henig, who is the director of the UK trade policy project at the European Centre for International Political Economy. With us in the room is Dr Arianna Andreangelini—Andreangeli; sorry, I will hopefully get it right as we go forward. She is professor of competition law at the University of Edinburgh.
Good morning. I welcome you all to the committee. I will begin with some questions before I bring in other members.
Our focus is on how the EU-UK trading relationship is likely to be impacted by wider geopolitical considerations. I have a broad opening question for you all. What do recent developments in international trade mean for the UK’s relationship with the EU and with the United States of America?
I begin with Dr Andreangeli.
As you know, trade circumstances have been changing for a while. It could be argued that the balance of geopolitics has been deteriorating in some ways and that there is increasing instability. We saw that a few years ago with the Ukraine crisis, which is set to continue.
In addition, there has been a weakening, if you like, of traditional approaches to trade relations. For instance, we were committed to multilateralism for many years through the World Trade Organization, which has been in a crisis situation for some time—at least as far back as 2017—due to the lack of space for a renegotiation of the appointments of members to the dispute resolution panel. That is a broader symptom of unease and of the general weakening of multilateralism as an approach to trade relations.
Trade relations have become much more concerned with reciprocity. There have been a lot of bilateral or more restricted multilateral attempts at forging new trade relations.
To refer to the position of the European Union, where my field of expertise lies, there is an argument for saying that, with the trade and co-operation agreement, the EU and UK have forged a partnership that has its own principles and frameworks for governance, review and implementation. One could therefore argue that, in some ways, the TCA has set out a trail for its own development in the future. However, it would be naive to think that the geopolitical situation does not and is not likely to affect how the relationship might develop.
After these points, I will leave the floor to my colleagues. The EU has, in and of itself, changed its approach to trade policy. Because I am old enough to remember the European Economic Community treaty, I am old enough to remember a time when trade policy was called common commercial policy. That was always an instrument for the European Union to forge ahead with its plan of European integration. Just as much as integration is on the inside, it should also be seen as providing a common front on trade policy between the community—afterwards, the union—with the third states outside.
That has developed in ways that are more diversified. For instance, we have preferential agreements, which have chapters that have little to do with trade and a lot to do with politics, the rule of law, democracy and so on. If you look at it from a European standpoint, the TCA is an expression of that diversification.
However, when it comes to trade, the European Union has also become a much more canny operator on the international plane. In my written evidence, I mentioned the all-important contribution that the Draghi report has made to the competitiveness agenda. That report is scathing. It says that multilateralism is weakening and that we need to be far more functional and strategic in the way in which we forge ahead with our trade relations.
I go back to my initial point. You could argue that the trade and co-operation agreement has set in motion a process that is based on principles. However, we are likely to see the European Union adopting to an extent the same sort of strategic and functional approach to trade policy when it comes to the reset.
Something that is important and should be welcomed is the fact that there seems to be a general willingness to look for areas in which co-operation is in the common interest of the European Union and the United Kingdom. In those areas, talks should be encouraged, and co-operation should be fostered and enhanced.
I bring in Mr Holmes.
Thank you very much for inviting me. It was very nice to hear Arianna Andreangeli’s presentation. I will try to be brief, but I risk failing on that front.
The key point in relation to what has changed in recent months is that the changes have, in some sense, exaggerated issues that were already present. I do not think that the presence of Trump totally alters the state of the world economy, because the Biden Administration was already very much undermining the functioning of the World Trade Organization and Britain was at risk from the backlash from American protectionism. The experience of the past few years has shown that, even where there was a degree of harmony in views across the Atlantic, the scope for intensifying trade relationships and agreements between the UK and the US was very limited.
Emily Fry is much more of an economic modeller than I am, but I think that I am right in saying that the evidence is in line with the old-fashioned economic theory—the gravity model of trade—that you do most trade with countries that are big and near. It is a bit like that lovely episode of “Father Ted”, which you might recall.
The EU is still our largest trading partner. Our economic relations with the EU are much more sensitive to trade policy matters than they are with the US. Our trade with the EU is value-chain oriented, and includes technical standards, the backwards and forwards movement of intermediate goods—where friction in supply chains really matters—and rules of origin. Those are very much embedded in our economic relationship with the EU. It has always been a fancy to think that trade with the US or Australia could replace that. That is even more true in the present circumstances.
We need to consolidate our relations with the EU. It is beginning to consider economic defences—that is, trade defence measures—and the UK might be caught up in those. In some ways, it is much more important that we avoid getting caught up in the backlash of frictions between the EU and the US than it is to worry about the backlash as a result of US actions against China.
The nature of our trade with the US is much less susceptible to what Trump might do. Above all, one has to say that no deal that we might do with Trump is likely to be credible. Look at the fuss that was made over the Trump renegotiation of the North American Free Trade Agreement, which became the United States-Mexico-Canada Agreement. Almost the day that it was signed, Trump broke promises that he had made in it.
From the point of view of restoring economic growth and getting the UK embedded in value chains, the changes in trade make the challenges that the UK is facing much harder.
You may remember that Boris Johnson gave a speech in Greenwich in February 2020, in which he announced that Britain was going to lead the world into re-embracing free trade and multilateralism. That was the worst possible time, up until that point, to launch a project such as that—and it is even worse now. In my opinion, we have very little alternative but to simply reinforce the wish to improve our economic relations with our nearest neighbours.
I will go to you next, Ms Fry, given that you were mentioned by Mr Holmes.
There is a somewhat curious difference between some of the economics around what has been happening recently in trade trends globally and the politics of what has been happening in those trends. You might have heard of the term “slowbalisation”: the idea that the growth in global trade is slower. We are definitely seeing slower growth in global trade, in particular on the goods side of things. However, taking the most recent year of data, the UN has shown that, actually, services reached new heights in 2024, growing by about 7 per cent, whereas goods trade grew by only about 2 per cent in 2024. There is a kind of bifurcation between some of the goods trends and some of the services trends.
It is curious that the political glare has been on the goods side. As Pete Holmes and Arianna Andreangeli have said, that has been building for a number of years, most obviously characterised by the China shock, which gave rise to some concentrated harms to manufacturing, for example in the US, as well as broader benefits to the US. Because of those concentrated harms, that appears to have captured some political minds. Some of the issues around the trade in goods are clearly continuing. For example, a big focus from Trump on potentially implementing some type of tariffs would continue to change some of the global calculations on goods trade.
On the services side, a challenge that we face is that the last big multilateral services deal—pretty much the only one—was the general agreement on trade in services by the WTO, but that was decades ago, and there has not really been an update to that multilateral deal. As we know, however, technology has changed substantially over the past 20 to 30 years. We are all much more online—I am dialling into this meeting remotely, for example—so the ways in which we trade services have really changed, and that gives us a clue as to how we should think about our position and the types of trade approaches that we should take in future.
As Arianna Andreangeli was saying, there are a lot of challenges in the multilateral space at the moment, so looking for deeper bilateral deals—potentially sectoral deals—will be key for the UK, particularly in reflecting the updated technologies and ways in which we are doing services trade, which, as we have learned through the Brexit process, can change.
Just to wrap up some of that discussion and to follow on from what Emily Fry has said, I note that actual trade figures are not reflecting the turn away from globalisation that politicians and the media are discussing. It is companies that trade; Governments set the framework. As we have seen from Brexit, when Governments make the conditions for trade much harder, it does not affect all companies equally, nor does it affect all sectors equally. Larger companies are better able to cope, as are services companies.
I do not think that there is likely to be a fundamental transformation over the next four years in the way that trade is actually carried out. Therefore, the question is what Governments can do to change the conditions of trade in their countries so as to improve them. We traditionally reach for the idea that the answer is trade deals but, from what we have seen, I am not sure that that is the case.
Trade deals can certainly help sometimes, but it is a matter of setting the right direction to show companies that a particular country is a reliable place from which to do business. Companies make their own decisions about where they want to be based; in that sense, it is as important for countries to set a sense of direction, such as, for example, by aligning regulations with the EU or, instead, aligning them with the US. It gives companies a basis on which to plan.
10:30One of the big weaknesses of UK trade policy since 2016 is that it has been all about the deal; it has not been about the direction that allows anybody to plan what the policy will actually be.
Thank you for those answers.
I will put a direct question to you, Ms Fry. In your submission, you suggested that
“some of the testing features of goods trade—hard borders, physical checks, fears about ‘backdoor’ access—don’t arise in quite the same way for services. Nor is the service trade caught in the same political glare”.
However, if we look at some of the technical services—information technology in particular, as well as financial services and fintech—following regulation around that, how does the UK balance having access to the EU and to the US, and keeping those standards in line for trade?
Thank you for the question. What is very interesting in relation to Brexit is that it has really tested some of our assumptions around what might happen to trade flows when you start implementing quite high barriers to trade. Under the TCA, the non-tariff barriers to services trade are estimated to be equivalent to a 21 per cent tariff, which is really quite substantial on the services side. However, what is interesting about services is that you can trade them in several different ways. You can physically go somewhere and deliver a consultancy presentation or you can deliver it online digitally, or you can set up a subsidiary in another country and use it as a mechanism to deliver services to another country.
Different types of services have very different ways of using those methods. Other business services, which I believe your committee has talked about, including professional services, are particularly traded digitally, whereas information and communication services, which include computer programming and film and television, are often delivered through subsidiaries. They might not face some of the physical checks that goods face. That said, a lot of our services are linked to goods. If you are advertising a specific product, you will not just be doing an advertising campaign that is completely irrelevant to anything that underlies it.
On the services side, when we think about regulations, there is quite a difference for the advertising and public relations sectors, which typically face different cultural barriers when trading with other countries. You need to understand the cultural nature of the country, and there are specific advertising and PR regulations that you need to operate within. The people who deliver advertising services do not necessarily face some of the regulatory barriers, so what becomes critical from a Government point of view when thinking about services trade is what other professional qualifications might be needed to deliver services across different countries, as well as what is needed under visa restrictions. Although a lot of trade is digital, gravity, as Peter Holmes said, is still very important, and it is important for people to travel to a different country in order to deliver services there. Thought needs to be given to the complements between professional qualifications, because some of our regulated sectors have struggled a bit more than some of our less-regulated sectors, post Brexit.
Thank you. Does anyone else want to come in on that question?
Emily Fry is absolutely right to point out that limits on those with professional qualifications, how long they can stay and the conditions under which a service provider can be in a place—whether someone is coming to the UK from the EU or going in the other direction—are going to be extremely critical.
The TCA put some provisions in place to allow short-stay visas, among other things. I had the benefit of listening to a bit of the committee’s previous evidence session on culture. One of the sectors that was hit hard by the limits on short-stay visas was, unsurprisingly, the arts sector. We are in Edinburgh, the city of the festival and so on, and we saw first-hand that artists were being stopped at the border and told, “Yes, you are coming on a short-stay visa, but you cannot be paid for what you do in Edinburgh”. That needs to be thought about.
I would not say that the issue is low-hanging fruit—do not quote me as saying that—but it is an area where improvement is likely to be in the interests of both the EU and the UK. Rethinking the short-stay visa would be a way of fostering links and that type of movement, which would in turn allow the delivery of various kinds of services.
My final point is that of course we also have to look at the conditions under which services can be provided. In the arts sector, there are no professional qualification limitations of any sort; either you are a painter or a theatre artist, or you are not, whereas a lawyer, for instance, needs to be qualified and that qualification must be recognised in the country that hosts them.
Obviously, that opens the area of mutual recognition of professional qualifications, and you have already had the benefit of listening to my colleagues from the Law Society of Scotland talk about that. However, we should seriously think of this as another area where co-operation could foster that kind of movement.
Thank you. Does anybody else want to come in on that?
Yes. I very much agree with what has just been said. As both David Henig and Emily Fry have stressed, the impact on trade has not been that world trade has collapsed. Unless there are massive multiplier effects that have not yet kicked in, we are not talking about it being like the 1930s.
However, as David or Emily said—I cannot remember which of them it was—and as our friend Lucian Cernat keeps stressing, we are increasingly seeing that we have a great, intertwining relationship between goods and services.
One question that I want to put a little flag on is that of the testing and certification of goods that cross borders. As part of the value chain, we need to have guarantees when selling products into a market, particularly the EU, that they conform to the host’s, or destination market’s, regulations. Wherever you are selling, you have to be able to do that.
The EU regulations are rather strict about the way that that is ensured. Not only do you have to conform to the regulations, but you have to have the right paperwork, testing and certification. One of the Brexit debate’s oddities was that people, particularly on the pro-Brexit side, overlooked the fact that testing and certification—the conformity assessment sector of the economy—is actually a substantial service activity in its own right. In certain areas, we are seeing situations where trade in goods is being disrupted because the previous UK Government insisted on a rather eccentric policy: in simplistic terms, even where mandatory standards are the same in the UK and the EU, there has to be a special UK conformity assessed mark placed on the goods in a British testing lab.
One of the consequences is that, because manufacturers wanted to avoid getting their products tested twice and preferred to use only the EU’s CE marks, the testing certification sector of the economy has shrunk quite considerably. In September, the Government had to modify one of the few remaining sectors where it had insisted on keeping British testing certification marks—the building materials sector—because there was not enough testing and certification capability in the economy. That is a very specific example.
In cars, so many things that were previously done by mechanical things are now done by electronics. In the future, we will need to be clear about the link between the service sector and the industrial sector.
There was discussion about whether we should we align our standards with those of the EU or of the US. We had to take a decision within the first two years of Brexit that the UK would remain part of the European standards system—CEN and CENELEC, which are the European Committee for Standardization and the European Committee for Electrotechnical Standardization. We made that decision, and it is very difficult to contemplate reversing that.
Thank you. I will move on to questions from members, starting with Mr Stewart.
Good morning. Individuals and organisations have said that the re-election of Donald Trump does not change much of the position that we find ourselves in, but that it does change the outlook and the opportunities that might have existed in the past. That is because Mr Trump is no longer as sympathetic to the UK Government as he might have been in his first term of office. That leaves institutions and individuals in a little bit of a dilemma as to how to manage things.
Moreover, some believe that securing deeper trade relations with the US would jeopardise some of the proposed reset with the EU, because the new UK Government wants to see a reset with the EU and Donald Trump would be against that. That might create some difficulties for the new Westminster Government when it comes to relations.
However, we should consider the fact that Trump will seek to deal with tariffs—we have already had the threat of tariffs being imposed—and, if there was to be any negotiation, we might want to align with the idea of putting more tariffs on China, which could benefit the UK in some ways.
It would be good to hear the views of you learned individuals about that and what it could mean. I do not believe that the reset with Europe will do anything other than turn the American President against the United Kingdom, because of the way that that is perceived in relation to what might happen in the future generally and particularly over the next three or four years. Maybe Peter Holmes could answer first.
That is a good question. David Henig used to negotiate the transatlantic trade and investment partnership, so he will be well informed on the matter.
The politics of it matter. There is not much that we could get out of a deal with Trump—even if he kept to it—that would benefit us enormously, compared with the kinds of benefits that we could get from a binding commitment to align our rules and regulations with those of the EU, as David suggested. We actually could not do that with the US because of the nature of the regulatory systems. We have very little alternative other than to consolidate and deepen our efforts to keep up the movement towards a reset with the EU.
However, the more that the UK appears to hint that it wants to try to use the opportunities that could conceivably be there for a deal with Trump, the less that the EU is going to trust us.
10:45It is worth looking back at the EU’s accession negotiations with the countries of eastern Europe. When the east European countries said, “Tell us what we have to do to get a better deal,” EU officials always used to say, “Let’s see what you choose to do. Do you show yourselves as being good potential members of this club?”
There are risks in trying to cosy up to Trump. He is open to flattery and will like it when we say what a great nation the Americans are and how we need to improve our relations. However, the EU wants Britain to appear pro-European, and it does not give us leverage to look like we are thinking instead of doing a deal with Trump—that makes us look like a less reliable partner. However, I will defer to David Henig on the diplomatic aspects of that.
What we are already remembering about President Trump is that chaos follows him and that he spreads chaos. Let us look at what he intends to do on the trade policy front—or at least at what he has said, or what those around him have said, he intends to do. They have said that they are going to have tariffs on everybody—on China, Mexico and Canada in particular. Those may or may not be introduced in different ways. The social media companies want us all to change our rules regarding social media. We have the old-fashioned food and drink—the famous chlorinated chicken—that the US might want us to change our rules on. However, none of that is a fixed position; any of it might happen or it might not.
On how the UK deals with this, the UK Government has made a good start by saying that its principle is that it believes in free trade. That is always a good principle for a UK Government to start with because it reflects popular opinion in the country. However, Europe will be the more important market, as it makes up 50 per cent of our trade compared to 15 to 20 per cent for the US.
It is also important to say that if Trump does impose tariffs on everybody, the UK will almost certainly be one of the least-affected economies, because our trade relationship with the US is predominantly in services. I do not have the exact figures to hand but we export far more services to the US than we do goods. We also do not have a trade surplus with the US, and it is well known that Trump’s main targets will be countries that the US has a trade deficit with and that he thinks are cheating the US in some way. That is not the case with the UK.
For the UK, in many respects, I suspect that the correct approach is to try to duck and weave a bit in the hope that we can somehow escape tariffs, but not necessarily to go into negotiations where we will probably start in a poor place due to the US demanding that we do all these things that do not necessarily suit our economy.
When it comes to alignment, why do we talk about alignment with the EU and not the US? That is not just because the EU is our largest trading partner; it is also because the EU is regarded globally as the better regulator. Aligning with a higher regulatory approach should mean that you are more easily able to sell goods to the rest of the world. It is not an EU-only approach; it is an approach of starting with the EU and then expanding globally. That is what the UK wants to do.
To finish off on China, just as we hope that what we do with the US will not affect our trade relations with the EU, we also hope that it will not affect those with China. However, I think that we are in a much trickier place in that regard. On Chinese electric vehicles, for example, on which the UK has not imposed extra tariffs but the EU and the US have, if the US made some kind of demand on us, I think that we might have to follow that. We may have to take greater actions with regard to China as the price for continuing to have friendly and strong trade relations with the US.
That is a price that we may have to pay—that is just being realistic. There is a hierarchy, if you like, which goes with the size of our trade relations. The EU, and Europe more generally, is clearly the most important of our trade relations. The US is clearly the second, but it is also important for defence. The rest of the world, including China, falls behind, I am afraid, and if need be, we may have to sacrifice something. That is just where we are, although we hope that that will not be the case.
I agree. David Henig is making exactly the right point.
I will add to David’s point about the EU being the better regulator. The committee may have heard of the book, “The Brussels Effect: How the European Union Rules the World” by Anu Bradford. In it, she speaks about the EU as the exporter of regulatory standards in an array of areas, a very prominent example of which is privacy. The impact of the general data protection regulation being a binding instrument that applies to anyone who wishes to process data within the EU or data that comes from the EU is that it applies to everyone, regardless of where they are incorporated. It could be an American company, for example, and it would still have to abide by GDPR.
In the book, Anu Bradford basically reconstructs the process of the externalisation of legal standards that were enacted by the EU and then applied not only within the EU but, to all intents and purposes, worldwide. Why? Because they were cogent and binding standards, but also because the EU was recognised as an important market and as an important regulatory area. It was therefore very much in the interest of companies to adhere to European standards, with a view to being able to trade within the EU. At the same time, because of the costs linked to compliance, it made sense to adopt the EU standards as very much the standards to abide by.
David is therefore right to say that the EU is the better regulator. As such, if there is not a diplomatic reason, if you like, as to why we should perhaps deepen and enhance our co-operation with the EU, there is definitely a business reason as to why that should be the case. That is felt by Governments, certainly, but also by companies that wish to trade within the EU, and it is very much the case that there are also British companies in that area.
The other point that I will make is in relation to the Trump issue that has been raised. I am very glad that Peter Holmes briefly mentioned TTIP, because I sat before one of the Parliament’s committees giving evidence on TTIP and the impact on health services in 2014. Be that as it may, one point that is very clear is that the US has always had, and has never reneged on, its policy of America first, including when it comes to the provision of key services such as health and, most importantly, public procurement. I do not think that you will find, or at least it would be very, very rare to find, a foreign provider as the winner of a public procurement deal within, for instance, the US federal Government.
That might be an isolated example, but it gives the committee an insight into and a sense of the likely approach of the US federal Government to market access into the US, especially when it comes to services and especially in key strategic areas, which are the areas of interest. I know about that in relation to TTIP from the EU side, but I would argue that there is unlikely to be a difference if it was a UK provider wishing to bid for those contracts. Access to those markets is incredibly limited.
The UK should of course reiterate its approach of being open to external trade; that goes without saying. However, when it comes to choosing your strategic partners—in other words, your main bedfellow—the EU is probably the best bet in terms of not only trade volumes, but geographical closeness.
If we think about this in terms of cultural ties, I also think that it makes a difference that we are talking about the TCA, which is, if you like, the weakening of the co-operation that used to be much closer, because it was about membership before. The UK and the EU are like no other partners in that respect.
Thank you. I know that time is tight, convener.
It is absolutely true that the TCA is unique. It is one of a kind for the European Union—there is no doubt about it. The fact is, though, that there is a changing dynamic in world trade. The European Union is losing share to the rest of the world, and British business—being pretty nimble, to be frank; it has managed to negotiate some particularly difficult political and economic minefields, not just in recent years but over the longer term—will go to where the opportunities are. The committee has heard in evidence that the United States is a market where British businesspeople are doing rather well, specifically in the service sector.
There is a change of heart in the European Union towards the overregulation of the EU market, is there not? I am thinking of Mario Draghi and the comments from Emmanuel Macron. I am looking at Arianna Andreangeli as I say that, because I know that her expertise is in the European Union. When we talk about a reset of Britain’s relationship with the European Union, is there not also a reset happening in the European Union in terms of its attitude towards trade?
Yes, certainly—I absolutely agree. I highlight the Draghi report, not just because it paints an incredibly realistic picture of how things are going in Brussels and in the EU in general, but because the European Council, which sets the tone and the strategy for the direction of the European Union, said at its meeting in Budapest at the end of 2024, “We agree with what Draghi says and we adopt many of the points.” It adopted pretty much all of the agenda, in terms of future policy, that comes out of the report. The European Council said that, while the EU is committed to multilateral trade frameworks such as the WTO, it is also committed to fostering trade policy wherever it suits the European Union’s interests.
One of the themes of the Draghi report is the idea of open, strategic autonomy. That is not a new concept. I have a long memory, and I remember when the first concerns about social media companies started to arise, for instance, around standards in relation to the protection of minors, privacy and so on. The EU said, “We don’t want to be hostages to fortune regarding what these social media platforms, as global actors, decide to do—we want to be able to set our own regulatory frameworks.” That is what regulatory autonomy means in practice.
The broad concept of open, strategic autonomy takes the concept of autonomy a step forward. In that regard, Draghi said, “We need to make sure that we use trade policy in a way that furthers our objectives for industrial policy internally.” That is already visible in, for instance, a lot of the analysis that has been undertaken in relation to critical raw materials, access to the defence industry and so on.
I certainly agree that the EU is becoming far more assertive on what its position should be on trade policy and that that is likely to affect the reset. However, I go back to what you said about the TCA being unique. In some respects, it has been defined as an unfinished partnership. In other words, the TCA, in the same way as any other preferential agreement—it is a preferential agreement on steroids, in that respect—is subject to review and continuous development through its supervision, oversight and implementation systems. That is where the potential lies and where the research should be: in looking at how we can further diversify and deepen the relationship, albeit within the framework of the TCA, in areas that are of mutual interest.
With regard to what Peter Holmes said, it has been said previously in this committee that one area that needs to be strengthened for the UK concerns veterinary certifications. I read the Official Report of the evidence session in which a person from the veterinary college said that we have too few veterinary professionals who can provide those certifications.
Another area in which there is certainly a common interest concerns professional qualifications in those industries that are particularly critical not just for the UK position but for the EU, because the debates about phytosanitary standards and veterinary standards happen in a number of European countries as well.
11:00
The UK has not changed its view of veterinary qualifications, has it? If you are a European vet, you can still come to the UK and get a job, and your qualifications are accepted as totally valid.
Many people believe—I am probably one of them—that the problem with the EU is that it often acts in a very protectionist way. That has fuelled a perception, and whether it is real or just a perception, it is certainly the perception that Donald Trump has of the actions of the European Union. A lot of the issues that we are discussing today are ultimately political. For example, the issue of trade between the US and the EU is framed by how Donald Trump sees Europe’s commitment to properly contribute towards its defence. He sees trade in the context of European weakness when it comes to dealing with Russia and China. He sees these things in that geopolitical context, first and foremost, and he is ultimately transactional. Yes?
In relation to Trump, I dare say that he is transactional. However, I would like to make a point on what you said about China. I do not think that the EU is being weak towards China. Quite to the contrary, the EU is acting in a very defensive way when it comes to trade with China. That can be seen with the foreign subsidy regulation, for example, which was enacted especially to counteract the pressure that is caused when goods come in from jurisdictions where there is, frankly, state-sponsored competition, as is the case in China. When those goods come into the EU, they can be sold at much lower prices, for obvious reasons.
You are, of course, familiar with the idea of the anti-dumping regulation. The foreign subsidy regulation acts exactly where it is needed, and the EU has already been quite successful in applying it—for example, in relation to electric vehicle batteries. The EU is not being weak in relation to China—quite to the contrary.
Yes, but there—
If I might just finish, on what you said about Trump. Of course he is transactional. I am not an expert in American politics by any manner or means; I am just a humble EU lawyer. However, I can see that Trump is also incredibly ill-advised in conflating what the EU is and does with what the member states do, for example as part of NATO or other multilateral defence treaties. Those are entirely different jurisdictions and frameworks. It is all Europe to Trump, but that is really not the case.
The EU is acting in ways that reflect the core values that are contained, ultimately, in the European Union treaty. Quite frankly, I would argue that the EU cannot claim to be what it is not. The EU can only be what the EU is.
I think that you are totally right that Donald Trump sees Europe as Europe. When the European Union has developed its own foreign policy and is formulating its own defence strategies, he is not entirely wrong to see the EU in that light and as tangential to what is happening in NATO.
Because of the time, I will get to the bottom line. I think that Keir Starmer has a point here. Britain does not have to choose between the United States and the EU. The appointment of Peter Mandelson to Washington as our ambassador is quite a clever move on Keir Starmer’s part, is it not? Peter Mandelson will take what I think has historically been the British approach to these things, which is to try to get the best of all worlds. We do not actually have to make a choice. Commerce and businesses will make a choice but, politically, we do not have to make any statements or choices, do we?
If you do not make a choice, even that might have, and is likely to have, considerable fall-backs, for instance in terms of regulatory standards. I am sorry if I am splitting a hair in four here, but I feel that it is necessary.
No—I am enjoying what you are saying.
I am very pleased about that.
The point is that the political choice has a legal fall-back. The UK may or may not want to make a choice between aligning with the US and aligning with Europe. Nonetheless, those are two distinct jurisdictions and each of those jurisdictions has its own regulatory standards.
Of course, business can choose, and it will do so. However, you are forgetting that that is likely to lead to considerable duplication costs when it comes to regulatory standards, for instance. David Henig remembered the famous example of chlorinated chicken. I do not think that they chlorinate chicken in the US any more, but never mind.
I have eaten a lot of American chicken and I am okay.
I am glad to hear that. Me too.
Okay. We will not put that to a vote.
My point is that aligning with a jurisdiction is not just about making a political choice—important legal consequences flow from that choice, too.
But businesses manage all of that.
Yes, but it has a cost, and that is the measure of the opportunity cost of accessing specific markets.
Pragmatism suggests that all aspects of that relationship—political, commercial, general economic and free trade—can be managed and that declarations of loyalty do not have to be made to one side or the other. You can just do what is in your best interests. In other words, if we have America first and the EU first, which is the attitude that has been described in the evidence, can we not also have a Britain first approach and do what is in the best interests of this country?
Mr Kerr, David Henig wants to comment and the other witnesses might also want to respond.
We need much more time to discuss these things, convener.
I will bring David in first.
I want to make two points in response to the original question. Part of it was about why we cannot sell services, in particular, into expanding markets. The answer is that we can and we are doing that. Trade in services with the US is in a healthy place and I am told that huge amounts are being done with the Gulf. UK consultancies are doing huge amounts of work there and in other markets. I do not necessarily link that to trade deals. It is not as if we need trade deals. If the US wants to give us some easier business mobility, which it has not done in the past, that would be helpful, but most of what is done in services trade does not really address the sorts of trade that are happening now.
My second point is that Stephen Kerr was starting to compare levels of protectionism in the EU and the US. Major markets such as the EU, the US and China are protectionist. By their nature, they are going to gain less from trade and they can source more at a competitive price internally. The UK is not a major market. Along with other countries that are what we call mid-sized powers, we are very keen on trade, but the US, the EU and China are not. We just have to work around that. We cannot assume that everybody else likes trade as much as we do. We have to make some choices, but the good news is that a lot of countries think that we are good at services, and that trade is happening anyway. I do not have a negative view on that.
That eloquently describes what I have been trying to say that the British position should be.
On the regulatory side, it is important to understand where we are coming from in our UK regulation, which has been deeply intertwined with EU regulation for a number of years. What is happening is active disalignment in regulation, which might harm companies’ abilities to export. That involves the UK changing our regulation. For example, the UK has recently diverged from the EU and increased animal standards. Meanwhile, other types of passive divergence are happening for UK companies through the EU implementing regulation that the UK is not implementing. We are increasingly seeing that happen in areas such as climate, the environment, AI and digital policy, as well as in some of the chemicals sectors. That is where we will see on-going friction in trade from the UK to the EU if there is not some kind of regulatory alignment deal. That will be really important in the future and it is where some of the impacts of Brexit might increase over time.
Arianna Andreangeli mentioned that the reality of our relationship with the EU is not the same as Switzerland’s. I am not saying that it is, but the Swiss experience of working with the EU teaches us that you must be constantly in negotiation—it is a living relationship. The Swiss have never completed that process. There is not a comprehensive agreement that is like tablets of stone from Sinai—the agreement is constantly moving.
It is. However, the Swiss have accepted convergence on key regulatory standards. The European Economic Area instrument is substantially different from the TCA. For instance, the EEA has institutions that are heavily intertwined with Brussels, whereas the TCA involves largely diplomatic oversight and implementation with updating of the governance framework, so there is a difference.
When the EEA was established, what the Swiss decided to do was also different in terms of the nature of the integration. I do not want to speak about theories in this committee meeting, because I do not think that that would be particularly helpful—I will keep that for the pleasure of my poor students. However, there is something about disintegrating a relationship, which is what happened with the TCA, versus creating a diversified type of integration that involves, if you like, negotiating a relationship upwards. The latter is what happened with regard to the European Community and Switzerland. I am talking about the 1980s and 1990s and the Single European Act.
You are therefore right to say that the Swiss are working to a relationship that fits them and the EU. There is no doubt about that but, when we compare the two relationships, we can see that the relationship that the Swiss have with the EU is substantively different in terms of quality and gradient.
I want to reinforce something that several speakers have said. In the era of hard Brexit, at the time of Boris Johnson and Liz Truss, there was an attempt to use trade agreements with third countries as a way of putting down, if you like, landmines against any Government that wanted to realign with the EU in the future. Doing a deal on food safety standards with the US was going to be a way of making it harder to do a deal on food safety standards with the EU. However, the era of going in that direction has completely gone. As all the speakers on the panel have said, we have a regulatory system that is based on the EU type of ecosystem.
To an extent, if we are not careful, we run the risk of being in the worst of all worlds. For practical reasons, we cannot diverge much from what the EU does—we are forced to accept the EU way of doing things, such as in relation to building materials and EU CE marking for technical regulations—but, because the EU knows that we are in that position, it is very relaxed about signing mutual recognition agreements with us because it knows that we will have to recognise its standards.
One of the prices that we are going to have to accept is that we will have to go beyond voluntary dynamic alignment, as we might call it. We will have to commit ourselves, legally, to signing up to accepting EU standards. We accept European standards through CEN and CENELEC, but we will have to make binding legal commitments, and that will require us to acknowledge that we cannot choose entirely a la carte. We might be able to do a bit of cherry picking, as the new negotiations are more flexible than the original TCA, but we run the risk of being forced to align ourselves with the EU, at least in most ways, without getting as many of the benefits as we could get. Arianna Andreangeli mentioned the book “The Brussels Effect: How the European Union Rules the World”. We will have to confirm that we will bind ourselves in a legally enforceable way and the EU will know that our goods will be absolutely and rigidly in conformity with its rules, as it requires.
We have a choice to make. Doing the regulatory alignment voluntarily will not bring us the benefits that we need if we are to be part of value chains and, increasingly, service activities that are integrated with the EU.
We probably do not have time for this debate, but I think that some of the things that Peter Holmes has just said are perhaps contestable. I will leave it there, convener.
That is not for today. As there are no further questions, I thank the witnesses for attending. It has been a helpful evidence session.
I will now move the committee into private session. Thank you, everyone.
11:16 Meeting continued in private until 11:25.Air ais
Budget Scrutiny 2025-26