The International Trade Committee 

Oral evidence: UK Trade Options Beyond 2019, HC 817-v

Tuesday 24 January 2017

Ordered by the House of Commons to be published on 24 January 2017.

Watch the meeting 

Members present: Mr Angus Brendan MacNeil (Chair); James Cleverly; Marcus Fysh; Sir Edward Leigh; Chris Leslie; Toby Perkins; Sir Desmond Swayne.

Questions 309 - 375

Witnesses

I: Sir Andrew Cahn, former head of UK Trade and Investment, Owen Tudor, Head of European Union and International Relations, TUC, and Sean McGuire, Director, CBI Brussels.

II: Mickael Laurans, Interim Head of International Policy and Engagement, Head of Brussels (EU and WTO) Affairs, The Law Society, Hugh Savill, Director of Regulation, Association of British Insurers, and Gerard Grech, CEO, Tech City UK.

Examination of witnesses

Witnesses: Sir Andrew Cahn, Owen Tudor and Sean McGuire.

Q309       Chair: Good morning, panel. Can I invite you to state your names and organisations for the record, starting at my left?

Owen Tudor: I am Owen Tudor. I am the Head of European Union and International Relations for the TUC.

Sir Andrew Cahn: I am Andrew Cahn, former head CEO of UK Trade and Investment.

Sean McGuire: Sean McGuire, Director of CBI Brussels.

Q310       Chair: Thank you very much. Sir Andrew, following the Prime Minister’s speech last week, you said the EU side has already won the first round of this negotiation because they have forced the UK to say, “No, we won’t be in the Single Market”. Why do you say that the EU won the first round?

Sir Andrew Cahn: I think the first round was the decision by the Prime Minister to announce that she would invoke Article 50 at a particular date by the end of March. That seemed to me to be missing a negotiating trick, because I would have thought that there was some leverage in being able to say to the European Union, “We will invoke Article 50 when you have agreed a negotiating process”, in particular saying very clearly that we would be able to negotiate trade agreements simultaneously with the exit arrangements. Whereas at the moment the EU side have simply said, “No, we will not. You sign your exit bill first, and then we will talk about trade”. I think the Prime Minister gave up negotiating leverage by her unilateral statement.

Q311       Chair: You are saying the Prime Minister is already dancing to the European tune on process here?

Sir Andrew Cahn: Exactly. That was the first round. The second round was last week, when the Prime Minister accepted the red lines of the other side of her negotiating partners. They had said very clearly, “If you want to be part of the Single Market then you must accept free movement, jurisdiction of the ECJ”, and so forth. One approach was to say, “We have red lines and you have red lines. They are clearly far apart. We will have a negotiation to see how we bring those together”, and there might have been a deal to be done where we remained part of the Single Market, or perhaps not. I think what happened was the Prime Minister simply accepted the red lines of the other side and said, “We are not going to be part of the Single Market”, and, therefore, excluded a substantial part of an area of possible agreement. In both round one and round two, the way I see it—and of course I am outside the negotiation; it is very difficult for outside commentators to really know what is going on in such negotiations—it does seem to me as though the UK has accepted the terms of the other party to the negotiation.

Q312       Chair: Why do you think the Prime Minister would have done that? You could argue it is a lack of lateral thinking, but there might be other reasons for the Prime Minister accepting the EU’s red lines.

Sir Andrew Cahn: As an external observer, it seems to me that domestic politics trumped the negotiating interests.

Q313       Chair: Short-term tabloid headlines have pushed the Prime Minister into a corner?

Sir Andrew Cahn: I would not put it like that, but I think domestic political pressures made a commitment to invoke Article 50 by a particular time very attractive. Also, next time, domestic political pressures made it very necessary for the Prime Minister to set out her position and her plan. Much of her speech last week was very well set out, very clear and very helpful. But the pressure was to set out a position, and I think in some ways she perhaps went further than she needed to in terms of boxing herself in. That is all I am saying.

Q314       Chair: Just briefly, before I move to James Cleverly, what would you identify as domestic political pressures?

Sir Andrew Cahn: There are all sorts of political pressures. Pressures come from her own party; pressures come from the Opposition; and pressures come from public opinion and from the media. As Prime Minister, obviously you have to take all of those into account. I would not for a moment want to second guess her judgment on that. The only point I was making is that, in a negotiation, the more you accept the terms and red lines of the other side, the more you box yourself in. I think she has chosen to box herself in more than—had I been an adviser—I would have suggested that she did.

Q315       James Cleverly: It is quite interesting the phraseology that you used. I have been involved in negotiation pretty much my whole adult life, and one of the long-standing techniques is that you talk down the value of the thing the other person is bringing to the table and you talk up the value of the thing that you are bringing to the table. Clearly, one of the things the EU thought was of huge value to us was membership of the Single Market, and by saying, “That is not something we value particularly highly”—as the Prime Minister has done—has that not given her a stronger negotiating position by taking one of the perceived valuable negotiating points off the table for the EU?

Sir Andrew Cahn: Mr Cleverly, I would look at it the other way around, which is that if you take a firm position like that, and make a claim like that, it has to be believable. I don’t think it is believable that no deal is better than a bad deal. It isn’t believable that the UK could, with equanimity, fall back on WTO rules, falling off a cliff edge without any transition or implementation-phase arrangements. It would be so chaotic, and so bad for British business and the British people, that it is not really conceivable that the British Government could allow that to happen.

I hasten to say: nor is it really conceivable that the EU-27, from their point of view, could allow it to happen. It would be disastrous for us but it would be extremely bad for them. But walking away, saying, “We do not want to be part of the Single Market”, it seems to me the Prime Minister has said, “We do not want to be part of the Single Market—we will exit from that and then we want as much of it back as we possibly can get through negotiation”. I am not convinced that that is a strong position to take up.

Q316       James Cleverly: Would you suggest that the point you are making was more or less conceivable than the UK voting to leave the EU was inconceivable, back in February 2016? The point I am making is that you are saying, “It is inconceivable that—”, and if your red line is not believed by the people you are negotiating with, then it is a powerless thing, as you say. My contention is that we have shown, through the Brexit vote, that some things that were inconceivable perhaps this time last year have not only become very conceivable; they have actually happened.

Sir Andrew Cahn: The world is full of inconceivable things happening just at the moment. I quite agree with you that it is entirely conceivable that a constructive, sensible outcome from both sides of the negotiation can come out of this. I very much hope it does, and I think the Prime Minister’s clarity last week makes it more likely. The point I was making is a slightly different one. That is, if you make a threat, you have to assume that your bluff may be called and you have to carry out that threat. I am not convinced, come the moment, that Britain could, with any equanimity—indeed, could at all—simply walk away from the exit negotiations, with those not completed, and fall back on WTO rules without really serious consequences for our country. The other side of the negotiations, the EU-27, will take that view. At the moment I don’t think they believe the threat. It may be that they will change their mind if it turns out that the Government really do mean what they say, but I am somewhat sceptical about that.

Q317       Chair: This inquiry is looking at UK trade options post 2019. You used the phrase “potentially serious consequences for this country” going back on WTO rules. What do you see specifically as being those serious consequences?

Sir Andrew Cahn: If we had to rely on WTO rules, the first thing, of course, is we would have to regularise our position in the WTO. I am sure that is eminently doable, but it is quite a complex, technical task that will take some time. It does offer some opportunities to other countries, both ill-wishers, who simply want to make difficulties for us, delaying it, and other countries, many of whom are very close friends of ours—like New Zealand or Australia—demanding changes to their market access. Nevertheless, I think in time we can certainly regularise our WTO position. The problem is a different one: we would lose all preferential access to the European Single Market, and we would also lose all preferential access to all the other countries that the EU has free trade agreements with. That would be one set of problems. The other set of problems is there would be no clarity about the law to be applied and the documentation required. If we suddenly found ourselves falling over a cliff edge, nobody would know what tariffs to apply at the border. Nobody would know what documentation was required.

Q318       Chair: That would not be full WTO; that would be almost WTO-minus. You are suggesting that, if we are not regularised with the WTO, if we don’t know what tariffs we are going to apply, we are not trading as WTO. We are trading at a status sub-WTO.

Sir Andrew Cahn: I am saying two different things. In the very short term, there would be great uncertainty—legal uncertainty and commercial uncertainty—which would be very difficult for the business community. In the medium to longer term, the problem would be that we would not have the preferential access that we have now, not only to the Single Market, but to the wider markets of countries that have free trade agreements with the European Union, to which currently we have access and we would not if we simply relied on WTO rules. That is not to say that we could not trade; that is not to say that we could not survive. Of course we could do that, but we would lose preferential positions—preferential trading opportunities—and that would be damaging.

In the short term, there would be chaos—I think that is not too strong a word—if we were to leave without agreements about what laws applied and what documentation was required. You would have so much uncertainty that, for a period of time, there would be real difficulty. I make one last point: business needs certainty, clarity and continuity in order to invest, in order to plan, and in order to trade. Of course, that is why I welcomed much of what the Prime Minister had to say last week, because she provided a great deal of clarity. But one area where there was no clarity or certainty was: what trading arrangements will apply until after we leave? Of course, she cannot do that because that is part of the negotiation, but she held up the spectre of a disorderly exit from the European Union, and I think that is not helpful for business.

Q319       Chair: Thank you. I think a number of members might come back with some cross-questioning, but I first want to go to Owen Tudor. Mr Tudor, your General Secretary accused the Prime Minister of throwing in the towel before the talks begin—perhaps similar to the points of Sir Andrew there—by passing up a historic opportunity to negotiate a better model of Single Market membership. What makes you think such a model could have been achieved?

Owen Tudor: I should say that I agree with quite a lot of what Andrew has said about negotiations and process and things like that, and I obviously take note of Mr Cleverly’s long experience of negotiations. But it is sort of our raison d’être to be involved in negotiations, so we have built up some expertise in that. The purpose of negotiating is obviously to reach an agreement. We are concerned that what the Prime Minister was doing was starting out by setting out the areas in which she wasn’t interested in reaching an agreement, and we think that the Government have not exhausted the opportunities for negotiation in that regard, because the negotiations have not started yet.

Q320       Chair: Similar to Sir Andrew’s point, they have accepted the EU red lines and have not tried to have counter red lines of their own?

Owen Tudor: Sorry?

Chair: Accepted the EU red lines, and not having counter red lines of our own, in that sphere of argument.

Owen Tudor: You obviously try to set out some indications of where you want to reach agreement and where agreement might be possible. That obviously implies that there are some areas where agreement is less possible. I think what the European Union has indicated is that there will be some areas where it will be very difficult to reach agreement, but I think it is important to remember that red lines in EU negotiations get crossed more often than a red traffic light outside a pub.

Q321       Chair: You are suggesting that a red line might not be a barrier, but a mere suggestion when it comes to the EU?

Owen Tudor: I think that we should adopt the approach that says, “We are trying to reach an agreement”, rather than, “We are trying to reach a non-agreement in some way”. If you first accept red lines from the other side as being total red lines, and set out similar from yourself, then you are not likely to get an agreement. The best way to negotiate agreements is to go in with a range of issues on the table where it is possible to make compromises between them, and not say, “We have to reach an agreement on this issue and this issue, and we have to reach an agreement on this issue”.

Q322       Chair: Are you suggesting that, what the EU said was a red line, they did not fully mean it as a red line in the way people in the UK might understand, but because of the actions of the Prime Minister it now has become a definite red line or a barrier?

Owen Tudor: It is all about signals. People do set out red lines, which they then find ways around.

Chair: They become amber and green lines.

Owen Tudor: Yes, indeed. But it is not sensible to indicate to people that you are going down the route of crossing things off. That is also true in terms of the EU as well. Obviously it is also useful to have clarity from both sides in this area, but it would be most helpful if people started from the idea that once negotiations start you are actually negotiating, rather than just telling people what you are not going to do.

Q323       Chair: Can I ask the whole panel something? It has been suggested and argued that businesses exposed to the UK will pressurise the EU-27 to give the UK a favourable trade agreement. I want your view on this. Is it possible under WTO rules to have favourable agreements for the UK from an EU point of view?

Sir Andrew Cahn: Sorry, are you asking me?

Chair: Anybody on the panel who feels suitably keen to answer the question. Sean?

Sir Andrew Cahn: You haven’t had a go yet, Sean. Go on.

Sean McGuire: Thank you. We work very closely with our sister federations and companies across Europe. I think it is important to point out that the business community from the UK, and indeed from the EU-27, do not see this as a zero-win game, but as a potential win-win game, because our supply chains are so integrated that punishing one side or the other will inevitably punish the whole of the continent of Europe and dampen growth. We do look at this purely from an economic perspective, as opposed to perhaps a more political route. There is a willingness to provide business-to-business solutions to some of the political challenges that Brexit has presented. That said, I think we have to bear in mind that the European business community in the EU-27, while wanting to do a deal with the UK because of our integrated supply chains, also have their eye on the future integration of the EU-27.

They have two challenges: getting a good deal for Brexit that helps their companies and their economies, but also trying to push forward in an EU of 27 that does not totally unravel and does not lead to even further market segmentation. They have a dual battle. The question will be: when we get into the negotiations, which one will they put the pressure on the most—whether they favour the economic route with the UK because they see the better economic value there, or whether they will be less persistent in some of the principles that they have held to strongly under the current EU?

Q324       Chair: Thank you. Could I invite the panel to comment on the Chancellor of the Exchequer’s words to the general press last week when he said that, in the absence of a UK-EU free trade agreement, the UK would consider abandoning the European social model, “to regain competitiveness”? Those were his words. What does that say about the UK’s negotiating position, Sir Andrew? Will that be a viable option more widely for UK trade policy?

Sir Andrew Cahn: I notice that one of the things that the Prime Minister said in her speech was that objective 7 was protecting workers’ rights, where she said very clearly that the UK would not dilute the employment protection provided for within the European Union and, indeed, it might even strengthen it, so the messages are a little mixed.

Nevertheless, I think that what the Chancellor of the Exchequer was saying was very reasonable, and I actually read the interview as opposed to merely the headlines. He said to the European Union, “If you are going to punish us—”, and in parenthesis might I say that almost no European leader has said they want to punish Britain? One or two have. I think President Hollande at one point virtually said that, but very few actually said it. We just sort of assumed. But what the Chancellor was saying was, “If you negotiate on the basis that you have to hurt us to make a political point to discourage other member states from seeking to go, or to show that there is a real penalty from leaving this club, then we will have to respond, and we will respond in whatever way we can to make ourselves competitive”. I thought that was an entirely reasonable position to take up. It is interpreted by people as saying that we will become an offshore Singapore. I think that is risible. We could not become an offshore Singapore, but we would become a competitive Britain. So I did not have any problem with the Chancellor of the Exchequer’s position.

However, the Prime Minister’s line was equally that, if the European Union were to punish us, we would respond. I accept that. That is a perfectly reasonable position for her to take up. The implied threat that, somehow or other, “If you hurt us we will hurt you”, is not a good way to take forward economic diplomacy. It is really what you read into the subtext to what the Chancellor said and what the Prime Minister said. I think it is very unwise of people to make the assumption that the British Government in negotiations want to hurt the EU-27, just as I think it is unwise, as some in this country do, to make the assumption that the EU-27 want to hurt the United Kingdom. I don’t think either set of politicians wants to do that. It is clearly not in the interests of either side to do that.

Q325       Chair: If the EU-27 have to behave in a certain way, and treated the UK like a normal second or third country, or whatever, it might be seen by some in the UK, through the UK media, as punishment when they go to normality compared with what they have at the moment.

Sir Andrew Cahn: They might interpret it that way. Relations between states and between international organisations in states cannot function if you start punishing, or function badly when you start thinking about punishing. They function well when you think about win-win. It all comes back to the general proposition—which I am sure everybody on the panel would agree to—that there is an outcome to Britain leaving the European Union that is a win-win for both sides. There are many outcomes, and there are many outcomes that are lose-lose. Economic rationality takes you to a win-win. Some of the politics on both sides of the Channel take you to a lose-lose. The challenge for the Prime Minister is to get to the win-win, which can be done, I am sure.

Owen Tudor: Can I say something slightly different about the Chancellor’s speech, because I have a slightly different view on it? Our starting point, obviously as the TUC, is that working people should not pay the price for leaving the European Union. In that context, we are quite worried about what the Chancellor was setting out because, both in terms of reducing the tax take to the Treasury and of reducing the regulatory protections that exist in the UK, we don’t think either of those is a good thing. We would challenge the suggestion that that is the way to achieve global competitiveness. If you look at the really competitive countries around the world, Sweden is one of the most competitive countries around the world, and it does it on the basis of what even I would accept is a relatively high-tax, high-regulation economy. I think that competitiveness is not merely to be equated with slashing and burning your way through things.

I am worried about the Chancellor and the Prime Minister, to the extent that she followed his remarks. If it was a prediction, that is one thing, but what I am worried about is that he was advocating it. I would rather that people did not sound quite so enthusiastic about it as an option that could be entertained. It does strike me that in particular, as the Chancellor, he might be following down the road of his predecessor, whose political future was sealed when he came out with the suggestion of a punishment budget for the UK if the referendum went the way he did not want it to go. I don’t think that worked very well for the previous Chancellor and I think, essentially, the current Chancellor is engaged in the same game now. I don’t think it is helpful.

Q326       Sir Edward Leigh: Mr Tudor, you said that the EU often crosses red lines in negotiations. Unfortunately, apropos your comment about Mrs May’s speech on staying in the internal market, I am afraid there is one line that they are never, ever going to cross, and that is free movement of workers. You represent workers. May I hazard a guess that most of your members are worried about free movement of people, workers undercutting their own wages, and unemployment?

Owen Tudor: It is certainly true that most of our members, like most of the population as a whole, are concerned about immigration. That does not necessarily transfer across to being opposed to free movement or, indeed, certain aspects of free movement. It is certainly the case that by a majority of about 60/40 – trade unionists voted in the referendum to remain, which suggests that they were not so concerned about it that it propelled them to vote to stay out.

I think what our members are worried about is not free movement, per se, any more than in previous generations they would have been worried, for instance, about women’s entry into the labour market. What they are worried about is how certain employers—I am sure none of Sean’s members, obviously—bad employers, have tried to use free movement to undermine people’s terms and conditions of employment. That is what people are worried about.

In those terms, I don’t think that the so-called red line on free movement from the European Union is as red as all that, because there are already measures that we have seen from the European Union that restrict the ability of people to exploit migrants and, therefore, undercut existing workforces, and we think those could be strengthened. There are a whole host of things that could be done without any negotiations with the European Union to manage migration better for Britain.

Q327       Chair: Such as?

Owen Tudor: First, restricting the exploitation of labour, as I have mentioned. In terms of legal measures, you can strengthen enforcement, you can introduce new rules. The Posted Workers Directive can be reformed. You can do things along those lines. Secondly, you can resurrect, with slightly better funding, the Migration Impact Fund that used to exist, and which never adequately did its job of redistributing the benefits to the Treasury of migration from the European Union to those communities suffering most. There are obviously concerns at the moment about pressure on housing and on public services. The answer to that is not to restrict migration; it is to increase spending on housing and public services. So there are a number of things there that can be done.

There are a number of things that you can do without any negotiation with the European Union being necessary, but I think there are also things that the European Union can do more effectively around free movement. In the European Union at the moment, we have a free market but it is not an unregulated free market. There is no reason why free movement should not be regulated in a similar way in that regard, and I think people ought to be exploring that more, rather than simply accepting the—

Q328       Sir Edward Leigh: I will not pursue the point. I would have thought there is such an imbalance, in terms of social security benefits and wages, between what you can get in Romania or Bulgaria, for example, and what you can get in the west midlands. Any changes that you have mentioned are peripheral. Can I just ask a question of Sir Andrew? The Prime Minister has said that we want to have a free trade agreement by the end of the two-year Article 50 process, and I think you have intimated, and I have also intimated, that this might be difficult. How difficult would it be, given that on the day that we leave the EU, say in March 2019, we would have                                                                                    transcribed every last directive, law and all the rest of it into our own law? That is what the Great Repeal Bill will do.

We will be absolutely on the same level in all respects as the EU. Isn’t that different from all the other trade agreements that people have ever attempted in the past, even the Canadian one? Because on day one we have adopted all their rules, all their laws, so presumably the bar to us concluding a free trade deal is political. It is political on their part. If they wanted to do it, in technical terms—and you are the technical expert—could they not do it?

Sir Andrew Cahn: May I make a comment about your previous question, Sir Edward, and then come on to that? You said that free movement was an immovable red line. I don’t think in real terms that can possibly be the case. If we want to have an agreement with the European Union of any sort, we are going to have to agree some movement between the two countries. If we want a free trade agreement with India, which is one of the Government’s priorities, there is no doubt that an Indian primary demand, and a red line for them, is free movement for their service professionals. We don’t have unalloyed free movement now, as Owen Tudor said. We have limited free movement. Clearly in the future we will have even more limited free movement, but there will be agreements in our free trade agreements, both with the EU and with other countries, on movement of workers between the two jurisdictions. That is inevitable, so you cannot have a firm red line.

Coming on to your specific question to me, Sir Edward, I think the problem is that a comprehensive free trade agreement with the European Union of 27 countries is enormously complicated, because it would cover a huge variety of areas. Let us just take patents as an example, which is one of 100 or so areas. We have the European Patent Office; we don’t have our own patent office. What would we do? What access would we have to the European Patent Office? It is an entirely solvable issue, but it needs to be negotiated, and there are 100 or more similar sorts of issues. Yes, you are absolutely right about the Great Repeal Bill, which is a funny name. It is actually the Great Continuation of the Application of EU Law for Quite a Long Time Bill, but it is a very sensible approach.

Q329       Sir Edward Leigh: It is a Great Transcription Bill, isn’t it?

Sir Andrew Cahn: Yes. That is a better, more neutral way of putting it. I quite agree. You are absolutely right that it facilitates an agreement, and I agree with you that, with goodwill on both sides, an agreement should be very possible. You say it should be possible quickly because all EU law would still be applying. I would put it a different way: it can take quite a long time, because it is just so complicated. We have 43 years of entanglement that we have to disentangle, and it is a complicated, technically difficult, doable but difficult task. It is inevitably going to take more than two years. We will not have two years. We will have 18 months or so, and it will take longer. But there is no reason why you cannot agree the general principles in that period, and then agree implementation arrangements while the full details are negotiated.

I agree with you that all of that is entirely doable but, first of all, the EU-27 is saying, “We are not even prepared to talk to you about this until you have left”. I think that is an illegitimate, rather aggressive position on the EU side and it will have to change. But they will want us to pay negotiating terms to change it. That is why we should have got the change earlier. When we do start there will be a temptation to say, “Only when you have signed up to the exit cheque do we agree something”. Again, that is going to be difficult.

I do think we will find that the negotiations on the general principles of the future of trading arrangements, and of the implementation arrangements, will be crammed into the last few months. It isn’t that we have two years; we will end up doing it in a rush, in a crisis, all-night sessions in the later stages of the two-year period.

Q330       Sir Edward Leigh: That is fair comment. Mr McGuire, your Director General has warned of a disorderly crash landing if we suddenly have to start trading under WTO rules. One of the problems with this is that people in the European Union never thought there would be a referendum. They never thought British people would vote to leave. They always thought there would be a second referendum. As this is a public session, just in case anybody is watching this, very large parts of the Conservative parliamentary party, which is a majority party, do think that a bad deal is worse than no deal.

You can comment on this. Maybe we are not as expert as you, but we think that maybe, if we get out of the internal market, if we get out of the Customs Union, if we are free to have our own immigration laws, if we are free to make our own international trade agreements, if we have to trade under WTO rules, that is not such a crash landing. It is what we want to achieve in the long term. We believe that other nations—whether it is Japan, China, or America—trade quite happily with the EU on that basis. I will give you a chance to comment. Is it a crash landing, or what is it?

Sean McGuire: Thank you. The Prime Minister’s speech last week did narrow down some of the options for barrier-free access to the EU, and particularly for those sectors that are highly dependent on integrated supply chains. Businesses have a lot of concern still on some of the detail from the Prime Minister’s speech last week. Nevertheless, we believe that a comprehensive and ambitious free trade agreement between the UK and the EU could alleviate most of them. We also particularly welcome the implementation phase that the Prime Minister mentioned last week in her speech. But for us and for British business it is all about a smooth Brexit, so that companies in the UK—and indeed those in continental Europe—can continue to trade and operate the day after we leave.

The threat that no deal is still on the table worries businesses significantly, because we would fall under WTO rules. If we fall under WTO rules we will then have to apply tariffs, and in some areas these tariffs can be significant. In the dairy/agri-food sector, it can be up to about 40%. In the automotive and automotive parts sector, it can be 10%. If you are operating in the automotive sector at the moment and have to put your prices up by 10% in a highly competitive, global economy automotive industry, that puts UK manufacturers at a significant disadvantage, because we would have to apply the tariffs under the arrangements of the WTO. For us, the no deal and going into the WTO, operating in a tariff world would significantly dent the competitiveness of the UK industry at the moment and, indeed, have a severe impact on our service economy as well.

Owen Tudor: I would add to that that the Spartan response to your position would be, “If”. The concern is that this relies on an awful lot of extremely good luck happening for that result to be achieved. It is always very difficult when we are talking about crash landings and chaos and all that sort of stuff. For most ordinary working people that is not the issue. The issue is, “Is my company still employing me? Am I still getting the same wages?” All that sort of stuff.

Q331       Sir Edward Leigh: Yes. It is over-politicising it.

Owen Tudor: Absolutely. It gets difficult to grasp what we are saying. Just as an example, the report that was published by the Welsh Government and Plaid Cymru this week looked at the amount of trade that Wales does with the European Union compared with the rest of the world. While for the UK as a whole, that is on average, it is roughly 50/50, for Wales it is considerably more trade with the European Union than with the rest of the world. If you interfere in some way with that trade with the rest of Europe, then you will have to make that up with the rest of the world. Even if it was a relatively small decline in your ability to trade with the rest of Europe, which WTO rules would certainly produce—I don’t know about chaos; I don’t know exactly how you would quantify that—assuming that you had something like a 10% reduction, you would need to have a far greater increase in Wales’s trade with the rest of the world to make that happen, in conditions either of operating under the WTO rules or the possibility at some stage of negotiating free trade agreements that would allow you to increase that trade. I don’t think it is a risk worth taking to hope that that will happen when you are talking about people’s jobs and livelihoods.

Q332       Toby Perkins: In the Prime Minister’s speech last week she laid out in the context of a customs agreement what she wanted to be free of, but also the hope that we would still have some sort of customs agreement with the EU alongside a UK-EU free trade agreement. What do you think she meant by the kind of customs agreement that she was envisaging with the EU, and are those arrangements legal under WTO rules?

Sir Andrew Cahn: I thought that the Prime Minister’s speech was admirably clear in almost everything except that. That was the one component that I found very difficult to understand. Essentially that is because I think what she was saying was, “We want to protect particular sectors of our economy”. She could see that staying in the Customs Union for those sectors would be beneficial—automotive and financial services most evidently—and, therefore, that is what she would like to do, so we are setting out an objective.

In so far as I understand it, I think it would be a huge stretch to say that it would be acceptable under WTO rules to have membership of the Customs Union for two, three or a few more sectors, because WTO rules require that such agreements must cover the generality of the economy.

Having said that, WTO rules are not legally applicable; they cannot be enforced. Probably if you can get away with it in the WTO, you can get away with it, and so it might well be possible to get away with it if it was clearly in most people’s interest. But I think she was, in effect, doing what the EU-27 says you cannot do, which is to cherry-pick. She was saying, “I would like to have membership of the Customs Union for those few areas where it benefits the UK economy, and I don’t want to have it for the rest”. That would be great if she can negotiate it, and more power to her elbow, but it will be a stretch.

Q333       Toby Perkins: By “a stretch”, you mean you think it is unlikely that the EU-27 will agree to that?

Sir Andrew Cahn: They will certainly start off saying they will not agree to it. All negotiations are package deals. All negotiations end up with concessions and wins for both parties. If the Prime Minister wants to win this particular bit, she will have to give way elsewhere. It is quite a big demand because it goes against the general practice and principles of the other party to the negotiation, and they will be reluctant to give it.

Q334       Toby Perkins: Yes. What she specifically said was that she did not want Britain to be part of the common commercial policy or bound by the common external tariff, but she did want to have a new customs agreement with the EU. You are saying you think that sounds like a reasonable idea, if they would agree to it. You are not certain if it is legal, and, even if it is legal, you think it is a stretch that the EU might agree to that?

Sir Andrew Cahn: It is in both sides’ interests to have a good, constructive, extensive agreement on customs arrangements. It is manifestly in both sides’ interests, if only because there are a lot of supply chains that cross the borders repeatedly—automotive being the biggest example, but there are many other industries. It is clearly in both sides’ interests to have that. What the Prime Minister was setting out was her wish to cherry-pick—a rather tendentious phrase—or to pick, to choose those areas where it is beneficial for Britain to have an agreement, to include some sectors and to exclude those sectors where it might be in the EU’s favour. That cannot be the end result of the negotiation. But can she achieve such an end? I very much hope so. It is an objective that would help Britain, but she will not just get what she has asked for. She will have to make concessions. Of course she will, but she will be setting out her objectives.

Q335       Toby Perkins: Mr Tudor, we heard about the UK Trade Policy Observatory’s idea of the sectoral Customs Union for the automotive industry within a wider free trade agreement, which would allow for lighter rules of origin and customs checks on automotive exports. What do you make of that policy on behalf of the TUC?

Owen Tudor: It is important that we look to try to create as frictionless a relationship as possible, because it is very often the friction as much as the tariffs, in terms of paperwork, rules of origin and so on, that adds to the cost. We should be looking for as much as possible in that sense. I am sure that would be advantageous to those parts of the economy that are dependent on automotive manufacture.

I am concerned at the idea of picking certain sectors because of the sectors that then don’t get picked and have problems as a result. In general terms, for instance, we would not be in favour of a deal that provided free access for the City of London but disadvantageous terms for the rest of the economy. We think that would simply lead to further unbalancing of the UK economy. I share the scepticism that it will be easy to negotiate a deal that just covers one or two sectors in that sense.

Q336       Chair: Such a deal would have to be WTO-compliant. We would have to be able to do that and it would have to be legal under the WTO. Another partner in the room we are not seeing here is the UK that the EU can have a deal with, but if they are not compliant with the WTO, they are going to have a problem later on down the line.

Owen Tudor: It is worth noting, for instance, that Turkey has semi-access to the Customs Union, but it covers a much broader spread of economic activity than we are talking about here. It also comes with further restrictions then on what Turkey is able to do under WTO rules.

Q337       Chair: Turkey lost a case against the European Union—I think in 1998—under the WTO rules. The WTO law was enforced at that point.

Owen Tudor: Yes. As Andrew says, it is true that WTO rules are not enforceable in some ways. However, they are a bit enforceable in as much as if you regularly flout them then you pay the price in other ways. It is a bit difficult. It is not as if the WTO is going to come in and seize assets if you don’t agree a deal, but it does mean that you will pay in other ways. The question, therefore, is: if you manage to get frictionless agreements in one or two sectors, what are you going to have to give up to get that? In particular, you will have given up frictionless deals for all the other sectors of the economy.

Q338       Toby Perkins: I want to ask Mr McGuire the same question: what do you make of the sectoral approach to the Customs Union, and the extent to which you think it might be both desirable and achievable?

Sean McGuire: As you will have seen in our latest report before Christmas, “Making a Success of Brexit”, we adopt a whole-economy approach to the Brexit negotiations and do not at this stage pick sectors and identify winners and losers. This is an all-economy approach, and one that has the complete backing of the CBI.

With regards to the Customs Union, and leaving, and sectoral—and I share Sir Andrew’s comments—this is the one that has caused the most concern and confusion among our membership of how it would work in practice, and whether it is indeed possible or legal. I think we can get over that in the WTO context.

Building up on some of the earlier points, where does this sector begin and end? Automotive is incredibly complex. There is no, “It is the automotive sector”. Services are involved in that as well. Making a screw for a car, are you part of the automotive sector or not if you supply somewhere else? It is so vague where sectors begin and end. Perhaps financial services is a little bit clearer, but there is much uncertainty. Even if we do have certain sectoral approaches to this, there will be those sectors that will be outside. This also raises the question around the whole capacity and trade facilitation.

Many have told us already that our ports are not capable to deal with any potential increase of clearance that being outside—either partial or fully outside—the Customs Union would imply. We don’t have the skills or personnel within our companies, or indeed within HMRC, to deal with customs clearance procedures. While there is a legal aspect, there is also a technical and practical aspect to this and having all these in place in a two-year timeframe is incredibly difficult.

Given that we do represent all parts of the UK, it would be remiss of me not to mention the concerns of CBI Northern Ireland, and having a Northern Ireland economy, and how the flow of goods and services could continue between the Northern Ireland economy and the Republic of Ireland. The solution to finding, whether we are outside or inside—certainly outside or partially outside—a Customs Union, the implications that would have on the border area of Northern Ireland and free flow is something that our members in Northern Ireland are particularly concerned about.

Chair: That is understandable.

Q339       Chris Leslie: Thinking about this sectoral approach that the Prime Minister has talked about, she could well knock on the door of the CBI and say, “We hear from your earlier answer that the CBI is not particularly keen”, but you have to help them pick which sectors. How will you go about that process?

Chair: Is it legal to pick sectors?

Chris Leslie: It is uncharted territory, so you have to help No. 10. Where will you start?

Sean McGuire: Our sectoral approach at the moment is covering all 18 sectors that are represented within the CBI, and I am not in a position at this stage—and it is too early in the game—to start identifying which sector we will pick over another. In fact, as you know, we are a membership organisation. Picking one sector could have a detrimental impact upon our bottom line. That said, we will go for a whole-economy approach on this one. It is not about picking winners or losers. I want to reiterate that one, because choosing one may have a detrimental impact upon employment in another area, so it is a whole-economy approach.

Q340       Chris Leslie: Sir Andrew, you have been in government and you have advised Ministers. What do you suppose the civil service advice would be to help Ministers choose which sectors we should be asking for frictionless trade?

Sir Andrew Cahn: As Sean says, it is quite difficult to select those sectors. The Prime Minister did mention specific sectors, and clearly the automotive sector is a particular one because of the possibility of tariffs and because the supply chains are so interlinked across the Channel. I think I would advise Ministers that the first thing to do is a very significant analysis of where the economic interests of the country lie, and I understand that that is what the civil servants in the Department for Exiting the European Union are doing. They are doing it very well, from what I hear. There is a huge amount of analysis, fact-finding and then economy analysis that needs to be done.

I then would say that you don’t want to put your cards on the table. Again, I think the Prime Minister is right when she says, “You don’t want everything out in the open”. I think you would want to enter the negotiations to see what the other side might be prepared to agree to without problems and then what you need to fight for. I think probably the Government have, in public, given as much indication as they need to for the time being.

I make one last point, and it very much builds on what Sean McGuire was saying, which is: business does need to be able to plan. If you are going to be in one of the sectors that are going to be outside a Customs Union agreement, you need to know that more than a few days or a few weeks before that happens. If you are going to be inside, you need to know. The financial service industry is, as of now, beginning the task of setting up operations on the continent, because they know they need 18 months or so preparatory time.

The last point I would make is that the Government themselves need to start preparing. If we are going to be wholly outside the Customs Union we are going to need many thousands of customs officers. That is doable if they are recruited in the next few months and trained up and the physical facilities of ports are changed now. It is absolutely not doable if you only know in the last few weeks before it happens; preparation, planning, and a certain clarity of what is going to happen, is vital both for business and for Government.

Q341       Chris Leslie: We are going to have a statement in the Commons on Article 50 at 12.30 pm, so I am conscious of time. My final point: if you have sectoral negotiations on a customs agreement and Britain says, “We want automotive, friction free”, the EU will not necessarily pick the same sector. It might want food processing, textiles or some other thing coming through the other way. Won’t this be an imbalance in the sectors? Therefore, could we not see a British sector, which isn’t given advantage by our own Government, disadvantaged by having to reciprocate to what the EU want?

Sir Andrew Cahn: I think the Prime Minister’s concept will only work in sectors where there is mutual benefit to an agreement, and automotive was mentioned because it is an obvious one where there is a mutual benefit. I don’t think you are going to have sectors included where there is an evident disbenefit to one party or the other.

Owen Tudor: Forget the Customs Union stuff—if we go for a free trade agreement, that will have a sectoral component. Obviously some of the trade agreement would be cross-sectoral, but some of it would be sectoral in any case. If you look at the trade agreements that are being negotiated at the moment, they will have a pharmaceutical aspect, they will have an agricultural aspect and things like that. In those, obviously you aim to try to get a win-win situation on each sector, because that makes everyone’s life easier, but occasionally in trade agreements you trade one sector off against another sector. Those issues are going to come up if we go for a free trade agreement, forget what we do about customs.

Q342       Chair: Before I come to James Cleverly, just for the CBI: you have talked of 18 sectors there, all effectively wanting to be in the Single Market. Really it is what these 18 sectors want and they want a special pleading to get into the Single Market. The reality, of course, is that if the EU gives special treatment to a single sector, then the UK under WTO law is going to have to give the same treatment to sectors of all other WTO members as well. Has that figured much in CBI’s thinking? Just a brief “Yes” or “No”.

Sean McGuire: No.

Q343       James Cleverly: Mr McGuire, the talk of a UK-US trade relationship has suddenly hit the headlines in a spectacular way, and I have it on good authority by someone in America that it is going to be great. Could you give me your thoughts on the—

Chair: It is not the way to start it.

James Cleverly: That is not what I said. Could you give me some idea of what your thoughts are on that, and the potential value, the opportunities that that might bring about, and how likely it might be that it could come about?

Sean McGuire: The UK and the US have a strong economic, political and cultural history. Indeed, the UK is the second largest exporter to the US in export value. It is something around £45 billion. We are the single largest investor in the US—around $450 million—which supports about 1 million jobs in all 50 states in the US, so there are significant trading links between the UK and the US at the moment. That said, there are still significant barriers to entry for UK companies and British companies, mainly around tariffs in certain sectors, particularly clothing and textile, but there are also regulatory barriers as well.

From a starting point, and the 140-character world that we live in at the moment, we would support a UK-US trade deal as quickly as possible. Of course, with all these things the devil is in the detail. While President Trump has given certain political backing to having a quick deal with the UK, I have been around trade negotiations for a number of years and they are never that quick and, once you get into the technical and perhaps more boring detail, it becomes much more of a challenge.

The other proviso that I would add is: a lot of the areas where British businesses would benefit from a trade agreement with the US are governed at state level, particularly around access to the procurement market. I do not see under the current Administration in the US that they will scrap the “buy American” principle in a UK-US trade agreement, or that at state level they will also scrap that “buy American”. While there is a great economic benefit to forging closer links, to having a trade deal, we must be alive to the fact that this will be a challenge and that in all trade negotiations there will be offensive and defensive areas. The UK will have ours and so will the US. Perhaps when the shine goes off it, in terms of the high-level political, and we get down to the technical level of where the benefit really is for financial services, professional services, manufacturing and procurement markets, it will be much more challenging, so the timeframe may not be as quick as perhaps envisaged at this stage.

Chair: Can I thank you, panel, for your attendance here this morning? It is much appreciated. I will now ask for the second panel to come along. Bearing in mind the time and the statement that we hear is coming at 12.30 pm, we are going to have a quick whistle-stop for the next panel. Thank you very much.

Examination of witnesses

Witnesses: Mickael Laurans, Hugh Savill and Gerard Grech.

Q344       Chair: Good morning. I welcome the second panel. Can you state your names and organisations, please, for the benefit of the record, starting on my left? Thank you.

Hugh Savill: I am Hugh Savill. I am Director of Regulation at the Association of British Insurers.

Gerard Grech: Gerard Grech, CEO of Tech City UK.

Mickael Laurans: Good morning. Mickael Laurans, head of the Brussels office for the Law Society of England and Wales.

Q345       Chair: Thank you very much. Mr Laurans, which countries are the most important for the UK law sector’s export business?

Mickael Laurans: The UK legal services sector shows a trade surplus of £3.6 billion. Many countries are of importance. The EU markets are of significant importance for members. We have member law firms in 25 of the EU-27 member states. However, other countries around the globe are of significant importance as well. Some of them would be very open to foreign lawyers from law firms being there; others will be a lot more closed. That is the whole issue of non-tariff barriers, which I understand we will discuss today.

Q346       Chair: Mr Savill, how does the insurance sector compare?

Hugh Savill: Outside the European Union we have eight priority markets, which are: India, China, Hong Kong, Indonesia, Japan, Malaysia, Singapore and South Korea.

Q347       Chair: Thank you. Mr Grech, how does the technology sector compare?

Gerard Grech: In the technology sector, obviously outside the EU it is America, India, China, Japan, but when you look at the technology sector, there are various parts of the sector that are growing at different speeds. I do make that distinction, which is important to note, and I will give you a full rundown of how those types of companies operate in those markets.

Essentially, these are companies that are extremely fast-growth companies that are employing a substantial amount of people in the sector at quite a rate. A good example is Farfetch, which three or four years ago used to employ 48 people in London and is now employing 1,400 people. The conditions have aligned in such a way in recent years that such companies can grow very quickly. We are very familiar with these types of companies from Silicon Valley.

We have a programme called Future Fifty, and Future Fifty tries to identify pioneers in this type of industry. When you look at their exports, 57% operate in North America, 48% in APAC, 9% in the Middle East and Africa, 56% in the EU, with Germany being the highest followed by France, and then 13% operate in South America. Note that they are very lean types of companies. Companies that would operate in APAC would go and land in Singapore and operate in multiple markets from Singapore. The same with South America: they would operate out of Miami just because it is a frictionless way of working and operating in other markets.

Q348       James Cleverly: In the service sector, obviously there is not so much physical product moving around between borders, but what is the model in your respective sectors in terms of international working? Is it people moving between countries? Is it things moving digitally between countries? Could I ask each of you, in your respective experiences, what the nature of international business is in your areas?

Hugh Savill: I will start. Insurance is a regulated business in virtually every country in the world, so that is the main thing that determines how you do your business. There are a huge variety of models. Our people establish themselves overseas via a subsidiary or, rarely, they are allowed to sell cross-border. There are just a huge variety of models, but it is regulation that always determines it.

Q349       James Cleverly: Often you will need a brass plate presence in the jurisdiction that you are hoping to operate in?

Hugh Savill: You normally have to have a bit more than a brass plate. People like the capital there so they know you can pay the claims.

Q350       James Cleverly: Fair point. In the tech sector?

Gerard Grech: In the tech sector, there are definitely three areas. One is talent, obviously. Typically, when you look at roll-up numbers based on ONS, about 30% of tech companies in London, for example, are non-UK. In Future Fifty-type companies it is even higher. It is over 50% because of the rate of growth that we are seeing. One is talent, clearly, and obviously one in five tech companies we have identified have been created by a non-UK person as well. That was data that was released last year.

The second one is investment. A lot of venture capital is involved. If you look collectively at these companies in our Future Fifty programme, over $4 billion has been raised in the last 36 months and they are employing about 25,000 people. That money has come from about 42 rounds of funding with venture capital. A lot of that venture capital leverages EIF money—that is the European Investment Fund. The movement of capital is extremely important and we have increasingly been seeing companies taking investment from Asia, particularly China. That is the second point.

The third point is the free flow of data across borders. If you are users of data services, it is probably very likely that data is residing in other parts of the world in some cases. We want to make sure that data continues to flow between borders.

Mickael Laurans: For the legal services and professional services sector in general, it is about getting the right person with the right skill set at the right place and the right time to conduct the client’s business, whether it is negotiating a contract, seeking redress in a dispute or defending a court case. The ability to send lawyers at very short notice to another country is important. The ability to establish in other countries is important. The ability to partner with local lawyers is also important. Obviously, there is a patchwork of the ability to do that across the globe. Data flows are increasingly important for the legal services and professional services sector as well. The ability to transfer data on clients, to work as a multinational team on the same contract, on the same negotiation, is key.

Q351       Chris Leslie: This gets us to this question about any deals with the other EU-27 and your ability to trade, especially if you have your regulated activities within that EU-27. It is not necessarily a question of tariffs on services at all; it is about the right to operate under a regulated context. How much insurance business do UK firms do currently in the rest of the EU-27? How significant is that market?

Hugh Savill: It is about £3 billion a year, significantly more outside the EU. We are talking £9 billion outside the EU. But you are quite right that it is entirely a regulatory matter. There are no tariffs, no agricultural inspections of insurance policies or anything. It is just whether you have the authority to sell insurance in that jurisdiction.

Q352       Chris Leslie: Ideally, under single market arrangements you would have a passport, but there is some talk about how equivalence can be agreed. What is your view of this equivalence right?

Hugh Savill: Equivalence is no substitute for passporting. In insurance, it is a really restricted and limited thing. It works quite well for reinsurers. It does not work so well for others. As the Prime Minister has now decided that we are not to be members of the Single Market, we are hoping that the Prime Minister strikes an ambitious deal that replicates in some way the kind of passporting arrangements we have now.

Q353       Chris Leslie: But if it is equivalence, there is a stability problem there, isn’t there? Isn’t that something that is determined by the European Commission? They can flick a switch and say, “You are not equivalent anymore”.

Hugh Savill: Yes. There are many things that are wrong with equivalence. One of them is that the Commission decides it and the Commission can rescind it with a month’s notice.

Chris Leslie: With a month’s notice?

Hugh Savill: Yes.

Q354       Chris Leslie: On data and legal, to what extent do you feel there are equivalence issues that you need to resolve? Will you be able to gain that sort of equivalence? How easy is that going to be? We will start with the legal side.

Mickael Laurans: The Single Market in legal services has been a great success. We have UK law firms in 25 of the EU-27 member states. We have UK-qualified solicitors in 24 of the EU-27.

Q355       Chris Leslie: How big is that in financial terms?

Mickael Laurans: Unfortunately, I don’t have a figure. The ONS has not produced specific data on that. Certainly, a key ask for my organisation was the continuation of the participation of the UK legal services sector in the two EU lawyers directives and the mutual recognition of qualifications directive. If you leave the Single Market, you have to look at 27 different national regimes of regulation, each having different restrictions in terms of market access and national treatment. There would be member states in which you cannot fly in/fly out. In others you cannot establish or in others you cannot partner with local lawyers. You really have to move to an analysis of the 27 different national regimes to see whether you can remain active in that market or not.

Q356       Chris Leslie: Have you done any analysis as to whether those other 27 are happy to continue to have British legal services coming in and competing with them, or do you think that there is a likelihood that those other EU-27 countries might be putting up some barriers if we are leaving the Single Market?

Mickael Laurans: We have started discussing the issue with a number of European bars and law societies and also at pan-European level. Some of our counterparts see a great benefit for them for UK law firms and UK solicitors and barristers to continue practising in their member states. There is the example of the Paris bar where a third of all Paris newly-qualified lawyers train in the UK, or what they call Anglo-Saxon law firms, which are UK or American law firms. Certainly, they are very concerned by Brexit. The response may be different from jurisdiction to jurisdiction.

Q357       Chris Leslie: My last question is on the data. There are regulated issues that come up. Is there this issue of the right to trade or not? Is it not quite the same as the financial services side? If you lose that regulated permission, are there ICT issues that you will not be able to trade?

Gerard Grech: There are two things. One is that and the other point was the passporting rights. We would hope that we would continue to operate under the privacy shield that we have in place between the EU and the US. That is a big key for us.

The other thing is on passporting rights. When you look at the Fintech sector, EY estimates that over half of all Fintech companies in Europe are based in the UK. The thing about Fintech companies is that some Fintech companies rely on passporting rights to operate. A company that is looking to become a challenger bank will need a licence to operate in other markets, so obviously passporting rights will be key to that company. Other companies are more in the business-to-business sector. They are there to serve banks that ultimately need those passporting rights. So there are some Fintech companies that will not need those passporting rights.

Q358       Chris Leslie: On this business about data roaming and mobile data, currently if businesses go across Europe they have quite low bills because the EU has agreed to data roaming protocols. If those are no longer available, is that not going to be an encumbrance for your business as well?

Gerard Grech: Absolutely.

Q359       Chris Leslie: How significant?

Gerard Grech: A major part of the digital sector is all driven by data. It is the oil behind the industry. That would significantly put a lot of pressure on not only the bottom line of companies if there are tariffs, but also just how to operate logistically.

Q360       James Cleverly: Mr Savill, I think in your written submission you have suggested the ABI should prioritise certain markets you mentioned earlier on today. Do you think that it is right to explicitly prioritise markets like that?

Hugh Savill: This is really a guide for where we put our resources. I would not say that these are probably the most important markets for our members. You have noticed the United States isn’t there; that is easily the largest export market for insurance. However, this is where our members think we, the ABI, can make the biggest difference. You need to look at it like that.

Q361       James Cleverly: So this is about impact and the future rather than just going for the big beasts at the moment?

Hugh Savill: Yes.

Q362       James Cleverly: Mr Laurans, you made particular reference to South Korea in your written evidence. Is that for the same reasons? What is your thinking behind that for law?

Mickael Laurans: The reason we quoted South Korea is because our member firms are in Seoul on the basis of an EU free trade agreement. As part of the exit process, it will be for us extremely important for the UK Government to reach a deal with the South Korean Government so that all member firms are able to remain in South Korea. It is the only example of an EU FTA that has made a significant difference in terms of legal services’ ability to establish in a third country.

Q363       James Cleverly: You mentioned pre-existing relationships. Would you discuss grandfathering, which is a phrase that gets kicked around a lot, in terms of how much can be done to carry across those relationships? Again, if I come back to you because it carries on from your last point, what is your view about the practicality of that? If you cannot get complete grandfathering, what elements would we be striving for?

Mickael Laurans: We would certainly support the UK Government and the DIT in their wish to secure these rights. I think it would rely on the goodwill of the other side as well. In some ways, it would depend in that example on the South Korean Government to agree that they would strike an agreement with the UK that will keep these practice rights for UK law firms in Seoul.

Q364       James Cleverly: I know this is probably a bit of an unfair question, because you are not here as a spokesperson for the South Korean Government, but from your knowledge—and I won’t hold you to this in the future—do you think they are likely to be amenable to these kinds of grandfathering-type deals?

Mickael Laurans: At the end of the day, it is a political question for them. I am afraid I have not followed South Korean politics recently, but are they still in the same frame of mind as when they concluded the EU-South Korean FTA? You have to look at these factors.

Q365       James Cleverly: Thank you. Back to you, Mr Savill, if you don’t mind. Again, going back to your written submission, you indicate that FTAs, “have rarely secured significant new market openings for the insurance industry”. FTAs seem to be the flavour of the month. I think Lord Marland wrote this morning that they are not the be all and end all. Why do you think that they have not been that useful to the insurance industry?

Hugh Savill: As I say, insurance is a regulated industry and it is the regulators that say whether or not you can have permission to do business in a particular country. They normally fall outside FTAs. I don’t think there is a single FTA that offers market access. There is also a tradition: FTAs normally deal with goods. If we are going to follow some of our major competitive advantages in financial services, we are going to have to change that. At the moment, temporarily, I see more hope in bilateral economic and financial dialogues with the major markets, such as India and China, where you get the regulator round the table with the Government and then you can take their concerns into account. We had a really good deal out of the China economic and financial dialogue in November and we hope the Government expand that.

Q366       James Cleverly: Mr Grech, by extension, if I could ask you to comment about the tech industry. It strikes me that with a very fast-moving industry, you are flanked by two very long-standing traditional industries, yet yours is a very new and fast-changing industry. How good are FTAs at understanding the needs of your sector and writing useful clauses in? Are there any examples of that?

Gerard Grech: Yes, I would say that there is probably not a lot of benchmarking that you can do at this point. Even the WTO rules are very much focused on the agricultural industry, fisheries, that sort of thing, but they are stepping up. They did come to see us relatively recently looking at digital marketplaces and how they should be thinking about this. It certainly is fast moving and it is a very important sector to the UK in the sense that McKinsey and the OECD published a recent report identifying the fact that the UK’s digital contribution to GDP is the highest in the world—it is 10%—followed by the US, which is 8%, followed by Sweden, which is 7%. To your question, I would say there is a lot of work to do to ensure that we are educating the WTO, other trade organisations and people working in this sector about the importance of this fast-growing market and sector.

Q367       James Cleverly: We have spoken, in terms of both law and insurance, about some focus geographically on future relationships. Are there places in the world in terms of the tech sector that we should be focusing on, whether they are places that have already been brought up or others?

Gerard Grech: There are probably a few ways to look at this. There is obviously market opportunity. In terms of size, Japan, China and the US are very big markets. Even when you look within the EU, Germany and France are the two that really come up quite quickly. Then there are markets where they are English speaking, including Australia—29% of our companies operate in Australia—and Singapore, but obviously they use Singapore as a hub for operating in other parts of Asia. That is by market size, the English language being to some extent the lingua franca of the internet, according to some people, obviously.

The other way to look at this is: we run a visa scheme on behalf of the Government, on behalf of the Home Office. If you look at the top five countries that apply to work here—the US, India, South Korea, Nigeria, Australia and Russia—in order for the sector to continue growing at the rate that it is, obviously we will continue developing home-grown talent, but we need to combine that with attracting talent from overseas because the momentum is now. As I said, 10% of GDP—the stars have aligned in such a way that we are at the forefront of digital technology. A number of policies were put in place a number of years ago; 10 years ago you would not have spoken of London as an international tech hub, but now you do. In order to continue with that momentum, we need to ensure that we are attracting the best and brightest talent from all around the world. There are some key markets where we are seeing a critical mass of expertise coming into the country, and I think we should perhaps look at prioritising those key countries.

Q368       James Cleverly: Can I just whip across the witnesses now and ask your thoughts on the UK subscribing in the future to trade in services agreements? The EU is currently attempting to negotiate TiSAs with 22 countries. Is this something that is worth the UK pursuing post-Brexit?

Mickael Laurans: Absolutely. I would agree with other witnesses in saying that free trade agreements sometimes don’t really deliver in terms of services or in tackling non-tariff barriers. However, the UK should be part of the TiSA negotiations. It is very important for the legal and professional services sector. It is also very important in dealing with the issue of data flows, which are of increasing importance.

Gerard Grech: I completely agree.

Hugh Savill: I don’t think it will do us much good, but there is no point in being a dog in the manger. Yes, it is important.

Q369       Sir Desmond Swayne: To what extent are your sectors already harmonised in terms of regulation in the European market? Secondly, what would be the implications were post-Brexit UK regulations to start to diverge significantly? Thirdly, in what respect are differences in regulation currently a barrier to trade beyond the EU?

Hugh Savill: I will start. In the European Union, insurance regulation is supposed to harmonise based on something called Solvency II. Is it really harmonised? No. Individual regulators do their own thing, and you can look at significant differences between the way it is implemented in France, Germany and the UK and so on. Sorry, what was the second question?

Q370       Sir Desmond Swayne: The second question is what the implications would be subsequent to our exit were we to start diverging.

Hugh Savill: Sorry, of course. I think it is inevitable. When we leave the European Union, we will have to set up our own standalone version of Solvency II. That is going to focus on what is good for the UK. Meanwhile, on the European side there are lots of bits of Solvency II that were put in there for the British market. When they review that, they will think, “Why on earth is that there?” Inevitably, things will drift apart. This is not necessarily a good thing; regulatory fragmentation is inefficient. On the other hand, if we are going to be independent we need an independent system. All I can think of is: what is really important for future relations between the UK and the EU is regulatory co-operation, continuing dialogue between the Bank of England and the European regulators, so that if there are differences they understand them and are comfortable with them.

Gerard Grech: To your first question, the digital tech sector is developing at such speed that sometimes regulation is trying to keep up with the speed of change. I would say that a lot of companies try to operate where regulation is not so heavy, but I also draw a distinction between hardware companies, so companies that produce sensors and technology, versus software companies that are operating in the free flow of data. Obviously, if tariffs were to be put up on hardware, then hardware companies would certainly be affected by that.

I think we have an opportunity, given that we will continue to be hopefully in the foreseeable future shaping the digital single market. The UK was a big proponent of the digital single market and a lot of countries in Europe look to the UK because it is at the forefront of this change that is happening. A key focus for Government is to continue to make sure that they are creating the right policy and regulatory conditions for the digital tech sector to thrive, which I think a lot of European countries will look to.

To your question: there is regulation, clearly, but it is not as significant at this point as in the insurance industry. That is an opportunity for Britain to lead and be at the forefront of this.

Chair: I am going to have to put some regulation of speed into our deliberations.

Mickael Laurans: I would like to suggest that the EU is not just about harmonisation. Other principles of EU law, like mutual recognition and non-discrimination, are very important for the legal services and professional services sector. Thanks to the Lawyers’ Services Directive, a lawyer qualified in the UK is recognised throughout Europe. In the US—for example, in New York State—they would make a distinction depending on how a UK-qualified solicitor has achieved his or her qualification, whether there was a law degree in the first place or a conversion course. There is no such distinction in the EU.

Likewise, you could not discriminate against an EU lawyer. You can go into partnership with any lawyers from the EU. It is not the case in other member states where they would say a third-country lawyer cannot go into partnership with a local lawyer. It is not just about harmonisation. Mutual recognition and non-discrimination are very important principles as well.

Q371       Sir Desmond Swayne: Mr Savill, you avoided the third question, namely: to what extent is it a barrier to trade outside the EU?

Hugh Savill: If you are going to go and do insurance in the United States, you must set yourself up in the United States and follow United States rules; ditto Japan, everywhere. Yes, it is a barrier but it is not insurmountable. All you need to do is go there.

Q372       Sir Edward Leigh: The last question is to Mr Savill on passporting and equivalence. You said in your written evidence that the loss of passporting could lead to job losses, reduced revenue to the UK and a reduction in services to UK customers. Well, of course, we all accept that, but given that there are 8,000 European passports that come into our financial sector and 6,000 passports go back in the other direction, surely it is entirely in the interests of our European friends that there is some sort of agreement on passporting. If there is no agreement for political reasons, would equivalence not be just as good as passporting? How would equivalence work for the insurance sector? Even if we could not get a final agreement within the two-year period, couldn’t we have some sort of transitional phase?

Hugh Savill: Yes, it is very much in both sides’ commercial interests that the continuing flow of trade in both directions should go on. It is in the interests of British consumers, for instance. Quite a lot of our non-life insurance market is done by companies that are based in Europe, so it is good for our consumers as well. If we have to fall back on equivalence, that is really not so good in the insurance sector. It is a very restricted set of permissions by comparison with passporting.

Q373       Sir Edward Leigh: Just explain that, follow that up a bit, because we know our financial sector is one of the most heavily regulated in the world. We are gold standard everything, have the best regulator in the entire EU. I don’t understand quite why equivalence is not so good.

Hugh Savill: Just the way it was written in Solvency II. It is written down there that if you are equivalent you may rely on group supervision and that is it. You may rely on the group supervision of your home country, so there is no ability to sell cross-border or right to set up in its dimension. It is very limited. Sorry, your final question?

Q374       Sir Edward Leigh: I was thinking about the implementation, but I don’t think that suddenly we are going to say, in March 2017, this is not in reality going to happen, no passporting. There will be some sort of transition phase. It is so much in the interests of both sides to do it.

Hugh Savill: Two points. First, companies are already making their own contingency plans. You will regularly read about people “relocating”. It is not as simple as that. All they are doing is seeking the regulatory permissions. The last thing they would want to do is move. Yes, if you look at the way the Prime Minister set it out, I think she wants to agree the bones of the future trading arrangement with the EU, the main political elements, and then leave the details for transitional arrangements, what she calls “a phased process of implementation”. That is important because there are all sorts of nit-picking details that will have to be sorted out, probably at technical level.

Q375       Chair: Thank you. Are there any other brief views from the panel on that question?

Mickael Laurans: Just to reinforce the point about legal certainty. Our members are there to advise their clients on what their legal obligations are, so the more time there is to prepare, the better.

Chair: Panel, thank you very much for your attendance this morning. I am sorry for the rushed nature, but the statement coming up on Article 50 is pushing a lot of members away. Thank you.