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As we saw in part 1, the ways that Brexit rips through business models are quite complex. Travelling back in time to a simpler era in 1973 before the UK joined the EEC, does not seem like a practical option for business. Cross-border trade, which was the exception back then, is now the norm. People get on planes for one-day conferences and business meetings. The simple email that was conceived inthe early 1970s  has itself been outgunned by the smartphone app. Rules are needed to govern these new practices that in themselves generate unforeseen legal complexities.  Being outside the EU will not suddenly drop the UK back into a simple system where it can pull up drawbridge and act as an island. There will be too many wires left dangling.

In part 1 of How Brexit Rips Up Business Models,  we considered the effects of a post-Brexit dual compliance regime. Here, in Part 2,  we look at some specific aspects  of  Brexit-imposed  changes to cross-border trade and trade in services.  

What have musicians and bankers got in common? Both offer services in the European Union, and both are concerned that Brexit presents a threat to their business. Musicians make their money from a combination of   live performances and royalties. In today’s world, royalties are derived from streams, downloads, and licencing. Hence,  the business model is more about services than goods. British musicians make a lot of their revenue from the EU27, not from their home market.  Bankers make commission  from carrying out trades on behalf  of others, and from providing services such as credit lending. They too, derive revenue from providing these services to organisations and individuals in the EU27.

Under Single Market rules,  services from other Member States cannot be discriminated against  or blocked from trading. Post- Brexit Britain, a third country, may find that discrimination and blocking will come back in again. That means different terms, and higher prices. It turns a lucrative and thriving business into something that may not even be possible.

Let’s unpack this. Cross-border trade was  one of the key Single Market aims. The idea was to remove non-tariff barriers to trade in order to create a large home market for European companies, that would enable them to scale up  in the same way as US companies, in order to give them sufficient critical mass to compete at a global level. *

The current population of the EU –512 million with the UK – provides a domestic market that is bigger than the US. At the start of the Single Market,  many US companies benefitted from it, preferring to use the UK as a beach-head into the rest of the EU. In their wake came the Japanese. Now there are EU firms such as Airbus that are achieving the original aim.

Since 1992, cross-border trade  has increased in importance. In 2018, services comprise 80% of the UK economy. The EU Single Market is the largest market for UK services exports, accounting for  43%  of services exports (2016) and worth £110 billion to the UK economy. (National Institute of Economic and Social Research, in  Brexit and the UK’s Services Trade, Tony Blair Institute, 10 October 2018).  Business and finance services account for more than 30% of UK GDP, according to the government’s own figures.

This has been able to happen because non-tariff barriers have been addressed by Single Market rules. These non-tariff barriers  include licencing, standards, and restrictive regulatory practices. In 1992, the EU market was bound up in national monopolies – in telecoms for example – and in restrictive practices entrenched in national laws – such as banking.  Spearheaded by the UK, and its Commissioner  Lord Cockfield, the Single Market Initiative tackled these non-tariff barriers.  It’s aim was to reduce or remove then, and to apply a consistent framework across all Member States, so that businesses across the EU could compete on fair terms.

For example, telecoms firms no longer need to apply for a State licence to set up networks in other Member States. They are covered by a general authorisation in the EU telecoms framework (Directive 2002/20/EC). They can also source their equipment  from anywhere, provided that it has the appropriate EU certifications. This was important in the setting up of the early pan-European networks that supported businesses such as Unilever, Visa cards, and Hotpoint.**

Moreover, in freeing up rules around customs and tariffs and free movement of people, the Single Market initiative  created an enabling environment for other cross-border services, such as live music performance and professional services, to flourish.

The Single Market means that an IT maintenance support person can go from  Birmingham to Milan, work on the client’s system for a week and come home. Management consultants can fly out to Vienna for four days’ a week on contract. Lawyers can visit clients in Frankfurt.  It means that a musician can go from the London to Berlin as an EU citizen (no visa), take their instruments (no customs checks), their merchandise for sale at the venue (again no customs checks or tariffs)  and play their gig (service) just as easily as it they were going to Manchester.

Brexit means the UK is pulling out of this pan-continental  system for cross-border trade. However,  you cannot just draw a line in the sea around these islands and  go back to a  time when traded goods came in  wooden boats. Pulling out, withdrawing from the Single Market will leave a whole host of wires dangling. 

Services regulation is based on concepts of mutual recognition.  Banking services, if legal in the UK, may be provided in any other EU country (passporting).  Similarly, broadcasters based in the UK can transmit to any EU country, without restriction – those countries may not block the signal.  

Regulatory jurisdiction matters. In order to benefit from the mutual recognition framework, businesses have to be based inside the European Union. In certain cases,  they have the option to appoint a representative who will act for them on regulatory matters. But EU rules are clear that they must do one or the other in order to qualify for the benefits of the Single Market.

As we reverse out of this system,  the old barriers that 1992 sought to get rid of, will, by default,  be re-instated.  Lawyers will no longer be eligible to offer their services across borders, unless they obtain professional registration in an EU 27 country. The musician   will need a business visa , stand in a long passport queue, declare their equipment and merchandise to customs – every time they cross a border.  I’m reliably informed that in the days before the Single Market launched in 1992, they used to have to declare every broken drumstick, Apparently, broken drumsticks are a common occurrence. Given that  jobbing musicians make up to half their income from live gigs in the EU, these apparently small changes may make a big difference, as expressed here by this Oxford-based viola-player.

Mutual recognition of regulatory authorities will no longer apply. The UK will no longer be recognised for the single legal regime that governs the provision of  cross-border banking services ( known as passporting).   The Bank of England said that in the event of a no-deal Brexit, UK-based firms could not provide services to EU clients and vice-versa. Those banks that still want to trade in the EU27 therefore have to move at least the part of their operation that requires  passporting. It is a similar situation for the broadcast sector, where services will have to move part or all of the operations into the EU27 in order to continue to make their services available there.

International agreements for airline flights are predicated on a mutual recognition arrangement for the EU as a whole, rather than individual nation states. Hence, the UK will fall out of the Open Skies agreement, which allows EU-based airlines to fly between EU countries, and on domestic internal routes within countries.     Airlines, such as  Ryanair,  flying in the EU and in the UK will be subject to a dual regime.  Trans-Atlantic flights are also based on the EU Open Skies policy, and the UK will also fall out of those arrangements and needs to make new arrangements for UK-US flights.

As a consequence, service providers have a choice to move their business – all or part – into the EU. If that is not possible, then  it will mean a reframing of their business model. Many will have to endure the long queues and Visa restrictions.  Their can no longer rely on the legal framework on which they have based their business and grown their revenues.

There will be no possibilty to replace the consequential  losses with other trade agreements – other regulatory blocs like the US or China, are a long way from offering anything similar to what we have in the EU Single Market.

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 *See this book: Paolo Cecchini (1988) 1992 The European Challenge – The Benefits of a Single Market, with Foreword by Lord Cockfield, UK Commissioner. Published by Wildwood House( Aldershot, Hampshire).

**These are firms that I spoke to at the time.

About me: I have 10 years experience analysing European Union policy. I hold a PhD in EU Communications Policy as well as a Post-graduate diploma in marketing. For many years I was a telecoms journalist where I interviewed people from  industry about the single market, and I've also worked in a service planning role in a telecoms industry start-up. More recently, I've worked with the Council of Europe on Internet governance issues, a role which involved travelling around the EU and neighbouring countries.  All of these roles have somehow contributed to this analysis of Brexit business models.

If you are interested in my work, please see my books advertised on this site, or contact me via Contact Us page or Twitter.

Photos: courtesy of European Commission. Brexit negotiations Autumn 2018, and the Schengen visa website.

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Iptegrity.com is the website of Dr Monica Horten. She is  a trainer & consultant on Internet governance policy, published author& Visiting Fellow at the London School of Economics & Political Science. She served as an independent expert on the Council of Europe Committee on  Internet freedom. She has worked on CoE, EU and UNDP funded projects in eastern Europe and beyond.  She was shortlisted for The Guardian Open Internet Poll 2012. Iptegrity  offers expert insights into Internet policy (and now Brexit). Iptegrity has a core readership in the Brussels policy community, and has been cited in the media. Please acknowledge Iptegrity when you cite or link.  For more, see IP politics with integrity

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