CEPR's Breinlich, Magli : Changes to firms’ service delivery post-Brexit

07 November 2024

This column analyses UK services trade following the Brexit referendum. UK firms circumvented expected future barriers by switching to modes less affected by Brexit, such as commercial presence sales. However, this came with lower UK employment growth...

Services can be supplied through cross-border trade, consumption abroad, commercial presence, and the presence of a natural person. The choice of delivery mode and the extent to which service traders can switch between modes (‘substitution elasticity’) can significantly affect how firms respond to trade barriers. This column analyses UK services trade following the Brexit referendum. UK firms circumvented expected future barriers by switching to modes less affected by Brexit, such as commercial presence sales. However, this came with lower UK employment growth as services exporters prioritised employment growth at their new foreign affiliates rather than at home.

Complexity of services trade and WTO modes

Unlike goods, services trade is more complex, as services can be supplied through four different modes as defined by the WTO: cross-border trade (Mode 1), consumption abroad (Mode 2), commercial presence (Mode 3), and the presence of a natural person (Mode 4). Firms face different challenges and opportunities depending on which mode they use. For instance, intellectual property services are primarily delivered cross-border, while health and education services often use all four modes (Figure 1)....

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