CER:Keeping up appearances: What now for UK services trade?
22 February 2021
The UK is a services superpower. But foreign-owned businesses are responsible for 56 per cent of its annual services exports (excluding financial, insurance and transport services).
- However, the UK’s decision to leave the EU’s single market jeopardises its position as a hub for multinational services firms to sell to clients across Europe. Policy-makers in London should take steps to ensure that the slow trickle of business moving to the EU does not become a flood.
- A more mature political discussion about the opportunities available for Britain’s traded services sector is needed. Foreign regulators are reluctant to allow risky services activity to take place outside their jurisdiction, which means there are few opportunities for new cross-border sales. Removing barriers to trade in foreign markets will remain difficult, requiring long-term diplomatic efforts to build trust and understanding.
- Free trade agreements (FTAs) have only a small role to play. They are unlikely to provide new market access for UK services exporters – as evidenced by the UK’s recent deal with Japan, which did not unlock any additional Japanese services liberalisation over and above what Japan unilaterally already offers other countries. But trade agreements do prevent partners from rolling back existing levels of openness to British services firms. They can therefore help to ensure a stable policy environment for investors in both directions.
- The UK government should make a priority of creating and maintaining a stable and open policy environment so as to attract investment and people. The UK should avoid the temptation to make a show of diverging from inherited EU rules, so as to avoid further unnecessary regulatory instability. It should also re-engage with the EU on discussions about enhanced labour mobility, to ensure that services workers can move more easily between the UK and the Union.
- As well as doing its best to retain services access to EU markets, the UK should also prioritise scrapping (or drastically reducing) visa application fees for all foreign workers, embedding provisions on the free flow of data in both the UK’s bilateral and multilateral arrangements, and engaging in longer-term formal and informal regulatory dialogue with regulators and politicians to improve access in target markets.
Trade in services is not well understood. Unlike trade in goods, where buyers and sellers physically transport objects across borders, it is possible to sell a service to a client on the other side of the world, unbeknownst to anyone else, without ever leaving the comfort of your living room. The ‘product’ is often intangible – for example advice or analysis – and capturing accurate data on the true value of services being traded across borders has eluded statistical agencies. There are also classification problems: the profits repatriated from the foreign branch of a bank do not register in a country’s national accounts as a services export, yet they are at least in part the result of a foreign country allowing outside financial services providers to operate in their territory.
When it comes to removing barriers to trade in services, there are no tariffs to remove. The rules governing services trade instead focus on whether:
- a person or the software selling services needs to be in the same territory as the person buying the services;
- foreign providers are allowed to sell their services directly to a country’s consumers at all;
- there are restrictions on foreign services suppliers opening local subsidiaries, branches or offices;
- foreign nationals are allowed to provide services in person on a temporary basis;
- qualifications or licenses granted by foreign bodies are recognised or not; and
- there are any numeric restrictions on the quantity or value of a service sold by a foreign provider.
Incomplete data and outdated assumptions about how trade works in the modern world have led policy-makers to both overemphasise and misunderstand the trade policy instruments available to them. Data on cross-border flows in services is patchy and often tells us more about a country’s approach to taxation than its trade policy or the economic impact of trade agreements.1 It is better to think about services trade in terms of investment: where do companies locate the bulk of their operations with the accompanying jobs and value creation when selling into a particular market, and why?
For the past three decades, the UK has been a magnet for international banks and services firms seeking a foothold in the European market. Now that the UK has left the EU’s single market, regulated services providers will find it notably more difficult to sell directly into the EU from Britain. Over time, this friction will lead to capital, workers and output leaving, and investment that would have otherwise come to the UK going elsewhere. Outside the EU, there are few opportunities for UK services providers that have not yet been explored. And the preferred tool of policy-makers, FTAs, will only play a small part in the future international activity of British services firms. Regulators in most countries are reluctant to allow economic activity that they think may pose a systemic risk, like financial services, or a direct risk to consumers, like medical advice, to take place outside their jurisdiction.
The UK should concentrate its efforts on investment, both outwards and inwards, and on shoring up its position as an attractive location for services firms to base themselves. In practice this involves the UK:
- creating a stable policy environment, both unilaterally and via binding treaty commitments;
- retaining access to a large pool of skilled workers via liberalisation of its immigration regime;
- ensuring continued preferential access to the EU market, where possible;
- trying to reduce the risk of restrictions on the cross-border flow of data; and
- engaging in targeted regulatory diplomacy to unlock new opportunities for British companies abroad.
A services trade superpower
Globally, if a company wants to sell services in a foreign market, more often than not it does so from offices or subsidiaries (mode 3) located in the destination market.2 However, in this respect, the UK is an anomaly. It is the only G7 economy that sees more than 50 per cent of its services directly exported (mode 1) – for example a UK-based architect emailing paid-for designs to a Brazilian property developer – from UK soil to the rest of the world (see Chart 1). With the caveat that the data is far from precise, and inevitably fails to account for all transactions, these numbers show that the UK is a services trade superpower, and suggest that UK services firms are already making good use of existing opportunities to sell directly across borders....
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