Author: Sam Lowe
The fortune of the UK’s all-important services sector after Brexit is inextricably linked to how open the country is to foreign workers and consumers.
Services account for around 45 per cent of total UK exports in value terms, an unusually high proportion for a medium-sized economy. The EU is the UK’s most important market, receiving roughly 40 per cent of UK services exports (the US is second, on 22 per cent). Services trade volumes are still lower than goods in most advanced economies because there is often the need for face-to-face contact.
Only 21 per cent of all EU services sold to the rest of the world are provided remotely – for example, by a London-based architect e-mailing plans to a client in New York, or a Parisian banker executing a trade following a phone call from a client based in Singapore. The rest are provided either via a foreign commercial presence (an Irish law firm operating out of an office established in Australia), by EU nationals travelling abroad to sell their services directly (a Swedish sustainability consultant jetting into Nigeria to complete an environmental impact assessment), or by foreign consumers entering the EU and purchasing services on location (Chinese tourists visiting Disneyland Paris). In practice, all of these modes of supply are reliant on people being able to easily move around the world.
Unless the UK prioritises increased openness to migrants, foreign workers and students, its attempts to open up new services markets at home and abroad will falter.
Unless the UK prioritises increased openness to migrants, foreign workers and students, its attempts to open up new services markets at home and abroad will falter. This is true of both services trade with the EU and the rest of the world. If the UK is to prioritise services trade with the EU, the free movement of people will need to be put back on the negotiating table; if the UK is to become a global services trading hub, it will need to create an immigration regime which prioritises enticing people in over keeping them out.
Trade with the EU
The EU will probably continue to refuse to split the four freedoms – the free movement of goods, capital, services and labour – which means that the UK’s decision to end the free movement of labour will prevent its services exporters from having full access to the EU’s single market. While the EU might go slightly further than it has done in previous trade agreements – particularly on mutual recognition of professional qualifications and the right to set up subsidiaries in EU member-states – once outside of the single market, the EU will treat Britain’s services much the same as it does with all other countries.
Not all sectors will suffer equally, but most will take a hit. Financial services are the most exposed, followed by insurance and pension services, transport services and business services (see Table 1).