Understanding trade in services

Opinion piece (Encompass)
Sam Lowe
12 March 2021

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.

Yet a lack of understanding has not prevented UK politicians from talking up the possibilities an independent UK trade policy – free of the EU – offers its services firms.  But in practice trade agreements are not effective tools for unlocking services liberalisation.

Foreign politicians and regulators are risk averse, and usually 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’s recent deal with Japan, for example, did not unlock any additional Japanese services liberalisation over and above what Japan unilaterally already offers other countries. Rather, trade deals focus on preventing countries from rolling back existing levels of access, which can help to ensure a stable policy environment for investors in both directions. Still useful, but not quite as billed.

As I argue in my latest policy brief for the Centre for European Reform, a more mature political discussion about the opportunities available for Britain’s traded services sector is needed. And it must start with the acknowledgement that 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 must now focus on ensuring that the slow trickle of business moving to the EU does not become a flood.

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 means ignoring domestic political pressure to engage in divergence from inherited EU rules, unless there is an evidence-based rationale for doing so. Divergence could not only destabilise the UK’s trade relations with the EU unnecessarily, but also add further uncertainty for businesses that have already spent large amounts of money preparing for the changes that Brexit entailed, and managing the COVID-19 fallout.

For regulated services sectors, such as financial services, the UK’s exit from the single market involves an unavoidable loss of access. But for unregulated services professions, such as advertising or software development, where fewer barriers to selling to EU clients exist, the UK must ensure it remains attractive as a destination for European and international talent. This means liberalising the UK’s immigration rules.

The end of free movement of people has left the UK less open to foreign workers, even taking into account the relative liberalisation afforded to people from outside the EU under its new ‘points based’ immigration system. For British services firms, this means it will now be more difficult to attract and retain EU workers. Whereas before, EU/EEA nationals could just turn up and start working – either permanently or on a short-term basis – the prospective employer will now need to apply for a visa on their behalf, face bureaucratic hurdles and pay licence fees of up to £1,476 per worker. The person moving to the UK will also face expensive fees.

Here, as a precursor to further liberalisation of its immigration system, the UK should consider waiving all application fees to avoid deterring workers from the EU or elsewhere. Any loss in revenue would be easily offset by the higher economic output and taxes generated by the workers coming to the UK.

And despite advances in telecommunications technology and the possibility that COVID-19 will permanently alter working patterns, services still rely heavily on in-person, face-to-face interaction. Here the UK government should drop its ideological aversion to labour mobility in the context of FTAs, and negotiate broad temporary mobility arrangements with the EU, building on the EU’s past offer to the UK, which would have allowed UK and EU residents to engage in paid work in each other’s territory for 90 days out of every 180. The UK-EU labour mobility arrangement could then form the basis of an enhanced offer from the UK to other trade agreement partners such as New Zealand, Australia and India.

The UK is undoubtedly a services superpower. But no one should be complacent – in an era of hyper business mobility, things can change quickly and Britain’s politicians and policy makers will need to work hard to ensure the UK retains the position it currently holds.

Sam Lowe is a seior research fellow at the Centre for European Reform.