Will Brexit boost British services trade? Don’t count on it

It is widely accepted in the Brexit debate that the UK’s ability to set our own trade policy after departure means that we can focus particularly on services, where we have significant strengths. Accounting for 80 per cent of the UK’s GDP and four in five jobs across the country, the UK is also the world’s second largest exporter of services, though these only represent 45 per cent of our total exports. Surely then, the argument goes, once we no longer have to worry about EU concerns in trade agreements we can ensure they focus on growing our services exports further. An alternate variant is that if we stay in a customs union with the EU, limiting our freedom to sign deals on goods, we’ll still be able to sign agreements focused on services.

Both true to a degree, but ignoring one fundamental problem. Barriers to trade in services are numerous and typically arise from domestic regulation on other countries. Free Trade Agreements agreed around the world manage only to reduce some of these, with limited economic gains.

Given this precedent, expecting our first wave of trade deals to deliver game-changing benefits is optimistic to say the least. Let’s though look at what’s possible in the countries the UK has identified as priorities for new FTAs: Australia, New Zealand and the United States, as well as some other opportunities elsewhere.

First, a quick reminder on definitions. The World Trade Organisation defines four modes of international services supply relating to the consumer and producer. These are cross-border supply where both stay in their own territory; consumption abroad, where the consumer travels; commercial presence, where a business is set up in another territory; and presence of a natural person, the most controversial known as Mode 4, where an individual supplies a service in another territory. The OECD takes a different approach in its Services Trade Restrictiveness Index, where it defines 22 sub-sectors of services such as computer services, air services, and insurance. In both cases however we can then define the barriers which may include restrictions on foreign entry, unclear regulation, and specific discrimination against foreign service suppliers.

So what do we know about the level of barriers in Australia, New Zealand and the US? According to the OECD Australia and New Zealand have few barriers in place to foreign supply of services, andthe most significant do not come in the sectors in which the UK is particularly strong. In Australia air transport and courier services are areas with relatively high barriers, in New Zealand air transport and cargo handling. In other sectors such as legal services there are particular requirements for foreign companies to operate, but these aren’t significantly onerous.

However, the US is obviously a far bigger market, already the largest destination for UK services. Here there are areas of interest to the UK with significant barriers, notably in insurance where there are requirements at state level, and generally in public procurement where Buy America rules frequently apply, for example to major engineering projects procured by states with federal money. Unfortunately for the UK there is little prospect of significant change in either area, as US trade deals rarely touch on state-level issues.

In summary the UK’s initial trade agreements stand to deliver little in terms of services gains. Then again it is already well documented that there is no apparent supporting logic to the choice of these three countries. Other countries could provide greater opportunities for the UK. Turkey would perhaps provide one example, as it currently has significant barriers in some strong areas for the UK like accounting and legal services. Another example is China, with numerous restrictions on foreign investment, but which reduced some of its barriers in an FTA with Australia, for example in legal services, telecoms, and healthcare services.

Of course our ability to reduce others' barriers in trade agreements does depend on our own ability to have something to offer in return. However in services we have relatively few barriers, with the exception of the previously mentioned Mode 4, where greater access to the UK labour market is of considerable interest to other countries. So a services only agreement could be problematic unless we were prepared to be more open to labour from other countries.

We also need to remember that there will potentially be new barriers arising to services trade with EU countries. These will be subject to the negotiations on the future economic relationship, but the impact could be significant economically.

Trade agreements are not the only way to tackle trade barriers in services, especially given that they primarily relate to domestic regulations. Mutual recognition, for example of professional qualifications, can help. Arrangements to enable data flows are essential for all modern services economies. UK diplomatic posts overseas can work with host governments to tackle specific barriers affecting UK companies. All of this requires a detailed understanding of services barriers, and how these affect UK companies. Perhaps the most significant step the UK government could take now would be to encourage services sector businesses to identify their priority areas and countries, so that we are ready with all the information we need from 2019.

There is one further step that could be taken to encourage services exports, which is to encourage more visitors to the UK, particularly for study. Unfortunately as with Mode 4 this is something the government has recently been discouraging, at a cost to the UK economy.

So services may be the focus of UK trade policy from March 2019, but it won’t be an economic game changer. As shown by the UK’s own experience, countries are frequently reluctant to make changes to their services rules, even when it might be in the interests of trade.