The service economy
It's not just the City
The European Union, taken as a whole, is the UK’s major trading partner. Well over 40 per cent of all UK exports—including both goods and services—go to other countries in the EU and considerably more than half of UK imports come from other countries in the EU. In short, UK trade is massively interdependent with EU trade and therefore the shape of any post-Brexit trade agreement matters a lot.
Services make up some 80 per cent of the UK economy. Not all of them are traded internationally but even domestically oriented sectors find themselves competing against foreign firms entering the UK market. Many, however, are outward-facing and have benefited from greater harmonisation of EU regulations and the opening up of markets.
Financial services for example, which contribute 8 per cent of total UK Gross Value Added, have seen substantial foreign direct investment largely due to “passporting,” whereby operating in the UK provides access to the rest of the EU. This has helped consolidate the City’s position as a global finance centre and a leader in euro-denominated transactions even though the UK remains outside the Eurozone. And, importantly, some 60 per cent of employment in the financial and related professional sectors is located in regions other than London.
Some 34 per cent of all UK financial services exports go to the EU and a large amount of attention has focused on the effect of Brexit on the financial and insurance sectors. Far less attention has been paid to the threat to non-financial services, even though their export value is twice as large as the total for financial and insurance services. They include: transport and travel; computer and information services; legal, accounting, management and public relations; architectural and engineering services; personal, cultural and recreational services; and export earnings from EU students, while government services alone represent a third of the exports grouped under the broad category of “other business services.” UK scientific research, in particular, has benefited from increased levels of funding from the EU: since 2007 Britain has won 22 per cent of the funds allocated by the European Research Council.
Services tend in general to be less export-oriented than manufacturing but their share of total UK trade is rising. A goods deficit of 6.9 per cent of GDP in fact contrasted with a services surplus of 4.7 per cent of GDP in 2015. Finance and insurance account for 25-30 per cent of total UK service exports and enjoy a trade surplus of some £20bn a year with the EU. Professional services firms have grown to be global players partly as a result of the financial sector’s success. Creative sectors have flourished on the back of openness and access to talent.
Additionally, the UK earns some £10-15bn a year from foreign students, many from the EU. And the weaker pound following the referendum will help those service sectors that are in direct international price competition. Indeed, some, like tourism and retail distribution, have already seen an improvement in their fortunes as the UK becomes a cheaper place to visit and buy products.
But even here there will be concerns about the sustainability of sub-sectors that depend heavily on workers from overseas. These range from the hospitality industry to the technology and digital sectors. Access to talent matters hugely. In this context the determination to suppress EU immigration which formed the centrepiece of Theresa May’s Conservative conference speech will not only hit the UK supply-side and constrain productivity growth, but will also make it less likely that the UK will be able to negotiate the same level of access to the vast EU consumer market that it now enjoys.
This matters because it is vital that these service industries are able to continue trading with the EU without having to face limits on market access and discrimination in favour of domestic suppliers. Non-tariff barriers of this sort were far too frequently overlooked in the Brexit discussions before the referendum.
Services are still a long way from being barrier-free in Europe. But the implementation of the EU services directive is being pursued and plans to ensure a proper single market in areas such as the digital sector, where the UK has an advantage, would add considerably to this country’s economic output if it were to stay inside the single market.
Services are a very large and important part of the UK economy and an area where the country generally excels. Limiting their ability to grow and restricting their competitiveness can only be bad for the UK’s future prosperity.
On the 17th of January 2017, Prospect hosted a roundtable discussion with the contributors to: Brexit Britain: the trade challenge. This report is designed to act as a guide for parliamentarians, officials and businesses with a stake in the UK’s changing relationship with the world following Brexit. The discussion was chaired by Tom Clark, Editor of Prospect. Participants included Tasmina Ahmed-Sheikh MP, Miriam González and Vicky Pryce.
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