In this blog, Hyunpyo Hong offers to navigate the future direction of the UK trade policy on services after Brexit and to provide insight into the EU-UK (trade) relations in 2031. This is because services were located at the centre of the discussions among negotiators and businesses and because the departure of the UK, a leader of EU internal and external trade in services, had reverberated throughout the political and social aspects of discussions beyond the boundaries of economic debates.
Written by Hyunpyo Hong, PhD Candidate at the School of Politics and International Relations, QMUL.
This blog is part of a policy report called "NEXTEUK – EU and UK Relations: Where will we be in 2031?".
The European Union (EU) and the United Kingdom (UK) reached a post-Brexit Trade Agreement on December 24, 2020, resulting from the EU Referendum in 2016 and following the Brexit transitional period in 2020. This historical bilateral trade deal inevitably adds a further dimension to the reestablishment of the existing trade relations between the EU and the UK, thus rebuilding both parties’ respective trading partnerships with the rest of the world. In terms of the industrial sector, services were located at the centre of the discussions among negotiators and businesses, considering their economic impact and importance for both sides. Moreover, the departure of the UK, a leader of EU internal and external trade in services, had reverberated throughout the political and social aspects of discussions beyond the boundaries of economic debates.
The main objective of this article is to navigate the future direction of the UK trade policy on services after Brexit, thereby providing insight into the EU-UK (trade) relations in 2031. First, the significance of services trade for the UK economy will be demonstrated through numerical figures. The list of the most profitable services in the UK trade balance will also be suggested to describe its service-oriented industrial structure. Second, the limited coverage on services, which is the vulnerable point of the current EU-UK post-Brexit deal, will be highlighted. Third, by focusing on Du and Shepotylo (2021), the article explains the overall impacts of Brexit on the UK trade in services thus far. Fourth, the reasons why we should keep paying attention to the future trends of the UK’s services trade and changes in the related policy settings will be elucidated.
In 2017, as the world’s largest services trader, the EU accounted for more than 25 per cent and 20 per cent of the global services exports and imports, respectively (Eurostat, 2019). In the same year, the EU external services trade accounted for nearly 30 per cent of the total value of trade in goods and services (Eurostat, 2019). Among the EU member states, the UK recorded the highest value of services exports with 185 billion euros, equivalent to one-fifth of total EU services exports to third countries (Eurostat, 2019). At the same time, the UK was the third biggest importer of services from non-EU trading partners, comprising 13 per cent of total EU services imports (Eurostat, 2019). These numerical figures explicitly demonstrate why the UK was referred to as a key player in the EU trade in services until its departure from the Union.
For the UK, the world’s second-largest services exporter by value following the US, services accounted for approximately 80 per cent of the UK economic output and half of all UK exports (Hill, 2021; UK Parliament, 2019; UK Parliament, 2021). The lion’s share of services in the British economy has been increasing over time and contributing to the balance of trade and payments by offsetting the trade deficit that generated in trade in goods (see Figure. 1). Looking into the UK trade balance, trade in services has outweighed that of goods since the late 1960s, and the imbalance between these two areas has gradually been expanding. The figures of 2016 suggest the UK trade deficit in trade in goods and surplus in trade in services of £135 billion and £92 billion, respectively (UK Parliament, 2017). Recently, it was confirmed that the UK’s goods trade deficit equivalent to £119 billion was partially offset by a services trade surplus equal to £107 billion in 2020, resulting in an overall trade deficit of £12 billion (the United Kingdom, Department for International Trade, 2021).
Figure.1 UK Trade Balance: Goods and Services (1948-2016)
Source: UK Parliament (2017)
The UK is viewed as a world leader in the global services trade, notably in business, financial, travel, transport, insurance and pension, telecommunication, and computer and information services. These services were included on the top-five UK services exports list between 2005 and 2019. Furthermore, during the same period, five services mentioned earlier (i.e., business, financial, travel, transport, telecommunication, and computer and information services) were also contained in the top-five UK services imports. Intellectual property was the only services area that appeared solely on the UK’s primary importing services list, not Britain’s critical services exports. One of the most interesting observations is that there were no changes in the rank of the UK’s most profitable service sectors (i.e., financial, other business, insurance and pension, telecommunication, computer and information, and intellectual property) during the fifteen consecutive years (partially described in Table. 1). Financial services, fundamental driving forces of the UK trade in services in terms of trade balance, marked a surplus of £23.7 billion in 2005 and reached £41.1billion in 2019.
Table.1 List of the Five Most Profitable Services in UK Trade Balance (2015-2019)
(£ billion)
1
2
3
4
5
2019
Financial services (41.1bn)
Other business services (36.7bn)
Insurance and pension services (17.4bn)
Telecommunication, computer and information services (10.3bn)
Intellectual property (4.1bn)
2018
Financial services (45.9bn)
Other business services (41.6bn)
Insurance and pension services (16.1bn)
Telecommunication, computer and information services (15.0bn)
Intellectual property (6.8bn)
2017
Financial services (45.3bn)
Other business services (36.1bn)
Insurance and pension services (15.8bn)
Telecommunication, computer and information services (13.0bn)
2016
Financial services (43.0bn)
Other business services (32.7bn)
Insurance and pension services (16.2bn)
Telecommunication, computer and information services (9.9bn)
Intellectual property (5.4bn)
2015
Financial services (39.7bn)
Other business services (29.4bn)
Insurance and pension services (13.2bn)
Telecommunication, computer and information services (8.7bn)
Intellectual property (5.1bn)
Note: * (Trade surplus), ** Author’s own calculation based on primary data source
Source: Office for National Statistics (2020)
As demonstrated above, the surplus in financial services, the most profitable area of UK services trade, has grown around 73.5 per cent between 2005 and 2019. Nonetheless, the post-Brexit EU-UK trade agreement incorporates minimal provisions on financial and professional services (Noonan and Foster, 2021). The services sector was rarely a priority throughout the negotiation process of the UK’s withdrawal from the EU, considering the importance of the services to the British economy (Hill, 2021). Sally Jones, a leading UK trade policy expert, added, “The extent to which the UK government prepared UK businesses for the change was inadequate, and that is particularly true of services businesses.” (Hill, 2021). It is hard to suggest a logical explanation of the negotiator’s lack of attention to services, which account for roughly half of total UK exports (Hill, 2021). There was an expectation that both sides would arrive at some agreement regarding trade in services. This also explains why businesses and media were embarrassed when the final terms of the EU-UK Brexit Agreement were released with minimal coverage on services.
At the time of writing, it has been eight months since Britain’s departure from the EU took full effect as 2021 began, and it might be premature to discuss the effects of Brexit, particularly on trade in services. Despite the significance of services to the UK economy, however, there is not much literature that assesses the impact of Brexit on the UK’s services trade. A recent research report written by two experts, Dr. Jun Du and Dr. Oleksandr Shepotylo at Aston University, found that the UK’s trade in services has declined after the 2016 EU referendum. Their empirical analyses based upon the synthetic control method estimated a 9.2 per cent or £28.3 billion annual declines between 2016 and 2019 on average, equivalent to £113.1 billion in total, based on the annual average exchange rate (Du and Shepotylo, 2021). This negative impact prevailed across the service sectors but was particularly noticeable in the financial, travel and transport, telecommunication, and computer and information services (Du and Shepotylo, 2021). In contrast, the authors did not find statistically significant adverse effects of Brexit on business and intellectual property-related services (Du and Shepotylo, 2021). The results demonstrate that Brexit influenced the UK services trade, even before it entirely left the EU after completing the transition period in 2020.
The reasons why we should keep looking into the future trends of the UK’s services trade and changes in the related policy settings can be summarised in three different but interrelated aspects. First, as we discussed above, there is a considerable contribution of services in maintaining the UK economic outputs. Second, the UK’s competitive advantage in services has enabled maintaining a trade surplus in services and balancing its chronic deficit in goods. Third, services contribute to the UK’s job creation, notably in the knowledge-intensive service industries that generate high-income services (Du and Shepotylo, 2021; UK Parliament, 2021). Given the limited coverage of services in the existing EU-UK post-Brexit agreement, trade barriers in services between the two parties might weaken Britain’s global competitiveness and reputation, notably in financial and business services. More importantly, trade in services entails politically sensitive elements such as foreign investment and movement of people that hinders the achievement of service liberalisation through trade agreements (Du and Shepotylo, 2021; Sauvé and Roy, 2016).
All things considered, the UK should diversify its trading partners with large and fast-growing services markets in Asia, including China and India, beyond Europe while maintaining close and mature economic ties with its traditional counterparts in the region such as Japan, Singapore, and South Korea. As the world’s leading services trader, the US has broader access in all continents, ranging from advanced economies to emerging markets. Since the early 2000s, in particular, the US has been expanding the destination of its service exports through the conclusion of various formats of trading partnerships with Asian countries. Moreover, the EU’s economic scale, six-times larger than that of the UK, allows more bargaining power and, consequently, better trade deals with third countries (Du and Shepotylo, 2021; Morita-Jaeger and Winters, 2018). For the UK, strengthening cooperation simultaneously with the US, the EU, and Japan, which are the traditional alliances and competitors, would help remove barriers in services liberalisation by improving negotiation leverage and ultimately sustain the competitiveness of the services in the post-Brexit era.
For the next decade, both the EU and the UK will face multidimensional economic, political, and social challenges to get their relations back on track, as either partner or competitor. Regarding the EU-UK bilateral trade relations, which is the main topic of this discussion, the two parties are already experiencing many unpredicted problems derived from the Brexit trade deal, directly and indirectly. Thus, the EU and the UK are likely to find resolutions from in and out of the European continent to address the situation adequately. The sophistication of the commitments in the existing post-Brexit trade agreement through additional negotiations and the expansion of the new (Asian) markets may be in the context of these efforts. Due to the ongoing pandemic and more frequent political conflict on the global stage, the progress may be rather sluggish, but overall, the aspiration to further trade liberalisation between both sides, the EU and the UK, will continue in the future.
References
Du, J. and Shepotylo, O. (2021) Feeding the Celtic Tiger – Brexit, Ireland and Services Trade. [Online] Available at: https://www.lbpresearch.ac.uk/wp-content/uploads/2021/05/Feeding-the-Celtic-Tiger-–-Brexit-Ireland-and-Services-Trade.pdf (Accessed: 22 August 2021).
Eurostat (2019) World Trade in Services. [Online] Available at: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=World_trade_in_services&oldid=452146 (Accessed: 22 August 2021).
Hill, A. (2021) ‘UK’s services sector starts to count the real cost of Brexit’, Financial Times, 10 May [Online] Available at: https://www.ft.com/content/d0c10195-0e2e-4913-af74-3b7057163e3f (Accessed: 22 August 2021).
Morita-Jaeger, M. and Winters, L. A. (2018) The UK’s Future Services Trade Deals with Non-EU Countries: A Reality Check [Online]. Available at: https://blogs.sussex.ac.uk/uktpo/files/2018/11 /BP24-print-interactive.pdf (Accessed: 22 August 2021).
Noonan, L. and Foster, P. (2021) ‘Brexit shrank UK services exports by £110 bn, academics find’, Financial Times, 31 May [Online] Available at: https://www.ft.com/content/20a626ab-d221-43e6-9990-bfd1e1ff132d (Accessed: 22 August 2021).
Office for National Statistics (2020) UK Balance of Payments: Trade in Services Dataset, The Pink Book: 2020 [Online] Available at: https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/datasets/3tradeinservicesthepinkbook2016 (Accessed: 22 August 2021).
Sauvé, P. and Roy, M. (ed.) (2016) Research Handbook on Trade in Services. Cheltenham: Edward Elgar.
UK Parliament (2017) UK trade: A deficit in goods but a surplus in services. [Online] Available at: https://commonslibrary.parliament.uk/uk-trade-a-deficit-in-goods-but-a-surplus-in-services/ (Accessed: 22 August 2021).
UK Parliament (2019) Trade in Services and Brexit. [Online] Available at: https://commonslibrary.parliament.uk/research-briefings/cbp-8586/ (Accessed: 22 August 2021).
UK Parliament (2021) Service industries: Key Economic Indicators. [Online] Available at: https://commonslibrary.parliament.uk/research-briefings/sn02786/ (Accessed: 22 August 2021).
United Kingdom. Department for International Trade (2021) UK Trade in Numbers. [Online] Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/964119/210225_Pocketbook_UK_Trade_in_Numbers_2021_Web_Accessible.pdf (Accessed: 22 August 2021).
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