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Comment

Brexit threatens UK’s successful services exports

by Robert Pringle | 11.04.2016

Leaving the EU could imperil the UK’s highly successful exports of business, professional and allied services. These are among Britain’s most competitive sectors. They make a massive contribution to Britain’s ability to pay its way in the world.  Moreover, competitiveness in such services is likely to be as important in raising Britain’s productivity as gains to international trade in goods.

Think of civil engineering consultants, law firms, accounting and management consultancies. Look at the 150,000 small firms in the creative industries: in advertising and marketing, architecture, crafts, product, graphic and fashion design, film, TV, video, radio and photography, IT, software and computer services, publishing, museums, galleries and libraries, music, performing and visual arts.

UK exports of services (excluding banking, travel and transport) increased by an average annual rate of 9.6% between 2001 and 2013. Professional, scientific and technical activities are the largest contributor.

The UK has a demonstrated comparative advantage in these sectors. The surplus – UK net exports of these services after deducting imports – more than tripled between 2001 to 2014 from £18.8 billion to £65.2 billion Indeed, Britain runs surpluses in this group of services with virtually every country in the world; in 2014, India was the only significant exception.

As the surplus on these services represent more than two-thirds of UK’s surplus on its trade in all services these net exports have greatly helped lift the UK’s surplus on trade in services from about 2% of GDP in the 1990s to nearly 5%. They have offset part of the huge deficit on trade in goods and reduced our dependence on what Bank of England governor Mark Carney has called “the kindness of strangers”.

This is a stunning record. But it also makes the UK vulnerable to Brexit. The EU is by far the UK’s largest customer, taking more than one-third of these exports and accounting for 27% of the surplus.

David Cameron has secured a pledge from the EU to complete the single market in services. It would be ironic if the UK handed over this evolving  market, which it had a large role in creating, to its competitors.

Indeed, in some areas European competitors are already snapping at our heels. According to OECD statistics, in 2014 German exports of telecoms, computer and information services were ahead of the UK.

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True, EU reforms to facilitate cross-border trade in services are painfully slow. But, for example, there is mutual recognition of qualifications in some professions, such as nurses, midwives, doctors, dentists, pharmacists and architects. The EC is mandated to protect and further basic rights of critical importance to the UK such as cross-border trade and freedom of establishment.  The European Commission has a multitude of programmes to make these rights a reality. Inside the EU, with a voice in the reforms needed, UK services could in time enjoy access to an internal market as large as that of the United States.

Life after Brexit could be very different. It is no good Brexiteers repeating ad nauseam that the UK could trade freely with all partners. In services, what matters is the detail of regulation – for example, who recognises an architect’s qualifications.

It is also wishful thinking to believe that the UK could quickly make up for a loss of market share in Europe by expanding in emerging markets.

Most of those have a long way to go before they could match the EU.  UK exports of non-financial services to mainland China in 2014 were about the same as to Denmark.  And it would be much harder for the UK on its own to negotiate agreements on trade in services with the non-EU countries with which the EU has agreements than through the EU.

There are further downside risks. The UK could also lose access to the EU’s public procurement market. Inward foreign direct investment by professional services firms wanting to use the UK as an export base would probably fall.  UK firms might find it harder to recruit the skilled professionals who are the life-blood of services. At present, UK-based services firms recruit talented people from across the EU and young people flock to set up export businesses from the UK.  Immigration restrictions would threaten all that.

It is conceivable that a depreciated pound, eventual trade agreements with the US and EU and technological changes could soften the blow. But these are slim hopes to set against the very real risks of Brexit for Britain’s world-beating business and professional services. With Britain out, protectionist pressures in EU countries and in the UK would be likely to grow. It is easy to raise new barriers to trade in services – and the UK would suffer.

Robert Pringle is Chairman of Central Banking Publications and is writing a book on world trade in services.

Edited by Michael Prest