Services trade in the UK: what is at stake?

Services trade is often regarded as a niche or specialty but in fact it constitutes a sizable share of overall trade and is economically significant in many respects. Whilst the financial sector is arguably an area of specialisation in the UK, trade in business services is quantitatively even more important. Services trade covers more than the international exchange of digitised services, it also encompasses investment flows as well as the movement of consumers and service professionals. The UK runs a sizable trade surplus in cross-border services trade and is an attractive location for foreign investment. As a result of this revealed comparative advantage, the surplus from cross-border services trade partly offsets the trade deficit in the realm of merchandise goods. More than half of the value added of UK total exports in 2011 consisted of domestic services. Brexit negotiations should seek to preserve the conditions that currently sustain this favourable situation, particularly as services are becoming increasingly important for the performance of the UK’s manufacturing base and its trade competitiveness. The EU Single Market for services may be imperfect but it goes a long way towards facilitating the exchange of services amongst members. Thus, Brexit will almost surely be associated with a deterioration in market access conditions for UK providers; however, the extent of that change is difficult to gauge for two reasons. First, applied services trade policies in the areas of cross-border trade, investment, and movement of people are typically more liberal than what the WTO’s General Agreement on Trade in Services (GATS) commitments would prescribe. Second, unlike for goods trade, there is no uniform EU services trade regime for suppliers from outside the EU. Hence, upon leaving the EU access to EU markets for UK service providers is likely to deteriorate in a way that differs across EU member states, sectors, and modes of supply.