Leaving the EU is likely to change how UK service businesses like law firms, banks, architects, insurers and tour operators trade with the EU. Given how important services are for the UK economy, trade in services deserves as much attention as trade in goods.

This Insight looks at what might change if the UK leaves without a deal. It also shows how Office for National Statistics (ONS) experimental statistics helps unravel the complexity of services trade with the EU and other countries.

Why should we care about services?

In 2018, services made up around 80% of the UK economy, 46% of UK exports and 28% of imports. This is high by international comparison. Business services – including accounting, engineering and legal – together with financial services account for about a half of UK services exports. But services are sold across country borders in many other sectors.

The US is the UK’s largest single trading partner. However, the EU absorbs the largest share of UK exports, and is the main source of imports if taken as a bloc. Leaving the EU will inevitably change how UK and EU service businesses trade with each other.

What impact might a no-deal Brexit have?

End of mutual recognition

If the UK leaves without a transition period, one thing is clear: mutual recognition of regulatory regimes will end. Mutual recognition of regulatory regimes means that while the UK is a Member State, a business which follows UK rules and standards is automatically compliant across the EU. Similarly, a business based in Finland can sell services in the UK.

Qualifications of individual professionals like nurses, vets or engineers are now generally recognised across the EU but may not be after a no-deal Brexit. UK data protection rules would lose recognition. That is a challenge to a large proportion of services which rely on the free flow of personal data.

A new set of rules

The EU has two sets of rules for services trade: EU businesses have the fundamental freedom to provide services and establish a business in any Member State. Non-EU businesses largely must comply with the national rules of each Member State; a few common EU rules and protections apply.

From exit day, if there is no deal, each Member State would treat a UK company as a third country business. They would trade under World Trade Organization (WTO) rules. These commitments are less liberal than the terms of the EU single market.

Other barriers to trade

Goods may face EU tariffs and checks at borders when entering the single market. In the case of services it is generally national regulations behind borders that hinder trade. The red tape, or the so-called barriers to trade, determine who can enter a foreign market and how they are treated. This complicates trade in services, and negotiations about it.

In practice in a no-deal Brexit UK citizens who wish to set up a business in an EU Member State may face new restrictions. These might include limits on foreign ownership of companies or residency requirements to company managers. As rules vary per country and per sector, the consequences for UK exporters will vary too. Preparing for a no-deal Brexit, the Government is advising UK service businesses to find out which rules will apply to them in each EU country they work.

How can we unravel the complexity of services trade?

Trade in services is complex. It’s helpful to look at the way services are traded relative to the border. The WTO distinguishes four different modes of supply: cross-border supply, consumption abroad, commercial presence and migration of natural persons (people) to supply services. WTO members commit to opening their markets across the four modes of supply. The modes also feature in free trade agreements between countries and are instrumental in trade negotiations.

WTO four modes of supply of services
Mode 1: Cross border supplyExamples
The service crosses the border, but neither consumer nor supplier does so. A service is provided over the phone, internet, post or other channels.Consultancy or market research, distance training, call centre services
Mode 2: Consumption abroadExamples
The consumer consumes the service while abroadA tourist or patient receives a service abroad, a ship is serviced in a foreign port
Mode 3: Commercial presenceExamples
Foreign investment – a company establishes itself in another country and supplies services from there A bank, hotel chain, construction company establishes a branch or subsidiary abroad
Mode 4: Service provider crosses the borderExamples
This involves migration and presence of natural persons in the country of supplyAn independent consultant or actor goes to another country to work on a project; a law firm or retail company sends employees to work at a foreign branch

Source: WTO GATS Training module 1.3

Barriers to trade vary among modes. For example, licensing and recognition of diplomas matter for professionals who want to practice in another country (mode 4). Certification or restrictions on foreign ownership may deter businesses from opening offices abroad (mode 3). But such divisions are by no means exclusive. A country’s rules on migration and business travel (mode 4) can for instance influence a foreign firm’s decision to establish a branch there (mode 3).

Experimental data

This summer, the ONS published experimental estimates of UK trade by modes of supply in 2018. This new data gives us a better understanding of the barriers UK services trade might face. It also helps inform UK trade policy, for example, by showing how much of UK trade in services involves migration. Approximately two-thirds of UK services exports, and half of UK services imports, were traded remotely in 2018 (mode 1).

Dominance of modes varies per sector. UK financial services had the largest proportion of remotely supplied exports (mode 1) at 89%. UK exports in construction and personal, cultural and recreational services are dominated by services providers crossing the border (mode 4).

What about commercial presence?

It should be noted that the data does not include UK trade through commercial presence (mode 3), nor is it included in export statistics. Commercial presence appears partly in data on foreign direct investment. Overall though, it is the dominant mode of service trade, estimated to account for between 50% and 60% of world service exports (at p.61). The ONS plans to include it in future estimates of UK services trade.

Many firms currently sell their services to EU countries directly from their UK offices or by sending their professionals to provide services on the spot. Several economists and trade researchers have argued that the increased costs of such remote trade from outside the EU may encourage these firms to establish a commercial presence by setting up offices in the EU instead.

Further reading

About the authors: Ilze Jozepa is a Senior Researcher and Matthew Ward is a Researcher at the House of Commons Library. Both specialise in trade.