The authoritative source for independent research on UK-EU relations

17 Aug 2020

Economy

Relationship with the EU

professional services

The UK’s professional and business services (PBS) sectors are some of the country’s most vibrant and productive – and are vital contributors to the nation’s economy.

They are also competitive international traders, active in the global market and contributing hugely to the trade surplus in services that helps balance the UK’s large trade deficit in goods.

As the country struggles to recover from the sweeping impacts of Covid-19, this contribution is likely to become more critical than ever.

But while economies around the world have been hit hard by the pandemic, Britain now faces an added, and potentially hugely damaging, uncertainty – Brexit. And this could prove particularly devastating for the UK’s PBS sectors.

PBS – which includes legal, accounting, research and development, telecommunications and computer services (some of which the UK is a world leader in) – has flourished largely because it has enjoyed the benefits of trading within the European Economic Area (EEA).

Within the EEA, trade policy restrictions are limited and business operations can run smoothly between countries without layers of red tape.

But Brexit, and particularly an increasingly likely no-deal Brexit, could wall off this market and decimate the international trading capability of the UK’s service sector.

This is a vital issue for the UK, and one that, so far, has not been robustly debated. To address this, we have written a comprehensive report which highlights the key facts that have been missing from the discussion.

Economic contribution

PBS sectors boost the UK economy in terms of both value generation and employment, especially highly-skilled and well-paid jobs which are harder to automate, such as many of those in engineering, computer systems and legal services.

Between 1998 and 2017, for example, the PBS sectors made up 23% of all UK firms and accounted for 19% of UK jobs. These firms also generated 10% of the UK’s turnover and 18% of value added.

professional services

Exhibit 1: PBS: a significance contributor of the UK economy

Source: Authors complied the data based on the UK Office of National Statistics the Annual Respondents Database and Annual Business Surveys over the period of 1998-2017.

The PBS sectors are highly dynamic, containing firms – often small and medium-sized enterprises (SMEs) – that are limited in scale (92.5% have fewer than 250 employees) and relatively young, with an average age of nine to 10 years.

Together, these UK firms are also of huge strategic significance to the wider global economy and have a central position in global supply chains and the world’s professional, business and financial services networks.

Indeed, PBS firms help the UK to maintain the second largest global service market and ensure the country is the second biggest cross-border service provider, just behind the US.

This makes them critical to other industries, such as manufacturing, because they cross-supply key, high quality services: sales, legal, financial, IT and advanced engineering and management services. And by doing so, the UK’s PBS sectors help these other companies maintain their competitive edge.

But the distinct nature of services delivery also makes them vulnerable to restrictions on the free flow of people and information – restrictions that may very well become a damaging reality in the post-Brexit world.

Indeed, the potential damage caused to these services networks by post-Brexit restrictions can be corroborated through the Services Trade Restrictiveness Index, (STRI) shown below.

Historical records demonstrate that restrictions on the entry of foreign firms and the movement of people and barriers to competition remain the greatest threat.

professional services

Exhibit 2: Services Trade Restrictiveness Index, UK 2019

Source: OECD Services Trade Restrictiveness Index (STRI): United Kingdom2019

What restrictions?
Trade in services between countries within the EEA is substantially more open than trade with those from outside – and services trade policies for traders located within and outside of the EEA can be vastly different.

To assess these differences, we used the OECD’s STRI. This evidence-based tool collects information on services trade restrictions across 19 major services sectors – and regulations and laws from 45 countries (36 OECD members and nine partners) – into a services trade regulatory database.

What is clear from our research is that all UK PBS sectors benefit from being within the EEA, and that they would face substantial protectionist measures if trading with the EEA from the outside.

Exhibit 3: STRI vs EEA STRI: overall assessment, 2019

Source: OECD Services Database

Note: We compare STRI within EU and outside of EU. Kernel density plots approximate distributions of STRI indices. The vertical line in Panel A indicates average EEA STRI in 2019, which is 0.23 and standard deviation of 0.10. The vertical line in Panel B indicates average EEA STRI in 2019, which is 0.06 and standard deviation of 0.04.

Indeed, for some industries, it can be easier to trade freely between the many nations of the EEA than between states in the US, as highlighted by Mickaël Laurans from the Law Society of England and Wales in his 2019 testimony to the Parliament’s International Trade Committee.

In fact, it is harder for a New York lawyer to service a client in California than it is for an Estonian lawyer to work with a client in Portugal.

But this enormous benefit could end with Brexit. In the case of legal services, for example, Laurans warned that most Brexit outcomes will lead to legal professionals encountering 31 different regulatory regimes, some of which do not permit access to lawyers from another, non-EEA country at all.

In light of these worrying facts, the UK government must seek an EU-UK agreement to reduce – if not eliminate – the negative impact of restrictions on these key sectors in the UK. If the country is to navigate its way out of the pending economic recession and continued coronavirus uncertainty, it will need the PBS sectors more than ever.

The government can’t expect them to generate the income and jobs the country needs with one hand tied behind their metaphorical back in the form of excessive trade restrictions – restrictions that most EU competitors will not have to endure.

By Jun Du, professor of Economics, Mustapha Douch, research fellow, Uzoamaka Nduka, graduate research student, and Oleksandr Shepotylo, lecturer, all from Aston University. 

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