Immigration is key to UK’s services trade after Brexit

Despite its importance to the economy, the UK’s services sector has not attracted the attention it deserves in the Brexit debate. Services account for around 45 per cent of total UK exports in value terms, a high proportion for a medium-sized economy. The EU is the most important market, receiving about 40 per cent of UK services exports, with the US second on 22 per cent. But unless the UK prioritises increased openness to migrants, foreign workers and students, its attempts to open up new services markets at home and abroad after Brexit will falter. That means re-considering free movement of people from the EU, and creating an immigration regime which focuses on attracting people rather than keeping them out.

Services trade tends to require face-to-face contact, and that in turn relies on people being able to easily move around. Only about one fifth of all EU services sold to the rest of the world are provided remotely. The lion’s share are provided either via a foreign commercial presence (an Irish law firm operating out of an office in Australia), by EU nationals travelling abroad to sell their services directly (a Swedish sustainability consultant jetting into Nigeria to complete an environmental impact assessment), or by foreign consumers entering the EU and purchasing services on location (Chinese tourists visiting Disneyland Paris).

The UK’s determination to end the free movement of EU citizens after Brexit means its services exporters will in turn lose free access to the EU’s single market. If the UK is outside of the single market, the EU is likely to treat UK services much the same as it does those from other countries. The impacts will vary by sector, but most will take a hit.

The Brexiters’ ‘Global Britain’ mantra faces an uncomfortable truth: opening up new services markets is notoriously difficult. Sections on services in trade agreements tend to do little more than re-assert commitments already made under the WTO’s General Agreement on Trade in Services. There is only one example of major recent progress in this area: the EU’s developing single market in services. Worldwide, services exports are largely provided by setting up a presence in the target market, such as a branch or subsidiary. There are several reasons for this, from domestic regulators wanting to have jurisdiction and oversight, to the necessity of face-to-face interaction. Setting up in another country is much easier if the provider is able to move in some of its home-country staff.

While the UK is broadly open to foreign companies establishing offices in its territory, it is not as generous towards foreign workers. The top demand in future trade negotiations for countries such as India will be for the UK to grant more business visas for their citizens. It’s reasonable to expect reciprocity – the UK can’t expect its services workers to operate in a foreign country without offering similar conditions in return. But the UK is among the more restrictive EU member-states when it comes to so-called ‘mode 4’ provisions found in trade agreements – the temporary movement workers to provide a service. For example, in its trade agreement with Japan, the UK has lodged reservations, offering less, on paper, than the default EU position.

The government’s plans for the UK’s new immigration system leaves open the possibility of granting preferential access to workers as part of future trade agreements. But the details are lacking. It has shown signs of preferring a more broad-based approach which moves beyond a narrow focus on the temporary movement of workers in specific services sectors. Yet its positive policy moves are being undermined by the actions of the Home Office which seems determined to paint the UK in the worst light possible.

Hostility to immigration can also directly undermine services exports. The British education sector is one example. A foreign student attending a British fee-paying school or university is registered as a services export in the balance of payments statistics. The data value education exports at just over £12 billion in 2016. But a sharp reduction in the time that foreign graduates are allowed to stay in the UK to find a job from two years to four months, combined with reports of higher university fees for EU nationals after Brexit, risk curtailing the sector’s success. There are signs that the popularity of British institutions is faltering despite the weaker pound. Foreign students are a boon for UK universities, but because they are included in the UK’s net migration target it is in the government’s interest to limit their numbers. Jo Johnson, former minister for universities and science, has warned the UK will miss the target of £35 billion in education exports by 2030 unless there are significant shifts in immigration policy.

If the UK is to embrace a global role as a vocal advocate of services liberalisation, the government will need to decide which to prioritise: arbitrary political targets for reducing the number of foreign people who move to the UK to study and work; or the future success of one of Britain’s few economic bright spots: traded services.

Sam Lowe is a senior research fellow at the Centre for European Reform.