UK service exports: Barriers to staying in the Premier League
July 05, 2019
As the UK moves ever closer to Brexit, much attention has been paid to the implications for trade relations and cross-border tariffs.
The UK is a nation of exporters and the success of our economy is inherently dependent on our businesses’ ability to provide goods and services to customers all around the world. This trade is driven by the same two forces that drive all trade: consumer preferences and perceived value for money - after all costs are taken into account. To preserve our dominant trading position post-Brexit, we need to understand both who wants to buy our services, and how cost and hassle-free it will be for them to do so.
PwC recently hosted the heads of mission from six southern African countries to discuss trade and investment opportunities for UK companies in their host countries. Having recently returned to the UK after four years in Cape Town, I can attest to the British business presence and the strength of cultural and economic ties in the region.
And while the colonial past that forged some of these ties is not forgotten, it doesn’t seem to be suppressing African consumers’ appetite for British products. Some exports are particularly visible. The major sports network in South Africa, for example, has four TV channels almost entirely dedicated to the English Premier League.
The Premier League is a good example of Britain’s trade in services, a subject that was recently explored by PwC’s trade economics team using ‘gravity’ models (see full paper here or listen to the podcast). Because they usually have to be delivered in person, services like film and TV, but also engineering, finance, marketing and research – tend to be traded across borders less than goods. In 2017 they accounted for just a quarter of OECD exports.1 In the UK, though, this figure was 47% which was by far the highest for any major economy.2
Understanding why the UK’s service sector is so dominant internationally is a complex task that requires us to focus on everything from its colonial past and the City of London, to David Attenborough, the Loch Ness Monster and of course the Premier League. But just as important are the country’s courts, the time zone, deep supply chains and membership of free trade arrangements, most notably the EU.
Our overall trade balance with countries like South Africa is a reflection of how hundreds of these factors add up to affect a foreign buyer’s desire to purchase from the UK.
What the world needs now
To see what countries value British services the most, we can examine imports of British services as a percentage of GDP shown in the map below: land area is distorted so that bigger countries buy proportionally more services.
Map of the world with land area scaled to UK exports as a percentage of that country’s GDP, and colour used to emphasise actual distance (deeper red is closer). Source: PwC visualisation using ONS data
Although there is a clear tendency towards more trade with our bigger, closer European neighbours, Africa and the Middle East also stand out. Considering its distance, South Africa is notable, with service purchases of £2.2bn in 2018.3 These underlying preferences are important for our future trade: Africa contains six of the world’s ten fastest growing countries and will account for half of the world’s population growth by 2050.
However, what the map doesn't tell us is how much trade is driven by consumer preferences versus perceived value for money. In theory, value reflects a nation’s productivity, or ‘competitive advantage’ in a certain area. For example, the cost to produce a tonne of high-grade steel. But for foreign buyers, what matters is the price of steel delivered.
In the case of steel and other goods, this extra cost-of-trade is largely made up of transport costs and tariffs and, to a lesser extent, regulatory checks like customs. But for services the equation is reversed: as David Armstrong, PwC’s head of international development, points out here, services are subject to much more complex trade restrictions than goods. Understanding these NTBs is the key to understanding why Britain performs well now, and what it will take to do so in the future.
NTBs: Necessary to barter
NTBs for services include work visas, local ownership rules, professional licensing and data restrictions that can seriously restrict trade – and are often designed to do exactly that. Unlike tariffs and quotas, which can be expressed as a number - and therefore targeted - NTBs are diverse. They vary sector by sector and country by country. Most countries require local qualifications for law, medicine and accounting, for example. International video-streaming services must be locally approved. And many football leagues, including the English Premier League, require a minimum quota of national players.
Despite the current US-China trade conflict, average global tariffs on goods have been falling for decades,4 but NTBs remain high and most free trade areas, including the EU, have failed to fully integrate services.
It might be tempting to conclude that the UK would not lose much from leaving the single market for services, or that the current hodgepodge of local rules might provide opportunities for a savvy negotiator. There are several technical reasons why this is unlikely,5 but the simplest is that more than a third of UK service exports go to the EU, so even a small increase in friction would be costly.
The UK on its own would also struggle to make better deals with non-EU countries: most NTBs are still in place because they are red lines that nations will not cross. Health services want to have control over the level of training their doctors receive. English football fans want to see their domestic league help to develop their national team. Black South Africans, who were prevented from owning businesses under Apartheid, want to ensure that this is now redressed.
And this is not unique to South Africa; employment and ownership rules are the most common of all non-tariff barriers, particularly in developing markets where youth unemployment is often high. Trade negotiators will find that many NTBs are in fact red-line issues with unique stories of their own.
On the other hand, new technology means new rules: the Fourth Industrial Revolution could well shake up NTBs in the way it is reshaping so many other markets.
So far, the UK has managed to navigate the NTB minefield to become the world’s leading services exporter6 In order to keep its position as the top global service exporter once it leaves the EU, UK trade negotiators must understand which sectors to promote and which countries to target, and - crucially - they must also understand which NTBs might be renegotiable.
Doing so will require more research, particularly where trade data is poor, as it is in many African countries. The complexity of services trade means that economics may temporarily have to take a backseat to diplomacy, as understanding local laws, culture and preferences becomes a priority.
The UK can remain a leader in this area, but there are barriers to staying at the top of the league.
1 Services account for 27% of exports for the average OECD country according to: OECD, Trade in goods / Trade in Services (2017)
2 The US comes second at 35%
3 See our gravity paper for more detail on how distance affects trade in services
4 World Bank (2019) - Tariff rate, applied, weighted mean, all products (%)
5 UKTPO (2018) - The UK’s future services trade deals with non-EU countries: A reality check. Briefing Paper 24 –Minako Morita-Jaeger and L. Alan Winters http://blogs.sussex.ac.uk/uktpo/publications/the-uks-future-services-trade-deals-with-non-eu-countries-a-reality-check/
6 Proportionally – the US exports more in absolute terms