The UK is the world’s second biggest exporter of services, and as transition from the EU beckons, firms and policy makers are sizing up the opportunities.
At a webinar hosted by Devonshire House for BDO on Tuesday 8 July, Terry Scuoler CBE, chairman of the Institute of Export & International Trade, will join panellists to debate the new horizons for UK services overseas.
The webinar is free to attend for IOE&IT members by registering here and using the code: IOE872.
Ahead of the webinar, Scuoler gave a preview of his vision for exporting services to the Daily Update. That vision stems from a considerable career track record, both commercial and in the corridors of Westminster.
A quick glance at Scuoler’s CV and technology – on which huge UK export hopes are pinned – emerges as another strong theme.
An economist by training, he spent 14 years at BAE Systems plc, rising to senior executive roles. Moving to Ferranti Technologies in 1999, Scuoler returned the loss-making company to profitability before moving on to lead the Engineering Employers' Federation trade body, now Make UK.
As chairman of the IOE&IT since 2017, Scuoler has championed the role of exports as a driver of UK economic growth.
Q: Is there still a romantic vision of the UK as a manufacturing nation?
I think there is, to a large and important degree.
Economic recovery post-2010 was going to be down to a resurgence in manufacturing, linked to a strong export drive in manufactured goods.
In 2018, the government’s export strategy focused largely on manufactured goods in its aim of achieving total exports of 35% of GDP.
Since then, policy makers have also seen huge opportunities in developing our economy by expanding exports in services.
The rise in protectionism and in particular the political drive by some countries to ‘bring manufacturing home’ have led the UK to look at how best it can further develop its service sector.
Yes, I still very must want manufacturing to be a major factor in our export performance, but services represent a huge opportunity and should be strongly encouraged.
Q: Which services hold the most growth export potential for the UK, do you think?
They are all important. It does seem sensible, however, to prioritise those where we are a global leader and have a track record of success.
Looking at the latest DIT figures for 2019, we are very strong in transport, travel, telecoms and digital, use of intellectual property and of course financial services.
The latter, including insurance services, account for £80bn per year and generate a surplus of over £40bn.
However, let us encourage all service sectors, wherever possible, to export.
I remember having dinner one evening in Berlin, in the restaurant within the cupola at the top of the German Reichstag – and being proud to remind my hosts that it had been designed by a British architect [Lord Norman Foster].
Q: Which territories do you see as holding most growth opportunity for UK service exports? In 2018 only 1.5% of UK services exports were to China, the world's second biggest economy.
The global marketplace is just what is says on the tin and all potential overseas markets are important and should not be ignored.
We do, however, need to pay attention to the huge markets of China, the US and India where significant opportunities for further growth exist and in the case of India and China, as you say, from a low base.
Other early opportunities for growth include those countries which have shown a desire to have trade agreements with the UK. These include Switzerland, Canada, South Korea, Japan, Australia, New Zealand and other Commonwealth countries.
Another major opportunity will come from the rapidly growing economies of SE Asia and Africa. Some 90% of global growth in the next ten years will come from the developing world and we must seek to partner with these countries.
Let’s also not forget some of the smaller nations with which we have enjoyed long-standing and positive trading relationships, such as the Republic of Ireland and the Netherlands.
Q: Given how diverse services are – tourism, financial services, engineering, IT, retail – do they need stronger representation to boost awareness?
Government has got to take a lead here and that comes in various forms.
If you’re selling accountancy or financial services to China for example, with language, culture and legal systems very different to our own, then the route to market will be very different, compared with, say, dealing with Australia.
With Australia, we share a common set of accountancy and financial principles, laws, language and even a joint Head of State.
Support, therefore, needs to be targeted and tailored in line with specific market requirements, but it does need to be part of an overall strategy.
The recent government export strategy update targets 80% of our international trade in the next three years to be covered by Free Trade Agreements (FTAs). That is a very ambitious aim, to say the least.
Given that UK trade in services accounts for 47% of total exports (2018), the simple arithmetic suggests that to achieve this aim, we need to significantly embed services exports in many of these FTAs.
It is certainly a worthy aim, but history suggests even in the EU single market services are difficult to embed in such agreements and if achieved, difficult to enforce.
If we look at the current negotiations with the US, Canada, Japan, South Korea and Switzerland, I sense the priority will be on goods. However, I am pleased to see that financial services equivalence is being sought with Switzerland.
It will, of course, be easier with Australia and other Commonwealth countries for the reasons I’ve outlined.
Q: How concerned should we be about protectionism?
The rise of protectionism is certainly worrying. The OECD has estimated that the trade dispute between China and the US will reduce global trade this year by $700bn.
While extremely serious, this is dwarfed by the effect of the Coronavirus pandemic which the World Trade Organisation estimates will reduce trade flows in 2020 by $4 trillion – some 20% of the total.
Let’s hope we see a rapid pick up when we finally overcome this dreadful pandemic and again look forward to international trade increasing by the trend rate of 4% growth.
Q: What are the challenges to growing service exports?
There are sadly several challenges or barriers to service exports and many come under the banner of what we call ‘invisible barriers’.
Protectionism can come in the form of national accreditation for professional services, a reluctance to recognise other countries certifications, degrees or experience, trade union agreements and downright refusal to recognise overseas qualifications as valid – whatever their calibre.
Another issue, of course, is our exit from the EU which, in theory has an open market for services. While this has become an important services market for us, I don’t think even an ardent Remainer could claim the EU is an open market for services.
Whether we secure a meaningful trade agreement with the EU before the end of 2020, and whether it contains provisions for the trade in services or not, remains to be seen.
I’m reminded of the case, some years ago, of an expert British skier who spent years trying to become a ski instructor in a French mountain resort. The story of his repeated failure to do so could form the basis of a Monty Python sketch.
Q: The EU, which accounted for some 40% of UK services exports in 2018, remains the UK’s key market for service exports. How will our exit from the EU affect future demand for our exports, including services?
I have watched and, indeed, been a participant in this debate since the June 2016 referendum on leaving the EU. I am fearful of not securing a meaningful trade deal before the end of the year.
As I have stated earlier, the EU single market for services is far from perfect. Nonetheless the EU accounts for £300bn annually of our exports of goods and services and the absence of a trade agreement would make the process, both of exporting and importing, more complex.
It is hard not to envisage at least a short term downturn and disruption to trade while new norms and arrangements are put in place and become effective.
I do believe, however, that the EU is overly-bureaucratic, hide-bound by regulation and condemned to a long period of low growth. Whatever happens, the United Kingdom will in the long run succeed and prosper outside the EU.
Q: Do you see a time when total UK service exports eclipse the value of product exports?
Yes – but I say that without the benefit of any hard-core analysis to support my assertion.
As we are potentially about to enter a recession – hopefully a short-lived one – it is important we encourage and support all export opportunities, both manufacturing and services.
The link that exporting companies have to higher productivity, the ability to innovate and create jobs is well known. Together with the wider added value to our economy and national prestige, it surely demands that we, as a nation, give it our all in support.
IOE&IT members can register free of charge for the BDO webinar on 8 July, which runs from 2-3.30pm, by clicking here and using the code: IOE872.
