Say hello, wave goodbye – Brexit and the services sector

Jeremy Thomson-Cook
Jeremy Thomson-Cook 01 April 2021

Since the 1970s the UK economy has relied on the services sector more than the manufacturing sector. Some would argue that the UK is a service economy superpower and, as a result, the Brexit decision was even more strange given the lack of a service sector provision within the trade deal.

Also, for all the strength that the UK economy has been provided by the service sector, over half of the sector’s exports are made by foreign companies. 

The Brexit decision puts both this dominance and support at risk moving forward.

How do services function in such an environment?

When it comes to removing barriers to trade in services, there are no tariffs to remove. The rules governing services trade instead focus on:

Geography – a person or the software selling services needs to be in the same territory as the person buying the services.

Personnel and qualifications – are foreign providers are allowed to sell their services directly to a country’s consumers at all? Or are there any numeric restrictions on the quantity or value of a service sold by a foreign provider?

Incorporation – are there restrictions on foreign services suppliers opening local subsidiaries, branches or offices?

Access – are foreign nationals allowed to provide services in person on a temporary basis? Are qualifications or licenses granted by foreign bodies recognised or not?

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What mode are you?

How your service is provided determines the level of conditions your business now falls under and what access you will receive.

Mode 1

This is the most likely way that a small business will be servicing EU customers i.e. via the internet. Example: an architect’s firm sending drawings via email to a client.

Mode 2

This entails supplying an EU customer in the UK. Example: a tourist travelling to the UK and purchasing a service.

Mode 3

Far more integrated, this is when a service is supplied by a UK supplier, through commercial presence in the territory of another country. Example: A service provided in France by a locally-established branch, subsidiary or office of a UK-owned and controlled company.

Mode 4

A service is supplied by a UK supplier, through the presence of UK workers in the territory of any other country. Example: A UK national provides services in France as an independent supplier or as a temporary employee of a foreign services firm.

What does all this mean?

British businesses will now have a number of new considerations to make about how they operate and who they work with. For example, over time new restrictions on cross-border sales will lead to a shift in capital away from the UK. 

Furthermore, future investment in EU-focused activity that would have otherwise been captured by the UK will instead go to the EU. The largest impact however, will most likely be felt by the financial, insurance and pensions sectors. The legal, professional, accountancy and transport services sectors will have to adjust as well, but to a lesser extent. 

Britain’s decision to extricate itself from the EU’s regulatory regime jeopardises its position as a European hub. Unless the UK rapidly changes its mind about EU regulation and the free movement of people, there is little it can do to keep hold of activity that, under EU rules, must take place in the single market.

What can the government do?

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The UK simply does not have the ability to rest on its laurels as a service sector superpower.

We see 4 ways that businesses can lobby government in a bid to make the UK economy’s service sector offering stronger than it currently sits in this post Brexit landscape.

1. Political investment – Time has been spent on creating Brexit, now it has to be managed. In a broader context this means working with government to ensure longer-term investment opportunities and limit regulatory divergence.

2. Movement of labour – British employers are pulling from an emptier well given the lack of free movement of labour since Brexit. Were businesses able to reduce the registration costs of an EU worker or offset against taxes, this would improve output far more than the lost fee.

3. Use of data – Will Britain want to make sure that data is held in the UK and not transmitted to the EU and vice versa? Such a move would limit the investment opportunities in high-data environments like AI.

4. Access to regional markets – This will depend almost exclusively on the the ability for the UK to keep its regulatory mindset in line with the EU. Divergence will have a terrible impact on regulated and slightly regulated industries.

What’s going on with sterling?

Currencies don’t operate in a vacuum and there is always more than one thing affecting the price of sterling. Brexit is not even the most important influence at the moment with Covid-19, US politics, the prospects of increased global stimulus and negative interest rates all having an effect on the pound. 

Brexit – Brexit will have more effect on GBP if and when certain conditions are met. These will range from the small that snowball – decreased corporate profitability and wider corporate bankruptcies, to the major, such as the ongoing negotiation over the regulation and access of the UK’s financial services industry.

Bank of England policy – while the odds remain low of a change, markets are increasingly pricing a cut in interest rates to 0% or even into negative territory. Whilst not likely to drive sterling much lower in the short term, concerns will likely keep the pound from driving higher.

The budget – From an FX point of view, the budget delivered earlier this month was a clever one, delaying the end of the furlough scheme and focusing on investment and vaccine-led reopening.

What are options markets saying?

Options markets are used to hedge risk and the prices of certain contracts can be used to divine market demand to protect against certain moves in currency pairs.

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