Brexit has driven a trade divide across Britain – with goods
trade suffering while services trade continues to surge – and
this divide could widen in the event of a global tariff war,
according to major new Resolution Foundation research published
today (Wednesday).
Trading blows notes that post-Brexit trade has been
a tale of two sectors. Goods exports have performed poorly –
growing by 0.3 per cent a year since 2019, compared to an OECD
average of 4.2 per cent.
In contrast, and against many people's expectations, exports by
service sectors – which now account for the majority (54 per
cent) of all UK exports – have continued to grow (by 7.5 per cent
a year since 2019, compared to an OECD average of 6.1 per cent).
Some of the top performers have been insurance and pension
services, and ‘other business services' (including legal
services, R&D and management consulting). In these areas, the
UK has gained global market share over other OECD economies of
0.9 percentage points, while the market share of our French and
US competitors has declined by 0.1 and 1.3 percentage points
respectively.
The report identifies three key reasons for this diverging
performance between goods and services.
First, some service sectors where the UK has long enjoyed a
comparative advantage – such as insurance and ‘other business
services' – are less affected by the physical barriers created by
Brexit, such as the customs border, and are well positioned in
terms to take advantage of growing global trade.
Second, some firms selling services have found it easy to work
around the trade barriers created by Brexit. For example, UK
firms have capitalised on the pandemic trend of remote working to
increase the share of sales that are done remotely from 65 to 72
per cent between 2019 and 2022.
Third, some service-sector firms have got around the non-tariff
barriers imposed by Brexit by trading through subsidiary firms in
the EU. The report notes that this new strategy of selling
services sales via subsidiary firms has been particularly
important for firms in information, communication and technology,
and in manufacturing services.
The authors caution, however, that while the approach of using
overseas subsidiaries has helped to support trade among UK firms,
it is less likely to have created new employment opportunities in
the UK.
With the dust finally settling on Brexit, Trading
Blows also considers how the next big trade shock – the
threat of universal tariffs to US imports from President-Elect
Trump – might affect UK firms.
The impact on firms that export goods to the US could be stark,
say the authors, as 10-20 per cent generalised tariffs on goods
would be roughly equivalent in scale to the non-tariff barriers
that Brexit imposed on goods sales to the EU. And with US-set
tariffs and any retaliatory action set to focus on goods, the
UK's diverging performance on goods and services could widen over
the coming years.
However, while the threat of goods tariffs is coming from the US,
the report says the Government should be mindful of the fact that
47 per cent of all UK goods exports go the EU, and that close
relations with our nearest trading bloc should remain a priority.
This EU-focused approach to goods should be combined with a more
expansive strategy on services that leverages the UK's existing
strengths and seeks agreements across the EU, US and the rest of
the world. UK firms' success at exporting services to Singapore
and the US – which have each close to doubled in value since 2016
– and India – which has tripled since 2016 – shows that there is
more to services exports than just the EU.
The report says the Government should prioritise reducing
regulatory barriers for services exports while working hard to
keep open workarounds, such as trading remotely.
One key focus should be mutual recognition agreements of
professional qualifications. The authors note that host-country
requirements are currently limiting export growth in key UK
sectors like legal services (up by only 35 per cent between 2015
and 2022), compared to less-regulated sectors such as advertising
(up by 128 per cent).
Emily Fry, Senior Economist at the Resolution Foundation,
said:
“Brexit has driven a trade divide between Britain's struggling
goods sectors and its powerhouse services industries. Firms
working in areas like advertising, IT and consultancies have
found it easier to work around Brexit than goods exporters who
can't avoid transport costs and border checks.
“And with the dust still settling on how Brexit has changed how
firms trade, the threat of universal tariffs on goods by
President-elect Trump risks widening this trade divide further.
“The Government should respond by doing what it can to avoid
taking sides on tariffs, easing cross-channel trade for goods,
and taking a truly global approach to reducing barriers to the
flow of services trade in and out of Britain.”
