126.The ONS measures trade in telecommunication, computer and information services, which includes trade in “computer, news agency and other information provision related service transactions”, and telecommunications services including the “broadcast or transmission of sound, images, data or other information.” In 2015, the UK had a sizeable surplus in global trade in these digital services, importing £9.2 billion but exporting £15.8 billion. Such trade is also growing, now accounting for 7% of the UK’s global services exports.
127.Within this sector, the EU was the destination for 43% of exports and the source of 56% of imports. The UK had a digital services trade surplus with the EU of £1.6 billion in 2015 (see Figure 6). Imports in digital services from the EU have also been increasing as a proportion of total imports, from 47% in 2007 to 56% in 2015.
Source: Written evidence from the ONS ()
128.It is widely accepted that the figures provided by the ONS do not accurately represent the importance of digital services and businesses to the UK’s economy. Professor Sir Charles Bean’s review of UK economic statistics concluded that “if the digital economy was fully captured by official statistics, it could add between one third and two thirds of a percent to the growth rate of the UK economy”.
129.The limitations of the available data partly reflect difficulties in defining digital services and businesses. In a recent report, The UK Digital Sectors After Brexit, Frontier Economics defined ‘digital-producing’ sectors as those that produce digital goods and services. While this broad definition includes some manufactured goods, the report said that “81% of digital sector exports are primarily services”, including services key to the ONS’ definition, such as “software and services, internet, information and telecommunications services”. The report concluded that digital producing sectors of the UK’s economy contributed 5.3% to the UK’s Gross Value Added (GVA) in 2015, and had a collective turnover of £151 billion (4.8% of GDP). Their GVA also grew by a faster rate than the economy generally from 2009–2014, achieving a compounded average annual growth rate of 3.9%, compared to an average growth of GVA across the UK economy closer to 3.3%. The report estimated that at least 1 million UK jobs were dependent on digital producing sectors.
130.Digital services also provide opportunities for future innovation and growth in business and trade. techUK told us that the UK had “a rich ecosystem of established and emerging digital tech businesses”, and that digital services “created jobs at almost three times the rate of the rest of the economy in the first half of this decade”. They also said that the increased adoption and exploitation of digital services would be “critical over the coming decade”, to capture the “significant income and productivity gains that will result from accelerating the process of digitisation across the economy”. Summarising the reasons to support UK trade in digital services, Antony Walker, CEO of techUK, said: “The sector is big, and probably bigger than we think it is. It is about the future, because the technology sector is the agent of change in a modern, global, digital economy, and we are really good at this stuff.”
131.techUK warned the Government to “beware the siren call of an FTA”, noting that “the tech sector is predominantly a services-based sector and the increasing ‘servicetisation’ of goods renders an FTA largely ineffective”. Skyscanner believed that “an FTA would certainly be preferable to an absence of provision for free trade”, but noted that “the extent of its attractiveness [would be] subject to the nature of the deal that is negotiated”. Witnesses highlighted a number of issues that would be critical to the UK’s future trading relationship with the EU, which are outlined below.
132.techUK said the “UK suffers from a chronic digital skills shortage which is hampering the growth of the tech sector”, noting that “high-skilled vacancies in tech companies made up the largest proportion of the professional vacancy market”. Frontier Economics said that to address this skills gap, UK firms in the digital sector “have been increasingly looking to European talent to accommodate growth”. EU-born workers represent a relatively small proportion of employees in the digital sector, approximately 6% of the total. Nevertheless, Frontier Economics found that “the foreign-born workforce, in particular the EU-born workforce, disproportionately drove growth in the digital sectors over the last half decade”. While the proportion of EU-born workers only increased from 4% to 6% of the total workforce over this period, they made up 17% of total workforce growth from 2009 to 2015. It would be important to consider “where future growth [in the workforce] will come from” after Brexit.
133.Witnesses warned that greater restrictions on the movement of EU nationals would lead to businesses basing themselves outside the UK. Mr Walker said: “If you are a very small company that is growing very fast you will move your company to where the talent is.” COADEC agreed that there was “a real risk that UK digital start-ups may simply opt to relocate to Europe, thus depriving the UK of the benefit of their growth”.
134.Although there was widespread support for increasing digital skills in the UK’s domestic workforce, UK Interactive Entertainment (UKIE), techUK, COADEC, Skyscanner and Digital Catapult all stressed that this would be a long-term solution. UK Cloud wrote that “whilst many initiatives are underway to resolve the issue in the longer term, having free access to the much wider European talent pool is a pre-requisite for growth in the immediate term”.
135.Skyscanner also highlighted the importance of ensuring the seamless temporary movement of employees and service providers across the EU. They employed “more than 115 non-British EU citizens across our business”, and relied on the “free movement of persons to allow our employees to move backwards and forwards between our UK head-quarters and our European subsidiary entities in a smooth and efficient manner”. The loss of “the ability to move swiftly” would put them “at a heavy disadvantage to our competitors when recruiting from the competitive tech talent pool”.
136.techUK told us: “In this digital age data flows cannot be separated from trade flows.” According to Frontier Economics, “about half of all trade in services is digitally enabled”. While recognising the difficulty of measuring the extent of cross-border data flows, Frontier Economics estimated that in 2015 the UK accounted for 11.5% of global cross-border data flows—compared to 3.9% of global GDP and 0.9% of global population. Frontier Economics also said that “75% of UK cross-border data flows are with EU partner countries”. This includes flows for information, communications, search, audio and video transactions and intra-company and intra-machine data flows. More information about data regulation is provided in Box 7.
The Data Protection Directive 95/46/EC stipulates that the processing of personal data within the EU is subject to standards of transparency, ‘legitimate purpose’ and proportionality. Those who collect and process personal data (‘data controllers’) must protect it from misuse and must respect the rights of those who provide their personal data (‘data subjects’), for example by gaining their consent.
In 2016, a major overhaul of the Directive was agreed, and the General Data Protection Regulation 2016/679/EU (GDPR) will replace the Directive from 25 May 2018.Under the GDPR, EU citizens’ personal data may only be transferred to a third country if:
While the GDPR sets high standards for the transfer of personal data between EU Member States and third countries, it does not address the movement of non-personal data (for example data that is not about a specific individual), or restrictions on the movement of personal data for reasons other than the protection of personal data (for example under taxation or accounting laws). The most common restrictions are national data localisation laws, which require organisations to store certain types of data on servers based in a particular country. The Commission is currently consulting on possible changes to data localisation rules, in order to create a European data market.
137.techUK called on the Government to “place protecting international data flows right at the heart of its negotiating strategy”. The Information Commissioner’s Office emphasised that “having a new UK data protection law similar, and essentially equivalent, to the GDPR will be critical to maintaining trade arrangements with the EU”.
138.The Minister, Mr Hancock, told us that “we want to have a free flow of data with the rest of the EU”, and that “there is a great interest in the rest of the EU for having a free flow of data with the UK”. He supported the GDPR, saying that it “will come into force in the UK and [we] will put through domestic legislation to make that happen and make us compliant”. Although the UK would have the opportunity to amend data protection legislation in the longer term, he emphasised that “we would want to be very careful that anything we did to make compliance easier [for businesses] would also ensure that we could still carry on with the free flow of data to the EU”.
139.Others argued that the UK would need to do more than merely implement the GDPR to protect data flows post-Brexit—it would also need to secure an ‘adequacy decision’ from the Commission, which recognised that the UK had adequate data protection standards. Frontier Economics described securing an adequacy decision as necessary to ensure that UK law “satisfies recent EU court case law and matches the expectations of the Article 29 Working Group Party’s templates for adequacy decisions”. An adequacy decision from the Commission would be based on “a full review of the UK’s domestic data regime to determine how the UK’s data protection landscape matches the requirements of EU law”.
140.Mr Walker highlighted the legal challenge to the ‘Safe Harbour’ agreement (the previous basis for data flows between the US and the EU, which has now been replaced by the EU-US Privacy Shield), to illustrate the difficulties of securing an adequacy decision. This legal challenge followed revelations about how US security agencies processed the data of EU citizens. Although UK agencies were involved in this data processing, as an EU Member State the UK was not directly implicated in the legal proceedings because, as Mr Walker explained, “when you are a member of the European Union … the European Court of Justice has no jurisdiction over security matters”. He continued: “When you are outside the European Union, the European Court of Justice has to take account of the adequacy of any data protection requirements”. Mr Walker raised particular concern about the Investigatory Powers Act 2016, noting that “the UK could be open to challenge by European privacy campaigners and a case brought to the European Court of Justice … could have real implications”.
141.When asked about the Investigatory Powers Act, Mr Hancock replied: “We are very confident that the Act is consistent with both the GDPR and the fundamental rights of the EU.”
142.Mr Walker also drew our attention to the Commission’s consultation on data localisation rules (see Box 7). He warned that the initiative could “require certain data to be hosted within the European Union”, meaning “that certain services could not be made available to the rest of the European market from here in the UK”. The EU could thus use the measure to “attract digital businesses away from the UK and require them to locate elsewhere in the European Union”.
143.The Broadband Stakeholder Group emphasised that “the large majority of telecoms revenue” was derived from “wholesale fixed and mobile voice and data services”, which were “predominantly delivered at national level”. Nevertheless, telecoms operators were affected by Regulation 2015/2120/EC, which provides for the abolition of roaming charges from June 2017, for consumers using their mobile phones while travelling in the EU. More information on this Regulation can be found in Box 8.
Regulation 2015/2120/EU abolishes roaming charges by telecommunications operators within the EU. Since 2007 the EU has gradually reduced the charges EU mobile network operators (MNOs) can impose on subscribers for using telephone, SMS and data services in another Member State, and the Regulation, adopted in 2015 will abolish roaming charges across the EU by June 2017. The cost of roaming charges is derived from international agreements between MNOs located in different Member States on the wholesale prices for providing services to each other’s customers abroad. The abolition of roaming charges requires that the wholesale prices that networks charge each other be capped. The Commission has proposed to achieve this through secondary legislation to be enforced by National Regulatory Authorities, such as Ofcom in the UK.
The Regulation also specifies that retail charges for roaming services (which are added to the cost of wholesale roaming charges by MNOs as the final charge paid by the consumer) be eliminated.
144.Which? highlighted the potential re-introduction of roaming charges as one of its main concerns for consumers after Brexit: “As it stands, and from what the Commission has said previously, the EU’s Roaming Regulation is an internal market instrument.” Matthew Evans, CEO of the Broadband Stakeholder Group, raised a similar concern: “On the question of whether the UK would be able to participate in … the decrease in wholesale roaming caps, I would have to say that I suspect not.” Broadband Stakeholder Group told us that it was “unclear whether or how these measures would continue to be implemented post-Brexit”, arguing that one option would be “to negotiate with the EU a regional trade agreement to enable UK operators to obtain similar wholesale roaming rates to operators throughout the EU Member States”.
145.We asked whether EU MNOs would be obliged to offer their UK counterparts capped prices on wholesale roaming charges after Brexit. Mr Evans said this depended on “the willingness of EU operators to continue to keep their wholesale costs in line with ours”. He conceded that the asymmetry in travel volumes, whereby more UK consumers travel to the EU than EU citizens travel to the UK, as well as the fact the UK travellers “use more data generally” than EU visitors to the UK, could create an incentive for EU MNOs to increase the wholesale charges they applied to UK networks.
146.We also took evidence from MNOs. Sky told us that, if the UK no longer benefited from the cap on wholesale roaming charges, “it is unlikely that operators such as Sky could offer domestic tariffs when consumers are travelling abroad”. Sky urged the Government to ensure that as a “result of bilateral arrangements”, the UK remained party to the “EU regulatory regime for international roaming”.
147.Consultants Oxera agreed that the uncapped costs of wholesale roaming charges could be passed onto UK consumers. They also suggested that, outside of the EU Regulation, UK MNOs may also increase retail charges on top of wholesale roaming charges, in order to increase profits. Comparing the impact of the EU Regulation on costs for consumers in EEA countries and Switzerland (which effectively trades telecoms services on the basis of WTO rules), Oxera estimated that the revenue of UK MNOs could increase by between £250–750 million annually. They said that “around three-quarters of this gain would be due to retail price revenues, which derive from UK consumers, effectively constituting a “transfer [of wealth] from consumers to MNOs”. Oxera said this reflected the finding that “retail roaming prices are typically a large mark-up on the equivalent wholesale charge that underpins the service”.
148.The Minister, Mr Hancock, noted that “we are a much bigger market than Switzerland”, and argued that “we have a much better position in terms of size.” He confirmed the Government was “undoubtedly” in favour of the abolition of roaming charges (and had “argued for it”), and that this issue “[would] no doubt be part of our thinking as we go through the negotiation”.
149.techUK reminded us that there was “a huge body of European law that underpins the day-to-day operations of the technology sector”, the purpose of which was to “harmonise the single market and reduce non-tariff barriers for trade within the EU”. Skyscanner also told us that a “harmonised Single Market framework” had had “a significant positive impact”, by “increasing operating efficiencies and reducing unnecessary costs.”
150.UK Cloud agreed: “Whilst the charge of over-regulation is frequently levelled at the EU, a single set of compliance costs is preferable to multiple regulatory compliance costs.”
151.While witnesses were generally supportive of the Commission’s proposals to alter the shape of the Single Market for digital and telecommunications services under the Commission’s Digital Single Market Strategy (launched in May 2015) and the Connectivity Package (launched in September 2016), some were concerned that, post-Brexit, the Strategy could be used to introduce non-tariff barriers to UK businesses providing services in the EU.
152.The Digital Single Market Strategy includes 16 legislative and non-legislative initiatives to create a Single Market in digital services by harmonising, among other things, copyright, consumer protection and VAT laws (largely for digital goods and services). The Connectivity Package seeks to reform competition and consumer protection rules for telecommunications businesses.
153.While Digital Catapult felt the market liberalisation proposed in the Digital Single Market Strategy “would offer a disproportionate benefit to the UK”, Antony Walker was concerned that it could do the opposite: “As that body of legislation is developed and approved at a European level, opportunities could be taken to make that market less accessible to UK firms once the UK exits the European Union.” He concluded: “We need to be very careful that the DSM cannot be used against the interests of UK-based companies in the future.” Commenting on the Connectivity Package, Broadband Stakeholder Group said the Commission’s proposals included measures to boost “investment in connectivity” and tackle “regulatory fragmentation across the EU”, but added that it was “unclear how these changes in regulations might affect the UK telecoms sector and its ability to provide services across the EU post Brexit”.
154.Mr Hancock said that, “since the referendum, [the UK’s] impact on current EU debates is as significant as it ever was—read into that what you will”. The Government was “using the fact that we are members until we leave to contribute to and win those arguments” with other Member States. Asked whether the Government had considered ways to maintain this influence after Brexit, he said it was “far too early to say”, and that the answer depended on the wider question of “once we are in control of our own laws, how would we react to any given new European law?” The UK would be “free to choose either to move towards it, align with another part of the world or come up with our own solution”. He also noted that the UK had experience of working with regulators in other trading nations, such as the US, but that it was “too early to go into the details of what that structure would look like” for the UK and EU post-Brexit.
155.techUK described the move to trading in digital services under WTO rules as “a regulatory cliff edge”. Mr Walker said that it was “a highly unattractive option from the perspective of the full breadth of techUK members”. Jo Twist, CEO of UKIE, told us: “The WTO does not provide the free movement of labour, and it does not provide for the free movement of personal data between the UK and the EU”.
156.As an internet business, Skyscanner did “not envisage a move from the EU regime to WTO (GATS) terms as likely to have a significant detrimental impact of itself”, but was concerned that enforcement of the GATS schedules could be “extremely difficult, often political”. They noted that GATS terms “have been heavily criticised due to the apparent lack of transparency in relation to settling disputes or negotiating new trade relations”. They therefore argued that trading on WTO terms would be “a much less attractive option than a free trade agreement”.
157.UK Cloud were concerned that trading under WTO rules would affect future innovation in digital businesses: “Like most regulation, WTO terms pre-date digital and cloud.” While most WTO schedules were “not unreasonable (and in some aspects not dissimilar to the terms of being a member of the EU)”, it would be “a daunting prospect for many small businesses in the UK to get to grips with the terms as they apply to them”. They also noted that the “pace of regulatory change in the WTO is even slower than Brussels—hardly surprising given the scale and diversity of its members—which would exacerbate the usual scenario where technology outpaces regulation by an order of magnitude”.
158.Digital services are a growing and successful part of the UK economy. The UK leads the EU in the provision of digital services, and the EU is a critical export market. The rapid growth in digital services in the UK has been fuelled by input from non-UK migrants, in particular EU nationals, moving to the UK to fill high-skilled jobs. The likelihood of future growth and innovation in the sector means that digital services should play an important part in the forthcoming negotiations. The Government should aim to maintain the UK’s strengths in this area in a future UK-EU FTA.
159.Preserving the free flow of data across borders is seen by industry as critical to the future of UK digital services. An ‘adequacy decision’ by the European Commission, recognising that the UK had adequate data protection standards (as well as reciprocal arrangements), would be needed to preserve this flow of data. We note concerns that certain provisions of the Investigatory Powers Act 2016, relating to the collection and storage of personal data by security services, could stand in the way of the Commission granting such a decision. We also note the Court of Justice of the European Union’s (CJEU) decision to deem the EU-US Safe Harbour agreement invalid.
160.A key benefit for UK consumers provided by the EU is the forthcoming abolition of roaming charges. This will be put at risk by Brexit, unless specific provisions are included in a UK-EU FTA extending the cap on wholesale roaming charges to UK Mobile Network Operators (MNOs). We note that there are no such provisions in existing FTAs, and that the number of UK citizens travelling to other EU Member States may dis-incentivise EU-based MNOs to extend the cap to UK MNOs. Post-Brexit, the Government and regulators should also take steps to prevent UK MNOs increasing retail charges for roaming services for UK consumers.
161.The Government should seek mechanisms whereby it can continue to formally influence and engage with the Commission and the EU27 in the development of the Digital Single Market (DSM) after Brexit. The DSM is currently under review, and there is a risk that the EU may introduce provisions that could increase the non-tariff barriers faced by UK firms. This highlights the general need for any UK-EU FTA to include provisions on transposing relevant future changes in EU law into UK law, and for the UK to ensure that changes in domestic law do not jeopardise regulatory equivalence.
162.In the absence of a UK-EU FTA, we heard grave concerns from the digital services sector about trading under WTO rules, relating in particular to the state-led nature of the dispute resolution mechanism and the challenges fast-moving technology poses to a global membership organisation. Businesses would face huge difficulties in adapting to trade with the EU and the rest of the world under WTO rules.
163.We also note that, if the trading environment for UK-based digital businesses were to deteriorate significantly following Brexit, digital platforms and start-ups might choose to relocate or redirect parts of their activities to other EU countries.