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Chapter 1: UK-EU trade in services

Our inquiry

1.On 24 December 2020, the UK and EU announced that they had reached an agreement on the future relationship. The EU-UK Trade and Cooperation Agreement (TCA) was published on the same day and came into force on 1 January 2021. The domestic legislation needed to give effect to the TCA was passed by the UK Parliament on 30 December 2020, prior to ratification, and it has also been provisionally applied in the EU.

2.In some ways, the TCA marked a conclusion to four and a half years of debate and discussion about what the UK’s future relationship with the EU will look like. For many services sectors, it set out how businesses should expect to trade with the EU, including provisions on mobility, the cross-border supply of services and rules of establishment, among others. But the TCA does not signify the end of negotiations between the UK and EU. The UK exports £317 billion worth of services and imports £217 billion from the EU.4 Both sides should seek to build on the TCA, to improve the relationship in areas where it is in their common interest.

3.In January 2021, the House of Lords EU Select Committee launched an inquiry into “the future of UK-EU relations: the institutional framework”. The four sub-committees launched inquiries analysing the TCA and its impact on areas related to their remits. This report considers the UK-EU future relationship on trade in services, particularly the impact of the TCA.

4.We heard from 17 witnesses in person and received 65 written submissions throughout January and February 2021. We have considered the crucial elements affecting trade in services between the UK and the EU. We make our recommendations just three months after the publication of the TCA and recognise that in some areas we can offer only a preliminary view, especially in light of the COVID-19 pandemic.

5.In this report, we take a sector-by-sector view to consider the impact of the TCA on trade in services. We look at financial services (Chapter 2), professional and business services (Chapter 3), data and digital trade (Chapter 4), the creative industries (Chapter 5) and research and education (Chapter 6).

6.Each of these sectors faces different opportunities and challenges from the future UK-EU relationship. There are some common themes, however, which are addressed in each chapter. These include the importance of mobility provisions, the role of data transfers, and the need for effective Government guidance and communications. We consider the areas where the TCA puts up new barriers, and how these may be overcome. We also look at the opportunities to forge a new kind of relationship with Europe. Throughout, we build on the work of past reports and letters from the European Union Committee and its sub-committees.

UK-EU trade in services

7.The services sector is at the heart of the UK economy, and the UK is a world leader in many services industries, which accounted for 80% of total UK economic output in 2019.5 Many of these industries are interconnected: for example, a flourishing financial services sector depends on the legal, audit and accountancy firms, and an innovative research environment depends on a thriving education sector.

8.The UK’s services industries are spread across the nations and regions of the UK, and many sectors consist mostly of small businesses. In 2020, there were 4.5 million UK businesses in the services sector, accounting for three quarters of all businesses in the UK.6 These businesses were responsible for 79% of UK employment and 71% of total turnover in 2019.7 The average number of employees for firms in the professional and business services sector is fewer than four.8

9.The UK punches well above its weight in many services sectors, including:

• Financial services: The financial services sector contributed £132 billion to the UK economy in 2019, amounting to 6.9% of total economic output.9 Exports of UK financial services were worth £60 billion in 2019, with a trade surplus of £41 billion.10
• Professional and business services: Professional and business services are the UK’s leading services export and the UK is second only to the US on the world stage for trade in this area.11 This sector provides specialised support to businesses and the public sector, including advertising, legal services, market research, accountancy, architecture, engineering, design, management consulting, and audit. They accounted for almost 12% (£224.8 billion) of the UK economy’s gross value added, 13% of the workforce (4.6 million jobs), and 23% of all registered businesses in 2019.12
• Music: The UK is one of only three net exporters of music globally13 and ranks third in the world for sales of recorded music (behind only the US and Japan).14 The sector contributes £5.8 billion to the UK economy annually,15 employs over 100,000 people,16 and the UK produced some of the highest-grossing global tours of 2019.17
• TV: The UK is the world’s second largest exporter of TV content, with exports of £1.5 billion in 2019/20; £490 million of these exports went to Europe.18 The UK is the largest international exporter of TV programme formats.19
• Research: the UK is the world’s third most prolific producer of research by volume, behind the US and China, but has ranked first internationally every year since 2007 for quality, as measured by field-weighted citation impact.20

10.Trade with the EU will continue to be an important part of the UK’s success in these industries. As Figure 1 shows, the UK’s top export globally is ‘other business services’, worth £98.8 billion, which includes professional, management consulting, technical and trade-related services and is more than the top three goods categories combined.21 Research by the Federation of Small Businesses has shown that the EU as a bloc is the largest trading partner for small firms, regardless of whether they trade in goods or services.22

Figure 1: UK top five global goods and services exports (£billions)

Source: Department for International Trade, UK Trade in Numbers, February 2020: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/868378/200227_UK_trade_in_Numbers_full_web_version_final.pdf [accessed 2 March 2021]

11.The TCA secures important trade liberalisation in some areas of service trade, such as digital services, mobility for some business travellers and intellectual property provisions. But this report also highlights many areas where both sides need to work together to overcome barriers. The EU is yet to grant the UK the bulk of the financial services equivalence decisions required to enable transactions to flow freely, and the two sides are yet to agree the future of regulatory cooperation. UK professionals may miss out if their qualifications are not recognised in the EU. The current rules on mobility for creative professionals would serve to stifle creative innovation in both the UK and EU. Without access to the Erasmus+ programme, the opportunities available to students and universities are restricted. All these mutual challenges, and many more besides, will require that that the UK and the EU continue to work together while recognising their new relationship.

12.We make this report for debate.