Post-Brexit UK should craft itself as a services trading hub

The writer chairs the London School of Economics economic diplomacy commission

After Brexit, the UK has an opportunity to refine its approach to trade and investment policy and its global role. It can become a trade hub for services, providing a bridge for other countries — particularly in a world where regional blocs are emerging due to stalled multilateral trade-liberalisation efforts.

If Britain positions itself in the centre of overlapping trade agreements, it can become the link between countries and blocs that do not have free trade agreements with each other — and benefit from the trade that flows.

In the 21st century, the UK should be centred on fast-growing services and digital trade. It is the world’s second-largest exporter of services after the US and has strengths in information and communications technology that enable trade in services as well as goods.

This underlines the importance of completing over the coming months the UK’s trade and co-operation agreement with the EU, which covers financial services and the UK’s data regime.

The services trade is not as open as that in goods under the World Trade Organization, and there is a lack of an effective multilateral framework. However, Israel has shown how a country can act as a bridge in such circumstances.

Until the late 1990s, Israel was one of the few countries that operated FTAs with both the EU and the US. Israel and the EU had had an FTA since 1975, and trade between them increased 29 per cent after Israel agreed an FTA with the US a decade later. So Israel benefited from trade passing through as it acted as a conduit between two economies without a mutual FTA.

Canada and Switzerland offer recent examples of trade hubs. Canada has an agreement with the US and a new FTA with the EU, while Switzerland has agreements with the EU and China.

The UK can also gain from serving as a conduit between major trade blocs. It has applied to join the 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership in which a number of countries — such as Australia, Brunei, Malaysia and New Zealand — do not have FTAs with the EU. The ones that do, benefit from linking two major trading blocs.

By focusing on services markets, the UK’s agenda would be pursuing liberalisation in line with its comparative advantage. This will not necessarily disadvantage its goods exports or manufacturing industry, which are already more open. Also, services liberalisation allows for the proper functioning of global value chains and boosts goods trade because of embedded services in manufacturing such as research and development, engineering and design.

The growing importance of services liberalisation has led to efforts to reduce global services trade barriers. The Trade in Services Agreement proposed between WTO members is the primary pluralistic initiative for services trade liberalisation. However, the effort has stalled.

Achieving multilateral services trade liberalisation is not easy. But the rapid growth of services and digital trade points to the need for a rules-based system that can further open up markets.

The stalled TiSA captures the dual role that the UK needs to play at the national and supranational level to capitalise on opportunities in a frayed international system. The country can lead a pluralistic and co-operative approach towards services trade liberalisation. There has been progress at the WTO on liberalising regimes, but more is needed — and those who help frame global rules have an advantage.

The UK has a chance to position itself as a hub for countries and blocs that lack FTAs with each other. The current patchwork of bilateral and regional trade agreements around services means Britain can negotiate market opening in services trade and sit at the nexus of trade deals. It won’t be easy. But it is a post-Brexit opportunity.