23 July 2021

Servicing the Commonwealth: liberalising trade in the UK’s strongest sector

By J de Leyser & Mohammad Razzaque

While services constitute 65% of global GDP, trade in this sector has not yet received the attention it merits. As an English-speaking services superpower with excellent diplomatic links – particularly with the Commonwealth – the UK is in a strong position to help pioneer openness in this area.

Services trade is sometimes mistakenly viewed as exclusively the business of trade agreements between rich nations. But many developing countries do have offensive interests and capacity in services, and liberalisation could help the sector grow yet further. 

We believe that other Commonwealth countries are an exciting community with whom the UK can make liberalising advances in this area. The Government’s 2021 Integrated Review has already reiterated the importance of the Commonwealth in terms of foreign policy, but there is also a well known economic case. 

The so-called ‘Commonwealth effect’ is firmly rooted in historical linkages, a common language, and familiarity with institutional and legal systems that help reduce trade costs while expanding trade flows between countries. Academic studies routinely provide strong empirical evidence on the significance of these factors in boosting trade flows between countries. 

It has been found that—after controlling for all standard factors affecting international trade such as country size, income, distance between countries, etc.— when two countries are both Commonwealth members, their bilateral trade in goods and services is about 10% and 42% higher, respectively, and FDI is 10% higher. The latest Commonwealth Trade Review 2021 shows that bilateral trade costs are around 20% lower for Commonwealth partners than they are for other bilateral partners (i.e. Commonwealth and non-Commonwealth or both countries being non-Commonwealth).

The UK’s commitment to a proactive trade policy is reflected in various bilateral trade deals that are being negotiated or lined up for consideration. Services have already featured in these talks, but there is potential to go further. Notwithstanding the Department for International Trade’s immense recent workload, it is notable that the UK has yet to engage at any significant level in this area with the vast majority of Commonwealth countries.

How might this situation be remedied?

In any conversation on Commonwealth-wide trade preferences, India looms large. Bearing in mind the UK’s stated intention to negotiate a free trade agreement with India, the Government is likely to want to use UK market access in services as negotiating leverage. Such an approach is also likely to be applied with countries like Bangladesh and Pakistan, which are predominantly exporters of goods but badly require services sector development to promote the overall competitiveness of their economies.

In terms of covering all Commonwealth countries on progressive terms for services, we suggest that UK considers a two-pronged approach. Firstly, this should involve reciprocity-based negotiations in the context of existing and future free trade agreements (FTAs). Secondly, the UK should upgrade its LDC Services Waiver.

Much like in goods trade, the World Trade Organization (WTO) allows developed countries to unilaterally extend market access preferences to all so-called Least-developed Countries (LDCs). But as economist David Primack and others have noted, until now most preferences offered by developed countries under the LDC Services Waiver have been too shallow to be worth making use of.

The UK can set a global example by unilaterally granting more meaningful services access to LDCs. This could include limited opening of semi-skilled and unskilled labour services where there are shortages of service providers. As the UK is rolling out a points-based immigration system, priority could be given to applicants from LDCs and low-income developing countries.

The other step should be to introduce, or – where already in place – improve Services Chapters in UK FTAs. Most of the UK’s existing Economic Partnership Agreements (EPAs) with Commonwealth countries only include commitments to turning to services trade in the future. The UK-CARIFORUM EPA is an exception, but even in this case the services commitments could be much more ambitious, as has been explained in a recently published CAPP paper, to which the Initiative for Free Trade contributed. 

When we talk about increased market access in services, we are very often talking about Mode 4, which covers visas and work permits. Under the UK-CARIFORUM EPA, excessively stringent criteria are set for independent professionals and contractual service providers . In many sectors, these include that service providers must have a university degree and have been practising in their field for 3-6 years. We propose that qualifications, years of experience and vague criteria such as “exceptional in field” be waived. The sponsoring company should be regarded as suitably positioned to determine whether or not foreign providers are qualified to perform a stated service. 

One of the many positive elements of the UK-CARIFORUM EPA is its provisions on mutual recognition of professional qualifications. While this process often involves deferral to domestic professional bodies and regulators, FTAs can still set an important framework and impetus under which these bodies can seek agreement.

Finally, it is important to recognise that trade preferences aren’t the only way to promote services trade. Business-to-business contacts and making use of investment opportunities can generate new avenues for services trade. Just look at the collaboration between Vodafone in London and Safaricom in Kenya, which led to the revolutionary mobile money transfer service M-Pesa.

Despite expansions into certain African countries, in the emerging markets of Asia – including in large Commonwealth nations such as Bangladesh, India, and Pakistan – British firms have been reluctant to make their presence felt, while Chinese investments have gained prominence.

As a services-superpower, free to negotiate and navigate its own trade policy, the UK is well placed to advance open markets in services globally, boosting trade-led growth and wealth creation. And it should start with the Commonwealth. 

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Jonathan de Leyser is Director of the Initiative for Free Trade. Mohammad Razzaque is Director of the Policy Research Institute of Bangladesh.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.