Professor John R. Bryson, Birmingham Business School, University of Birmingham – Written evidence (FTS0024)

Professor John R. Bryson, FAcSS, holds the Chair in Enterprise and Economic Geography, University of Birmingham. In 1990 he undertook the first ESRC funded UK project on business and professional services (BPS)[1] and in 2002 the first detailed study of BPS in the West Midlands. This on-going research agenda includes the publication of a book on service trade, three research monographs on business and professional services[2] and a book published in December 2020 on the practice of Service Management (2020)[3] that also explores service internationalisation. He advised the European Commission on the development of the Services Directive and the single market in services. In 2013-14 he was responsible for drafting the European Commission's report on services, internationalisation, and trade. 

The reason for submitting evidence is to ensure that the Committee has the opportunity to draw upon academic research undertaken in the UK on service businesses. 

1. What is the impact of the UK-EU free trade agreement on trade in services?

It is perhaps too early to make a formal objective assessment of these impacts. Nevertheless, it is worth noting that free trade deals intended to cover services are difficult to negotiate and implement. A key policy challenge is that “identifying and measuring service transactions is extremely challenging . . . for governments it has become difficult to identify the relationship between the location of a transaction and where and how this should be taxed”[4] and regulated. This difficulty will have been further complicated by the rapid adoption and development of online approaches to service delivery as one response by service businesses to COVID-19.

There are four points to consider.

First, the EU internal market for services is still under development. Significant non-tariff barriers (NTBs) exist that continue to restrict trade between EU member states. These non-tariff barriers include laws, practices, and technical regulations that have been developed by individual Member States. There are general and specific NTBs. The general ones include differences in the application of VAT requirements in intra-EU trade, differences in approaches to public sector procurement and differences in corporate legal structures. The sector specific NTBs are perhaps harder to address as they are underpinned by more general NTBs. This is the context within which UK-EU trade in services is positioned.

Second, the UK-EU free trade agreement highlights some of the differences between EU member states and these differences will operate as NTBs to UK companies that will act as additional barriers to market access. These include the requirement for a UK service supplier to identify and comply with different host-country rules and regulations. The ability to supply a service to EU clients depends on the delivery mode adopted: mode 1 – digital/online; mode 2 - EU client travelling to the UK to receive a service; mode 3 – foreign direct investment/commercial presence, and mode 4 – temporary presence of a service provider in another national jurisdiction. In practice, a UK service firm that has significant international business will be engaged in all four modes. Movement of service professionals between the UK and EU has become more complex even with the agreed reciprocal commitments. This complexity includes the application of EU Member State local rules and regulations on specific service sectors. For UK companies, the EU service market has become a complex mosaic of differing local rules and regulations.

Third, it is important that the House of Lords EU Services Sub-Committee considers the client dimension of UK-EU trade. There are two types of services – price-sensitive and services that are procured not based on price but on the quality of the expertise. For the latter, it is the nature of the expertise, and often the individual professional, that is the key deciding factor in the client procurement process. There will be EU-based companies whose activities are compromised given difficulties in accessing world-class expertise available from the UK and the same will hold for UK companies who need specific types of expertise available from service professionals located within the EU. In this context, it is important to remember that business and professional service firms create value in their own right, but they also enhance client value creation. Restricting client access to essential expertise which might be rare and inimitable would impact on client growth and local economic development.

Fourth, the development of the EU single market in services has focused on private services rather than public services. The UK-EU agreement goes beyond the WTO agreement on government procurement. EU companies will be able to participate on an equal footing with UK companies in procurement tenders that are covered by the agreement and vice versa. The danger is that in the UK the public service sector is more open to private sector service provision compared to many EU Member States. In any case, across the EU there is a tendency for Member States to try to focus public service contracts on home companies. Thus, there may perhaps be unequal application of NTB by EU Member States in public service procurement processes compared to the UK.

3. What effect will arrangements on the mobility of professionals have on trade in services between the UK and EU?  

The key here is to consider the impact of different regulations, that combined, result in NTBs that act as significant barriers to limit trade. These include business visas and other travel restrictions. The UK-EU have agreed reciprocal commitments regarding certain employees and mode 4 cross-border service transactions, but these arrangements apply to intra-corporate transfers. There are also arrangements in place for contractual service suppliers. Nevertheless, NTBs tend to work together to restrict or limit access to markets.  Thus, mobility of professionals will require, where relevant, recognition of their professional qualifications by the relevant Member State.

Barriers to business travel will disadvantage UK companies especially for firms with clients who require immediate assistance. These barriers include visas but also the difficulties of travelling to the EU from a third country. This is further complicated by any travel restrictions imposed during times of crisis, for example with COVID-19.

5. How will the arrangements in the UK-EU Trade and Cooperation Agreement shape UK-EU trade in financial services? 

It has led to foreign direct investment from the UK to the EU with companies continuing to supply services to Member States via the establishment of branch offices within the EU.

The ongoing negotiations regarding financial services are important including negotiations regarding equivalence frameworks. Nevertheless, UK financial service companies have adjusted to the decision of the UK to leave the EU with adaptations implemented before January 2021. The UK must continue to ensure that the wider framework conditions that support the provision of financial services from the UK to other national jurisdictions are maintained and enhanced. This includes facilitating the UK’s role in providing financial services across Commonwealth countries and in core emerging economies.

7. Given the plans to delegate more powers to financial regulators, what form of Parliamentary oversight of these regulators would be appropriate?

Regulators have a tendency to over-regulate and create barriers to business. A balance needs to emerge between the role financial regulators play in overseeing financial services with maintaining and enhancing the wider framework conditions that underpin the provision of financial services. There are two critical roles that must be undertaken by Parliamentary oversight. First, to ensure that regulation does not reduce the competitiveness of UK firms compared to companies located in other national jurisdictions. Second, that due care and attention is given to maintaining and enhancing the wider framework conditions that support UK financial services. This is a complex process, and this includes the interface between financial services and UK law.

9. How will the new UK-EU framework for the mutual recognition of professional qualifications affect professionals and service sector businesses? 

A core barrier involves the mutual recognition of qualifications. Businesses located in EU Member States benefit from simplified and, in some cases, automatic recognition of professional qualifications. With the UK-EU trade deal, UK nationals, irrespective of where they acquired their qualifications, will need to have their qualifications recognised by each Member State. This is a standard and effective NTB and there is great variation between Member States. This recognition process comes with additional costs. A key issue is the time required for qualifications to be recognised. It is important, for both UK and EU service firms, and their clients, that the UK and the EU consider cultural recognition of professional qualifications on a case-by-case basis as soon as possible.

For the UK, it would be important to identify those qualifications that should be prioritised in these negotiations. 

10. What will be the impact of the Agreement’s provisions on the cross-border supply of services and rights of establishment, such as commitments on local presence and economic needs tests? 

This works both ways with EU firms establishing or maintaining an establishment in the UK and UK firms establishing offices within an EU Member State. One issue is the extent to which service tasks, processes or expertise are undertaken by employees based in the UK and delivered via an employee located in an office located within the EU. This is a process of blended or hybrid service delivery based on combining remote provision with face-to-face provision or localised provision.

It must be appreciated that EU Member States have different laws in place regarding corporate structures and governance. Thus, a UK service firm wanting to establish a limited liability partnership will find this impossible in France as there is no direct equivalent to this type of corporate form. It means that UK firms will need to develop very different types of corporate structure to meet the requirements of individual Member States – there is no one size fits all model. There may also be ownership rules linked to residency within a national jurisdiction. Each company will need to explore the most appropriate corporate structure to adopt if they want to establish a presence in an EU Member State.

Economic needs tests act as barriers to markets and this is especially the case for mode 4 (presence of natural persons) combined with mode 3 (commercial presence). The issue is the ways in which economic needs tests are implemented. These operate in multiple ways and are designed to regulate and restrict trade flows. It may mean that a mode 3 (commercial presence) must rely predominantly on local employees given some of the difficulties related to blending mode 4 with mode 3.

12 What is your assessment of the Turing Scheme - the Government proposed domestic alternative to Erasmus+?

The UK needs to adopt a much broader approach to training as it relates to services. This includes encouraging UK firms to offer work experience opportunities for people from overseas. These types of placements targeted at individuals early on in their careers would extend the geographic reach of the UK’s commercial network. These individuals would develop an appreciation of the quality of UK service providers, establish relationships with UK located service professionals, and later in their careers these individuals would be responsible for procurement decisions. The UK should facilitate workforce exchange between UK and EU located establishments within the same company but extend this beyond the EU.

It is important to appreciate the role that education, training and relationships play in service delivery. The UK’s new Turing scheme must become an effective replacement for the Erasmus scheme. The possibility exists for the UK scheme to be more flexible and effective than the Erasmus scheme. An important limitation would be continuity of funding. The Turing scheme must develop and implement a long-term strategy to ensure that this new scheme is positioned as one of the most desirable of student exchange programmes in the world. If managed correctly, the Turing scheme would become associated with quality, educational attainment, and career success for all those participating in this scheme. The new scheme can support the education sector but should also support the UK’s service sector by enabling student mobility that might have longer-term commercial benefits.

February 2021