Official Report 764KB pdf
Under our second agenda item, we will continue to take evidence on the second phase of our review of the trade and co-operation agreement between the United Kingdom and the European Union. The second phase focuses on mobility and trade in services. All our witnesses join us remotely, and I welcome Professor Catherine Barnard, professor of European and employment law at the University of Cambridge; Professor Sarah Hall, deputy director of UK in a Changing Europe; Mike Buckley, director of the Independent Commission on UK-EU Relations; and Professor Jonathan Portes, professor of economics and public policy at King’s College London. I appreciate that Professor Barnard and Mr Buckley have only a short time with us, so we will try to be succinct, which is always a good thing, and succinct answers might help with that, too.
I will ask the first question. In his recent Mansion house speech, the governor of the Bank of England said:
“The changing trading relationship with the EU has weighed on the level of potential supply. The impact on trade seems to be more in goods than services”.
Guidance from the European Commission has suggested that the TCA
“provides for a significant level of openness for trade in services and investment in many sectors including professional and business services”.
What is your assessment of the impact that the TCA has had on services from a UK perspective?
Thank you very much for the kind invitation to be here.
I am a lawyer, so I will leave it to Jonathan Portes to talk about the economics. The TCA provisions on the mobility of people, which is crucial to the provision of services—[Inaudible.]—if it was contact, are, in fact, incredibly limited. If services can be provided online, which happens a lot, that avoids a lot of the limitations under the TCA.
If I wanted to go to work in a university in France and to get paid there, the TCA would not help me. I would have to get a work permit, and that would very much depend on the vagaries of French law, including whether the university could show that it could not get a suitable European to do the job. There is provision for short-term business visitors, but the crucial thing is that they cannot be paid. Key sectors are also excluded from the list of short-term business visitors. Perhaps we will come back to this point, but touring musicians and artists are good examples of those who are excluded from the categories of people who can benefit from protection under the TCA.
Thank you very much for the invitation to be here.
The Office for Budget Responsibility recently concluded that the data that it has seen on Brexit is broadly in line with its initial assumption that Brexit would reduce the UK’s trade intensity—a measure of how much the UK is trading—by about 15 per cent in the long term. The OBR argues that it has not seen data that would change that assumption. It is interesting that, at least on the surface, services exports to the EU have held up rather better than we might have expected, whereas the hit has been particularly in goods.
My interests are in financial services. That sector, which is strategically, politically and economically central to the UK economy, does not enjoy anything like the amount of market access that it did when the UK was an EU member state. When assessing the TCA, it is important to consider the baseline as the position when the UK was a member state. It is different from comparing the relationship between, say, Singapore and the EU. That is where some of the confusion arises about what the impacts have been.
I do not want to repeat things that have already been said. I am sure that you are aware that services make up the bulk of our economy—72.8 per cent of our gross domestic product. Goods are, of course, also very important, and there are much greater barriers in place for goods than there are for services, but when it comes to the overall impact on the UK economy, services are incredibly important. It is very good news that the services trade has held up, but we need to compare the current position not just with the past but with the future that we might have had. Had we remained a member of the EU and the single market, the services trade with the EU would certainly have grown much more than it has done.
Professor Hall referred to financial services. In relation to financial services, transport and other sectors, it is important to recognise that the EU single market is not fully integrated with all aspects of services. Regulations in different member states can create barriers even between member states, but they are progressively working to reduce those. Of course, those barriers are not being reduced for the UK because we are no longer part of the EU.
Financial services and transport are two sectors that are particularly well integrated with the single market. The UK used to be part of that market, but we are not any more, and because those two sectors—particularly financial services—are seen as being important to the EU economy, the EU has quite strict barriers for outsiders, which we now are. The EU and its member states see the City of London as a major financial services centre and, therefore, as a rival, so they, in essence, want to keep it out, and they have devised the TCA to enable that to happen, which has made things difficult for the City of London.
Like me, committee members will, no doubt, have read articles and news pieces that say that the City of London is doing very well, as not many jobs have been lost. However, in reality, the growth that there would have been in the City of London has not happened, and the jobs that would have been created in the City of London have, instead, been created in Amsterdam, Paris and Frankfurt.
There has been a major hit to the financial services sector, which is not really being talked about. Importantly and understandably, the big institutions in the City of London are not really talking publicly about that hit, because they want to talk up their sector and say that it is thriving; they do not want to point to the negatives and the downsides. From a commerce perspective, I fully understand that, but you, as legislators, should recognise and understand what is happening. It does not necessarily need to go on the front pages, but Governments ought to respond, because we should do all that we can to help the sector, which is central to our GDP.
I echo what Catherine Barnard and Sarah Hall have said. Clearly, there are some additional barriers to the services trade as a consequence of Brexit and the operation of the TCA, but the fact is that, in macroeconomic terms, the UK’s overall performance on services exports has been good. It is broadly in line with the pre-pandemic trend, and it is very difficult to see any obvious Brexit effects. I am sure that, at the micro level, some jobs and services are now located on the continent rather than in London and other financial centres here, but Brexit has not really moved the dial.
If we look at the big picture, we see that Scotland and the rest of the UK have a lot of big structural economic problems with productivity, investment and demography—all the things that we know about. However, we have one really big advantage, which is that we clearly have a very significant comparative advantage in tradeable services, which has survived Brexit in a considerably better way than I and other economists expected. Given all our other problems, we absolutely need to make the most of that. I am not making any specific policy recommendations at this stage, but that is a good news story. Brexit has not been the disaster for that sector that we might have thought it would be, and we have a big advantage in that sector, so we need to make the most of it in relation to the TCA and much more broadly.
It will be a bit tricky to manage the meeting, given that all the witnesses are online, so I ask members to direct their questions to certain witnesses. If anyone wants to add anything to what has been said, they should say so in the chat, and the clerks will let me know that they want to come in.
Good morning. You have all touched on the challenges that we have faced and that we continue to face in managing the processes for our sectors. Professor Portes, you touched on potential successes in how things have progressed. Are there specific areas and sectors in which there has been real change, with activity going from vibrant to non-existent, and are there others in which there was an acceptable level of activity and there are now further opportunities? We have heard that some organisations have relocated their offices to other locations to try to develop and expand some of their processes to ensure that they can tap into opportunities, whereas other organisations have not done that but have been reasonably successful. Do you believe that there is an opportunity to try to do that as we move forward? I ask Professor Portes to answer first.
It is very unfortunate that—as, I suspect, you know—the data on the UK services trade is considerably less timely than the data on its goods trade. We do not know exactly whether this is the case, but I and, I suspect, others are strongly of the view that the data on the services trade is also significantly more inaccurate, because it is very hard to measure some of the trade that happens remotely. However, we know that organisations under the general category of other business services—in other words, legal, consultancy and accounting services—have been doing extremely well. That has particularly been the case for consultancy services, broadly defined, as there are relatively few trade barriers of any sort.
We can see why that is the case from this morning’s meeting. I regularly do this sort of thing remotely, including for people in foreign countries for money. That is an export. That did not happen—certainly not in the same way—five or 10 years ago, so that is the opportunity.
In relation to Scotland’s relative competitive advantage within the UK, there might be some specific advantages to Scotland in that regard. On trade promotion, you should consider those competitive advantages. Scotland has a lot of space and a lot of beautiful countryside. In some ways, it is easier for people in Scotland to live near large cities and to be within reach of the countryside than it is for some of us down here in the crowded greater south-east of England. There are potential competitive advantages in those growth sectors. I would look for opportunities in those sectors and consider what is needed to reduce barriers to entry. I suspect that the issues are not specifically about trade arrangements but about immigration policy, mobility, the position of universities within the business ecosystem and so on.
09:15
Mr Bibby has a quick supplementary, and then I will bring in Professor Barnard.
I want to follow up on the points that were just raised about trade in services, although it is largely excluded from the TCA, holding up better than trade in goods. What analysis is there on that? We have heard this morning about online remote working being a big factor. Is that enough to largely explain what has happened, or are there other factors?
There is quite a lot of analysis but, as I said, it is slightly hampered by the fact that the data is far from ideal even at a UK level, let alone at a country level. The Resolution Foundation has produced some excellent analysis, and the Office for National Statistics does analysis of the issue for the whole country. On a more specific and detailed disaggregated level, our colleague Jun Du at Aston University business school has done some work on trade in services, and Sarah Hall has written on the issue, too. So, there is some analysis and, as I said, it all probably supports the picture of the UK’s relatively good performance in the area. However, it is a frustratingly moving target, because of the nature of the data.
On how much the situation is accounted for by remote working, it is certainly very hard to imagine that you would see the growth in the general catch-all category of other business services without the use of remote working. It is just inconceivable that we would have had that, because remote working is such an integral part of the business process. So much of the necessary co-ordination between teams across different countries and the direct interaction with clients now happens remotely in a way that it did not previously. You would previously see a lot more activity taking place in the individual country or in the city offices of firms, whereas now it happens much more across different locations. Personally, I am completely convinced but, again, we do not have very much quantitative analysis.
I totally agree with what has been said on other business services. It is important to set out that that is an area where future research is needed. It is an incredibly broad category, as set out by the Office for National Statistics. There are some activities where the data clearly shows that Scotland does very well—I am thinking of fintech, which is at the intersection between financial services, technology and consultancy—but that do not fit neatly into the Office for National Statistics categorisations. When the ONS set up the business codes, something like fintech did not exist as an activity. We do not accurately know how those new and emerging activities are playing into our economy, so that is still an area of uncertainty.
Another important point is that, in many ways, we should not be surprised that other business services are doing well, given how they are traded and the barriers to trade. The barriers to trade in services are not tariffs; they are essentially about regulatory alignment between the two trading parties. In many ways that regulation is sensible and important. I think that we would all agree that we want to be certain about a medic’s qualifications before they operate in our country—there is a really good rationale for that. However, that means that, for services such as consultancy, which have much lower regulatory standards—I could set up as a consultant with no professional qualification if I had the capital do to that—it is much easier to sell services into another country. It is not like being an architect, where you need to have a professional qualification. I have a degree of caution around the data, because a lot of the other business services activity is new and does not fit neatly into our existing data.
Another important explanatory variable is that there are services that have quite low barriers to services trade, because they are not reliant on regulatory closure—for example, that applies to those who can operate as information technology consultants.
I will bring in Professor Barnard on Alexander Stewart’s original question.
I will answer the first part of that question, which was about which sectors have been badly affected, so I am looking at the negative rather than the positive. The sectors that we know have been particularly badly affected are those in the creative industries—musicians, artists, models and things like that.
I will briefly talk about a bit of law to help you to understand why they have been so badly affected. The first thing to understand is that the trade and co-operation agreement is not EU law minus; it is actually World Trade Organization law with a tiny bit plus. In other words, it would be totally wrong to look at the TCA as some sort of substandard version of free movement of services. The reason why that is relevant is because there are categories of individuals who are allowed to move, and the three categories that are most relevant for the purposes of creative professionals are short-term business visitors, contractual service suppliers and independent professionals.
From those three titles, you might think that it is obvious that creative professionals would probably fall into one of those. The problem is that the TCA operates based on what is called a positive listing system, which means that you enjoy the rights under those three headings—short-term business visitors, contractual service suppliers and independent professionals—only if your activity, profession or sector is listed in one of the annexes to the TCA. The problem is that none of the creative industries is listed in those annexes. Under those annexes, consultants and academics can physically move but cannot be paid for their work if they go as a short-term visitor.
The big difference between the creative industries and those providing the other business services that we have been talking about is that the creative industries require physical presence. If you are going to perform in the opera in Paris, you cannot do it online and you want to be physically there as part of the orchestra. You have to move physically. That would in principle be in the provisions of the TCA but, as I have just explained, the TCA does not cover any of the creative industries, because of the system of listing. Those who want to move to do jobs that require you to be there in person have been particularly badly affected.
Good morning. I am a wee bit stunned by the diversity in the responses, which go from quoting the OBR talking about a 15 per cent drop in trade intensity over the long term, which is absolutely astonishing if you think about the impact on the economy, to a statement that Brexit has not really moved the dial. I find it hard to reconcile those two different views.
My specific question is the balance of payments, which is something we used to agonise over. I appreciate that this information may not be readily to hand for the panel members, but the balance of payments for the UK has been massively negative over a long period, although Scotland’s balance of payments has—notionally, I suppose—been positive, with exports exceeding imports over a long period. Are any members of the panel aware of how that might have changed as a result of Brexit? I imagine, for example, that if there is any data on Northern Ireland, that would have seen an improvement given its special status, but I am just guessing.
I do not have balance of payments figures readily available, but there are indications that the impacts have been different across the UK. I refer you to Professor Portes’s earlier remarks about the challenge of data and particularly the challenge of data disaggregation within the United Kingdom. As a researcher in my field, you end up almost using workarounds to try to understand exactly what is going on. With financial services, which is the sector that I am most familiar with, there is clear evidence that London has held up more than anticipated or projected at the start of the process, but sometimes the focus on what has been going on in London maybe masks other quite important trends, particularly the ways in which mid-tier financial centres in the UK have perhaps taken more of a hit than we readily acknowledge.
There is quite clear evidence of significant growth in places such as Warsaw and Lisbon in mid and back-office functions, and that should not be ignored, particularly when thinking about the expertise that Scotland has in financial services. What was the rationale for foreign direct investment in financial services in Birmingham, Belfast or Glasgow? A lot of it was that you were getting a highly skilled workforce that was fluent in English and able to work in the English common law system but also able to access the single market. We are now without single market access, and some of those attributes of a highly skilled workforce are available at lower cost in EU member states. That is how I would summarise the situation from the data that I know of.
On the difference between the OBR saying that there is a 15 per cent drop in trade intensity and other people saying that things are not so bad and are much better than they would have been, that is partly a result of looking at different data sources and it is partly about people’s different perspectives. You will remember that, pre our leaving the single market, the customs union and the EU, there were lots of projections as to how bad the economic impact was going to be but, in the event, it often has not been as bad as people expected it to be. As a result, a cohort of people are saying that things are not quite so bad as we thought they were going to be.
However, other people compare with things as they could have been and look at a counterfactual. That is about asking, “Had we stayed in the EU, the single market and the customs union, where would the UK economy now be and where would trade in goods and services now be?” If you look from that latter perspective, you have a much more pessimistic view on where we are on trade in goods and services or indeed just on sectors thriving.
Another problem is that there is lots of data that we do not have, as others have referred to. With industries such as the automobile industry—those that make big physical things that are constructed, sold and traded by big companies that gather data and can communicate it—there is a lot of readily available data, but with some of the newer industries such as fintech, which was referred to earlier, there is much less data gathering.
That is also the case with small and medium-sized enterprises. I have spoken to a lot of people working in SMEs across a range of sectors who have stopped trading with the EU entirely. Others have just stopped trading at all, because that was what they used to do, or they have shifted to doing other things. Nobody is systematically gathering that data, so nobody really knows, other than from anecdotal evidence, what the impact has been. Because those smaller organisations do not have the capacity to employ lots of people to fill in forms if they are trading in goods or to adjust to the fact that their mobility is reduced if they are trading in services, many SMEs have shifted to doing different things, but they have had nobody to tell that to. The Government has not been interested in that information. The previous Government was not interested in it, and I am not sure how interested the current Government is.
09:30We are missing data on the regional impacts. Before Brexit happened, research was done into what the regional impacts would be. Essentially, the determination was that areas such as London and other high-performing areas of the UK would not be particularly badly affected, but that the regions of the UK that were already poorer, such as Northern Ireland, the north-east, the poorer parts of Wales and south Yorkshire, would be much more badly impacted. It was expected that the impact in London would be a loss of, say, 1 per cent of GDP and that the loss in the north-east would be something like 12 per cent of GDP.
We simply do not know whether that has been borne out. I suspect that it probably has been, but I am not aware of anybody who has the capacity or the choice to do that research, and certainly the previous Government was not interested in doing it. As yet, we do not know whether the current Government will be. However, there is some evidence from the regional GDP figures, which show that Northern Ireland has jumped from being bottom of the pile in every survey pre-Brexit to being consistently number 2 after London. London is not doing too badly, as far as we know. Northern Ireland is in both markets for goods and is doing better as a result. We can all celebrate that but, from the data that we have, it sounds as if the rest of the UK, including Scotland, is doing worse.
I would love to do that research but, as an organisation, we simply do not have the capacity. However, I am continually aware that it is a job that needs to be done. If it was borne out that already poorer regions of the UK are losing out, partly as a loss of structural adjustment funding but also just because of a loss of economic activity, that would be really important. Another piece of work that needs to be done is consistent, or much more in-depth, research with SMEs.
Before I bring Professor Portes in, I note in response to what Mr Buckley has just said that the vast majority of the evidence that the committee has heard has veered towards identifying disastrous effects. People have said that they stopped trading with the EU immediately. An example is small seafood producers. Some businesses have outsourced to parts of the EU and others have had to go through parts of the EU in order to continue. On the point about the lack of data, as a former economy secretary in Scotland, I note that it is very difficult to get information about Scotland from UK sources. The information is very often not disaggregated and it is often based just on surveys.
I appreciate that it is difficult, but my question was about the balance of payments. Professor Portes, can you say anything about what the balance of payments was before Brexit over the longer term and what it might be now? I realise that it is difficult, but is there any way in which you can disaggregate that to different parts of the UK?
Picking up the original question about the difference between the OBR assessment and mine, I note that the answer is easy—there is no difference. The OBR said that the long-run negative impact of Brexit would be 15 per cent on trade intensity and, as a consequence, about 4 per cent on GDP per capita. It sees no reason to change that long-run assessment, and neither do I.
The point that I was making is that the impact on trade has been felt on trade in goods. At a macro level at least, it is hard to see that it has been felt on trade in services. The negative effects that we have seen so far in macro-level data are very much effects on trade in goods. They are not really on trade in services, despite the points that other witnesses have made, which I do not dispute, about individual impacts on particular businesses or particular small sectors. Overall, trade in services has continued to perform very well despite Brexit.
As I said, the OBR’s overall assessment of the impact of Brexit on the UK economy remains the best guess that we have, uncertainties notwithstanding. There is a negative impact on trade in goods. It is a negative impact on trade and a negative impact on GDP and productivity.
When you refer to Scotland’s balance of payments, which is an interesting issue, I am not entirely sure whether you are referring to Scotland’s international trade, on which we have figures, albeit that they are out of date and subject to the same issues as those that are relevant to the rest of the UK, or to Scotland’s balance of payments in the economic sense—that is to say, taking into account its imports and exports with the rest of the UK and with the rest of the world at the same time. My take on it is that, even with the best will in the world, it is unfortunately very difficult to get data on that, particularly on the latter. I think that the latest data that is available is from 2021. That was during the bounce-back from the pandemic and it is not clear that we can read anything into that in relation to long-term trends.
As you will know better than I do, the value of Scotland’s exports in the short term is quite volatile as a consequence of the impact of energy prices. They went up a lot during the energy price spike and then down a lot as that receded. That is quite normal in the broad sweep of history and it is not directly attributable to Brexit.
My perception is that Scotland still does relatively well compared with the rest of the UK in terms of international trade overall, but it has a significant deficit with the rest of the UK. From a macroeconomic perspective, that is an almost inevitable counterpart of the fact that, on net, from a fiscal point of view—I know that this is a hugely controversial topic in Scotland and I suspect that we do not want to get into it today—there are significant transfers from the rest of the UK to Scotland. As a macroeconomic fact, capital that flows one way must be mirrored by a trade deficit the other way. If Scotland is spending more than it is getting in tax, there will be a counterpart trade deficit to that within the UK.
I will bring in our last witness. Professor, on that point, you said that, even with the best will in the world, the information is not available. There is no will to look at the information on exactly the point that you made. What are Scotland’s exports? We can think about whisky and oil, but oil comes ashore, it gets sold in the Netherlands and it is apportioned to the UK. There is a lot of clarity on fiscal transfers but very little on what goes out of Scotland. I ask the last professor to wind up on that, if possible.
I think that that was Professor Barnard. I do not have anything to add on your question.
On your point about goods versus services—you specifically mentioned seafood producers—you are absolutely right. We are mainly talking about services, but what the data shows about goods is that small and medium-sized enterprises have stopped exporting to the EU because the burdens that are associated with the paperwork and rules of origin are so crippling that it is just not worth the effort. Some businesses are still exporting and are actually paying tariffs on the goods even though they are not obliged to do so under the TCA because it is easier to do that than it is to go through all the paperwork and prove the origin of the goods. Although services may have held up in certain areas, goods have been significantly affected.
Could we get some form of sanitary and phytosanitary standards agreement or veterinary agreement with the EU as part of the reset? I suspect that the EU will not even countenance discussing anything to do with that until after 21 January, when President Trump takes office, for the simple reason that it will want to see which way the UK Government goes in relation to the US. Will it trend the UK much more closely into the US orbit by offering a trade deal with tariffs, but on condition that we accept President Trump’s terms in the field of agriculture? That would have the effect of making it more difficult to trade with the EU rather than less, because there would be more checks. At the moment, we are broadly aligned. If we entered any deal with the US on those terms, we would increasingly de-align, which would further aggravate the problem with the Northern Ireland border.
I would like us to try to get our arms around what we are talking about. We are exclusively talking about services here. The UK is currently the third biggest exporter to the European Union, with 7.1 per cent of the entire EU imports being from the UK. Can someone tell me, as a matter of fact, the split between services and goods of the $193 billion of trade that we do with the EU? I presume that it is predominantly services. Can anyone cast any light on that? Professor Barnard, you are nodding.
I am a lawyer, but it is clearly dominated by services.
Does anyone have a more definitive split?
They are not necessarily what you want, but I can give you some statistics that I have in front of me. They are on our services exports, but not necessarily directly to the EU. I am not sure which year they refer to, but the most recent figures I have for our exports are £61.3 billion in financial services, £28.4 billion in travel, £5.4 billion in telecoms and £29.4 billion in transport.
Those are global figures rather than being specifically on exports to the EU.
Yes.
Professor Portes, do you want to comment?
You are speaking, but we cannot hear anything.
The muting is happening centrally; it is being controlled from Edinburgh and not from London.
The picture may be slightly misleading. Our exports to the EU are considerably more goods heavy than services heavy. Given that the issue has come up in the context of the threat from Trump’s tariff policy, it is interesting to note that we export mostly services to the US and mostly goods to the EU. In 2023, we exported £138 billion of services to the EU, which is a lot, but we exported £243 billion outside the EU, whereas our goods exports were £153 billion to the EU and £162 outside the EU. In other words, almost half of our goods exports go to the EU but only roughly a third of our services exports go to the EU.
I keep coming back to the problem with measuring these things. I know that that is frustrating for you, and it is frustrating for us as well. However, as far as we can tell, our services exports are considerably more global whereas our goods exports are more weighted to the EU.
The balance of our exports to the EU is towards goods rather than services. Mike Buckley has put his hand up, so he might be about to shed some more light on that.
I am looking at a report that we are to publish shortly on trade in services. I have some statistics from Deloitte, which did some research recently and published an article titled “Why has the UK missed out on a trade boom?” It makes the point that non-EU services trade from the UK has grown more than EU services trade. It compares the position now with the position in 2016. In 2016, our services trade with the EU and our services trade with the rest of the world were relatively similar. The figure for our services trade exports to the EU was £160 billion and the figure for our non-EU services trade exports was £150 billion. The gap was only £10 billion, so we were exporting about the same to both.
Since 2016, that has shifted. We now export significantly more to the non-EU part of the world than to the EU. The figure for EU services exports has gone down slightly, from £160 billion to £155 billion. That is only a small reduction, but the figure for non-EU exports has gone up to £185 billion, which represents a £35 billion increase. Services exports to the EU have gone down slightly and those to the non-EU part of the world have gone up by about £35 billion.
What is your analysis of the reason for that? How much is being driven by the issues that we are discussing today and how much is being driven by market opportunities for UK service companies?
09:45
Clearly, it will be a combination of things, including regulatory barriers and movement. On movement, which we talked about earlier, the Government talks about mutual recognition of professional qualifications. Most of the businesspeople that I speak to say that that would be nice to have but that they do not expect to get it, partly because it would take years to negotiate if it was to happen. However, they want business mobility. They want to be able to go over there and get paid and to have face-to-face conversations with people and run training courses. They want to be able to send staff on short-term assignments, because they have staff with particular expertise, either here or in EU member states, and they want people to be able to go back and forth without facing barriers or feeling like they are breaking the law in doing so.
There will, of course, also be a shift with people looking beyond the EU for opportunities, finding those opportunities and exploiting them, in part precipitated by the fact that we have left the EU.
Is the conclusion to that that it is easier for service-orientated businesses and individuals to trade in, for example, the United States than in the EU?
It might be similarly easy or difficult. It might be easier in some areas or sectors; I am afraid that I do not know which off the top of my head. It is clearly easier for a services exporter to adjust than a goods exporter. A goods exporter is limited by proximity to the place that they are exporting to. It is obviously easier and cheaper to get something across the English Channel than it is to send it to the States or Panama, but a services exporter can look further afield. I imagine that one of the reasons that we do particularly well with the US is just that we have a shared language and it is easier to export to people with whom you can more easily communicate.
When it comes to the EU, are there any statistics on what sectors we are talking about within the generic term “services”? Do we have a breakdown? Financial services were mentioned but I have not heard any of the others mentioned. We took evidence from the legal sector last week. What are the other main sectors, and how would you apportion the split by importance?
As we discussed earlier, the biggest sector by far is other business services, which includes the legal sector as a subsector. “Other business services” is an umbrella term covering legal services, consultancy, accounting, advertising, architecture and so on. It varies between things that are quite well regulated or in which regulation matters, such as architecture, to less regulated things such as consultancy, as Sarah Hall rightly said. My consultancy business took me £10 to set up. I registered it at Companies House, I have a laptop and I do it in our spare room. That is it.
Yes, Bob’s your uncle.
I believe that I am qualified to do what I do—and so do my clients, I think—but there is absolutely no regulation involved.
Let us stick on the area that you have just raised. Mutual recognition of qualifications is an issue. Of the sectors that you have mentioned, which have suffered more because of the loss of mutual recognition of qualifications? Has that mattered? It was highlighted last week in our evidence from the legal profession that qualifications in Scotland are not even recognised in England or vice versa. How much of an impact has this really had?
That is very much a question for Catherine Barnard.
When we were in the EU, there was a directive on mutual recognition of qualifications. The broad principle of the directive was immensely simple—the clue is in the title—and it was meant to be straightforward. However, even when we were in the EU, the mutual recognition provisions did not work terribly well, because there is a lot of vested interest in each state to ensure that its people get the jobs and professions and that those are not very open to other people. The legal profession is a good example of that.
In leaving the EU, of course, we have lost access to that directive and to the principles and enforcement mechanisms that underpin it. There is a provision in the TCA whereby it is possible to negotiate mutual recognition agreement. It is based on an equivalent provision in the FTA between Canada and the EU—the comprehensive economic and trade agreement, or CETA. However, there is only one sector in which there has been an agreement between the EU and Canada, which is architecture, and that took up to about seven years to negotiate, depending on how you count it. It certainly took a very large number of months to get to the agreement on that.
What we are seeing a bit of is bilateral arrangements whereby, for example, law societies might try to enter into some form of agreement with their opposite numbers. However, as Stephen Kerr has already said, that does not go swimmingly even between Edinburgh and London, and we share a common supreme court. As you can imagine, it will go even less swimmingly when trying to get the Bulgarians, for example, to recognise British qualifications. Mutual recognition of qualifications is probably the biggest stumbling block for professionals to work with.
Which sectors have been particularly negatively impacted?
Law.
Law is the biggest issue.
Yes—the legal sector. Although I do not have the data on this, I imagine that accountancy and all sectors that are underpinned by a detailed—[Inaudible.]—national legal system have been impacted, too.
I want to follow up on that and make two points. The first is that you need to think about the value of mutual recognition of professional qualifications alongside mobility agreements, because, if you had MRPQ but only limited mobility, you would not exploit the full economic value of MRPQ. Someone might be qualified to work as an architect in Germany but they also need the mobility to deliver that service face to face.
It is an important area. The terms under which UK service providers trade with the EU are now more like a complex web of interrelated policies and regulations. If you are a service provider, you have to think about your sector, what service you are providing, which member state you are providing it in, whether you are qualified to do it and whether you have the mobility to do it. It is quite complicated.
Secondly, I want to follow up on the case of architecture, which is one of the impacted sectors, because a professional qualification is required to practise as an architect. Catherine Barnard is exactly right that the EU and the UK can try to agree an MRPQ that follows the Canadian deal. In fact, in October 2022, the European Commission received a joint recommendation from the Architects Council of Europe and the Architects Registration Board in the UK, which set out a proposal for mutual recognition of architecture qualifications. However, the Commission turned it down, arguing that the proposal was
“unbalanced and prejudicial to EU architects”,
because, under the proposal, UK architects would have had a level of recognition similar to that which they enjoyed when the United Kingdom was a member state.
That points to the difficulty of translating an agreement that the EU has with Canada to an agreement that the EU might have with the UK, because of the proximity of the UK to the EU—
Also because of the politics.
—and because of the UK’s relative strength in services. The really important point is that the EU met a lot of its negotiating ambitions on its strategically strong goods sector, but, arguably, the UK did not meet as many of its negotiating objectives around the UK’s strategic strengths in services. That is where some of the complexity lies.
If the Commission acceded to the request that the architects had all agreed among themselves, it would see that as a threat to the agreement itself—I get that. Convener, have I used up all my time?
Yes, because we have a second evidence session today. I move to questions from Patrick Harvie.
Good morning to our witnesses. You might be aware that, later in this inquiry, we will have sessions specifically on mobility; in particular, the committee has an interest in youth mobility. I want to ask about the connection between that theme and the trade in services that we have been discussing; it has come up in a number of your answers.
For me, people’s freedom of movement and young people’s opportunity to move can be justified in its own terms due to the social and immediate benefit that people get from it. Should we also regard it as an economic investment for the future, to ensure that we have a generation of people coming up in every walk of life and business who have personal connections with people in other European countries, particularly in the fields in which they have studied, and who regard European countries as something more than a holiday destination?
If we do not restore that opportunity for the upcoming generation, what will be the impact of the loss of youth mobility, not just on trade and services at the moment but in the longer term? Regardless of whether the UK and the EU agree improvements in this area, is there anything more that the Scottish Government should be doing to maximise the opportunities in the current context for young people in Scotland to experience a connection with European countries and for young people in Europe to experience a connection with Scotland?
As you can imagine, those of us who work in a university feel strongly about having some sort of youth mobility scheme. We have already seen the impact of Brexit on numbers of applicants coming from Europe, which have gone down significantly. It has also become much harder for British universities that teach modern languages courses to be able to send students on years abroad, not least because they now have to go through a visa application process to study at, say, a Spanish university.
The EU proposed an ambitious youth mobility scheme in May 2024, which was very quickly rejected by the Conservatives and just as quickly by Labour. It was an ambitious ask, including on universities, that the fees should be set at home fee rates—of course, that is not an issue for Scotland in the same way as it is for England—and with no health service surcharge, and both aspects seem to be unacceptable to the UK. Yvette Cooper has come out very publicly to say there will be no youth mobility deal. That said, if there is a reset, some sort of deal that might be described as a cultural exchange might be a way forward.
What are the benefits of having access to European universities? The loss of Erasmus has of course been keenly felt by British universities, and the Turing programme has not been an adequate replacement for its loss. Even under the Conservative Government, there was recognition of the value of having young people staying in the UK after they complete their degrees. The UK Government introduced the graduate visa, so, after you had done a degree in the UK, you could stay and work for two years. The Conservative Government also recognised the value of having young people studying here and then using their skills to work—if they got a long-term job, they could then get a five-year visa to stay and, eventually, apply for citizenship.
Hands have gone up, and the order was Mike Buckley, Professor Hall and then Professor Portes.
I am afraid that I have to leave very shortly but, before I go, I want to talk a bit about youth mobility. It strikes me that there is a huge disconnect between the UK and the EU, which goes back to the disconnect that has been there the whole way along of the non-UK parts of the EU seeing the EU fundamentally as a peace project in bringing nations together, preventing war in Europe, creating mutual understanding and so on.
Mobility, and youth mobility in particular, is an emotional thing for the EU, which of course it is not in the UK. The UK has pretty much always seen the EU and the single market as an economic issue—does it make us rich or does it make us poorer? For the moment, we have just made the assessment, “Well, it makes us poorer but we do not care because of the politics”, not wanting to go back to the leave or remain divide, and with the Labour Party not wanting to upset the red wall and give Nigel Farage a way in.
Indeed, we see that in youth mobility. The whole youth mobility issue came up because the previous Conservative Government was running around Europe, talking to EU member states that it liked, particularly Germany and France, and trying to persuade them to do bilateral youth mobility deals. Although the Conservative Party will probably never admit that publicly, that is what was happening. That set the whole process off, because the EU Commission decided, “This is our competence, not your competence”. When it came out with its proposal in March, that was not really anything to do with the UK; it was simply saying to member states, “You need to get back in line because this is our competence, not your competence”. That is why it announced what it did back in March.
10:00That had the effect, in the run-up to the UK general election, of making the issue public and giving red meat to the right-wing press, forcing the Labour Party and the Conservative Party to say they would not go near the issue in the run-up to a general election, and it made Labour state a position.
Since the election, the EU has put forward different proposals, which are somewhat reduced from the ones that it proposed before.
I have said to people from the EU many times that it is really unhelpful that this debate has become a notable, front-page issue in the UK. In the UK, the most difficult thing in the whole Brexit debate has been mobility and the perception that freedom of movement was taking people’s jobs and keeping their wages down. Regardless of how true that was, that was the perception and the story that has been put forward by Nigel Farage and others on the right. That story has never really been countered—or certainly not strongly enough—by people in the Labour Party or others on the left in the UK. Therefore, freedom of movement is the most difficult issue.
Even though youth mobility is completely different to freedom of movement, it sounds too similar to too many people. When Maroš Šefcovic talked about it publicly in Brussels recently, he started talking about it as a youth opportunity scheme rather than a youth mobility scheme. I have advised multiple people to do that in the EU, because even just using a word that is not a long word that starts with the letter M is helpful when describing it. It would be good if they can continue on that basis.
The other thing that I have said to people in the EU is to stop talking about youth mobility as a stand-alone issue and to just talk about it in the wider reset as part of a piece. They should not use the words “mobility” or “movement”. If they talk about it as opportunities or an exchange programme or something, they are much more likely to get what they want.
On what Scotland can do, I do not know what freedom of manoeuvre you have to do anything, particularly when it comes to university education or exchange programmes. There is the slight workaround for school trips, whereby people can come in on their identity cards rather than their passports. Would it be possible for Scotland to do something similar for people who are at university age, even if only for a month or a term or something like that? I simply do not know, but you could investigate that.
It is hard to say what the long-term impact will be on services, trade and GDP. Yesterday, or this morning, I read that we are losing somewhere between 100,000 and 150,000 EU nationals from the UK, just because, over time, people who were here have decided to go home or somewhere else, and people are not being replaced, in part because it is much more expensive for someone from the EU to come to the UK than vice versa. There are fewer barriers for somebody here wanting to go to the EU on a digital nomad visa, for example, or to study, whereas people coming here are not allowed to bring family members or spouses, and there is also the national health service surcharge.
We deliberately make it very difficult in lots of ways for people to come to the UK. It is understandable that a European person—Polish, Romanian, Portuguese, French or whatever—who is looking at different options of where to go will decide to go to Germany or Spain, because that is logistically so much easier than jumping through the many hoops to come to the UK. There might be things that the Scottish Government could do to remove some of those barriers. I do not know.
I apologise for having to leave. Thank you for the invitation to join you today—it has been a pleasure to meet you all.
Many thanks. I wish we had time for a long exchange about the political points that you have made but we do not. I will move on to Professor Hall.
I want to return to the part of the question about the longer-term impacts on youth mobility. As Mike Buckley said, it is hard to measure that in quantitative economic terms. However, there is clear evidence in the research literature that the UK developed quite a lot of soft power through having a very open and international approach, particularly in the higher education setting.
I have done some research on why Chinese banks arrived in London in the early 2000s. One of the common stories was that senior officials in those banks had been educated in the UK. They felt an affinity for the country and they felt that they understood the political and regulatory norms. That can sound a bit woolly, but when you think about what services are, a lot of it is about developing trust between clients and service providers. We know that things such as common backgrounds, including shared educational backgrounds, can be quite an important plank in delivering the trust that is needed to deliver services. I think that it is quite clear that the UK has developed quite a lot of soft power through an internationalised higher education system and youth mobility.
That is helpful, thank you.
There is quite a lot here, so I will try to be brief. First, I will zoom out to examine the overall impact of Brexit, in particular on the labour market and the Scottish population and economy. My particular field is immigration, much more than trade. Those of us in that field were pretty unanimous in predicting that Brexit would have a negative economic impact on the UK and certainly on Scotland, as a result of the loss of free movement and the impact that that had on migration and, hence, the labour force.
However, on that, in contrast to the OBR macro picture, we were clearly wrong. If we look at what has happened to the Scottish workforce—I am referring to the most recent data from His Majesty’s Revenue and Customs on the number of people on company payrolls—we can see that the number of EU nationals who are employed in Scotland has fallen slightly from the pre-pandemic high, which was about 145,000, to 135,000. That is a fall of about 10,000 and is clearly a Brexit impact. Therefore, Brexit has reduced the number of EU nationals working in Scotland.
On the other hand, that has been far more than outweighed by a very large increase in the number of non-EU nationals employed in Scotland, which has more than doubled from about 75,000 or 80,000 before the pandemic to 160,000. Therefore, the liberalisation of the migration system, which has resulted in very large increases in immigration overall to the UK, has very much impacted Scotland and has done quite a lot to sustain the Scottish workforce over the last five years. Whether you call that a Brexit impact is a semi-political question, but the fact is that we have seen is a large increase in the number of non-EU nationals working in Scotland, which has clearly been beneficial for the Scottish economy and labour market.
The same impact has been seen in universities. In the most recent year for which we have figures, Scottish universities got a record number of non-UK, and in particular non-EU, students. The loss of EU students has been more than compensated for by the rise in non-EU students.
For me, the big strategic question is, how does Scotland make the most of that? How do you get those people to stay, to thrive, to prosper and to progress in the labour market? How do you work with universities to make the maximum use of the graduate visa, make sure that people who come to Scottish universities—whether they are from France, Bulgaria, elsewhere in the EU, India or China—stay and work in Scotland and contribute to Scotland after they have graduated. They do not have to, of course. They can graduate from a university in Dundee and go and work in Dunstable, but you do not want them to do that. I think that working with universities to try to get people who have come partly because of the availability of the graduate visa to stay on and contribute to Scotland would be my number 1 priority in this area.
I have a little to add on what others have said on youth mobility. It is not a question of freedom of movement. It has the beneficial long-term impacts that you and others have discussed. There is a need to pressure the UK Government to not be so silly about this issue—because it is not a question of freedom of movement, and, frankly, the idea that this is some big issue that people are worried about is a political mirage. Apart from doing that, there is a need to think about, again at the micro level, what schemes exist and, as they are expanded, to try to maximise the relative attractiveness of Scotland within the UK as a whole. What are the particular strengths of Scotland in terms of attractiveness that you can use within the framework of the UK-wide immigration system, which you broadly have to take as given, to make the most of the opportunities for Scotland?
The post-study work visa ,as it was, was made in Scotland initially, and we had an exception for that. It was then taken on and rolled out across the UK but was subsequently withdrawn, except in relation to Cambridge and Oxford. It is difficult to see the balance from a Scottish perspective, as the issue is complicated, and we have been impacted slightly differently by that process. However, the figures are interesting, nonetheless.
I am glad that Professor Portes and Professor Hall are still with us, as my question is probably best directed to you. It concerns the issue of data. We have heard that a lot of financial services are now going through Irish companies—those in the EU, so not Northern Ireland. We have also heard from the culture sector and touring artists that many of them are now joining Celtic-type festivals through an Irish base and that Scottish artists are losing out from that point of view. I want to get to the nub of whether there is any way of capturing that economic impact—the benefit to Ireland—or any way at all that we could expose or understand that data more broadly?
I am not sure that I can help on that. I think that you would have to ask the Scottish Government statisticians what they could do or what extra information or help they would need from the ONS in London and Newport to make that feasible. It is obviously very difficult to do what you are asking, because, ultimately, you have to get those records from individual businesses—you have to require a bunch of people who are mostly involved in small businesses that are struggling to get by to fill in an extra bunch of forms. Understandably, that is hard. I think it is quite a difficult task but you would be probably best advised asking the ONS what is available and what more could be done.
Professor Hall, have you any final thoughts?
I agree with Jonathan Portes. I think, though, that it is important to note that part of the story in financial services is that Dublin was a strong financial centre within the EU before Brexit, has English as its main language and, crucially, has quite strong trading links with the US. Throughout the conversation, it is important to note that the US has been doing very well in financial services activity. It may be that this is not just a Brexit effect. It is quite important to locate the impact of the TCA within these broader global trade trends.
The data that I am more familiar with is financial services foreign direct investment into Northern Ireland. It is quite clear that that has increased, particularly from the US, in areas at the crossover between fintech and insurance in particular—“insurtech”, as it is often termed. You can piece together data that suggests that Dublin has fared quite well compared with other international financial centres. However, I think that it would be worth asking statisticians officially for the specific data that you are talking about.
That has exhausted questions from the committee. I thank you all and put on record my thanks also to Mr Buckley and Professor Barnard for their attendance. It has been very helpful.
10:14 Meeting suspended.Air adhart
European Union Alignment (Annual Reports)