Don't believe the myth: Britain's services industry has been hit hard by Brexit

Irish Times

2 days ago

One by one the supposed pillars of the economic argument for
Brexit
have been knocked away by the realities. Far from being shackled to a corpse, as some Brexiteers described the
European Union
economy, both the euro zone and the EU have grown faster than the UK since the 2016 referendum. Britain's goods exports have slumped compared with the rest of the G7.
'Look at services,' Brexiteers cry. Their export growth has been exceptional, according to Policy Exchange, the right-of-centre think-tank. The Office for Budget Responsibility also noted a year ago that UK services trade growth had been the strongest in the G7.
Should the UK be happy that its trade in services has performed well? Was this the result of Brexit?
The short answers are 'no' and 'no'. Instead it should be annoyed that services exports did not grow even more, and blame Brexit for this disappointment, according to new research from the London School of Economics.
READ MORE
Before explaining the findings, it is important to note that although the UK economy has many weaknesses, services are a strength. While television crews will always want to picture industries such as manufacturing or fishing to visually describe what makes a country wealthy, this is not relevant to 80 per cent of Britain's economic activity.
The UK's success lies in its lawyers, information providers, creative types, management consultants and educators. A handful of universities generate more export income than the entire fishing industry, for example.
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Unusually for any economy, UK services exports exceed those of goods and not by a trivial amount – almost 40 per cent higher in 2024, with the gap widening. The OBR noticed, however, that not all of the UK's services exports appeared equally strong.
Business services including management consultancy and research and advertising – where Brexit barriers were small or nonexistent – were growing strongly. Other services did not perform nearly as well, including finance and transport, where the barriers erected by leaving the single market were significant. But the fiscal watchdog left its analysis hanging.
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Picking up the baton has been left to LSE team economists Shania Bhalotia, Swati Dhingra and Danyal Arnold. Using data that allowed comparison of the growth in services trade across different sectors and between a large number of pairs of countries, they examined how strong UK services exports were in each sector compared with all other countries.
They also meticulously examined the UK-EU Trade and Co-operation Agreement to document which services exports into the EU faced new barriers after the post-Brexit deal came into effect in 2021.
The results are stark. The OBR was right to note that UK services exports facing new Brexit barriers appeared to perform worse. UK exports to countries with greater barriers were hit much harder. Where the most extreme barriers were introduced, services exports fell 90 per cent.
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On average there was a 16 per cent drop in services exports to the EU in sectors where Brexit imposed new trade frictions compared with bilateral trade between other countries in the same sectors.
Did Brexit allow British companies to focus on trade with the US and other countries? Again, the answer was 'no'. Overall, the research found that UK services exports five years after Brexit were 4-5 per cent lower than they would have been without the effect of new trade frictions.
In a nation that struggles to accept its relative economic decline since Brexit, the UK has been far too quick to celebrate the better performance of services. Instead of showing that Brexit might have some benefits, it simply shows that the UK had specialised in the right industries at the right time, allowing many world-class companies to sell globally.
Rather than generate 'global Britain', leaving the EU has had one simple effect: economic harm. Without Brexit, they would have done even better. – Copyright The Financial Times Limited 2025