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How the next government can build on the UK’s strength in services exports

Our services industry is concentrated within London and the south-east – we must tackle this regional bias.

By Marco Forgione

Looking ahead to 2024 and the expected general election, whichever party wins power, it will face an unenviable set of economic and geopolitical challenges. In office, Keir Starmer’s team would be constrained by the public finances, in addition to the continued disruption to global supply chains, heightening US-China tensions, the increasing impact of climate change, the war in Ukraine, technological disruption and the demands of reshaping the UK’s role outside of the EU. Within this context, Starmer should be applauded for pledging to lead the UK towards having the fastest growth rate in the G7.

One of the most important issues to address is the UK’s productivity gap, which successive governments have struggled to solve. The Institute of Export and International Trade (IOE&IT), along with other organisations, has been vocal in calling for a comprehensive industrial strategy, which would integrate approaches to both exports and imports. This must address the structural weaknesses that have emerged in the country, while accentuating the strengths of the whole UK.

The UK is a world leader in services trade. Services – which encompass anything from professions such as law and banking, to computer services and telecommunications or hospitality and catering – comprise around half of the county’s exports, making the UK the second-largest global services exporter. This is undoubtedly a strength upon which any future government must build.

Services trade is also where global growth can be found, with the World Trade Organisation recently reporting that it outpaced growth in trade in goods in 2022, growing by 15 per cent compared with 2.7 per cent. The British government has predicted technological advances and a growing global middle class will continue to propel services trade, estimating it will represent 28 per cent of total UK trade by 2035, up from its pre-pandemic share of 25 per cent.

It is also important to understand that trade in services is intimately linked to trade in manufactured goods. The continuing servicification of manufacturing – especially high-value and advanced manufacturing, where the services sold alongside goods often contribute most value – means that bolstering services trade will directly impact wider UK industry.

But UK services exports are emblematic of one of the UK’s major economic weaknesses – the structural bias towards the south. Services are particularly concentrated in London and the south-east. In fact, IOE&IT’s new report, “Global horizons: Realising the services export potential of UK nations and regions”, finds that roughly 60 per cent of our services exports currently come from these regions.

The question, then, is whether an incoming Labour government could generate untapped growth by diversifying the existing regional bias and reigniting services exports in the nations and regions outside of the south.

IOE&IT’s paper seeks to answer this by assessing the relationship between a region’s services export potential (SEP) and its actual service exports (ASE). It determines SEP using data from government departments, with ASE based on data collected by the EU in 2018 – the last year in which comprehensive data was collected pre-pandemic.  

When ranking the 33 English regions’ SEP against their ASE, the report finds that more than a tenth (12 per cent) are currently underperforming against their potential, including Bedfordshire and Hertfordshire, Merseyside and Devon. But it’s by scratching beneath the surface and looking at the data feeding into the SEP metric that the next government can identify investment and policy opportunities to drive future services growth.

For example, East Riding and Lincolnshire ranks 22nd for SEP but comes 30th for ASE. This shows the region is underperforming compared with its potential despite being among the top half when it comes to connectivity, as per its reputation as a transport hub in the north-east. One factor impacting its SEP is education and skills – measured as the percentage of economically active professionals with a National Vocational Qualification (NVQ) Level 4 or above – where it ranks bottom among English regions. Based on this finding, the government and local authorities must prioritise addressing a clear skills gap to increase the region’s capability to export services.

The framework is unprecedented in giving a data-led methodology for identifying strengths, weaknesses and untapped potential for services growth across all UK nations and regions. As a new metric, it inevitably needs refining, particularly given its reliance on limited data available on services trade. For example, data on key SEP factors, such as higher education research and development (R&D) expenditure, was not available in all four UK nations.

One of the key recommendations the report makes is for the government to establish a regional trade-in-services taskforce, charged with improving data collection across the UK. It also advises that the government prioritises easing immigration and mobility rules, deepens trade relationships with international partners and creates a more stable business environment. These are all stated ambitions of the Labour leadership which I hope will become firm manifesto commitments.

What particularly struck me was seeing the impact that lower workforce skill levels have on the ability of regions to actualise SEP, including East Riding and Lincolnshire. Many high-value services jobs require significant skill levels, so the next government would be wise to develop policies towards attracting the best international talent to the UK. This could include reviewing and reducing fees associated with work visas, easing limitations on foreign student numbers and softening restrictions on post-study work.

While Brexit has clearly impacted the UK’s access to European labour, it has nonetheless given the government an opportunity to forge new and deeper trader relationships with international partners. The next government should be ambitious when negotiating new trade agreements, seeking deals that improve market access, remove regulatory friction and reduce costs for delivering services in overseas markets, while also ensuring there are stable and collaborative relations with the EU.

Finally, government must take a long-term approach to the domestic regulatory and fiscal business environment. Certain causes of instability, such as the war in Ukraine and Covid-19, are external and difficult to control. But the next government can pledge to businesses that it will keep its own house in order by avoiding unnecessary regulatory changes and consulting comprehensively with businesses when considering policy changes.

Generating economic growth will undoubtedly be among the main challenges for any future government. Building on the country’s world-leading services sectors, by helping nations and regions across the UK to fulfil their exporting potential, can help achieve this. IOE&IT looks forward to working with the next government to help all parts of the UK seize these opportunities.

[See also: In power, Labour will have to act like a wartime cabinet]