Even in a digital age, trading services often requires people to move too, says Sam Lowe
The internet makes the world feel smaller. Gone are the days when sending documents overseas took months, or paying for a 20-minute call to a supplier in the Philippines required taking out a second mortgage. Yet services trade is still constrained by geography – a 10% increase in distance between countries tends to reduce services trade between them by 7% – and it often requires people to move too.
Why? Time zones are one reason: it is not much fun sitting in the office until midnight in order to have a five-minute conversation with a client on the other side of the world. The need for local expertise is another. Moreover, business often requires face-to-face interaction, while moving people around the world costs time and money.
And we see this in the data. Typically, if a company that provides services wants to enter a new market it does so by establishing a presence within the territory. For example, 69% of the services sold by European firms abroad are provided on location through a foreign subsidiary or branch. A further 10% are provided by people briefly moving to foreign countries to deliver services contracts, or by foreigners coming to the EU to make use of a service at source, be it staying in a Greek hotel or having dentures put in by a Bulgarian dentist. Even in a digital age, only 21% of services are provided remotely.
Indeed, all of these different means of supplying services are interlinked – and underpinned by the ease with which people can move. Consider a UK-based investment bank that wants to expand into the Indonesian market. Its success depends not just on the ease of opening a branch in Jakarta – and the ability to transfer the requisite staff there – but also on its ability to sell to new clients remotely from its London headquarters, and the ease with which its bankers can meet Indonesian clients in both countries.
In practice, barriers to people moving often curtail investment, in-person services provision and the remote selling of services. For example, the tighter visa rules introduced by President Donald Trump to cut immigration also hamper foreign businesspeople on short business trips. His restrictions on H-1B visas for temporary skilled migrants impede the outsourcing of IT services to Indian companies. Technology companies are increasingly investing in the Canadian city of Toronto to bypass tighter US immigration rules, as Jack Graham highlighted for OPEN.
The reliance of services trade on the mobility of people in a particularly pressing issue for Brexit Britain, which is desperate to boost the services exports in which it specialises but is also intent on restricting immigration further once it leaves the EU.
As I have recently argued for the Centre for European Reform, if the UK is to maintain existing levels of openness to trade in services with the EU, it will need to revisit its intention to end freedom of movement between the UK and the EU. As for boosting trade with the rest of the world, immigration policies that restrict foreign student numbers and prevent them working in the UK once they graduate undermine the university sector, one of the UK’s most successful services export industries.
But winning public consent for liberalising immigration in order to open up trade opportunities can be difficult. In the UK, polling by Sophia Gaston of the Centre for Social and Political Risk found that the British public were only willing to accept higher levels of immigration in exchange for a free-trade agreement with three countries: Canada (61%), Australia (60%) and the United States (55%). Only 37% were willing to do so to boost trade with China. The figures were even lower for Brazil (36%), India (35%), Korea (35%), Mexico (33%) and Indonesia (31%).
This is not only a problem for the UK. Globally, the populist backlashes against globalisation and immigration are interlinked. President Donald Trump’s view that international exchanges are zero-sum and that America is losing out from them underpins both his protectionism in trade and his desire to build a wall on the Mexican border to keep out immigrants.
Services trade tends to create jobs, boost investment, raise productivity, lift living standards and bolster tax revenues. Governments everywhere ought to do more to liberalise it. And to do so politicians ought to be honest with voters that it requires people to move more easily too – and that this is a good thing too.
Sam Lowe is a senior research fellow at the Centre for European Reform and a fellow at OPEN. Follow him on twitter @SamuelMarcLowe