Insight
Britain’s services firms can’t defy gravity, alas by John Springford and Sam Lowe 5 February 2018
Britain’s specialism in traded services, some of which can be delivered electronically, has led Brexiters to claim that the country’s trade will inevitably unmoor itself from Europe. In fact, Britain is not about to enter a “post-geography trading world”. Trade between two countries is greater if they have larger economies, and less if they are more distant from one another. This observation, underpinning the ‘gravity’ model of trade, has proven itself to be remarkably robust. Evidence from the gravity model undermines the government’s ‘global Britain’ narrative, in that it shows that the EU is the UK’s natural trading partner; that the single market has done more to raise trade in services than free trade agreements (FTAs); and that any barriers thrown up as a consequence of Brexit will be hard to offset with lower barriers to trade with the rest of the world. Yet, after the Brexit vote, gravity has fallen foul of a choir of non-believers. The Brexit Secretary, David Davis, doubts its continued relevance. Nearly half of the UK’s exports are now in services – an unusually high proportion for a medium-sized economy – and Davis contends that cultural links and language, not geographic proximity, will become more important in the future. Liam Fox, the Secretary of State for International Trade, has heralded the post-Brexit opportunities on offer in a “post-geography trading world”. The implication is that the UK’s prowess in services means that distance will become irrelevant. When it comes to goods and agriculture, the idea that trade is detached from geography is flat wrong. The rest of the EU is the UK’s biggest trading partner thanks to its size and proximity. Distance reduces trade in goods significantly, although new research suggests distance has become a little less important over time, with the cost of trade imposed by distance falling by 11 per cent between 1986 and 2006. But it is at least intuitive that distance should matter less in services, and therefore for Britain’s trade, compared to for example Germany, which specialises in manufactured goods. Britain does conduct more trade with countries with which it shares a language than economic size and distance would predict. And services are increasingly delivered electronically, with financial transactions, advertisement mock-ups, and architectural blueprints sent to clients over the internet. The cost of air travel has steadily fallen since the 1960s, making it cheaper to do business across borders. However, this intuition does not show up CER INSIGHT: Britain’s services firms can’t defy gravity, alas 5 February 2018
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