Is the UK really a Services Export Superpower?

I had understood that whereas the UK has for many years had a very large trade defect in goods, this was  made up for by the excellence in the UK services export sector. Indeed league tables generally put the UK as second only to the US in terms of services exports.The 2015 World Atlas for example puts the US services exports first at $690.1bn, the UK second at $344.4bn and IE eight at $127.7bn.

I have quoted the Irish figure because I have been a keen observer of the Irish Economy for years and  there is a consistent anomaly: both countries think they have a considerable services export surplus with each other! This of course is not possible but, whereas goods are very easy to track, services are a lot more difficult to measure, sampling and statistical errors can occur and there is no defined methodology.

This was interesting but, perhaps, not of major importance. I learned recently however that it was a much wider problem as reported in the Financial Times. The 2014 figures for example are displayed in Fig. 1 and show, in each and every case, for the top 10 services trading partners the UK maybe considerably overestimating its services surplus with its partner, with dramatic differences especially for the US, Netherlands and Ireland – swinging from an impressive surplus to a substantial deficit.

Fig.1 UK vs top services trading partners.

As stated by Chris Giles in the FT article:

For the 10 countries with the largest discrepancies, British data held at the UN recorded a combined services trade surplus of $77bn in 2014, the most recent year of comparable statistics, while data from the other countries showed Britain has a services trade deficit of $39bn.

What is worrying from the measurement point of view that there is a pattern emerging. The fact that with every single one of the top services trading countries the UK thinks it has a greater trade surplus than the partner country is indicative of a systematic rather than a random error.

This could well have serious consequences for HMG policy. The Chequers option so favoured by PM May for example will align its goods policy very close to the EU but leave the UK free to trade in services as it wishes. The likelihood of course of the Chequers plan surviving in its current form is of course zero. This is not the point. If the UK really has a trade deficit rather than a substantive trade surplus in services, possibly the entire thrust of HMG policy, based on putting all ones eggs in the services basket, is a false premise?

Comments

  1. Peter May -

    Agree with this – all eggs in any one basket is a crazy idea. That’s the real lesson of Venezuela – or even Saudi Arabia.
    The contradictory statistics reminds me of the enormous difference (which I think still continues) in the amount of wine exported by France to the UK and the amount that is actually received in the UK. Either the English Channel is in fact running red and alcoholic, or smuggling involves Tesco.
    Probably, in fact, neither side is actually very good at collecting statistics. And that must be even more difficult when they are services – and so without prominent physical evidence.
    Anyway we should be much less preoccupied with our ‘strengths’, so called. We should not be picking winners and going for a specialist economy but for an economy that is as diverse as possible, so we retain differing skills locally.
    Britain should particularly avoid parasitical financial services specialisation, where, when the fall comes, as seems likely eventually, it will be completely disastrous for the UK, unless, we can but hope, it comes gradually..

    1. Sean Danaher -

      that is interesting. I thought goods were well tracked and we could believe the trade figures. I was unaware of the wine example.

      I agree entirely that the reliance on one particular sector is unhealthy. Diversification obviously improves resilience and the over-reliance on the “City” is not good for the UK economy.

      What is worrying is that high skills jobs seem to be leaving the UK – moving largely to the EU27.

      My understanding of the IE/UK skill flow is an unprecedented number of UK SMEs moving some or all of their staff to IE. There is an opposite flow of low skilled agricultural workers moving from IE to the UK.

      Brexit seems to be making a bad situation even worse.

  2. TonyB -

    @Sean. How do I read the light blue data on the left hand side of the graph? The numbers for the USA, Netherlands, IE etc reflect that those countries believe they ran a surplus, as indicated by a negative value to the UK economy. If so, the UN’s indicated a $77Bn surplus, for 2014, seems shaky.

    This is all deeply worrying and I am not surprised by the performance of the worst UK Govt in my living memory. The News used to report balance of payments as an indicator of the nation’s economic health now it focuses on growth to baffle the masses of their wondrous powers. Presumably the growth figures are distorted by incorrect Services estimates. When that adjustment is taken into account does it infer we are in or near recession?

    1. Sean Danaher -

      Tony
      you are correct. Chris Giles says the $77bn surplus turns into a $39bn deficit. I’m not sure if the statistic offices of the trading partners are any better at measuring. It could be of course that the measurement procedures find exports easier to find than imports. I suspect the real figure is between the two.

      The UK growth this year is supposedly around the 1-1.5% region so it could well indeed take the UK into recession territory.

  3. Ivan Horrocks -

    You’ve hit on something here, Sean. And sadly I think your analysis is accurate, at least in the sense that the claimed figures are wildly optimistic. Anyone whose worked in the service sector knows how difficult it is to measure – or even simply define clearly for the purpose of recording – the flows back and forth, particularly when organisations have multiple offices located in different countries. For example, I read an assignment from one of my MSc students working in middle management in a large media organisation in which they detailed how the various strategic and innovation management related activities and responsibilities were divided up between offices in four seperate EU contries and how they went about combining them to develop and supply their services around the globe. In such a case how do you divvy up percentages? And in any case, each participating entity (in each country) has an incentive to maximise their claim over what they’re contributing (which was one of the issues my students was looking at) thus contributing to the inflation of services provided between one country and another. That’s just one example, but from amongst the 70+ students I had on my course last year at least 60% will be working in organisations doing similar stuff and in a similarly multi-country manner so that gives an idea of the scale of the issue.

    1. Sean Danaher -

      Ivan

      thanks. This makes a lot of sense and sounds like human nature – we all like to overestimate our importance and impact, some overtly – some covertly.

      The magnitude of the problem is informative as indeed is the interconnectedness of the modern world.

      It supports the theory that the true figure for export contribution will be somewhere in the middle – the UK has a surplus in services but nowhere near as spectacular as JMG likes to spin.

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