Transatlantic Services Trade and Investment: Dynamics of and Challenges to the ‘Special Relationship’ in the Twenty-First Century

Abstract

Dalingwater centers her analysis on transatlantic services trade and investment. She shows that although hard to measure, trade in services should not be taken for granted when assessing the volume of transatlantic trade between the USA and the UK. Both countries have specialized in the trade of finance and business services and are world leaders in the export and import of services. Admittedly, the surplus that both countries enjoy in this sector is not sufficient to offset the deficit in goods trade, but Dalingwater spotlights its dynamism and promising future growth prospects. This trade relationship could be boosted by the Transatlatlantic Trade and Investment Partnership currently being negotiated by the USA and the European Union. Nonetheless she considers that the UK and the US should endeavor to develop their trade links with emerging and newly industrialized countries.

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1 Introduction

Winston Churchill used the phrase ‘special relationship’ for the first time in Fulton, Missouri in 1946¹ with a view to establishing a strong strategic alliance between the UK and the USA. While the term is often used to refer to the close strategic and political relationship of the two countries, it can be extended to the economic realm. Both the USA and the UK have followed a very similar economic trajectory in the twentieth and twenty-first centuries. Prior to the Great Depression of 1929, classical economic thought was dominant in economic policy. However, this gave way to a more interventionist approach in the USA from the 1930s forward and in the UK during the post-war period. With the breakdown of the post-war Keynesian consensus in the 1970s, liberal economy theory was revived in the form of neoliberalism. Neoliberal politics have not been called into question on either side of the Atlantic.

Such shared political and economic ideologies helped form strong ties between the two countries. Yet, this relationship seems to have become rather one-sided and referred to more often by British officials than their US counterparts. US politicians have been known to refer to the ‘special relationship’ from time to time if a military intervention requires support. Kissinger, for example, referred to the intimate relationship that the Americans share with the British in diplomacy. However, the need for an alliance has been far greater on the British side since World War II. With the decline of the British Empire and the country’s dependence on the USA for reconstruction after World War II, the UK looked to the USA to help them become a super economic power once again. Maintaining close ties or a ‘special relationship’ was seen as a way of regaining political power and economic weight in the world. The USA is more likely to talk about ‘special relationships’ which it enjoys not only with Britain but also Israel, Germany and South Korea. Moreover, it can be argued that the close ties with the UK are currently on the decline. It is questionable whether ‘special relationship’ is still an appropriate term in light of progressive economic and political stances, which promote more open and diverse alliances. Cross-regionalism has also encouraged both countries to expand their horizons in terms of economic partners.

Nevertheless, while the economic ‘special relationship’ seems to be an exaggeration of the ties between the two countries, it can be argued that a ‘special service relationship’ still exists, particularly because of the nature of services and the strengths that both economies possess in this domain. This chapter will analyze many of the issues related to trade and foreign investment in services between the two nations. Research in this area has to date tended to focus on general transatlantic trade or global investment, but has failed to concentrate on the significant links in services trade and investment between the two nations. The links between the two countries are significantly greater when services are taken into consideration. This chapter will begin by considering conceptual difficulties regarding the exchange of services. It will then describe the dynamics of US–UK trade and investment in services. Barriers to trade in services will also be considered as well as which strategies might overcome restrictiveness. Foreign investment between the two countries and bottlenecks to expansion will then be analyzed. Finally, the chapter will also consider how this ‘special service relationship’ is currently being challenged and whether it is in the general interest of the two countries to continue these tight commercial bonds or whether developing closer links with other nations might be more desirable.

2 Conceptual and Measurement Difficulties

Both the USA and the UK, like many other developed countries, failed for a long time to recognize the essential role that the international exchange of services plays in the national economies because many services are difficult to trade beyond national borders. Trade in services encompasses an extremely large and complex range of sectors such as finance, telecommunications, retail trade, and so on. The conditions of exchange of services vary significantly depending on the sector, the means of supply, whether it be the state or the private sector, monopolies or competitive markets, and the extent to which the sector relies on technology for its supply. Currently, a number of services are still sheltered from international competition and require the producer to be close to the consumer, which greatly restricts international development. Other services cannot be traded because of a number of obstacles to trade.

One of the major obstacles to exchanging services across borders has always been the difficulty in defining and measuring services trade. First of all, the definition of services themselves is problematic because the service sector is so wide and varied. The Organization for Economic Co-operation and Development (OECD) defines services as: ‘a diverse number of economic activities not associated with agriculture, mining or manufacturing, involving the provision of human value added in the form of labor, advice, managerial skill, entertainment, intermediation, and so on.’² Traditionally, services could not be inventoried and had to be consumed at the point of production. However, technological advances have reduced the differences between services and other economic activities. In a number of services, it is now possible to consume the activities in real or deferred time without it being necessary for the producer to be physically present.

Second, beyond these taxonomical complexities, it is difficult to distinguish how services are traded. How can a national transaction be distinguished from an international transaction when the producer, consumer, and even the service itself can move? How can a service transaction be distinguished from a goods transaction? The osmosis between services and goods is evident if one looks at the exchange of services across borders. Services are dependent on manufactured products and vice versa. For example, services form an important part of the automobile sector in the form of scientific knowledge, engineering, design, and finance. Furthermore, the value of service trade is often underestimated in international trade figures because the contribution of services in the final manufacturing output cannot be calculated.

The World Trade Organization (WTO) has drawn up a list of services traded internationally, which encompasses consultancy (including professional services and information technology), communications, distribution, health, education and training, environment, finance, tourism, transport, construction, personal, cultural, and leisure services. Unlike merchandise trade, which is generally measured in terms of cross-border transactions, the WTO’s General Agreement on Trade in Services underlines four modes of exchange of services: (1) cross-border supply, where services are supplied from the territory of one party to the territory of another (which is similar to trade in goods); (2) consumption abroad of services supplied in the territory of one party and consumed by the party of another territory (e.g., tourism); (3) commercial presence, which involves services provided through the presence of service-providing entities of one party within the territory of another (e.g., in banking); and (4) presence of natural persons, services provided by nationals of one party in the territory of any other (construction projects or consultancy).

Traditional measures of world services trade only account for the first and second modes of exchange because they are more visible and close to trade in goods. This would explain why world services trade is only estimated at 20 % of total trade. The last two modes of exchange imply that one of the participants has to go beyond the national border to offer his or her services, often in industries such as tourism, leisure, education, or health. However, this type of service is invisible because the service itself does not go over the border; the service provider must go across the border to provide the services to the client overseas making it difficult to measure. Karsenty³ has estimated that this mode of exchange accounts for around 7–8 % of world gross domestic product (GDP), a considerable gain excluded from world trading accounts.

3 Dynamics of International Trade between the USA and the UK

Trade in services has accelerated in recent years, driven by the globalization of the world economy. Indeed, technological advances and the liberalization of services have transformed the nature and supply of services across borders. Since World War II, there has been a significant increase in the number of countries trading with each other, and an expansion in the number of services traded. The USA and UK are both now trading and investing in services worldwide. They are leaders in the export and import of services. The USA is the world’s biggest services trader and the UK is the second largest. Foreign investment in services is also very important for both countries. It is not surprising that there are strong links in trade and investment in services between the two countries given their domination of world markets. Trade in services between the USA and the UK is greater than between any other two countries. The ‘special service relationship’ seems therefore to be far less one-sided and very strong if we consider trade in services between the two countries.

The USA and the UK share of total trade in services compared with other sectors is estimated to be much higher than the world average. Exports of services represent 44 % of total exports in the UK and 31 % in the USA.⁴ Both countries have an overall trade deficit, but a surplus in services.

Over the past three decades, growth in services has outpaced GDP growth. Moreover, services represent a sizeable proportion of the economies of the USA and the UK (over 75 % of output and 80 % of employment). Since the 1970s, both economies have been transformed by the development of services. Up until 2007, exceptional economic growth in the USA and the UK, and resistance to cyclical shocks have been credited to the dynamism of the service sector. The recent renewal with growth can also be attributed to the performance of this sector.

However, the inherent difficulties to trade certain services or account for them, and the increase in imports of manufactured goods, has had a significant impact on the current account balance in both countries. The USA has experienced a trade deficit since 1976, which expanded considerably in the late 1980s and then fell back, only to swell again from the late 1990s forward. The reason for such a significant trade gap is that the USA became richer as their economy grew faster than other trading partners and, consequently, demand for foreign goods rose above demand for US goods. The financial crisis in Asia in the later 1990s led to the devaluation of Asian currencies, making the dollar more expensive and thus encouraging imports. The UK has experienced similar fortunes in terms of its trade balance. Until the 1980s, the fall in manufacturing exports was compensated by oil revenue and services in the current account, but the manufacturing deficit rose leading to a significant deficit of the current account.

Services run a surplus in trade in both countries, particularly financial services, information technology, insurances, and business services, but unfortunately this is not sufficient to cover the deficit in goods trade. Although the service sector surplus cannot cover the deficit of the manufacturing sector, the dynamism of the international exchange of services is impressive. The USA is the world’s largest services trader with exports worth $606 billion in 2011 and has a trade surplus of $179 billion.⁵ The UK is the second largest trader with exports worth 97.3 billion in 2011.⁶

Strong trade links between the two countries have been developed throughout history thanks to the commonalities and complementarities between them. Services trade links developed in parallel with the premature rise of services in the two countries. The commonalities and complementarities between the two nations are evident if we consider that they have a common language, common laws, and they both uphold a tradition of economic and political liberalism. Indeed, both the USA’s and the UK’s tradition of democracy and freedom of speech and constitutional checks and balances, corporate governance and accounting standards favor business owners rather than stakeholders. The common language is also very important, particularly in the exchange of services which requires the exchange of a significant amount of information. There is a close interaction between the two nations in terms of political, cultural, and business elites.

These trade links are as strong as ever today. The USA exported $58 billion worth of services to the UK in 2012, considerably more than exports to other main trading partners (Ireland, $28 billion; Germany $27, billion; France, $19 billion). US imports of services from the UK totaled $46 billion, again significantly greater than other main importers (Germany, $27 billion; France, $15 billion; and Ireland, $12 billion).⁷

Each country is specialized in particular areas. The USA and the UK both have a comparative advantage in business services and financial services. These are areas which, for the moment, are less exposed to competition from low-wage countries.

The UK has a world-class reputation in many professions, including UK commercial law and arbitration. The professional and business service sector also covers a wide range of activities, ranging from legal services, accountancy and audit to market research, consultancy, architectural and technical consulting, computer services, and advertising. While the sector is predominantly based in London and the South East, it also has important regional centers. The UK is the largest net exporter of professional and business services in the G7. In this sector, approximately 10 % of recent growth can be attributed to the international export of services. More business services are exported overseas than imported. In the UK, the most significant increase took place between 1995 and 2001, when exports rose from 11.7 to 31.7 billion pounds. Since the financial crisis of 2008, this sector has continued to grow by 20 % and represents 27 % of total exports.⁸

The USA also enjoys a comparative advantage in business services. Twenty one per cent of all US exports in 2011 were professional services, totaling $124 billion. Imports accounted for $75 billion. Within this sector, management and consulting services were the leading services exported, followed by research and testing services.⁹ Again the ties between the two countries are important for the growth of this key sector. The UK and Switzerland were the major recipients of US professional and business service exports. Trade in legal services is also very important between the USA and the UK. The UK and Japan accounted for one third of US exports of legal services in 2011.

Financial services represent an even greater part of total service exports. The USA has the largest and most liquid financial markets in the world. In 2011, exports in financial services were worth $92.5 billion in the USA and represented a $23.0 billion surplus. Financial services and insurance account for 5.87 million jobs in the USA.¹⁰

The UK also enjoys a comparative advantage in trade in financial services. Despite the recent recession, the City continues to play a major role in all areas relating to financial markets and is mainly responsible for the positive specialization. Until the crisis in 2008, the UK continued to gain market shares in this area and London maintained its position as a major financial center. Between 2002 and 2006, hedge funds more than doubled to reach 21 % of total world funds, whereas they fell in the USA from 42 % to 33 %. In 2009, financial services accounted for 28 % of total exports and 10 % of imports, despite a significant drop between 2008 and 2009 from 39.7 billion to 32.9 billion pounds, which was mainly due to decreases in exports of financial services by UK banks.¹¹

The growth of London as a financial center in the twentieth and twenty-first centuries has been inextricably linked to developments in the financial sector in New York. Moreover, innovations in this sector, which spurred on further growth in this leading center, were often dictated by New York bankers in London. London, as a specialized financial center, has adopted financial innovations coming from the USA to serve foreign and international markets. Most of these innovations have been adopted in the UK thanks to the significant number of US banks located in London. For example, one of the initial innovations, the first teleport located on Staten Island in 1981 containing satellite stations and fiber optic cables, was operated as part of a joint project between Merrill Lynch and the Port Authority of New York and New Jersey.

The UK has obviously gained from the dollar being the world currency for over a century and that the USA has chosen London as a refuge for dollar transactions. Furthermore, evidence suggests that each job on Wall Street leads to two more in the City. The importance of this axis has meant that the Anglo-American share in global finance is huge: 32 % for cross-border banks assets, 53 % for stock trading, 55 % for Forex and 71 % for interest rate derivatives in 2010. It is only in stock trading that the UK and the USA do not claim the two leading positions. In considering only foreign traded stocks, the UK’s and the USA’s share is greater than 80 %. This share has increased since 1995 thanks to the ever-increasing ties between the two countries.¹²

Education exports are also very significant in both countries. The USA is the global leader in education services. US exports of education services (which is foreign students’ education expenditure in the USA) increased by 8 % to $23 billion in 2011. Asia is the top destination for educational services: China ($5 billion), India ($3 billion), and the Republic of Korea ($2 billion). However, the top destination for US students studying abroad is the UK.¹³

The UK and US strengths are therefore in knowledge-intensive services. This implies that there is good potential for future innovation and development. In the two key sectors, business services and finance, this growth is very much dependent on trade between the two countries.

4 The Significance of Foreign Direct Investment

Although trade is significant, foreign direct investment (FDI) is now the main means of providing services across borders. FDI has been an important part of the US economy since it was founded in 1776. As early as 1778, French investors made loans to the USA under the Franco-American alliance. However, Great Britain soon became the USA’s greatest source of inward investment after the signing of the Jay Treaty in 1794, which strengthened relations between the two countries. The USA is still the main recipient of FDI (worth $168 billion in 2012). FDI has existed in the UK since the nineteenth century, but it only represented a small share of GDP and employment. In the twentieth century, FDI gradually started to develop. It was not until the 1990s that there was a real surge in this kind of investment. Indeed, between 1990 and 2002, FDI increased fourfold in the UK. This increase can be attributed to the strength of the pound, which encouraged many firms to produce abroad to become more competitive in the international sphere.

Nevertheless, the financial crisis, which began in 2008, had a serious effect on company investment overseas. The United Nations World Investment Report 2013 states that global foreign direct investment fell by 18 % to $1.35 trillion in 2012. According to the same report, the USA experienced a decline of its inward flows of 26 % and a fall of 17 % for its outward flows in 2012.¹⁴ According to the Office for National Statistics (ONS), net investment abroad by UK companies fell to 21.2 billion in 2009, its lowest level since 1994. There was also a large decrease in investment from the UK to the USA, down to 1.9 billion in 2009 compared with 33.6 billion in the previous year. Furthermore, investment by foreign companies in the UK dropped to its lowest value in six years. The net amount invested fell by 3.2 billion to 45.7 billion in 2009.¹⁵ These results were particularly surprising given that international trade has rebounded since the financial crisis of 2008. Investors have obviously been uncertain about the strength of international economies since the crisis.

Despite declines in FDI, the USA and the UK remain two of the most promising developed economy investors along with France and Germany. Moreover, these decreases were largely a result of declines in manufacturing investment. Indeed, as the World Investment Report underlines, services were affected the least by declines in FDI investment. Business trade, finance, and transport continued to show resilience.

The USA and the UK enjoy a comparative advantage in services FDI in many of the sectors in which they hold a comparative advantage in trade: financial services, insurance, and real estate. The USA is, by far, the largest market for the UK’s outward FDI, followed by the Netherlands and Luxembourg. British FDI in financial services is mainly concentrated in the USA. According to a report by the Organization for International Investment,¹⁶ the UK is the single largest investor in the US economy, representing 18 % of all FDI US holdings. US companies employ 1 million people in the UK and British companies employ 880,000 US workers across the USA. Many of the top British services companies invest in the USA: BT, Vodafone, and HSBC, and also smaller, less well-known companies. According to a Confederation of British Industry (CBI) report, the UK invested just under half a trillion dollars in the USA, which amounted to 17 % of all foreign direct investment. Investment from the UK is much higher than that from other main investors.¹⁷ It is therefore clear again that there is a very particular and fairly even relationship in FDI services between the two countries. However, this does not mean that there are no challenges to the special partnership that has emerged over time.

5 Challenges to Future Development of the US–UK Transatlantic Partnership in Services Trade and Investment

The development of services trade between the two nations and, indeed, other nations is affected by a number of challenges. Barriers to trade come both from the very nature of the services themselves and other unrelated challenges to growth. Many of the barriers are non-tariff barriers. It has been estimated that the benefits to removing these obstacles would raise global GDP by $110 billion a year.¹⁸

First, services can be difficult to store or transport, which limits the possibility of exportation. There is a need for a high level of person-to-person interaction, which may require a local presence. Often, service providers are small firms and, therefore, they are not as open to globalization and less likely to export a high volume of homogeneous products. There are also cultural barriers which can limit demand for imports of services and local restrictions on establishment and operations.

Restrictions also vary according to the service sector. For example, air cargo services face ownership and control issues, wet leasing problems (the leasing of aircraft with a crew), multiple licensing agreements, and customs and safety issues. Environmental services face issues of regulations relating to investment and establishment and entry conditions. Financial information and advisory services meet with problems and limitations regarding physical establishment, restrictions on provision and transfer of information and market access limitations. Trade may be restricted in professional services because of requirements for full retraining, nationality, and citizenship requirements. Finally, wholesale trade services must overcome obstacles regarding commercial presence requirements, specific measures affecting FDI in wholesale trade….

It is generally accepted that reducing barriers to trade is more difficult than reducing those for goods. Regulatory conditions and obstacles to trade tend to be specific to each service sector, therefore many international service negotiations are conducted on a sectoral basis. Moreover, since the financial crisis of 2008, negotiations have been impeded by the fragility of certain sectors. Negotiations to free trade in financial services can meet with various obstacles. Indeed, since the financial crisis, governments have set up regulatory frameworks to ensure better oversight and regulation of financial services. There is pressure not to lower these standards, supported, for example, by the consumer protection clause included in the Dodd Frank Wall Street Act of 2010. The audiovisual sector is also highly protected at European Union (EU) level, which can prevent the further expansion of trade in services between the USA and the UK. This is partly due to lobbying from France to protect its own industry. Law, insurance, medicine, and education also meet with a number of institutional barriers because appropriate credentials are required to work in these areas. There is a lack of harmony between qualifications required in the USA and the UK. Digital trade and e-commerce between the two countries is also often restricted. Since July 2013 and the disclosure of unauthorized data related to the National Security Agency, increasing pressure has come at the European level to set limits on cross-border data flows. This can negatively affect growth and innovation in a high value-added export sector.

Additionally, the USA raises significant barriers to investment, with limits to commercial establishment and/or citizenship requirements. EU tariffs are imposed on the USA when trading with the UK. Indeed, costs imposed on the EU from the USA amount to $1.9 trillion.¹⁹ However, according to a survey carried out by UK Trade and Investment to assess barriers to growth in the UK, the biggest obstacle to international business operations comes from unclear bureaucratic regulations. In particular, professional and business service sector companies raised concerns about the complexity and speed of visa administration.

Liberalization through trade agreements is seen to be the most effective way of reducing barriers to trade. Liberalization enables a wider supply of services. Because a significant number of services can be costly to trade, it is often more advantageous to establish a commercial presence abroad. Markusen, Rutherford, and Tarr²⁰ found that reducing barriers to inward foreign direct investment in the service sector has a significant positive impact on income in the FDI importing country. This impact is greater in the services sector than any other sector.

The biggest breakthrough to developing trade in services and overcoming barriers to trade has been the General Agreement on Trade in Services, negotiated as part of the Uruguay Round, under the auspices of the WTO in 1995. The agreement covered most services, apart from public services. It established the principle of non-discrimination in favor of national providers, which is known as the national treatment principle, and the principle of non-discrimination among members of the Agreement, called the most favored nation principle. According to Dee and Hanslow,²¹ it is estimated that all the countries of the world have the potential to benefit from trade revenues of over $260 billion per year after the elimination of all Uruguay Round trade barriers. Half that gain would come from the liberalization of services. The success of liberalizing key sectors has already been proved. The Agreement on Basic Telecommunications has meant that global revenue from mobile telephony increased by 25 % between 1999 and 2000, with 650 million global cellular subscribers in 2000, compared with only 214 million in 1997. In addition, consumers benefitted from a significant reduction in costs for international calls. The cost of US–UK calls fell by 95 % between 1982 and 1999, with the greatest reduction recorded in 1997, which was the year that the WTO concluded the agreement on basic telecommunications services.²² Prices have gone down and profits have risen in transport services thanks to liberalization. A vast number of other service sectors have also benefited in this same way. For this reason, both the US and the UK governments are committed to completing the Doha agreement.

In addition, the launching of the Transatlantic Trade and Investment Partnership (TTIP) in February 2013 to strengthen trading and investment links between the USA and Europe is also a significant move toward enhancing trade and investment links between the USA and the UK. One of the key areas of negotiation is the service sector. The idea is to address barriers to trade which were not previously addressed by the WTO or free trade agreements. Four rounds of negotiations were scheduled in 2013 and 2014. The goal is to cut tariffs in all sectors, but also to simplify technical regulations, standards, and approval procedures. This partnership also seeks to increase foreign investment. So far, only bilateral investment treaties exist, but the partnership should open up access in the US and the UK economies to more investment. TTIP has been estimated to boost the US’s economy by 90 billion Euros and the EU’s economy by 120 billion Euros. Furthermore, it has been estimated that the benefits that would accrue to the UK are at least $3 billion in increased GDP.²³

However, as mentioned previously, barriers still remain in areas where the UK and the USA could expand their special relationship. For example, both countries are seeking free trade of the English-language film industry. However, the French government has excluded this possibility in negotiations, underlining the need to protect culturally important industries from competitive pressures. This curtails expansion of trade between the two countries, particularly because British actors are often in demand in Hollywood. This protection means that British involvement in US film making has been reduced. No negotiations will take place as a result. Some believe, therefore, that rather than pursuing a larger transatlantic trade and investment agreement, it may be more beneficial for the two nations to pursue a bilateral agreement or allow the UK to enter the North Atlantic Free Trade Area. It has been estimated that this could increase UK exports to the USA by $1.9 billion per year.²⁴

6 Going Beyond the ‘Special Relationship’ in Trade and Investment

Although the ‘special service relationship’ seems to still be evident between the two major service trading nations, faced with economic decline and crisis, we can question whether exclusive trading and investment partnerships have a viable future. In the 1970s, the UK realized the importance of extending trading and investment links beyond the USA and the Commonwealth in order to reverse economic decline. Indeed, joining the EU in 1973 has had major benefits for the UK economy. The UK exports and imports more services to the EU as a whole than to the USA, accounting for 50 % of all service exports and 51 % of all service imports.²⁵ The two main partners within the EU are Germany and France representing respectively 11,221 million and 9,295 million pounds worth of exports and 8,387 million and 10,622 million pounds worth of imports.²⁶ The Single Act in 1986 and the subsequent signing of the Maastricht Treaty in 1992 enabled the free circulation of goods, services, and people in the EU, which led to a massive increase in the inflow and outflow of foreign investment within the EU. In the UK, trade to the EU represented 44 % of total exports in 1979, compared with 21.5 % in 1970. Between 1992 and 2011, exports of British services toward the EU increased from 28,215 million pounds to 97,300 million pounds.²⁷ Likewise, the USA also benefits from a wider exchange of services within the EU. Nevertheless, anti-European lobbies have recently called for the exit of the UK from the EU. Such a move may lead to reinforcing links with the USA because the UK would no longer need to abide by certain trading rules imposed by the EU. However, since the EU is the UK’s main trading partner, it is highly questionable whether this is really in the interest of the country.

The fall in trade between developing nations since the crisis has urged both the USA and the UK to reach out to other trading partners, notably in emerging markets. China is the USA’s third major trading partner. Although services trade may be less significant than the exchanges between the UK and the USA, US exports of private commercial services to China totaled $30 billion in 2012, an increase of 455 % since 2001. Furthermore, while the USA has a trade deficit in goods with China, it has a trade services surplus of $17 billion. FDI is also important with total inward stocks of FDI from China amounting to $5.2 billion in 2012, an increase of 38.2 % compared with the previous year.²⁸

Emerging markets have also taken on more importance in the UK. After the EU and the USA, China is the UK’s biggest trading partner, even if it only accounts for 2.4 % of UK exports. In order to boost trade, in November 2010 a summit between Prime Minister Cameron and Premier Wen agreed to target a doubling of bilateral trade to reach a value of $100 billion a year by 2015. Commonwealth countries also still represent important markets for the UK, with over $3 trillion in trade between Commonwealth countries, which contains several of the world’s fastest growing economies including India, South Africa, Malaysia, Nigeria, and Singapore. Saudi Arabia has also become an important trading partner for the UK, with the greatest increase in UK export values. With a rising middle class of consumers in emerging markets, trade in services could definitely represent significant markets for both investment and trade for both the USA and the UK in the future. James Emmett²⁹ from HSBC notes that the growth of emerging markets is phenomenal and will dictate world trade patterns over the next few decades.

However, services trade remains rather subdued between the UK and key emerging markets. The UK exported only 3,128 million pounds worth of services and imported only 1,369 million pounds worth of services. Exports to India only represented 2,227 million pounds and imports 2,312 million pounds, which is substantially lower than trade with the USA and European partners.³⁰ Many non-tariff barriers currently prevent expansion to emerging markets, particularly in services trade and investment. For example, in India, the infrastructure is poorly developed and bureaucracy inefficient. In China, property rights cap foreign ownership in services sectors and restrict EU investment in banking and telecommunications. China also raises linguistic and cultural barriers to growth. Lack of contacts, information, and resource problems represent major obstacles for UK and US exporters. In some markets with lower historical and cultural ties, both countries suffer from lack of information and understanding of networks.

7 Conclusion

The USA and the UK have undoubtedly one of the strongest trading and FDI records in services in the world. Commonalities and complementarities have led to the development of close bonds between the two. Services trade and investment developed later, but the fact that both countries have strengths in the same service activities has further increased trade and investment between the two countries. It would seem that while the strategic, military, and political ‘special relationship’ has been called into question in recent years, there is indeed a ‘special services relationship’ between the USA and the UK.

Despite a number of obstacles to growth in services, it has been estimated that international trade and investment will continue to grow at higher rates than those of global GDP growth. This growth is mainly a result of an increase in demand from the middle classes in emerging and newly industrialized economies. The USA and the UK should therefore benefit from the increase in demand for high-quality goods and services from the middle classes in both China and India. Currently these countries have a comparative advantage in the secondary sector, but are at a comparative disadvantage in financial and insurance services. It is therefore important for the USA and the UK to continue to expand their horizons and develop other partnerships in services trade and investment.