What moves on free movement?

What’s the issue?

The principle of free movement gives EU citizens access to labour markets in all of the EU member states (as well as non-member states that have committed to this principle, such as the members of the European Economic Area, and Switzerland). Along with the Irish border issue, it is one of the most heated issues in the Brexit debate.

Free movement is sometimes seen as a price to be paid for closer trading relations between the EU and the UK. This may be true politically, but it is not sensible economics. The reality is that free movement is a facilitator of trade. This is partly because it gives businesses much better access to skills. But there is also a very specific link via services trade. . One of the modes through which services are supplied on a cross-border basis is through the movement of a service supplier (e.g. an architect or a lawyer) from one country to another. Another mode is for businesses to set up a commercial presence (e.g. the branch of a bank or an office) in another country. But to make most of the ability to do this, businesses need to be able to recruit and move employees across borders.  Importantly, countries may reduce or lift restrictions on the movement of workers in this manner without committing to free movement per se. But committing to free movement is the simplest way of doing away with these restrictions across all sectors.

Losing free movement: a tax on services.

We can estimate the effects of losing free movement on services trade by representing this loss as an increase in services trade restrictions.

Figure 1 shows the overall impacts on UK services exports to the EU and services imports from it.


Figure 1 Effects of losing free movement on UK-EU bilateral services trade

Source: Frontier Economics calculations based on OECD, ONS data

Figure 2 reports results for  some specific sectors.

Figure 2 Effects of losing free movement on UK-EU bilateral services trade

Source: Frontier Economics calculations based on OECD, ONS data

The effects are particularly strong in the professional services sectors (law, accounting, business services), and knowledge intensive sectors such as computer services and research and development. The result is intuitive, given the importance to these sectors of hiring skilled employees, and deploying them efficiently across offices.

We also observe that that though overall, the effects on UK services exports dominate imports from the EU (figure 1), the effects on professional services is comparable. This probably reflects the growing (though still incomplete) interconnectedness of professional services sectors across the EU.

The figures probably understate the overall impact on UK services trade. This is because they capture EU-facing trade effects, and not global impacts. Yet UK services are globally competitive, and losing access to skills will affect that global level of competitiveness. For example analysis conducted by Frontier Economics for the  Royal Institute of British Architects suggests that 7% of UK architecture exports to non-EU markets could be in jeopardy if UK businesses were constrained in their access to EU skills. This is lower in percentage terms than the loss in EU-facing trade – but is significant nevertheless given that up to 85% of architecture exports go outside the EU.

The results suggest that both the UK and the EU have an inherent interest in reaching an agreement on the issue of free movement, not least because of the wider effects this has on trade. As observed above, the UK’s proposal is that it exit the single market for services, in return for it being allowed to relinquish the principle of free movement. The logic for this is not economic: it reflects a political decision based on an interpretation of the June 2016 referendum.

For a fuller analysis of the issues and a discussion of the modelling, please see our article at the Trade Knowledge Exchange