UK Government Report
Digital services in the UK
126.The ONS measures trade in telecommunication, computer and information services, which includes trade in “computer, news agency and other information provision related service transactions”, and telecommunications services including the “broadcast or transmission of sound, images, data or other information.” In 2015, the UK had a sizeable surplus in global trade in these digital services, importing £9.2 billion but exporting £15.8 billion. Such trade is also growing, now accounting for 7% of the UK’s global services exports.166
127.Within this sector, the EU was the destination for 43% of exports and the source of 56% of imports. The UK had a digital services trade surplus with the EU of £1.6 billion in 2015 (see Figure 6). Imports in digital services from the EU have also been increasing as a proportion of total imports, from 47% in 2007 to 56% in 2015.167
Figure 6: UK-EU Trade in digital services 2015
Source: Written evidence from the ONS (TAS0064)
128.It is widely accepted that the figures provided by the ONS do not accurately represent the importance of digital services and businesses to the UK’s economy. Professor Sir Charles Bean’s review of UK economic statistics concluded that “if the digital economy was fully captured by official statistics, it could add between one third and two thirds of a percent to the growth rate of the UK economy”.168
129.The limitations of the available data partly reflect difficulties in defining digital services and businesses. In a recent report, The UK Digital Sectors After Brexit, Frontier Economics defined ‘digital-producing’ sectors as those that produce digital goods and services. While this broad definition includes some manufactured goods, the report said that “81% of digital sector exports are primarily services”, including services key to the ONS’ definition, such as “software and services, internet, information and telecommunications services”. The report concluded that digital producing sectors of the UK’s economy contributed 5.3% to the UK’s Gross Value Added (GVA) in 2015, and had a collective turnover of £151 billion (4.8% of GDP).169 Their GVA also grew by a faster rate than the economy generally from 2009–2014, achieving a compounded average annual growth rate of 3.9%, compared to an average growth of GVA across the UK economy closer to 3.3%. The report estimated that at least 1 million UK jobs were dependent on digital producing sectors.170
130.Digital services also provide opportunities for future innovation and growth in business and trade. techUK told us that the UK had “a rich ecosystem of established and emerging digital tech businesses”, and that digital services “created jobs at almost three times the rate of the rest of the economy in the first half of this decade”. They also said that the increased adoption and exploitation of digital services would be “critical over the coming decade”, to capture the “significant income and productivity gains that will result from accelerating the process of digitisation across the economy”.171 Summarising the reasons to support UK trade in digital services, Antony Walker, CEO of techUK, said: “The sector is big, and probably bigger than we think it is. It is about the future, because the technology sector is the agent of change in a modern, global, digital economy, and we are really good at this stuff.”172
Priorities for a UK-EU FTA
131.techUK warned the Government to “beware the siren call of an FTA”, noting that “the tech sector is predominantly a services-based sector and the increasing ‘servicetisation’ of goods renders an FTA largely ineffective”.173 Skyscanner believed that “an FTA would certainly be preferable to an absence of provision for free trade”, but noted that “the extent of its attractiveness [would be] subject to the nature of the deal that is negotiated”.174 Witnesses highlighted a number of issues that would be critical to the UK’s future trading relationship with the EU, which are outlined below.
Access to skills and frictionless movement of persons
132.techUK said the “UK suffers from a chronic digital skills shortage which is hampering the growth of the tech sector”, noting that “high-skilled vacancies in tech companies made up the largest proportion of the professional vacancy market”.175 Frontier Economics said that to address this skills gap, UK firms in the digital sector “have been increasingly looking to European talent to accommodate growth”. EU-born workers represent a relatively small proportion of employees in the digital sector, approximately 6% of the total. Nevertheless, Frontier Economics found that “the foreign-born workforce, in particular the EU-born workforce, disproportionately drove growth in the digital sectors over the last half decade”. While the proportion of EU-born workers only increased from 4% to 6% of the total workforce over this period, they made up 17% of total workforce growth from 2009 to 2015. It would be important to consider “where future growth [in the workforce] will come from”176 after Brexit.
133.Witnesses warned that greater restrictions on the movement of EU nationals would lead to businesses basing themselves outside the UK. Mr Walker said: “If you are a very small company that is growing very fast you will move your company to where the talent is.”177 COADEC agreed that there was “a real risk that UK digital start-ups may simply opt to relocate to Europe, thus depriving the UK of the benefit of their growth”.178
134.Although there was widespread support for increasing digital skills in the UK’s domestic workforce, UK Interactive Entertainment (UKIE), techUK, COADEC, Skyscanner and Digital Catapult all stressed that this would be a long-term solution.179 UK Cloud wrote that “whilst many initiatives are underway to resolve the issue in the longer term, having free access to the much wider European talent pool is a pre-requisite for growth in the immediate term”.180
135.Skyscanner also highlighted the importance of ensuring the seamless temporary movement of employees and service providers across the EU. They employed “more than 115 non-British EU citizens across our business”, and relied on the “free movement of persons to allow our employees to move backwards and forwards between our UK head-quarters and our European subsidiary entities in a smooth and efficient manner”. The loss of “the ability to move swiftly” would put them “at a heavy disadvantage to our competitors when recruiting from the competitive tech talent pool”.181
Free flow of data
136.techUK told us: “In this digital age data flows cannot be separated from trade flows.”182 According to Frontier Economics, “about half of all trade in services is digitally enabled”. While recognising the difficulty of measuring the extent of cross-border data flows, Frontier Economics estimated that in 2015 the UK accounted for 11.5% of global cross-border data flows—compared to 3.9% of global GDP and 0.9% of global population. Frontier Economics also said that “75% of UK cross-border data flows are with EU partner countries”. This includes flows for information, communications, search, audio and video transactions and intra-company and intra-machine data flows.183 More information about data regulation is provided in Box 7.
Box 7: EU data protection rules
The Data Protection Directive 95/46/EC stipulates that the processing of personal data within the EU is subject to standards of transparency, ‘legitimate purpose’ and proportionality. Those who collect and process personal data (‘data controllers’) must protect it from misuse and must respect the rights of those who provide their personal data (‘data subjects’), for example by gaining their consent.184
In 2016, a major overhaul of the Directive was agreed, and the General Data Protection Regulation 2016/679/EU (GDPR) will replace the Directive from 25 May 2018.185 Under the GDPR, EU citizens’ personal data may only be transferred to a third country if:
the Commission has decided that a third country, territory or an international organisation ensures an adequate level of protection; and
the organisation receiving the personal data of EU citizens has provided adequate safeguards. Individuals’ rights must be enforceable and effective legal remedies for individuals must be available following the transfer.186
While the GDPR sets high standards for the transfer of personal data between EU Member States and third countries, it does not address the movement of non-personal data (for example data that is not about a specific individual), or restrictions on the movement of personal data for reasons other than the protection of personal data (for example under taxation or accounting laws). The most common restrictions are national data localisation laws, which require organisations to store certain types of data on servers based in a particular country. The Commission is currently consulting on possible changes to data localisation rules, in order to create a European data market.187
137.techUK called on the Government to “place protecting international data flows right at the heart of its negotiating strategy”.188 The Information Commissioner’s Office emphasised that “having a new UK data protection law similar, and essentially equivalent, to the GDPR will be critical to maintaining trade arrangements with the EU”.189
138.The Minister, Mr Hancock, told us that “we want to have a free flow of data with the rest of the EU”, and that “there is a great interest in the rest of the EU for having a free flow of data with the UK”. He supported the GDPR, saying that it “will come into force in the UK and [we] will put through domestic legislation to make that happen and make us compliant”. Although the UK would have the opportunity to amend data protection legislation in the longer term, he emphasised that “we would want to be very careful that anything we did to make compliance easier [for businesses] would also ensure that we could still carry on with the free flow of data to the EU”.190
139.Others argued that the UK would need to do more than merely implement the GDPR to protect data flows post-Brexit—it would also need to secure an ‘adequacy decision’ from the Commission, which recognised that the UK had adequate data protection standards. Frontier Economics described securing an adequacy decision as necessary to ensure that UK law “satisfies recent EU court case law and matches the expectations of the Article 29 Working Group Party’s templates for adequacy decisions”. An adequacy decision from the Commission would be based on “a full review of the UK’s domestic data regime to determine how the UK’s data protection landscape matches the requirements of EU law”.191
140.Mr Walker highlighted the legal challenge to the ‘Safe Harbour’ agreement192 (the previous basis for data flows between the US and the EU, which has now been replaced by the EU-US Privacy Shield193), to illustrate the difficulties of securing an adequacy decision. This legal challenge followed revelations about how US security agencies processed the data of EU citizens. Although UK agencies were involved in this data processing, as an EU Member State the UK was not directly implicated in the legal proceedings because, as Mr Walker explained, “when you are a member of the European Union … the European Court of Justice has no jurisdiction over security matters”. He continued: “When you are outside the European Union, the European Court of Justice has to take account of the adequacy of any data protection requirements”. Mr Walker raised particular concern about the Investigatory Powers Act 2016, noting that “the UK could be open to challenge by European privacy campaigners and a case brought to the European Court of Justice … could have real implications”.194
141.When asked about the Investigatory Powers Act, Mr Hancock replied: “We are very confident that the Act is consistent with both the GDPR and the fundamental rights of the EU.”195
142.Mr Walker also drew our attention to the Commission’s consultation on data localisation rules (see Box 7). He warned that the initiative could “require certain data to be hosted within the European Union”, meaning “that certain services could not be made available to the rest of the European market from here in the UK”. The EU could thus use the measure to “attract digital businesses away from the UK and require them to locate elsewhere in the European Union”.196
Abolishing roaming charges for consumers
143.The Broadband Stakeholder Group emphasised that “the large majority of telecoms revenue” was derived from “wholesale fixed and mobile voice and data services”, which were “predominantly delivered at national level”. Nevertheless, telecoms operators were affected by Regulation 2015/2120/EC, which provides for the abolition of roaming charges from June 2017, for consumers using their mobile phones while travelling in the EU. More information on this Regulation can be found in Box 8.
Box 8: EU roaming rules
Regulation 2015/2120/EU abolishes roaming charges by telecommunications operators within the EU. Since 2007 the EU has gradually reduced the charges EU mobile network operators (MNOs) can impose on subscribers for using telephone, SMS and data services in another Member State, and the Regulation, adopted in 2015 will abolish roaming charges across the EU by June 2017. The cost of roaming charges is derived from international agreements between MNOs located in different Member States on the wholesale prices for providing services to each other’s customers abroad. The abolition of roaming charges requires that the wholesale prices that networks charge each other be capped. The Commission has proposed to achieve this through secondary legislation to be enforced by National Regulatory Authorities, such as Ofcom in the UK.
The Regulation also specifies that retail charges for roaming services (which are added to the cost of wholesale roaming charges by MNOs as the final charge paid by the consumer) be eliminated.
Source: European Commission, Technical Factsheet about roaming charges (December 2016): https://ec.europa.eu/digital-single-market/en/news/end-roaming-charges-travellers-european-union-how-will-commission-make-it-work [accessed 22 February 2017]
144.Which? highlighted the potential re-introduction of roaming charges as one of its main concerns for consumers after Brexit: “As it stands, and from what the Commission has said previously, the EU’s Roaming Regulation is an internal market instrument.”197 Matthew Evans, CEO of the Broadband Stakeholder Group, raised a similar concern: “On the question of whether the UK would be able to participate in … the decrease in wholesale roaming caps, I would have to say that I suspect not.”198 Broadband Stakeholder Group told us that it was “unclear whether or how these measures would continue to be implemented post-Brexit”, arguing that one option would be “to negotiate with the EU a regional trade agreement to enable UK operators to obtain similar wholesale roaming rates to operators throughout the EU Member States”.199
145.We asked whether EU MNOs would be obliged to offer their UK counterparts capped prices on wholesale roaming charges after Brexit. Mr Evans said this depended on “the willingness of EU operators to continue to keep their wholesale costs in line with ours”. He conceded that the asymmetry in travel volumes, whereby more UK consumers travel to the EU than EU citizens travel to the UK, as well as the fact the UK travellers “use more data generally” than EU visitors to the UK, could create an incentive for EU MNOs to increase the wholesale charges they applied to UK networks.200
146.We also took evidence from MNOs. Sky told us that, if the UK no longer benefited from the cap on wholesale roaming charges, “it is unlikely that operators such as Sky could offer domestic tariffs when consumers are travelling abroad”. Sky urged the Government to ensure that as a “result of bilateral arrangements”, the UK remained party to the “EU regulatory regime for international roaming”.201
147.Consultants Oxera agreed that the uncapped costs of wholesale roaming charges could be passed onto UK consumers. They also suggested that, outside of the EU Regulation, UK MNOs may also increase retail charges on top of wholesale roaming charges, in order to increase profits. Comparing the impact of the EU Regulation on costs for consumers in EEA countries and Switzerland (which effectively trades telecoms services on the basis of WTO rules), Oxera estimated that the revenue of UK MNOs could increase by between £250–750 million annually. They said that “around three-quarters of this gain would be due to retail price revenues, which derive from UK consumers, effectively constituting a “transfer [of wealth] from consumers to MNOs”. Oxera said this reflected the finding that “retail roaming prices are typically a large mark-up on the equivalent wholesale charge that underpins the service”.202
148.The Minister, Mr Hancock, noted that “we are a much bigger market than Switzerland”, and argued that “we have a much better position in terms of size.” He confirmed the Government was “undoubtedly” in favour of the abolition of roaming charges (and had “argued for it”), and that this issue “[would] no doubt be part of our thinking as we go through the negotiation”.203