London’s status as a world city has been resilient to global economic and political change over the past 50 years, and even to shocks like the financial crisis of 2008-09. However, as the last chapter argued, London’s success has been accompanied by long-standing problems, common to many world cities.

These challenges of strained infrastructure, soaring living costs and social polarisation inhibit London’s success and help prevent its economic and cultural wealth being shared more fairly.

The UK’s decision to leave the European Union presents a much more immediate challenge, posing risks, threats and opportunities for the capital. Before the June 2017 general election, Brexit was expected to entail an end to freedom of movement for EU nationals and the UK leaving the European Single Market and Customs Union – as set out by Prime Minister Theresa May in January 2017.[1]  Subsequent chapters propose specific policy responses to these risks, and more general measures that will help London to maintain its position.

Many risks involved in departure from the EU are common to all parts of the UK. This report focuses on the London specifics – the risks that disproportionately affect the capital. Primary among these are the challenges to London’s openness to trade and talent.

World city trade

London is the first exporter region for services (46 per cent of the UK’s service exports), and the second for goods, after the South East.[2] [3] Exports have generated a value of around £130bn a year in recent years, up from £75bn in 2002.[4]

London is slightly less reliant on the EU than other regions: roughly 40 per cent of London’s exports go to EU markets, representing circa seven per cent of London’s GDP – whereas other regions send on average half of their exports to the EU, representing 10 per cent of their GDP. This is partly because the capital is already more engaged in worldwide trading,[5] but mostly because London’s economy is so much larger and diverse than that of the other regions, meaning the capital is more self-reliant than other UK regions.[6]

Recent analysis also suggests that London and the South East are the only regions that have become less dependent on EU markets between 2000 and 2010.[7]

We should not make too much of estimates of London’s exports by destination. Measuring trade by sector and region is complex, and the figures miss important ways in which London’s trade is bound up with the EU. For example, they do not pick up the services that London businesses provide to exporters outside the capital. Nor do they take account of the firms who export globally, but are based in London at least partly because of its access to the European Single Market. In addition, trade between London-based businesses and the subsidiaries they set up in other EU does not show in the UK’s trade balance.[8]

In coming years, looking beyond Europe and North America will become increasingly important for exporters. Europe’s share of global middle-class consumption is expected to fall from 38 to 20 per cent from 2009 to 2030, and North America’s from 26 to 10 per cent, while the Asia-Pacific region will account for nearly 60 per cent (up from 23 per cent in 2009)[9].  Although trade relationships thrive on proximity,[10] this shift in export opportunity will be crucial to London’s future success, and strengthens the case (made in Centre for London’s 2014 report Trading Places) for the Mayor of London to be given a strategic lead role for trade in London.[11]

London’s goods and services exports

While goods still account for around 25 per cent of London’s exports, growth in recent years has been concentrated in services, which have doubled in value to around £100 billion in the past decade (not adjusted for inflation).  As we set out below, London’s growing strength in service sector exports has important implications for post-Brexit negotiations, which will need to address the complexities of regulatory, as well as tariff, barriers to trade.

Within services, financial and business services and other specialised services such as architecture were the largest components of growth in the 2000s. Since 2008, growth has been slower overall, but smaller export categories like travel and transport, engineering, and film/television (see table below) have been growing faster.[12] Nonetheless, financial and business services still account for around 50 per cent of London’s exports.

London services exports

Source: Greater London Authority (2014). London’s exports estimates. Above average rises are highlighted.

For many of the service sectors in which London is most strongly represented, the greatest challenge to trade after Brexit will be continuing access to the regulatory regimes that seek to ensure common standards across EU boundaries, rather than the tariff barriers that are applied to goods. The challenge is sharply accentuated if the UK fails to agree a trade deal – long-term or transitional – before March 2019. In the case of goods, there are World Trade Organisations rules to fall back on. These do not apply to many of London’s critical service sectors. Leaving without a deal would present real problems for service sector businesses in trading from the UK; for the more mobile sectors, an obvious solution would be to move operations to other EU states.

The potential impact of different regulatory regimes is illustrated by TheCityUK’s research estimating that the impact on the UK’s economy could range from a loss of 3-4,000 jobs and £2 billion of revenue, if UK financial services were able to retain access on similar terms to today’s, to a loss of up to 35,000 jobs UK-wide, revenue of £20 billion and tax revenues of up to £5 billion, if the UK had nothing beyond World Trade Organisation rules to rely on. In the latter scenario, knock-on effects could double the impact.[13]

Similar arguments have been made for legal services, where the UK’s legal framework and courts system make it a jurisdiction of choice for contract administration and dispute resolution. TheCityUK has argued that the UK Government needs to work with EU partners to ensure that legal judgments are mutually enforceable, and that parties to contracts can continue to specify that these will be interpreted under English law.[14]

The House of Lords’ Select Committee on the European Union has reviewed barriers to other sectors. These include mutual recognition of qualifications, without which it would be impossible for lawyers, accountants and architects to work with clients in other EU states – and for the NHS to hire staff trained on the continent.[15]

Leaving the EU without a new air services agreement would hamper growth in air transport exports (and damage London’s connectivity). Flying between EU cities depends on membership of the European Common Aviation Area (ECAA), and the ability of airlines to fly from the UK to the USA rests on the Open Skies agreements negotiated by the EU.[16]  Following Brexit, the UK would need to negotiate membership of the ECAA or reach bespoke agreements with the EU, and the USA and other countries with whom the EU currently has air services agreements[17].

Digital services would require UK data protection standards to be recognised as adequate by the EU to be able to share data over borders. Industry experts suggest that this may not be automatically or easily acquired, and could require an EU review of UK security and surveillance legislation. WTO rules still lag behind digital innovation, and could put the UK at a significant disadvantage as a tech centre.[18]

Creative industries, including film, television and audio exports have been among London’s fastest growing in recent years – these will also need specific agreements to ensure mutual recognition of intellectual property rights and the ability of UK broadcasters to export to the EU.[19]

Other exports, like tourism and education, rely on EU citizens being able to travel freely to London, and could be damaged by more restrictive immigration rules.[20] And many service sector exports are closely tied to freedom of movement. Service professionals move temporarily to another country to deliver services to a customer. These transfers represent a relatively small share of service exports (around five per cent)[21], but help to establish and cement new trading relationships, which London has been spearheading these thanks to its rail link to the EU.

World city skills

London is far more dependent on EU workers than any other region or nation within the UK, so restrictions on freedom of movement are far more challenging for London’s economy. The erosion or loss of London’s EU workforce would not just hamper the ability of world-leading industries in financial and business services, design and creative industries to hunt for the best talent in a labour market of 500 million, but would also rob London’s hotels, restaurants, construction sites and care homes of the staff who keep the city running.

London is home to 13 per cent of the UK’s population but a third of the country’s EU citizens. Reliance on EU workers has grown as the government has sought to curtail non-EU migration, while EU nationals work freely in the UK.

Workers born in the European Economic Area (EEA) now hold 13 per cent of London’s jobs overall, but a quarter to a third of jobs in lower-paid sectors like construction and catering (table below). These sectors will face big challenges if migration from the EU is reduced, but they are not where most of the EEA-born in London work (chart below). Most of the EU citizens working in London are employed in a middle- to high-skilled role (82 per cent, against 73 per cent in the rest of the UK).[22]

Foreign-born workers in each industry, 2015

Source: ONS. Jobs in London by SIC, SOC, HiQual, COB and age, 2015. User requested data Ref 005733. 23 May 2016

ONS. Workforce jobs by industry, 2016. Number and proportion of people in employment: by country of birth and industry, ages 16 and over, April 2015 to March 2016.

Whatever is agreed about the status of London’s current EU workforce, the loss of open labour flows still presents a challenge. The growth in London’s workforce is forecast to continue – by more than 20 per cent, or 1.2 million jobs by 2041 according to GLA projections. [24]  Not all of this forecast growth would take place if migration was significantly curtailed – migration creates jobs as well as filling them – but on the basis of current employment patterns, more than 150,000 of these new jobs would be filled by people born in the EEA.

Furthermore, the existing population is not static. Every year between 10,000 and 50,000 EEA-born Londoners move from London to the continent.[25]  Indeed, London’s pattern of EU migration seems qualitatively different to that in the rest of the UK’s: the number of EEA citizens arriving to work in the capital (measured by registrations for national insurance numbers), has grown much faster than the population of EEA citizens living London, and the difference is much wider than in the rest of the UK. This suggests that many European workers – like UK workers – come to London for a few years, then leave the city (either to return to their home nation or to other parts of the UK). The imminence of Brexit may encourage those EEA citizens who are already in London to stay put, but restrictions on immigration could also combine with existing outflows to reduce significantly London’s EU population in coming years.[26]

Migration, students and soft power

The potential effects of reducing migration into London go beyond the challenge of skills shortages: there are collateral longer-term effects on public finances, London’s economy and soft power.

The National Institute for Economic and Social Research has outlined the positive fiscal and employment impacts of migration.[27] Research from the Office for Budget Responsibility suggests reductions in migration would have a larger impact on public finances than changes in trade[28] – but the figures are minor compared to broader changes in productivity and employment. Links between immigration levels and productivity that have been established anecdotally, but are difficult to quantify.[29] There is also some evidence on the positive impact of diversity on innovation in the US[30] and the UK[31] – though measuring innovation remains a challenge.

Universities across the UK face challenges in maintaining participation in EU-funded research programmes, and in attracting EU students, but the latter challenge is particularly pressing in London. In 2014/15, around 33,000 of London’s 360,000 students were from other EU countries – almost 10 per cent, compared to six per cent in the rest of the UK.[32]  Many of these students, who pay the same fees as domestic students under reciprocal EU arrangements, would be put off by the higher fees paid by international students (which are around twice as high as the domestic levels, and do not qualify for grants or student loans). EU applications to UK universities have fallen slightly since the EU referendum[33] (though the picture is mixed; some leading London institutions have seen growth).

The number of non-EU students in London universities has stalled in recent years, despite larger global student cohorts, party because of the restrictions placed on student visa numbers and the clampdown on post-study work permits. Limiting EU student numbers further, in order to meet net migration targets, could undermine one of London’s leading export sectors, challenge the funding model of London’s universities, and damage London’s economy and soft power.

The next chapter proposes policies that could reduce uncertainty around service trading, keep London open to European talent, and preserve London’s role as one of Europe’s main economic and cultural centres.

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Footnotes

[1] UK Government. The government’s negotiating objectives for exiting the EU: PM speech. 17 January 2017.

[2] London accounts for 30 per cent of the UK’s total exports

[3] Keijonen 2015.

[4] Theseira, M. (2014). Trading Places; Maximizing London’s Exports Potential. Centre for London.

[5] Los et al. 2017.

[6] McCann, P. (2016). The UK regional–national economic problem: Geography, globalisation and governance. Routledge.

[7] Los, B., McCann, P., Springford, J., Thissen, M. (2017). The mismatch between local voting and the local economic consequences of Brexit. Regional Studies, 1-14.

[8] House of Lords European Union Committee (2017). Brexit: trade in non-financial services. Authority of the House of Lords.

[9] Kharas, H., Gertz, G. (2010). The new global middle class: A cross-over from West to East. Wolfensohn Center for Development at Brookings, 1-14.

[10] McCann 2016.

[11] Theseira 2014.

[12] Keijonen 2015.

[13] Oliver Wyman (2016). The impact of the UK’s exit from the EU on the UK-based financial services sector.

[14] TheCityUK (2016). The impact of Brexit on the UK-based legal services sector.

[15] House of Lords European Union Committee 2017.

[16] House of Lords European Union Committee 2017.

[17] IATA, The Impact of Brexit on UK Air Transport, June 2016.

[18] House of Lords European Union Committee 2017.

[19] House of Lords European Union Committee 2017.

[20] House of Lords European Union Committee 2017.

[21] House of Lords Select Committee on the European Union (2017). Corrected oral evidence: Brexit: Future Trade between the UK and the EU. http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/eu-internal-market-subcommittee/brexit-future-trade-between-the-uk-and-the-eu-in-services/oral/42064.html

[22] ONS (2016) International immigration and the labour market, UK: regional data. For definition of skill levels, see: ONS (2016). Article: International immigration and the labour market, UK: 2016.

[23] Except people employed by households

[24] GLA (2016). Long-term labour market projections.

[25] ONS Provisional Long-term International Migration 2001-2014, based on ONS International Passenger Survey.

[26] While London would be highly impacted by the curtailing of freedom of movement with other EU countries, we know little about the effects of public policies on migration. More restrictive migration policies are unlikely to provide full control on migration into the UK: the number of work permits delivered by the Home Office to non-Europeans declined by around 30 per cent between 2005 and 2016, but the non-European population in the UK still rose by 70 per cent since 2002. See https://www.gov.uk/government/publications/immigration-statistics-july-to-september-2016/work and ONS, resident population by region and nationality, 2000/01 to 2015.

[27] Portes J., Forte G. (2016). The Economic Impact of Brexit-induced Reductions in Migration. National Institute of Economic and Social Research.

[28] Portes J. (2016) Brexit, Migration and the UK Economy. http://www.niesr.ac.uk/blog/brexit-migration-and-uk-economy#.WJMhykWLRZh

[29] Rolfe, H., Rienzo, C., Lalani, M., Portes, J. (2013). Migration and productivity: employers’ practices, public attitudes and statistical evidence. National Institute of Economic and Social Research.

[30] Hunt, J., Gauthier-Loiselle, M. (2010). How much does immigration boost innovation?. American Economic Journal: Macroeconomics, 2(2), 31-56.

[31] Nathan, M., Lee, N. (2011). Does cultural diversity help innovation in cities. Evidence from London’s firms. SERC Discussion Paper69, Spatial Economics Research Centre, LSE.

[32] Higher Education Statistics Agency (2015).

[33] UCAS (2017). Applicants by domicile at the 15 January deadline.