Trade in Services Report

Executive Summary: Cross-Cutting Themes in Scotland’s Trade in Services

This chapter draws together the key themes emerging from the sectoral analysis presented later in this report. While each sector operates within distinct regulatory and commercial environments, evidence from roundtables, case studies and supporting data points to a consistent set of factors shaping how services are traded, how barriers arise, and how firms respond in practice. These cross-cutting themes provide a framework for interpreting sectoral findings and understanding Scotland’s position within UK and global services trade.

Importance of services trade to Scotland

Services trade plays a central role in the Scottish economy, supporting high-value employment, productivity and international competitiveness across a wide range of sectors. While there are numerous methodological challenges associated with service sector exports data, official data indicates that the nominal value of total service exports stood at approximately £16bn in 2023, which is roughly double the value in 2008. Scottish inflation adjusted international service sector exports increased by 8 per cent in 2023 (relative to 2018) and nearly 41 per cent of all international exports originate from service sector businesses. Key service sector exports underpin high value employment and evidence suggests that these jobs tend to pay significantly more, in line with the higher productivity levels. The sectors examined in this report —including financial services, professional and business services, science and research, digital technologies and energy-related services are structurally knowledge-intensive and increasingly integrated into global markets and value chains.

Source: ESS

The selection of service sectors that have been the focus of this report has been shaped heavily from a trade policy lens. Although higher education and tourism are significant contributors to Scotland’s services exports, they are not priority sectors within a trade barrier reduction strategy. Dynamics in these sectors is driven primarily by visa policy, migration policy, global demand conditions, exchange rates and reputation rather than by regulatory market access barriers that can be addressed through trade negotiations or mutual recognition agreements. As a result, the scope for trade policy to materially alter outcomes is limited and hence scarce policy resources may be better allocated on regulated service sectors where targeted intervention can generate measurable gains.

It’s also worth noting that while sectors such as tourism and education receive significant attention, these are largely final-demand services consumed directly by end users and are therefore more exposed to cyclical shocks, as demonstrated during the pandemic. By contrast, many of the sectors examined in this report provide intermediate services that act as inputs into wider production processes. These activities tend to be more embedded in global value chains, are typically more resilient, and support specialisation and the development of sectoral clusters.

Scotland’s strong higher education base, combined with a skilled workforce and established sectoral capabilities, positions the economy well to capture a greater share of global services trade. In particular, the ability to generate, apply and commercialise knowledge intensive services provides a foundation for sustained export growth.

Unlike goods, services are delivered through multiple channels, including cross-border supply, commercial presence and the temporary movement of personnel. As a result, services trade is closely linked to firm capabilities, regulatory conditions and the ability to operate across jurisdictions. This makes services trade both economically significant and particularly sensitive to non-tariff barriers and institutional arrangements in destination markets.

A defining feature of the Scottish services economy is its high degree of integration with the rest of the UK. Businesses consistently report that they do not distinguish between Scotland and the rest of the UK as separate markets, reflecting shared regulatory, legal and institutional frameworks. At the same time, international services exports remain critical for accessing external demand, diversifying markets and supporting economic resilience.

All this highlights the importance of understanding not only the scale of services exports, but also the conditions under which they occur, particularly the role of non-tariff barriers, firm behaviour and sector-specific capabilities in shaping trade outcomes.

The nature of services trade and market access

A consistent finding across sectors is that services trade is shaped by the interaction between delivery modes, regulatory conditions and firm level relationships. Services are rarely delivered through a single channel. Instead, firms typically combine cross-border supply, commercial presence and the temporary movement of personnel when operating in international markets.

Unlike goods trade, services transactions are often ongoing and relationship-driven. Market access is therefore determined not only by formal regulatory requirements, but also by commercial practices and client expectations. Evidence from firm engagement highlights that so-called “soft” barriers such as requirements for local presence, familiarity with domestic standards and preferences for locally embedded delivery can be as significant as formal restrictions.

These features mean that barriers to services trade do not simply limit whether trade occurs, but shape how firms organise and scale their international activities. In practice, firms adjust delivery models, establish a local presence, or form partnerships to meet regulatory and commercial requirements in destination markets.

Emerging technologies, including artificial intelligence, are beginning to reshape how services are delivered across borders. While these developments have the potential to expand the range of services that can be traded remotely, they also introduce new considerations around data governance, regulation and market access. It’s also clear that while evidence and economic literature is lacking due to the rapid development and evolution of the technology – it introduces both risks as well as opportunities across service sectors.

Non-tariff barriers and regulatory fragmentation

Across all sectors examined, non-tariff barriers represent the most significant constraints on services trade. These barriers operate latently and are embedded within domestic regulatory and institutional frameworks in partner markets.

Common barriers include recognition of professional qualifications, licensing and authorisation requirements, restrictions on short-term mobility, requirements for local establishment, divergence in standards and certification regimes, and data-related regulations. Firms also highlighted the role of public sector procurement practices and client driven requirements in shaping access to markets.

These barriers tend to increase fixed costs, introduce uncertainty and restrict available modes of supply. Rather than acting as explicit prohibitions, they require businesses to adapt their models and incur additional compliance costs or completely restructure delivery.

While the distinction between hard and soft barriers is analytically useful, soft barriers are inherently more difficult to observe and measure. Unlike formal regulatory restrictions, they arise through commercial practices, client preferences and market norms. As a result, they are best explored through firm level evidence, including structured industry surveys, regular ongoing roundtable engagement and case studies that capture how businesses experience these constraints in practice.

Evidence from firm engagement suggests that soft barriers can, in some cases, be as binding as formal regulatory constraints. While hard barriers increase compliance requirements in a transparent and often quantifiable way, soft barriers can influence market access indirectly by shaping client expectations, procurement practices and delivery models. This makes them more difficult to measure, but not necessarily less significant. In particular, requirements for local presence, familiarity with domestic standards and established in-market relationships can impose costs and constraints comparable to formal licensing or authorisation requirements.

Assessing the relative importance of hard and soft barriers therefore requires a combination of approaches. Quantitative indicators, such as services trade restrictiveness indices, can provide insight into formal barriers, while firm-level surveys and case studies are better suited to capturing the impact of softer constraints. Developing more systematic metrics in this area remains a priority for future research, particularly in understanding how these barriers affect firm behaviour, investment decisions and the location of service delivery.

Business responses and adjustment mechanisms

Businesses across all sectors reported similar responses to the constraints outlined above. These responses reflect the need to adapt delivery models and organisational structures in order to maintain access to international markets.

In practice, firms tend to adjust in three main ways. First, many establish a commercial presence in key markets, either through subsidiaries or local offices, to meet regulatory requirements and client expectations. Second, firms form partnerships with locally established businesses, allowing them to navigate regulatory environments and access networks more effectively. Third, firms adapt their delivery models, including hiring locally rather than relying on cross-border provision, or modifying services to meet jurisdiction-specific standards.

In some cases, firms reported choosing not to enter certain markets, or scaling back activity where barriers were considered too costly or complex. In others, firms absorbed additional costs in order to retain market access, particularly in strategically important or high-value markets.

These responses highlight that non-tariff barriers do not simply restrict trade, but reshape how and where economic activity takes place. Adjustments in business structure, investment decisions and location of service delivery can affect productivity, the distribution of value added and the extent to which economic activity remains anchored in Scotland.

Many of these adjustments are not directly observable in trade statistics, reinforcing the importance of firm level evidence in understanding how barriers operate in practice.

Scotland’s position within the UK services landscape

A consistent finding across all sectors is the high degree of integration between Scotland and the rest of the UK. Firms do not treat Scotland and the rest of the UK as distinct markets, reflecting shared regulatory, legal and institutional frameworks. This integration provides access to a large domestic market and reduces internal barriers to trade.

At the same time, this high level of integration can mask important differences in the composition of the Scottish and wider UK services economies. While the UK is internationally competitive across a broad range of service activities, Scotland’s strengths are more concentrated in specific sectors and sub-sectors, particularly those linked to knowledge-intensive and specialised services.

This has important implications for how Scottish firms participate in international services trade. Rather than competing across the full range of service activities, firms are more likely to compete on specialised expertise, sector-specific capabilities and the delivery of high-value services within defined market segments.

As a result, Scotland’s international services trade is closely linked to its role within wider UK and global value chains. Scottish firms often contribute specialised services as part of larger projects or integrated supply chains, rather than operating as standalone providers across all markets. For policymakers, the key point here is the importance of aligning export strategies with areas of comparative strength, rather than attempting to replicate the broader services profile of the UK as a whole.

Implications for Scottish export opportunities

The importance of destination markets is evident across all sectors examined in this report. Scottish services exports remain concentrated in a relatively small number of mature markets, particularly the rest of the UK, the European Union and the United States. These markets offer scale, established demand and strong commercial linkages, but are also characterised by regulatory complexity and, in some cases, increasing divergence in standards, mobility requirements and compliance frameworks.

At the same time, emerging markets, including India, China and the Gulf states, present growing demand for knowledge-intensive services in areas such as financial services, engineering, digital technologies and research. However, these markets are often associated with evolving regulatory environments, less predictable market access conditions and a greater reliance on local presence or partnerships. This creates a different set of challenges for Scottish firms, particularly in navigating regulatory frameworks and establishing credibility in new markets.

Evidence across sectors suggests that export opportunities are shaped not only by underlying demand, but by the interaction between destination market characteristics, non-tariff barriers and firm capabilities. In particular, the ability to navigate regulatory requirements, adapt delivery models and maintain commercial relationships plays a central role in determining where and how firms can compete.

Opportunities are most evident where services can be delivered across borders with limited reliance on sustained local presence, or where regulatory and client requirements can be met through existing capabilities. This includes digitally deliverable services, as well as project-based and collaborative models that allow firms to operate internationally while retaining a Scottish base.

At the same time, greater alignment, mutual recognition and structured regulatory engagement can reduce barriers and support more seamless participation in international markets. This is particularly important where Scottish firms contribute specialised services within wider value chains and international projects.

Scottish service sector trade data and measurement considerations

Services trade is inherently more difficult to measure than goods trade, reflecting its intangible nature, the range of delivery modes involved and the role of commercial presence and intra-firm activity.

As a result, observed trade flows may not fully capture underlying changes in market access or competitiveness. Non-tariff barriers often affect how services are delivered rather than whether trade takes place. Firms may respond by establishing a presence in overseas markets, restructuring delivery models or choosing not to enter certain markets altogether. These adjustments are not always reflected in aggregate trade data.

This means that the absence of observable changes in trade flows does not imply the absence of binding constraints. Business-level evidence is therefore essential in interpreting trends in services exports.

Nowcasting is used to provide indicative estimates of recent export performance, helping to bridge the gap between the latest available data and current economic conditions. While these estimates improve timeliness, they do not fully capture structural changes in delivery models or market access conditions and should be interpreted alongside firm-level evidence.

The analysis also highlights a number of important data gaps and areas for further research. Current statistics are primarily based on recorded cross-border transactions and do not fully capture the range of ways in which services are traded and embedded within wider economic activity. In particular, there is limited visibility on services that are bundled with, or embodied in, the export of goods, sometimes referred to as Mode 5 services. These activities are increasingly relevant in sectors such as engineering, energy and advanced manufacturing, where services are delivered as part of integrated projects or long-term contracts.

There are also gaps in capturing firm-level delivery models, including the extent to which services are provided through overseas commercial presence, intra-firm activity or partnerships with local firms. These modes of delivery can significantly affect how and where economic value is created but are not always reflected in trade statistics.

Addressing these gaps would support a more comprehensive understanding of Scotland’s services trade. Areas for further research include improved measurement of services embodied in goods trade, greater use of firm-level and administrative data to capture delivery models, and enhanced granularity in sector-level statistics to reflect the role of Scottish firms within UK and global value chains.

Box E.1: Nowcasting Export Statistics Scotland

Nowcasting work was undertaken as part of the Trade in Services Research project to fill the gap between the latest official publication (covering up to 2023) and the present (2025). The goal is to provide timely insights into Scotland’s export performance by sector during periods where official data is unavailable. Currently, the next publication of Export Statistics Scotland, covering 2024 and 2025, is scheduled for 2027. This box presents an overview of the final results in table E.4 of the FAI’s nowcasts with the full and historical Exports Statistics Scotland series, currently available from 2008 to 2023, in growth rates. Further details of methodology, suitability of predictor datasets, robustness of models, and the Excel data sheets can be found in the Trade in Services Nowcasting Report, published adjacent to the Trade in Services Report. Two external datasets were selected as potential predictors of sector-level Scottish exports, for service-based sectors:

1. Quarterly National Accounts Scotland (QNAS) – Scottish GVA by industry (2008 Q1–2025 Q2)

2. ONSUK Trade in Services – UK service‐product export data (2008 Q1–2025 Q2)

These datasets were regressed, in growth rates, with ESS values for each sector from 2008, 2010, and 2016 onwards. Mean Squared Errors of back testing these regression models in the 2021 – 2023 period were then calculated to select the most appropriate model for nowcasting the 2023 – 2025 period. The nowcasted figures presented in the attached table are calculated from the best of the six regression models.

ONS Subnational Trade data and HMRC trade data are also under consideration as predictors for exports from goods-based sectors. However, this is currently an area for future research.

QNAS was most useful for nowcasting sectors where the relationship between Scottish exports and Scottish sectoral GVA was strong (i.e., where exports compose a large portion of the sector’s GVA). Meanwhile the ONS data was most useful for nowcasting sectors which are well integrated with their UK counterparts.

Starting models from 2008, 2010, and 2016 onwards reflects the impact of the Global Financial Crisis and Brexit on the exporting behaviour of the sector. This became particularly relevant where the reaction of sector to the Covid-19 pandemic mirrored vs differed from its experience during the Financial Crisis.

These nowcasts are not unquestionable predictions of Scotland’s exports, rather they aim to provide estimates of which level Scotland’s exports might be at until official statistics are published in 2027. An area for further research could develop a more detailed and robust methodology for nowcasting Scottish exports.

Source: Export Statistics Scotland, FAI Calculations

Supplementary Indicators to assess the growth of services sector exports

Supplementary indicators of services export growth should move beyond headline export values and focus on whether Scotland’s services base is broadening, deepening, and becoming more resilient over time. This includes measures of scale and participation, such as the number and share of Scottish firms exporting services, average export value per exporter, repeat-exporter and survival rates, and SME participation in international markets. Market reach and diversification indicators, including the number of destination markets served, reliance on the top three or five markets, concentration metrics, and exposure to faster growing economies helps assess vulnerabilities to shocks and over dependence on a narrow set of trading partners.

Given the importance of non-goods channels, modes of supply indicators are essential, capturing cross-border digital delivery (Mode 1), overseas commercial presence through affiliate revenues and foreign subsidiaries (Mode 3), and short-term business mobility and project-based postings (Mode 4), which are particularly relevant for professional, financial, digital, and energy-related services. Value-added and productivity measures—such as domestic value added embodied in services exports, services export intensity relative to Scottish GVA, exporter productivity and wage premia, and the share of knowledge-intensive services—provide insight into the quality and sustainability of growth. Finally, trade cost and barrier indicators act as leading signals of future performance and include sector level scores from the OECD Services Trade Restrictiveness Index, evidence on professional qualification recognition and licensing delays, survey-based reporting of regulatory or mobility constraints, and compliance costs faced by firms abroad.

Taken together, these indicators support a shift in focus from “how much Scotland exports” to how many firms export, how diversified they are, how they deliver services internationally, and what frictions are holding back further growth.