How Britain's Economic Future Still Depends On Brussels

Britain has a services-based economy: 80% of our output and employment is in services. Professional services, finance, travel, telecoms/computing are all key areas, as is degree to which retail sales are online. This is clearly an advantage for a set of islands when it comes to exports, because services don't need to be shipped. But services may be subject to other trade barriers, such as licensing requirements when offered in other countries, as well as unfair trade practices by local competitors and suppliers. Rules and how well they're enforced are important issues. About half our trade is with the EU, because it's closer than the rest of the world. The EU is also a market of 448m people, 412m of whom are internet users, with 288m online shoppers. That makes enforcement of the EU's new Digital Markets and Digital Services Acts all the more critical, regardless of the fact that the UK no longer sits at the regulatory table.

Scale of UK services exports to the EU

While we generally import more than we export, that overall trade deficit being £33bn in 2023. That's the result of a deficit of £187bn in goods imported over exports, offset by a surplus of £153bn in exported services (including services that overseas customers bought here in the UK, as well as services performed by UK firms working abroad). 

Brexit has obviously made the EU market less accessible for UK firms, so the loss of the free movement in goods, services, people and capital makes earlier comparisons unreliable. But based on trade data for 2022: 

• the EU accounts for 36% of Britain's total services exports;
• we have a trade surplus in services with 14 EU countries and a deficit of trade in services with 13 countries, our closest neighbour being the largest surplus (Ireland at £14 billion) and Spain the largest services deficit (£11 billion); 
• our single largest type of exported service was £55bn worth of “other business services”, being legal, accounting, advertising, research and development, architectural, engineering and other professional and technical services, representing 38% of all UK service exports to the EU. 
• exports of financial, travel and telecoms/computing/data services are also very significant.  

The Importance of Digital Platforms

You can see from the nature of our most successful services exports that their marketing and supply depends on digital platforms and related services, including search engines, cloud/hosting, app stores, browsers, e-commerce marketplaces and messaging services. 

While most of the services exported by British businesses will be supplied electronically to EU businesses of varying sizes, the online consumer markets are obviously also very important. In the retail sector, over a third of British business is now online, making the UK the third largest country in terms of the share of retail that is e-commerce, after the US and China. By contrast, about 15.4% of retail sales across all EU countries occur online. In absolute terms, however, the UK only has a domestic market of 66m internet users, while the EU has 412m (92%) of its population using the internet, 70% of whom (288m) buy stuff online. 

At that scale it becomes very important that the EU's digital markets are well regulated, and that businesses and their customers are shielded from unfair competition and trade practices.

How Does the EU Ensure Fair Digital Markets?

The Digital Markets Act (DMA) builds on existing competition law by rooting out unfair practices of very large digital platform operators (“gatekeepers”) when providing services that other businesses use to reach their own customers online. Alphabet, Amazon, Apple, ByteDance, Meta and Microsoft have all been designated as gatekeepers, since they effectively act as private rule-makers who could potentially create ‘bottlenecks’ and ‘choke points’ that limit access, unfairly exploit personal and business data for their own purposes and/or impose unfair conditions on market participants. All face exploratory investigations under the DMA by the European Commission in connection with search services, app stores, browsers and messaging services, to see if they might be luring away customers from other businesses who use those platform services. 

The EU's Digital Services Act (DSA), on the other hand, protects EU-based users of online communication, e-commerce, hosting and search services, by exempting intermediary service providers (“ISPs”) from certain liability for performing certain duties. There are extra requirements for ISPs with at least 45m average monthly active EU users (known as ‘very large online’ (or 'VLO') platforms and search engines). Even UK providers may be caught, where it has an entity based in the EU or has a 'substantial connection' with the EU (i.e. a significant number of users as a proportion of the EU population or by targeting its activities at one or more EU countries). Services such as Bing, Google Search, Facebook, Instagram, Snapchat, TikTok, YouTube, X/Twitter, AliExpress and LinkedIn already face exploratory investigations under the DSA. Basically, the European Commission wants to know how these businesses: 

• mitigate the risks of creating and spreading information using generative AI and risks to electoral processes; 
• block illegal content; 
• protect users' fundamental rights; 
• avoid promoting gender-based violence; 
• protect children; 
• protect users' mental well-being; 
• protect users' personal data; 
• protect consumers; and 
• avoid the infringement of copyright and other intellectual property rights.

How Do British Businesses Benefit From the DMA and DSA?

British businesses will not want to spend heavily to acquire and deal with customers via gatekeepers' services, only to see the gatekeepers take those customers on directly. That's where the DMA comes in. It should not matter that a foreign business is among those who suffer any violation, since that will also affect EU businesses and customers that the DMA is primarily designed to benefit. 

More widely, British businesses trading online the EU customers should also be reassured that the DSA regime is designed to ensure those customers are treated well and fairly in the intermediary environments. Otherwise, they risk losing both the channels through which they attract and deal with EU customers and/or the EU customers who are unwilling to engage with those channels. Equally, businesses will want to know that they are taking on genuine customers and dealing with reputable service providers online, rather than risking exposure to fraud and intellectual property rights infringement via their EU sales and marketing channels.

Either way, it's clear that Britain's service exporters are highly dependent on the EU trade bloc and its regulatory regime, regardless of Brexit.

Whether they can expect the same protection at home is another matter...

EU Countries To Offer Their Citizens Digital Identity Wallets From 2026

The EU is finally pushing forward with aRegulation that requires member state governments to offer their citizens a voluntary European digital identity wallet from 2026.

Under the new law, member states will offer citizens and businesses digital wallets that will be able to link their national digital identities with proof of other personal attributes (e.g., driving licence, qualifications, bank account). Citizens will be able to prove their identity and share electronic documents from their digital wallets simply, using their mobile phones. 

 The new European digital identity wallets (EDIWs) will enable all citizens to access online services with their national digital identification, which will be recognised throughout the EU, without having to use private identification methods or unnecessarily share personal data. User control ensures that only information that needs to be shared will be shared.

For the past 20 years, various players have pushed the idea that you could have a digital identity issued by any number of certified 'trust providers' based on certain agreed standards. This would go hand-in-hand with concepts of 'personal data stores' and access to your transaction data in machine-readable form ('midata')that would allow you to control how your data is monetized. There was speculation that the trust providers would likely be banks and telecoms companies, or perhaps dedicated new entities; but there were always concerns about whether they really had the core competencies required - or the risk/liability appetite - as well as issues relating to security and privacy.

The European Commission explains that:

• by 2026, each member state must make a digital identity wallet available to its citizens and accept EDIWs from other member states according to the revised regulation 
• sufficient safeguards have been included to avoid discrimination against anyone choosing not to use the wallet, which will always remain voluntary 
• the wallet’s business model: issuance, use and revocation will be free of charge for all natural persons 
• the validation of electronic attestation of attributes: member states are required to provide free-of-charge validation mechanisms only to verify the authenticity and validity of the wallet and of the relying parties’ identity 
• the code for the wallets: the application software components will be open source, but member states are granted leeway so that, for justified reasons, specific components other than those installed on user devices need not be disclosed 
• consistency has been ensured between the wallet as a form of eID and the scheme under which it is issued...

Qualified website authentication certificates (QWACs) will ensure that users can verify who is behind a website under well-established eID security rules and standards (which enable open banking service providers to authenticate each other's systems, for example).

There's Nothing Intelligent About The Government's Approach To AI Either

Surprise! The UK government's under-funded, shambolic approach to public services also extends to the public sector's use of artificial intelligence. Ministers are no doubt piling the pressure on officials with demands for 'announcements' and other soundbites. But amid concerns that even major online platforms are failing to adequately mitigate the risks - not to mention this government's record for explosively bad news - you'd have thought they'd tread more carefully.

Despite 60 of the 87 public bodies either using or planning to use AI, the National Audit Office reports a lack of governance, accountability, funding, implementation plans and performance measures. 

There are also "difficulties attracting and retaining staff with AI skills, and lack of clarity around legal liability... concerns about risks of unreliable or inaccurate outputs from AI, for example due to bias and discrimination, and risks to privacy, data protection, [and] cyber security." 

The full report is here.

Amid concerns that the major online platforms are also failing to adequately mitigate the risks of generative AI (among other things), you'd have thought that government would be more concerned to approach the use of AI technologies responsibly.

But, no...

For what it's worth, here's my post on AI risk management (recently re-published by SCL).

SuperStupidity: Are We Allowing AI To Generate The Next Global Financial Crisis?

I updated my thoughts on AI risk management over on The Fine Print recently and next on my list to catch up on was 'the next financial crisis'. Coincidentally, a news search prompted an FT article on remarks about AI from the head of the SEC. 

While Mr Gensler sees benefits from the use of AI in some efficiencies and combating fraud, he also spots the seeds of the next financial crisis lurking not only in the various general challenges associated with AI (e.g. inaccuracy, bias, hallucination) but particularly in: 

• potential 'herding' around certain trading decisions; 
• concentration of AI services in a few cloud providers;  
• lack of transparency in who's using AI and for what purposes; and
• inability to explain the outputs. 

All familiar themes, but it's the concentration of risk that leaps out in a financial context, though it was also a wider concern identified in hearings before the House of Lords communications committee and by the FTC, as explained in my earlier post. 

The fact that only a few large tech players are able to (a) compete for the necessary semiconductors (chips) and (b) provide the vast scale of cloud computing infrastructure that AI systems require is particularly concerning in the financial markets context because the world relies so heavily on those markets for economic, social and even political stability - as the global financial crisis revealed. 

We can't blame the computers for allowing this situation to develop.

So, if 'superintelligence' is the point at which AI systems develop the intelligence to out-compete humans to the point of extinction, is 'superstupidity' the point at which we humans seal our fate by concentrating the risks posed by AI systems to the point of critical failure?  

AI is a Set of Technologies, Not The End Of Work

We've heard a lot for a long time about artificial intelligence replacing our jobs and, ultimately, the human race. We're told we'll need to retrain to do things that AI computers cannot. But beware the hype. After all, AI is just a set of technologies and we've coped with the introduction of new technology before. Rather than having to retrain, it's more likely you'll be using AI without even realising it. And there are cases where robotics are needed because humans are reluctant or unavailable to do certain tasks... The real concern is that the hype distracts us from more immediate and greater threats posed by AI and how to manage and regulate the risks appropriately.

Much of the hype surrounding AI confuses its development with its actual or potential uses, whether in business or in the course of other activities, like writing a wedding speech. As with any technology, there's obviously a business in developing AI, selling it and deploying it. But how useful it is depends on who uses it and how.

This confusion is perhaps partly driven by the fact that some businesses are developing and operating 'open' AI systems-as-a-service focused on particular use-cases or scenarios (chatbots, research, text-to-image and so on), so you conduct your activity on their platform rather than your own device. The hype surrounding these platforms is intended to attract investment and users, but it seems unlikely that they will become the Alphabet (Google), Microsoft or Meta (Facebook) of tomorrow, especially as those tech giants are funding AI development themselves, to cement their own market dominance. 

Yet, while the tech giants might dominate the markets for their technology (and some markets where they act as more than just a tech business, like advertising), you'll see that they aren't dominating every business sector or industry in which their technology is used. 

It's therefore the people and businesses who successfully deploy and use AI who will benefit from those technologies, not the developers. This is no different to the use of telephones, laptop computers or email (or a distributed ledger supporting a cryptocurrency). 

Nobody who went from using a typewriter or the analog version of a telephone, laptop, email or work intranet would say that they're redundant or even work less as a result of using the new/replacement technology. If anything, those tools have enabled changes in work patterns that have meant that humans work faster, longer and, ultimately, harder.

And there was more 'retraining' involved in introducing PCs, email, spreadsheets and video conferencing than AI, which may be so embedded in existing processes that you don't even realise you're using it, whether in terms of product recommendations, chatbots and virtual assistants, predictive text and search features, or tagging your friends in the social media. 

There is plenty of speculation that truck drivers will be replaced by robots. Maybe truck technology has evolved to mean fewer drivers per tonne of truck, but there has been a steady increase in the number of trucks (and therefore demand for drivers) in the UK, for example, and driving a giant HGV takes more skill than smaller vehicles. Yet, ironically, there is a persistent shortage of drivers, so that transport firms are effectively being forced to invest in autonomous vehicles, just as farmers are turning to robotics due to a shortage of humans willing to pick fruit and vegetables). There are also many risky tasks that are better done remotely by machines, such as working in radioactive or other dangerous environments. AI may still be a threat to those still willing to do those tasks, yet they could also benefit from the demand for experienced humans to help in the wider development, deployment and use of the robots. This is no different to previous waves of technological innovation.

Yet all humans have a genuine concern if their personal information is being included in an AI's training data or is otherwise being harvested and used without your consent. That's where humans need to focus urgently, as well as in the creative industries where copyright violation by AIs is also rife. We also need to be on guard against hallucinating AIs, disinformation, deepfakes and misinformation - particularly in an election year.

More on that soon...