Services trade is vital to the growth of the global economy and comes in many forms. However, their contributions are often wrongly underestimated. Services span Indian exports of software services and foreign banks providing financial services to domestic customers to consumers downloading music or movies from an overseas provider or even the English cricket team receiving lessons in Australia. They make up half of global trade and have expanded faster than goods for much of the past two decades. With the right policy support and growth opportunities within global value chains, services trade could define the next chapter of globalisation and provide a bulwark against anti-trade sentiment globally. 

As countries get richer, services gradually become the dominant sector, overtaking manufacturing and agricultural industries. In the US and UK, services make up 82% and 80% of these economies, respectively. However, when it comes to global trade, much of the focus is still on physical goods rather than services. This happens for several reasons. First, goods like cars, washing machines and sports watches are more tangible than financial, business or logistics services. Second, and clearly related, trade policy in recent decades has focused on tariff reduction, which applies to goods rather than services. Fortunately, the focus is shifting—albeit slowly. Before we examine the progress in global rules related to services, we need to understand why services trade is so important for advanced and developing economies. 

The increasingly blurred boundary between goods and services trade will offer opportunities for firms to join global value chains

Services offer important opportunities for economic growth. That is the conclusion of a 2021 World Bank report that examined the promise of service-led development. This is particularly important for developing countries, where economists previously worried that the export-led growth strategies developed countries have followed would fall short. Services can complement a country’s manufacturing base. Studies have shown that services liberalisation positively affects the productivity of a country’s manufacturing sector. Better still, the impact of such liberalisation on manufacturing exports is even greater than a reduction in tariffs. Services also offer direct opportunities for exports that do not require a manufacturing sector. For example, local language and cultural considerations are increasingly important as mobile phone applications spread globally. Health and education services are also increasingly traded across borders. 

Global value chains (GVC), especially those that include both goods and services, offer multiple touchpoints for developing countries to engage in global trade. The opportunities are demonstrated in an emerging trend—known as the servicification of manufacturing, which refers to manufacturing products that require greater input of services. In these GVCs, the boundaries between the physical products and the embedded services are becoming increasingly blurred. Embedded services in these products can include research and design (upstream services), as well as marketing, logistics and retail (downstream services). As this servicification develops, more opportunities to join GVCs may come from circular business models. As greater connectivity offers opportunities for post-sales services to customers, some products may move to a subscription-based model. For these products, value for the consumer is more closely related to the service that the product provides than the ownership of the product itself. Rolls Royce’s engine service subscription model for airlines is a case in point. So, whether it is directly exporting services or providing services to manufactured products pre-or-post sale, the opportunities for increased services trade are becoming more diverse and more substantial. 

WTO agrees first deal on services trade in 24 years—but efforts will need to be maintained

There is significantly more scope to liberalise services trade than goods trade. The Services Trade Restrictiveness Index (STRI)  provides a useful measure of a country’s barriers to services trade. The STRI enables the comparison of the restrictiveness of an economy's regulatory and policy framework with respect to trade in services. The US, one of the most open advanced economies with respect to services trade, scores 34 on the STRI (on a scale of 1-100 where 0 indicates that none of the restrictions underlying the index is applied, and 100 means that the subsector is completely closed to foreign services). By comparison, the STRI for key emerging markets is 43, 42, 65, 60 and 34 for Brazil, Russia, India, China and South Africa respectively. Apart from South Africa, there is a clear gap with the openness to services of the US economy. 

Encouragingly, the World Trade Organisation (WTO) has recently agreed the first services trade deal in 24 years. On December 2nd, 67 WTO members concluded negotiations on the Joint Initiative on Services Domestic Regulation (SDR) that will slash administrative costs faced by service providers. The initiative addresses regulatory barriers that relate to transparency, legal certainty, and regulatory quality and facilitation. The impact of the new agreement could be significant. Research from the WTO and the Organisation for Economic Cooperation and Development suggests that the implementation of this initiative could amount to US$150bn annually globally, with the largest gains for financial, business, communications and transport services. Supporting its global impact, this was agreed on a most-favoured-nation basis, meaning that it benefits all countries with WTO membership. The SDR follows regional and bilateral trade agreements that have also addressed services trade, including the Regional Comprehensive Economic Partnership and the recent UK-Australia free trade agreement. It is likely that more bilateral agreements will seek to address services trade but, as services liberalisation is difficult, progress is far from assured. Given the significant growth and development opportunities afforded by enhanced services trade, it is critical that measures to liberalise services trade continue at pace. The future of the global trading system depends on it.