A Bright Spot for Trade

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In a world of slow economic growth, trade in services stands out as a rare bright spot. Recent industrial data paints a gloomy picture for the global economy. We have recently revised down our forecasts for global economic growth. Global trade remains weak, with the pace of export growth set to undershoot overall GDP growth again in 2016.

Digging into the trade data, however, reveals a more nuanced story. Trade in goods has faltered – in part due to lower commodity prices – but trade in services is powering ahead, fuelled by relatively robust consumer demand. Between 2005 and 2015 the nominal value of services exports grew at a compound annual growth rate of 5.9 per cent whereas trade in goods grew just 4.6 per cent. During the downturns in 2009 and 2015, the declines in exports of services in percentage terms were about half as severe as those for goods.

Service industries are playing an increasingly important role in economic development. They now account for the majority of economic activity in most developed countries and a rising share in many emerging markets. In France, India, the Philippines, the UK, and the US, services also play a key role in export trade – accounting for about 30 per cent of their total exports.

Some countries are seeing real benefits from encouraging service industries. In Sweden, for example, where wages are high, there is often little value in pursuing growth based on labour-intensive sectors in manufacturing. Sweden’s economy has evolved into one based on high value-added services. Technology companies, for example, have helped to boost employment, exports and growth. In 2015, services exports were the biggest contributor to growth and Sweden was the fastest growing G10 economy.

Globally, trade in services has the potential to grow further still. There are, however, barriers to overcome. Notably, policy and regulation are constraining the services trade by discriminating against foreign suppliers.

There has been some progress on liberalising services. The General Agreement on Trade in Services created credible international trade rules for World Trade Organization members. But the agreement, which came into force in 1995, does not deliver general market openness and the extent of liberalisation varies by country and sector.

A group of 23 WTO countries has sought to move forward independently with a Trade in Services Agreement, which would include market-opening commitments on a broad range of services including digital commerce. A number of countries have also pursued their own regional or bilateral trade agreements covering services.

Significantly, three mega trade deals – which are in various stages of negotiation or ratification – have the potential to deliver a substantial expansion in global services trade. They are: the Trans-Pacific Partnership, the Transatlantic Trade and Investment Partnership and the Regional Comprehensive Economic Partnership.

In the medium to long term, then, there are encouraging signs of improvements in the policy and regulatory environment. That is good news, because new agreements could further open services markets in leading trading nations around the world and, potentially, support global trade and growth. In the current economic environment, that makes sense.

This research was first published on 21 April 2016.