Trade in services

The role of the services sector in the growth of an economy has been critical in recent years. In fact, many developing countries depend heavily on their services sector, as compared to manufacturing or agriculture, for exports, GDP growth and employment.

The World Bank blog had this piece on the importance and growth of the service sector in international trade. It highlights the potential of the services sector in employment creation in both the developed and developing worlds.

Sources of Job Creation in Developed and Developing counties

Source: Ghani et al

Except for a fall in 2008 due to the financial crisis, the growth of the services sector has been phenomenal.

"It is known that, after some income levels, services (tourism, health, education, and leisure-related activities) tend to rise as a proportion of households’ consumption baskets. Furthermore, on the production side, in the wake of the wave of restructuring, downsizing and all that corporate jazz of the eighties, sources of enhancing competitiveness have been found in divesting and contracting-out the provision of business, logistic and professional services once internalized by industrial firms. However, the deep transformation that new technologies of information and telecommunications have been bringing to a substantial range of services is yet to be widely realized. 

As Ghani et al. note, until recently “services were considered as menial, low-skilled, and low-innovation”, whereas now “the number of services that can be transported digitally is constantly expanding.” Modern services constitute sophisticated key components of value chains in agriculture and industry. They can also themselves be unbundled and broken down into value chains just like physical goods. In this context, the authors show that productivity – value-added per employee – growth in services has substantially outpaced that in industry, again in both developed and developing countries."

Stressing the importance of services led export growth, the importance of modernization and productivity in the sector has been brought out as a critical factor in the sustainability of the competitive advantage. The WTO has brought out a new interactive tool on international trade. This shows the growing importance of the services sector.With services being a small proportion of the total disputes brought before the dispute settlement mechanism of the WTO, the coming days will see an increase in its importance as well as probable disputes related to market access and other aspects of the commitments under the GATS.