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.

World Bank, Free trade and Globalisation - Some questions

The World Bank in a recent Report has summarised the costs and benefits of free trade to a country's economy. Elaborating on the benefits it said:

"For participating countries the main benefits of unrestricted foreign trade stem from the increased access of their producers to larger, international markets. For a national economy that access means an opportunity to benefit from the international division of labor, on the one hand, and the need to face stronger competition in world markets,on the other. Domestic producers produce more efficiently due to their international specialization and the pressure that comes from foreign competition, and consumers enjoy a wider variety of domestic and imported goods at lower prices.

In addition, an actively trading country benefits from the new technologies that “spill over” to it from its trading partners, such as through the knowledge embedded in imported production equipment. These technological spillovers are particularly important for developing countries because they give them a chance to catch up more quickly with the developed countries in terms of productivity. Former centrally planned economies, which missed out on many of the benefits of global trade because of their politically imposed isolation from market economies, today aspire to tap into these benefits by reintegrating with the global trading system."

Recognising the risks of free trade, the report continued:

" But active participation in international trade also entails risks, particularly those associated with the strong competition in international markets. For example, a country runs the risk that some of its industries—those that are less competitive and adaptable—will be forced out of business. Meanwhile, reliance on foreign suppliers may be considered unacceptable when it comes to industries with a significant role in national security. For example, many governments are determined to ensure the so-called food security of their countries, in case food imports are cut off during a war.

In addition, governments of developing countries often argue that recently established industries require temporary protection until they become more competitive and less vulnerable to foreign competition. Thus governments often prohibit or reduce selected imports by introducing quotas, or make imports more expensive and less competitive by imposing tariffs."

 It is increasingly seen that as a country integrated into the global economy its ratio of trade to GDP increases. In the developed world this ratio is upto 40% while it is less than 10% in the developing countries.  Globalisation and integration into world markets with an increase in trade and integration has immense benefits but it also brings with it concomitant risks. Can a country understand the dual effects and craft domestic policy to address the challenges in an integrated world? While trade would benefit certain sectors of the economy, it is beyond doubt that inefficient industries and sectors would wither away under international competition. This would inturn have disastrous consequences to domestic constituencies in terms of local economies, jobs and growth. One has to address this dichotomy in the overall strategy to globalise. Further the whole issue of "equitable globalisation" is extremely relevant. While people from different countries will increasingly access markets and the world economy will get globalised, a large segment will remain untouched. The State would remain as a strong provider of access to opportunity for those left out by the markets. However, trade policy experts must think of making global markets more inclusive in terms of giving a stake for a large section of population. Adoption of a free trade system must not necessarily mean the withdrawal of the State. One must tread the middle patha nd find the truth somewhere in between. the balance is not easy to find. Of what relevance is world trade and globalisation to a tribal woman in an interior village in Africa? Of what relevance is it to a marginal farmer in a developing country? How could the small, entrepreneur in a city benefit from international trade? How would an unorganised worker in an informal sector in an underdeveloped country visualise his or her stake in an international economy? International trade is not only about mega corporations or countries engaging in trading of products. It has far more strategic implications. To address issues and challenges of the 21st century we must ask ourselves how a less protectionist and liberal trade environment would benefit multiple stakeholders with multiple problems and issues. Answers to these questions perhaps would help assuage strong resentment within domestic constituencies about the ill effects of free trade and globalisation. There are no easy answers. But we need to recognise that the questions exist.