While politicians often spend an inordinate amount of time praising manufacturing and trade in goods, a big portion of what is actually traded in the world is made up of services. Despite the importance of services trade to the global economy, the costs for engaging in services trade remain high. In fact, a 2019 report by the World Trade Organization (WTO) found that the cost of trading in services is twice as high as the cost of trading in goods. This is because some of the barriers to trade in services are often “behind the border” measures, such as government rules and regulations, that can become significant obstacles to trade. This month, a group of 67 WTO members making up 90 percent of global services trade took action to cut red tape that can impede trade in services. This action not only shows that WTO members remain committed to negotiating agreements that liberalize trade, but also that they recognize the vital part services plays in the global economy.
Why Does Trade in Services Matter?
Services trade covers a broad range of economic activity, such as transportation, tourism, logistics, finance, healthcare, entertainment, telecommunications, professional services, and many of these and other services are increasingly traded in digital form. Taken together, services trade accounts for more than 60 percent of world GDP and over half of global employment. As Figure 1 shows, global commercial services exports were estimated to be worth more than $6 trillion in 2019 and have grown faster than merchandise trade in recent years.
Services trade plays a major role in the U.S. economy. As the Congressional Research Service reports, the United States is “the largest single-country exporter (14.0%) and importer (9.8%) of global commercial services,” and is engaged in services trade across the globe. In 2018, “services accounted for 33.1% of the $2,501 billion total in U.S. exports (of goods and services) and 18.1% of the $3,129 billion in total U.S. imports” and “the United States has continually realized surpluses in cross-border services trade.”
As the U.S. International Trade Commission highlights, “U.S. cross-border services exports substantially exceeded imports,” in 2019, “resulting in a trade surplus of $289.0 billion; cross-border trade surpluses were recorded in most major services sectors, with the largest surpluses in professional services, financial services, and travel services.” The top export destinations are the United Kingdom, Canada, Ireland, China, and Japan. The largest share of cross-border services trade for the United States is in professional services, where exports totaled $292.3 billion, and imports amounted to $143.4 billion in 2019. Research and development (R&D) services “are the largest category of U.S. professional services cross-border trade and underpin the production and trade of many other products, such as computer and information services, pharmaceuticals, and automobiles.” Consider the development of the COVID-19 vaccines, which required global collaboration in R&D—this is services trade in action.
What is in the Services Deal?
The important role of services in the global economy is precisely why the issue of reducing domestic regulatory barriers to services trade was taken up at the WTO. In 2017, a group of WTO members established the Joint Initiative on Services Domestic Regulation to “revive negotiations” that had begun in 1999 under the WTO Working Party on Domestic Regulation. The goal was to build “disciplines to mitigate the unintended trade restrictive effects of measures relating to licensing requirements and procedures, qualification requirements and procedures, and technical standards.” The motivation behind the talks was to improve transparency in the regulatory process and to ensure predictability for businesses and individuals in the procedures they must follow to receive authorization for supplying services. On December 2, 2021, 67 members, depicted in Figure 2, concluded these long running negotiations.
So what’s in this new deal? As the Geneva Trade Platform’s recently launched website tracking the WTO’s plurilaterals explains:
Importantly, this plurilateral is not a market access negotiation. In other words this negotiation did not seek to address situations where a certain form or mode of service is categorically banned from importation (for example, if foreign lawyers aren’t allowed to represent your citizens before your legal system). Instead, the negotiations focused exclusively on the bureaucracy firms have to navigate in order to legally offer services which are in principle permitted for sale across the relevant borders.
Thus, the provisions do not address the substance of services regulations, but rather the way they are developed, communicated, and applied to service providers. These disciplines are also meant to ensure that governments can’t use opaque forms of protectionism to limit market access commitments to which they have already agreed. The disciplines can be organized into three broad categories, namely: transparency, legal certainty and predictability, and regulatory quality and facilitation. For example, these include obligations to:
- Publish and make available information required to comply with requirements and procedures for authorization, including through electronic means;
- Establish indicative timeframes for processing applications;
- Inform applicants of reasons for rejection of applications and allow resubmission;
- Require applicants to approach only one competent authority to obtain authorization; and
- Accept electronic applications and authenticated copies of documents.
Notably, some of the provisions are what can be described as “best endeavors,” meaning that governments will make their best possible effort at achieving them, but they do not have any binding legal force. There are also some flexibilities in place for developing countries, who are given the option to have a transition period, of up to seven years, in areas where they may face challenges implementing their obligations. Least-developed countries are only expected to apply them once they graduate from LDC status.
In addition, while the agreement only includes 67 of the 164 members that make up the WTO, the commitments are extended on what is called a most-favored nation basis to members that are not part of the agreement. This means that service suppliers from all WTO members will be able to equally benefit from the new rules. This can help to improve competition in the market for service suppliers for WTO members that signed on to the deal, while at the same time making it easier for services suppliers of all WTO members to participate in 90% of the global services market.
The benefits of this agreement could be significant. A recent joint study by the Organisation for Economic Co-operation and Development (OECD) and the WTO estimates that the annual savings in costs to services trade would be approximately $150 billion USD. Breaking this down between participants and non-participants shows that the potential cost savings to the deal’s signatories would be around $135 billion, while non-signatories would still see a $17 billion reduction in costs. The study goes on to say that “Substantial benefits accrue in a number of sectors, including financial services sector with USD 47 billion, business services with USD 36 billion, as well as communications and transport services, with both around USD 20 billion.” This is a win-win.
The impact of implementing these provisions also goes beyond these topline figures. A 2021 WTO study analyzing the implementation of similar services domestic regulation disciplines that were negotiated in regional trade agreements found that high levels of implementation are correlated with a higher volume of services trade and a higher rates of participation in global value chains. Global value chains give industries access to a wider range of markets, and can also improve productivity and efficiency that benefits both firms and consumers. Furthermore, since regulatory costs are more burdensome for micro, small and medium-sized enterprises (MSMEs) and women entrepreneurs, they especially stand to benefit from streamlined regulations and more transparency in entering services markets.
Services also serve as inputs for manufacturing, and can indirectly impact both productivity and competitiveness. For example, an NBER Working Paper by Liu et al. that looks at the impact of financial and business services in manufacturing production shows that “a country can partially overcome the handicap of an underdeveloped domestic services sector by relying more on imported services inputs. Thus, lower services trade barriers in developing countries can help to promote their manufacturing exports.” Finally, as the OECD-WTO study points out, “Most barriers could be eliminated in sectors such as computer services, commercial banking, and telecommunications services, which are key intermediate services contributing to all economic activities” and since “most of these sectors are important pillars of the digital economy, streamlining domestic regulations would also benefit digital trade.” Full implementation of the new rules on services domestic regulation could therefore have a broad impact throughout various sectors of the global economy.
The WTO Can Get Down to Business
While the WTO’s ministerial conference had to be postponed this year due to the pandemic, the outcome on domestic services regulation negotiations gives reason for optimism. When WTO members are committed to an issue, they find a way forward and cement a deal. Though there is some concern that momentum in other negotiations this year may be lost with the holiday break, delaying the official meeting of trade ministers may not be a bad thing after all. It may, in fact, provide the opportunity for negotiators in Geneva to check in with their capitals so that they return to work with a clear mandate on ongoing work, and to hit the ground running when they return to the office in January. If the ministerial meeting does not take place until March, there is plenty of time for WTO members to continue plugging away in the meantime, and to deliver more positive outcomes for liberalizing global trade in the new year.
