Digital Trade in Services: Globalization’s Exciting New Frontier

Students have been struggling with math homework since the dawn of math homework. And until very recently, the idea of having someone on the other side of the world assist over a real-time video call would have been unthinkable—especially for anyone who wasn’t rich. However, this is an example of the next frontier in globalization: digital trade in services.

Digitalization is allowing more services than ever to be traded internationally. I’ve termed this new globalization “Peloton Globalization.” Not so long ago, if you wanted to take a spin class, you had to do it at a local gym or spin studio. Now, if you have the Peloton app and any stationary bike, you can, from anywhere in the world, be led through a spin class by Peloton instructor Ben Alldis, who coaches from the Peloton London studio.

Digitalization has reduced what political economists call the “proximity burden.” With goods, the seller and the buyer do not normally need to be near each other. A pair of shoes can be made in Vietnam and purchased in Spain. Traditionally, that has not been the case with services. To provide a service, the seller and the buyer needed to be in the same room. Some services still work that way. If you want a haircut, you must physically go to a barber or stylist, and traveling too far to get that service easily overwhelms the value of the service, which means that the service has to be provided locally. Granted, many services continue to operate this way, but as the Zoom tutor and Peloton examples suggest, an increasing number of services do not, thanks to digitalization.

A variety of services—including content creation, engineering, legal assistance, and customer service—can now be traded internationally. This will continue to grow over time as technology progresses. Advances in augmented and virtual reality could make delivering services internationally even easier and more effective. Imagine being able to take an immersive, virtual cooking class from someone in Thailand or violin lessons from a musician in Poland, who could use augmented or virtual reality to help you better understand how to position your arms.

If you ask the average person what they think of when they think of international trade, they almost always think of goods in containers on ships. Trade in goods is easier for people to grasp and often involves industries such as automobiles that are symbolically powerful and have a lot of lobbying power, which means that trade in services typically are underappreciated.

Still, despite this underappreciation, the international trade in services is increasingly important. As Scott Lincicome’s “Globalization Isn’t Going Anywhere” essay points out, the trade in services as a share of the global economy nearly doubled from less than 8 percent in 1991 to nearly 14 percent in 2019, and digital services were particularly important to this. From 2005 to 2021, trade in digitally delivered services more than tripled, and information and communication technology services increased more than five-fold. As you can see in Figure 1, international internet bandwidth is rapidly increasing; that infrastructure is capable of carrying more and more digitally delivered services.

It is also important to understand that digital trade in services is almost certainly understated significantly because traditional statistics and data sets have trouble capturing the transactions. Think about the Pakistani math tutor and the Peloton examples; it is quite likely that those don’t make it into any traditional trade flow measures. As impressive as many of the growth numbers in this area are, they are not even capturing all of what is going on. As Shawn Donnan, senior writer for Bloomberg, explains,

Globally, the trade in commercial services, digital and analog, has nearly doubled since 2010, from $3.9 trillion to $7.1 trillion in 2022 (Figure 2). This trend is likely to continue. By 2026, the market for telemedicine alone is expected to be worth more than $175 billion. Even if the popular image of international trade remains as goods and ships-based for some time, services and digital tools are going to be an increasingly large part of the picture.

Reducing the proximity burden makes it easier for people to escape constraints on their mobility. Digital services have helped facilitate working from home. The COVID-19 pandemic made this especially clear. During the pandemic, because of digital services, many people were able to keep working. Even when these digitally enabled interactions felt local (i.e., meeting a physically nearby colleague on Zoom), the providers of those services are based in multiple countries and often rely on cross-border data flows, so those interactions are still very much a part of globalization. Not only is working from home good for many workers, but it could also help bridge America’s urban-rural divide.

Being able to sell labor digitally means that people can live wherever they want. Many people will still want to live in Manhattan, but a lot of people, for several reasons—whether it’s cost or family connections or proximity to outdoor activities—may instead want to live in smaller places. Digital services and working from home let them do that and could help rural areas. Because rural areas have thinner markets, all kinds of services can be difficult to access, which is inconvenient for people who live in those areas but also can discourage people from moving to them. If, however, it is easy to access some services digitally, such as a spin class or a doctor’s visit, that shifts some of the calculus in the cost–benefit analysis of whether to move to a rural area. That’s especially heartening given the extent to which many rural areas have been seeing declining working-age populations (Figure 3).

Additionally, the increasing trade in digital services is an alternative way to capitalize on Global South talents should we not find a way to increase immigration. It would be better to allow people to immigrate to the United States if they want to. Here, they could not only work in their professions but would also contribute as colleagues, friends, fellow citizens, and neighbors. The United States would be stronger for having them. Alas, xenophobia and nativism have made liberalizing immigration significantly harder. If, despite immigrants’ obvious merit, policymakers cannot find the political will to more easily allow people to immigrate here, then digital services are the next best option. This is why economist Richard Baldwin terms digital trade services “telemigration.” This telemigration may end up being very important as global population skews toward the Global South. In a world where nativists want to build walls, digital trade in services can, at least in part, make those walls irrelevant.

This is not the only way in which digital services bring people together. Many people play Fortnite in the United States, China, and around the world. They buy and sell digital goods within the game, and they rarely think about nationality. Another way that Fortnite is emblematic of this kind of international cooperation is that Tencent, one of the biggest technology firms in China, owns 40 percent of Epic Games, the North Carolina–based maker of Fortnite. The more that digital services can help intertwine the United States and China economically, the more those two countries will have at least some common interests that can make their relationship less conflictual and less dangerous. Just as digital services can help marginalize nativists, it can go around nationalists and hardliners arguing for decoupling.

Another way in which digital trade in services has broad benefits is that it boosts innovation. During the COVID-19 pandemic, researchers in many different countries were able to use digital tools to collaborate on their research. That helped accelerate the creation and rollout of highly effective COVID-19 vaccines that saved millions of lives. Cloud computing has been hugely helpful in cancer research. Digital tools can help multinational firms crowdsource ideas from their customers and business partners around the world and are becoming essential to some companies’ innovation.

The United States is a powerhouse in services and especially digital-friendly services. U.S. services exports grew from $563 billion in 2010 to $897 billion in 2022, a 42 percent increase. A lot of that growth either is or could be connected to digital technology. More than 80 percent of U.S. services exports could, at least in principle, be delivered digitally. In 2020, U.S. exports of information and communication technology–adjacent services totaled $520 billion. Export growth has been especially strong in cloud computing and data services ($397 million in 2010 to $6.9 billion in 2021), computer services ($10.1 billion to $45.2 billion), research and development ($22.2 billion to $47.2 billion), and professional services ($48.7 billion to $132.5 billion). As Figure 4 and Figure 5 show, U.S. exports of services, and particularly information and community technology services, have grown significantly since 2010.

The other things to keep in mind are that the digital economy is large and growing and that services are a much larger portion of the overall economy than goods. In 2019, the digital economy was roughly a 10th of American gross domestic product, and from 2005 to 2019, it grew at more than double the rate of the nondigital economy. Roughly two-thirds of the global economy and more than three-quarters of the American economy are services, not goods. The growth potential for digital trade in services is enormous. The more that services can be traded internationally, the more customers American service firms have access to.

Some of the most high-profile American businesses that benefit from this are the Big Tech firms: Apple, Microsoft, Amazon, Google, and Meta. These are five of the most important companies in the American economy—and arguably the world. The more of their services that they can sell abroad (e.g., Microsoft and Amazon’s cloud computing, Google’s search and advertising, Apple’s media content, and Meta’s social media and WhatsApp), the better it is for those firms’ workers and shareholders, most of whom are American. Those benefits then spread to the wider economy; one technology sector job supports, on average, five other jobs in the economy. A worker at one of these businesses, or any other business that can better sell its services globally, has more disposable income that they can then spend on local goods and services. Moreover, millions of Americans’ retirement savings plans, such as a 401(k), include one or more of these companies’ stocks. These firms contribute significantly to the U.S. tax base, and they provide services that delight consumers, often for free. There are a lot of ways in which the success of these companies strengthen America. To the extent that U.S. policy encourages more globally liberalized trade in services and thus helps these companies succeed, those policies make America better.

Moreover, the benefits of digital services do not merely accrue to this small handful of firms but are instead (and encouragingly) widely dispersed throughout the economy. In 2022, Apple’s App Store facilitated over $1 trillion in commerce, more than double what it did in 2019. Cloud computing is another good example. As the Congressional Research Service notes, “One driver of the diffusion of the benefits of the internet and digitization has been cloud computing. Cloud services have been called the great equalizer, since they generally allow small companies access to the same information and the same computing power as large firms using a flexible, scalable, and on-demand model.” Not only that, but digital services increasingly undergird the movement of physical goods. For example, in 2018, Walmart partnered with IBM to create a blockchain-enabled food traceability system that helps prevent foodborne illness outbreaks. Manufacturing increasingly comes packaged with services, many of which are digital in nature, that add considerable value. So, for example, a manufacturing firm might hire another firm to do product design or supply chain optimization; those services end up embedded in the value of the product, but the design expertise and supply chain expertise are communicated across borders digitally. These services add value to the manufactured product while also reducing costs. Service exports also support jobs (e.g., 98,800 jobs in Michigan, 73,000 jobs in Missouri, 32,300 jobs in Kentucky, 46,200 jobs in Utah, and 116,000 jobs in Ohio). All told, service exports support 5.3 million American jobs.

American consumers also benefit. In 2021, the Korean show Squid Game spent nearly a month as the top show on Netflix, which also offers its subscribers popular content from other countries, including Babylon Berlin (Germany), Money Heist (Spain), The Great British Baking Show (UK), The Magnificent Century (Turkey), Borgen (Denmark), and The Glory (South Korea). And the selection keeps growing. As Figure 6 shows, annual U.S. imports of audiovisual services have exploded from $3.7 billion in 2010 to more than $25 billion in 2021 and seem likely to continue increasing. In these and many other ways, the increasing digital trade in services benefits Americans as workers, taxpayers, consumers, shareholders, and citizens.

To fully realize the benefits of digital globalization, two main challenges need to be effectively dealt with: barriers to the free flow of data and underdeveloped rules on digital services at both the World Trade Organization (WTO) level and in terms of U.S. free trade agreements. Much of the international trade in services is directly predicated upon enormous cross-border data flows. This, however, has become a major friction point between the United States, the EU, and China, with China especially insisting that its citizens’ privacy can only be properly protected if those citizens’ data are kept in-country and stored according to very specific requirements. These mandates hinder U.S. service exporters’ access to new markets. Likewise, several countries also have policies that place onerous requirements on cloud computing providers. Vietnam, Korea, France, Indonesia, Malaysia, and China all have protectionist restrictions on cloud computing services. Though this is an important policy challenge, there is some room for optimism. The Safe Harbour Principles, Privacy Shield program, and now the Trans-Atlantic Data Privacy Framework have helped to smooth over U.S.-EU differences with regards to privacy and data transfers. There may also be technological advances that help. Microsoft’s Azure cloud computing service is fully capable of localizing data while still providing the service, so it may end up being the case that data localization is not as large a hindrance to commerce as it may seem. What is more worrisome are barriers to data flow imposed to block the spread of ideas and expression to uphold authoritarian governments. China’s Great Firewall is the most high-profile example of this. The Great Firewall is not only a tool of censorship, but it is also a huge barrier to U.S. service exporters.

We also need more progress on digital services at the WTO level. Since 1998, WTO members have agreed to not impose tariffs on electronic transmissions, and they extend that moratorium every few years. Given the growth of digital trade, making that moratorium permanent would provide greater regulatory certainty. The international trade in services is, for the most part, much newer than the trade in goods. Therefore, the range and depth of international trade rules that deal with services is also less fully developed, especially as they apply to digital services. For the moment, a big comprehensive agreement on services seems politically infeasible, but WTO members could start taking smaller steps toward curtailing digital protectionism. One area they could take an immediate step on is discriminatory treatment of electronic signatures. That may sound like a tiny thing, but it helps to illustrate the necessity and usefulness of new digital trade rules.

Let’s imagine that a government wanted to discriminate against services being provided from abroad via digital means but that it had no legitimate basis on which it could claim that the service provider was causing some kind of social or policy problem. If a government wanted to discriminate against the foreign provider, it could require physical in-person signatures rather than electronic signatures, and that would re-impose all of those proximity burdens even though doing so would achieve no clear public policy objective. It would be protectionism, plain and simple, to the detriment of the provider and often to the detriment of the consumer.

Another area where well-balanced international trade rules could be helpful is in source code access. Businesses want assurances that they will not have to divulge their source code (which is often the very heart of their software and a major part of their trade secrets) as a condition of providing their services in that country. The service provider often has a very credible fear that, once divulged, that source code will be passed onto a domestic competitor. In effect, the national government of that country has conditioned access to that market on expropriating some of that business’s most valuable assets. Knowing this, the business cannot enter that market, so its ability to participate in that digital trade in services has been snuffed out from the beginning. On the other hand, there are several completely legitimate reasons why a government might want to review a business’s source code. If it has reason to believe that the way a service provider is doing business violates the country’s laws—and that could be anything from data protection to anti-discrimination law—to investigate whether that is actually happening, it needs access to the source code. If the states involved were not allowed to do that, they might not want to allow a foreign firm to provide that service in the first place. So, allowing this kind of access for governments both protects their right to engage in legitimate regulation and promotes digital trade in services. Here the language in the USMCA could be a model. The USMCA bars states from forcing firms to divulge their source code simply as a condition of entry to the market but allows governments to require access to the code as part “a specific investigation, inspection, examination, enforcement action, or judicial proceeding, subject to safeguards against unauthorized disclosure.”

International cooperation on clearly discriminatory digital service taxes, whether under the WTO or the Organisation for Economic Co-operation and Development, would be another useful step. However, some countries have instituted digital service taxes in ways that are clearly and obviously designed to target American businesses but not their own businesses. French politicians were open about the fact that their country’s digital service taxes were aimed at American companies and even branded the tax the “GAFA tax” for targeting Google, Amazon, Facebook, and Apple. Digital service taxes, when applied to all digital service providers, are one thing; digital service taxes that are blatantly discriminatory are quite another.

Free trade agreements that the United States is part of already have some of these provisions. For example, the USMCA already prohibits data localization and the discriminatory treatment of electronic signatures. The United States should go even further. One way the United States and its most important trading partners could promote the international trade in services while respecting states’ ability to engage in legitimate regulation is through mutual recognition agreements (MRAs). MRAs pioneered the trade in goods in the European Union. In an MRA, instead of states changing their domestic regulations, they agree to mutually recognize each other’s regulations as equivalent. Perhaps appropriately the Comprehensive Economic and Trade Agreement between the European Union and Canada includes a proposed dialogue on creating MRAs in digital services. With this kind of MRA, if it were to come to fruition, a service provider in the agreed upon field who was licensed to operate in the EU would also be allowed to provide that service in Canada and vice versa. A particularly ambitious option would be to use MRAs with a negative list. In other words, the parties would say that any professional license issued in one state is valid in the other except for in those areas specifically carved out by each party. This would echo the negative-list approach used by the General Agreement on Trade in Services, the main agreement that structures the trade in services under the WTO. Just as an MRA undergirds trade within the EU, an MRA in services could facilitate greater trade in services among the USMCA countries in at least some industries.

Digital trade in services benefits American businesses, American citizens, rural areas struggling with population decline, and many more. It is simply wrong to say that the benefits of globalization and technology only accrue to the few and not the many. They benefit all of us. Consumers get more choices, workers get more options, shareholders get more value, and citizens get more of all the benefits of internationalism.

Greater digital trade in services isn’t just about helping with math homework, flexibility for workers, easier telemedicine, increased exports, television shows or movies, 3D printing, and Zoom calls, as great as all those things are. It’s about building a more open, freer, richer world. That’s the promise of American-led globalization: material prosperity and ever-greater individual liberty.