Trade in Services
In 2020, CBI commissioned a study on the international trade in services in order to inform it’s future programming in the services sectors. The study gives an overview of the development and trends in the global trade in services. In particular, it looks at opportunities for export of services from developing countries in Africa, regionally and to Europe.
Contents of this page
1. Overview of international trade in services
One of the fastest-growing sectors in the global economy is services. Trade and foreign direct investment in services have grown faster than in goods over the past 10 years. Services now generate more than two-thirds of economic output. The sector also attracts over two-thirds of foreign direct investment. The services sector provides the most jobs globally and accounts for over 40% of world trade.
Many service activities are now traded across borders. The World Trade Organisation’s (WTO) list of service activities looks at about 170 different subsectors. These are categorised into the sectors:
- Manufacturing services on physical inputs owned by others;
- Maintenance and repair services;
- Insurance and pension services;
- Financial services;
- Charges for the use of intellectual property;
- Telecommunications, computer and information services;
- Other business services;
- Personal, cultural and recreational services; and
- Government goods and services.
Trade in commercial services includes all these sectors except government services. The statistics for trade in services are not accurate, especially for developing countries. It is thus best to focus on trends.
WTO data shows that total global service exports in 2018 amounted to US$5,770 billion, and total service imports were US$5,485 billion. The United States and the European Union account for the majority of global trade in services. Still, a large amount of service exports is now from developing countries (DCs). This amount is increasing quickly, especially in the case of least developed countries (LDCs).
International trade has been growing steadily in financial services, information technology (IT) services, business and professional services. This is a clear trend over the last 20 years. Also, more developing countries are increasing their service exports. Tourism and transport services are the biggest exports from developing countries as a group. Still, their service exports are diverse. More recently, we can see an increase in the range of services in international trade, such as educational, health and environmental services. Right now, these services account for a very small share of global trade. But this is expected to change soon. 4 major factors that will affect global services trade in the future are:
- Digital technologies;
- Demographic changes;
- Rising incomes; and
- The impact of climate change.
2. Service exports and developing countries
The services trade from DCs has grown by more than 10%since 2015. In 2017 the services trade from DCs amounted to 25% of global service exports and 34.4% of global service imports. Of the total global services exports, the share of developing economy service exports amounted to US$1,521 billion in 2015. 5 countries account for more than 50% of total service exports from the developing world: India, China, South Korea, Hong Kong and Thailand. The least developed countries accounted for only 0.3% of global service exports and 0.7% of global service imports in 2017. These are mainly African economies, and their services sector is under-developed.
Most DCs and LDCs provide tourism-related services through mode 2 (consumption abroad). Foreigners travel to these countries for holidays or business reasons. Still, there is a lot of diversity in the structure of service exports from DCs. In South Asia, service exports are mainly cross-border services (mode 1) like ICT, BPO, and business and professional services. In East Asia, service exports are closely linked to manufacturing exports. In Latin America, exports focus on services that are supplied through direct investment (mode 3) to other countries in the region. The geographic patterns of trade are also different. India mainly exports services to developed countries. Latin American exports are mostly to countries in the same region. Countries in the Middle East and North Africa tend to export services to Europe. South African service providers, however, target African countries more and more.
Africa’s total imports of commercial services grew from US$140 billion in 2016 to US$150 billion in 2017. This indicates a large potential market for African suppliers if the continent can reduce barriers. The 2019 World Trade Report pointed out that it is still a challenge for the least developed countries (LDCs) to expand service exports and to join the global services trade. Among other things, this is due to infrastructural limits, the educational and skills gap, a lack of financial resources and the digital gap. Countries that want to export services need to develop the skills for the new types of jobs that are being outsourced by both developed and large developing countries. The new jobs are mainly in areas that require computer skills and use of various software and online processes. But these skills are lacking in many African LDCs.
3. Services that offer the best opportunities for SMEs
The sectors with particular potential for SMEs all over the world, and particularly in African countries are:
- ICT and BPO;
- Financial services;
- Online distribution;
- Courier/delivery services;
- Cultural and entertainment services; and
- Advertising services.
4. EU-Africa trade in services
From the limited trade data available, it is clear that service exports from most African countries to the EU are unpredictable. They do not follow any consistent growth pattern but increase and decrease over time. The biggest exports to the EU from Africa are tourism/travel and transport services. Only Egypt, Morocco and Liberia show continued service trade surpluses with the EU. Egypt is the largest service exporter to the EU, followed by Morocco.
African SME’s with plans to export their services, should start in their Regional Economic Communities. But, service companies that have already joined global value chains may benefit more from opportunities in European services markets. Such value chains are in IT, ITeS, and BPO, for example.
Although the EU imports services on a large scale, it is unlikely that Sub-Saharan African economies can diversify and increase their exports to the EU on short notice. This is because most of these economies have a low level of service development. The complex EU standards, laws and regulations make exporting services even harder. Still, areas such as IT and BPO offer opportunities. Service firms that use digital networks and are internationally competitive will also find opportunities in exporting their services. Yet, African SMEs may find fewer trade barriers in regional economic communities.
5. Impact of the COVID-19 pandemic
COVID-19 has affected trade in many services, regionally and globally. Some industries, such as travel and tourism, suspended almost all operations. Other industries, such as telecommunications, e-commerce, online entertainment, have experienced massive growth. African countries will suffer most from the lower demand for travel, tourism and transport services in the following year. Insurance, financial, telecommunications and computer-related services will not suffer as much.
Because of the crisis, the following sectors focus more on online supplies:
- telecommunication, and
- audio-visual services.
There may be opportunities for African services suppliers in these areas. Most predictions foresee a profound and long-term shift towards online services. The African economy has to solve fundamental shortcomings. This means to improve connectivity and develop businesses on digital networks.